By Sarah Brenner, IRA Analyst
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Are you considering converting your traditional IRA to a Roth IRA in 2016? If you are making this important decision, here are 6 things you will want to know.
- December 31 Deadline. The deadline for a 2016 conversion is December 31, 2016. This means that the funds must leave your traditional IRA by the end of the year. You do not have until April 15 to do a conversion for a prior year, as you do for a Roth IRA contribution. Keep mind that your IRA custodian may need more time than you think to complete the conversion transaction. Waiting until the last minute can be risky. Consider converting now before the busy holiday season to be sure that everything is done by the deadline.
- Tax Trade Off. Your Roth conversion income will increase your ordinary income for 2016 – potentially causing the loss of exemptions, credits tax deductions, taxation of Social Security, and increased premiums for Medicare Part B and Part D premiums – but this only happens for the year of the conversion. The trade-off is that all future qualified distributions from your Roth IRA will be distributed completely tax-free.
- Factors for Conversion. On the fence about converting? Some factors in favor of converting include not needing your money soon, or even at all and expecting your future tax rates to be higher. Being younger can favor conversion as younger people generally are in a lower bracket, have not yet accumulated large sums in their IRA, and have long retirement savings timelines to work with.
- Factors against Conversion. Conversion may be a good strategy for some but is not for everyone. What factors weigh against conversion? Conversion may not be for you if you are older and will need the need the money soon (but age is never the determining factor) or if you think you will be in a lower tax bracket at retirement. Another significant factor weighing against conversion is not having available, non-retirement assets to pay the tax due on the conversion.
- A “Do-Over.” Do not forget about one the few “do-overs” in the tax code. If you do decide to convert in 2016 and you later decide that conversion was not the right move, you can recharacterize the funds back to your traditional IRA. The deadline for recharacterizing a 2016 conversion is October 16, 2017.
- Consult an Expert. Converting is one of the biggest decisions you can make with your IRA. You will want to be sure that whatever you decide is right for you and your overall retirement goals. You will want to know all the facts and weigh all the factors, both in favor and against conversion. The best move is to get guidance from a knowledgeable financial or tax advisor.