Please Note: With the passage of the Tax Cuts and Jobs Act of 2017, beginning in 2018 a recharacterization of a Roth conversion is no longer allowed. You may still recharacterize any Roth conversions done in 2017, but this will no longer be allowed for Roth conversions done in 2018 or beyond.
The end of the year is a busy time for most of us. Don’t forget to consider whether the Roth conversion might be worth your while. This year’s deadline, December 31st, is quickly approaching.
The income limitations to convert to a Roth have been repealed for this year and beyond, so anyone with an IRA is now eligible. Also, don’t forget that for 2010 conversions only, you have the option of recognizing the conversion income in the subsequent two years (2011 and 2012). This allows you to receive the benefits of a Roth IRA immediately while delaying the tax hit for a few years.
If you convert now and later change your mind, you can “undo” the conversion with a recharacterization—so you are not necessarily locked into the conversion if you do it this year. You have until the extended due date of your tax return (i.e. October 17, 2011) to recharacterize the conversion if you change your mind.
You may consider doing partial conversions—converting just enough each year to use up the rest of a particular tax bracket, like the 15% or 25% tier. Although this requires more work and planning each year, it’s a great way to gradually gain Roth exposure while sensibly controlling the tax impact.
Your financial advisor or CPA can help you decide if a Roth conversion is right for you. You can also find more information on the pros and cons of a Roth conversion in my article “Roth IRAs: To convert or not to convert.”
Written by retired Merriman Advisor, Phuc Dang
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