Converting Traditional IRA Money to Roth IRA Before Year End

Converting Traditional IRA Money to Roth IRA Before Year End

It’s almost the end of the year. Holidays are approaching or are already here. There are three issues to consider before year-end when you contemplate the conversion of Traditional IRA funds to a Roth IRA account.

First and foremost is the tax consequence. Your income will go up because the conversion recognizes the transfer (conversion) as income. Your Adjusted Gross Income will go up. You may enter an increased tax bracket both federal and state if your state taxes income. (My state, Nevada, is one of 9 that doesn’t tax income, just so you know.) If you have a tax preparer, ask them how much you can convert before entering the next higher bracket.

Secondly, you might be thinking that taxes will be higher in the future. So, what if your federal income tax goes up 2% this year because of a conversion? Remember we have a graduated system so only the last dollars are taxed at the higher rate (24% instead of 22% for example). If you estimate you will be paying 5-10% more in taxes in the future, a Roth IRA conversion will reduce the future amount of Required Minimum Distributions that begin at age 72. That’s a double benefit you may want to obtain by converting now.

What happens if you find out after the first of the year, that your Roth conversion was a mistake. That’s the third issue. Not to worry if you decide early enough. You can complete a “recharacterization” (reversal) of a Traditional IRA to Roth IRA conversion if you complete the transfer back to your IRA by the due date of your tax return, including extensions as detailed in IRS publications 590-A.

Here at MainStreet, we have additional resources for you to view:

SHOULD AGE 65+ DO ROTH IRA CONVERSIONS?

Jim Ludwick
Jim Ludwick
jim@mainstreetplanning.com

Jim Ludwick is the founder of MainStreet Financial Planning. His varied education and life experiences have enabled him to apply his knowledge and experience into useful solutions for personal financial problems. His writing and broadcasting activities allow him to help many more than just individual clients. He loves a microphone.

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