What is a Roth IRA conversion?
A Roth IRA conversion is when a traditional IRA, or pre-tax employer sponsored retirement plan, is converted to a Roth IRA.
This is also known as a “backdoor conversion.”
Once the conversion is complete, converted funds will be placed in your Roth IRA and your earnings and contributions will now grow on a tax-free basis.
Why would I request a conversion?
If the advantages of a Roth IRA outweigh the advantages of owning a pre-tax account, a conversion may be worth considering.
If you aren’t eligible to contribute directly to a Roth IRA due to income limits, a conversion provides a way to add post-tax assets to your investment portfolio.
Owning a Roth IRA in addition to pre-tax accounts may improve your tax diversification to an investment portfolio.
Tax considerations and reporting
To convert a pre-tax account to a Roth IRA, the account owner needs to add the taxable amount of the converted funds to their gross income while filing their taxes.
However, there is no 10% early withdrawal penalty on converted funds.
Following a conversion, you will receive a Form 1099-R that shows the withdrawal from your pre-tax account and a Form 5498 that shows the contribution to your Roth IRA.
Converting pre-tax assets to a Roth IRA is irreversible and the converted funds can’t be recharacterized at a later date.
Roth IRA conversions must be completed by December 31.
Due to the high volume of requests received toward the end of the calendar year, we can’t guarantee that conversions requested after December 15 will be completed prior to the IRS deadline.
Please request your conversion prior to December 15.
Conversions at M1
The following information is required for a conversion at M1:
- Receiving account number
- Delivering account number
- Amount (full or partial) - If you’re requesting partial, please list the cash and/or securities to be transferred.
Once our team receives this information, it usually takes three business days to process your conversion.
Please be aware that processing time may increase during periods of high volume, including at the end of the calendar year and as the tax filing deadlines approach.
M1 is unable to advise if an IRA conversion is right for you
Please consult a qualified financial professional with any questions you have about additional tax implications or filing your taxes. We recommend speaking with a qualified financial professional before requesting an IRA conversion.
To request a conversion of your M1 Traditional IRA into an M1 Roth IRA, please contact us.