difference between rollover and conversion

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cork
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difference between rollover and conversion

Post by cork »

Basically, I have funds (all tax deferred) in a TIRA, and would like to move as much of these funds as possible into a Roth IRA before RMD's kick in.
Most of the threads I've read refer to this as doing Roth conversions. As I understand conversions, I can take x amount of shares from the TIRA and put them into the Roth IRA. Then the value of the funds at the time of transfer is considered taxable income.

How does this differ from a rollover?

The reason for asking: According to the IRS Rollover Chart, I can do as many rollovers in a year as I want (from Traditional to Roth) and is considered taxable, as with the conversion.
Are there any restrictions on how many conversions can be done in a year, or restrictions on the amount?

I realize that as long as I have been a member I should know the answer to this, but it seems the more I learn the more I realize how much I don't know.
fabdog
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Re: difference between rollover and conversion

Post by fabdog »

Most folks think of rollovers as moving from one tax deferred vehicle to another (401K to IRA, tIRA to TIRA) and conversions as taking tax deferred balances and converting them to Roth

If you look closely at the chart you'll see that rollovers are limited to one per year between Roth accounts, and between TIRA's.

From TIRA to Roth as many as you'd like, as you note, they are all included in taxable income

Mike
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FiveK
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Re: difference between rollover and conversion

Post by FiveK »

The word "rollover" is often used when moving funds between brokers but retaining the same account type. E.g., traditional to traditional, or Roth to Roth.

The word "conversion" is used is often used when moving funds between account types. E.g., traditional to Roth.

But as you noticed, the https://www.irs.gov/pub/irs-tege/rollover_chart.pdf calls everything a "rollover"....

Your other question is easier: you may do as many "traditional to Roth conversions," for any amounts, as you wish.
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cork
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Re: difference between rollover and conversion

Post by cork »

Great clarification, thank you both!
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RickBoglehead
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Re: difference between rollover and conversion

Post by RickBoglehead »

If you look at the chart you referenced, https://www.irs.gov/pub/irs-tege/rollover_chart.pdf, the footnotes answer your questions.

If you look at the Traditional to Roth box, it says Yes, and 3. 3 says "must include income".

If you look at Traditional to Traditional, it says Yes and 2. 2 says Only one rollover in any 12 month period, and includes a link. If you click on that link, it brings you to the IRA One-Rollover-Per-Year Rule. The first paragraph says:

Beginning in 2015, you can make only one rollover from an IRA to another (or the same) IRA in any 12-month period, regardless of the number of IRAs you own (Announcement 2014-15 and Announcement 2014-32). The limit will apply by aggregating all of an individual’s IRAs, including SEP and SIMPLE IRAs as well as traditional and Roth IRAs, effectively treating them as one IRA for purposes of the limit.
  • Trustee-to-trustee transfers between IRAs are not limited
    Rollovers from traditional to Roth IRAs ("conversions") are not limited
Note the 2nd line is what you were looking for, that a conversion is not limited, which is what you are doing. They should have included this reference on that Traditional to Roth footnote also.
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cork
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Re: difference between rollover and conversion

Post by cork »

Thank you!
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FIREchief
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Re: difference between rollover and conversion

Post by FIREchief »

As others have suggested, the term "rollover" is used in too many ways, so without context it has become largely meaningless. If you take money that is in a tIRA and move it to a Roth, you've completed a Roth conversion.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
Alan S.
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Re: difference between rollover and conversion

Post by Alan S. »

A conversion is limited to a distribution from a non Roth IRA and a rollover to a Roth IRA, so it's a special type of rollover.

A transfer from a pre tax qualified plan to a Roth IRA functions like a conversion in most ways, but is not a conversion. Technically, it is called a "qualified rollover contribution".

As already noted, do not look for consistency in IRS descriptive lingo. Sometimes it is there, often it is not.
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Eagle33
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Re: difference between rollover and conversion

Post by Eagle33 »

Alan S. wrote: Wed May 05, 2021 1:06 pm A transfer from a pre tax qualified plan to a Roth IRA functions like a conversion in most ways, but is not a conversion. Technically, it is called a "qualified rollover contribution".
What should one call the following types of rollovers?
* Transfer from a Roth 401k to a Roth IRA
* Transfer from a post tax qualified plan to a Roth IRA
FactualFran
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Re: difference between rollover and conversion

Post by FactualFran »

Eagle33 wrote: Thu May 06, 2021 8:16 am What should one call the following types of rollovers?
* Transfer from a Roth 401k to a Roth IRA
* Transfer from a post tax qualified plan to a Roth IRA
Keep it simple and call each a rollover.

Using more words, the first is a rollover from a designated Roth account of the 401(k), and the second is a rollover of the basis (after-tax contributions) that have been made to the qualified plan.

For more information, see the Rollover From Employer's Plan Into a Roth IRA section of IRS Publication 590-A.
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