You might think you can convert anything into a Roth IRA, but you'd be wrong.
"The tax code allows only eligible rollover distributions to be converted to Roth IRAs," Slott wrote.
Besides RMDs, there are a number of other items that can't be converted, including 72(t) payments, hardship distributions, corrective distributions of excess deferrals, deemed distributions, and dividends from employer securities.
10. Non-spouse beneficiaries can't convert inherited IRAs
Besides the aforementioned, Slott said there's one type of account not eligible for conversion that merits special attention.
"Any non-spouse beneficiary who inherits a qualified plan is eligible to convert that plan to an inherited Roth IRA, and the plan must allow this transfer," he said.
"This conversion must be done by a direct transfer as non-spouse beneficiaries can never do a 60-day rollover. But, while a non-spouse beneficiary who inherits a qualified plan can convert to an inherited Roth IRA, if the same beneficiary inherits an IRA they cannot convert it to an inherited Roth IRA."
11. The SIMPLE IRA 25% penalty
All IRAs, including SEP IRAs and SIMPLE IRAs, are eligible for conversion to a Roth IRA. But unlike a traditional IRA or SEP IRA that can be converted anytime without penalty, SIMPLE IRAs present a dangerous trap, Slott noted. "SIMPLE IRAs have a two-year holding period. The two-year clock is unique to each participant and starts once they have made their first contribution," he said. "Funds that leave a SIMPLE in the first two years are treated as a taxable distribution that is not eligible for rollover other than to another SIMPLE IRA. They cannot be converted to a Roth IRA."
12. The 10% penalty trap
There's a 10% early withdrawal penalty when funds are withdrawn from an IRA before age 59 1/2, but the Roth conversion is an exception, Slott said. "IRA or plan funds withdrawn at any age are not subject to the 10% penalty if those funds are converted to a Roth IRA."