Converting Qualified Funds to a ROTH SDIRA


Navigating the Maze

How to convert qualified funds ROTH SDIRA can seem like navigating a maze. I helped several clients create a ROTH self-directed IRA. Here is what you need to know.

Start With Your Objective

What you want to do with your ROTH IRA directs your choice of custodians. Custodian steps can differ. We will talk through your objectives in the initial consult, then choose the appropriate custodian, then map out the steps.

The important question in the ROTH conversion process that does not exist in creating a traditional or pre-tax SDIRA is which custodian or administrator creates and reports the conversion. It does NOT work to have funds leave a pre-tax account from one custodian and appear in a ROTH account in another custodian. That will trigger IRS issues about 100% of the time. Here is what works.

From a Traditional IRA

Have the current custodian create the conversion. This requires:

  • open a ROTH IRA account with your current custodian
  • have the current custodian convert the traditional IRA to the ROTH IRA
  • create a ROTH IRA account with the SDIRA custodian
  • ask the current custodian to transfer the ROTH funds to the new custodian

From a 401K Plan

Have the new custodian create the conversion. This requires:

  • open a traditional IRA account with the SDIRA custodian
  • have the current custodian transfer the Plan funds to the traditional IRA
  • open a ROTH IRA account with the SDIRA custodian
  • have the SDIRA custodian convert the traditional IRA to the ROTH IRA

Voilà! You created a ROTH SDIRA!

Does this make part of the maze navigable? This does not answer the question of whether a ROTH conversion is a good tax strategy for you. Is for some, not for others. I leave that discussion to your CPA.

What of your funds come from a qualified account other than the two mentioned above? If you funds are eligible to transfer to a ROTH IRA (see this IRS chart for the complete list), the we can figure out the proper steps.

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