What are the tax consequences of an IRA to Roth IRA conversion?
You must include in your gross income all pretax assets converted to a Roth IRA. You will not, however, be subject to the 10 percent early distribution penalty tax.
EXAMPLE:Oliver has only made deductible IRA contributions to his Traditional IRA. In 2016, Oliver decides to convert $20,500 from his Traditional IRA to a Roth IRA. Oliver will need to include $20,500 as income in 2016.
For any conversion made in 2010, the Tax Increase Prevention and Reconciliation Act of 2005 allowed the taxable amount of the conversion to be included in the taxpayer's gross income ratably in 2011 and 2012 unless he elected to include the entire taxable amount in 2010 income.
If you distribute conversion assets within five years of the conversion, a 10 percent early distribution penalty tax will apply unless you have a penalty tax exception.