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All of my retirement savings is in a rollover IRA, and my income is too high to contribute to a Roth IRA. Is there a way to convert money in my rollover to a Roth a little at a time so I don’t get stuck with a huge tax hit in a single year?


You can, but are you sure you want to? There’s nothing to stop you from doing a conversion a little at a time. The amount of each conversion will be taxable in the year that you make it and at your marginal tax rate. You don’t have to sell any assets in your portfolio, either. If you want to move stocks, bonds or funds from your traditional individual retirement account into a Roth, just instruct the firm where your traditional IRA is held that you want to do an “in-kind transfer.” Chances are there will be an appropriate box on the form that you can check.
But why are you considering this at all? If your income is too high to contribute to a Roth, then it sounds as if you’re in a fairly high tax bracket, higher than the one you’re likely to be in after you retire and your earned income stops or at least drops off substantially. If you keep the money in a traditional IRA, you’ll only be taxed when you withdraw some of it, and then it will be at your (probably) lower marginal rate. Also, if you’re close to age 59 and a half, when you can withdraw money from a traditional IRA without penalty, converting to a Roth may separate you from your money for longer. You’ll have to wait up to five years, no matter how old you are, to withdraw the investment returns that the assets in your Roth earn without facing taxes and penalties. And if it takes 10 years to convert all of your IRA into a Roth, then it will be up to 15 years before you no longer have to deal with this issue on the last bit that you convert.
There is one reason why you might want to consider this conversion: if you’re confident that you won’t need all or most of the money in your IRA and you want to leave it as an inheritance that’s free and clear of any tax liability. In a Roth, unlike a traditional IRA, there’s no rule that mandates withdrawals by age 70 and a half, and Roth IRA assets in an estate are generally not taxable. If that’s the case, then your conversion plan makes sense, although there are other ways to mitigate the tax bill for your heirs, such as if they take annual distributions from the IRA in amounts based on their life expectancy. Whichever way you decide to go, just make sure that you fill in the form indicating who your beneficiaries are. Otherwise your careful planning could unravel at the worst possible time.

-Conrad de Aenlle