It's that time of year. The leaves are falling. The holidays are coming. And retirement planning quickly turns to year-end conversion questions. To help the financial advisor-client team with your year-end Roth conversion planning, we have assembled a FAQ list below. Also, read through our latest articles on Roth conversion planning.
Q: What’s the last day I can make a 2013 Roth IRA conversion?
A: The answer to this question is a little tricky. A Roth IRA conversion will be treated as a 2013 Roth IRA conversion provided the funds leave the distributing account by December 31, 2013. If you make your Roth IRA conversion via a direct rollover or trustee-to-trustee transfer – which is generally the best way to convert – then the funds could go into your new Roth IRA the same day they leave your old account.
On the other hand, you can do a Roth IRA conversion via a 60-day rollover, though it’s generally not recommended. In such cases, money might not go into your Roth IRA until well into 2014, but could still be counted as a 2013 Roth IRA conversion. For instance, if you take a distribution from your IRA on December 31, 2013 and deposit the funds into a Roth IRA on February 28, 2014 (within 60 days), you’ve still made a 2013 Roth IRA conversion.
Q: What happens if I make a Roth conversion before the end of the year, but when I meet with my tax preparer to do my 2013 tax return, the tax bill is more than I thought?
A: No problem. A 2013 Roth IRA conversion can be recharacterized – a fancy tax word for undone – up until October 15, 2014. The recharacterization can be made for any reason, including that you simply changed your mind.
Q: If I make a Roth IRA conversion now, when do I have to pay the tax?
A: This depends on a number of factors. Depending on your specific circumstances, you may have to make an estimated tax payment in January 2014. Alternatively, you may be able to square up with IRS anytime before April 15, 2014. Since the answer to this question depends on many variables, it’s best to review this question with a knowledgeable financial advisor or tax professional.
Q: If I convert today, how soon can I access my Roth IRA?
A: Right away. As far as the tax code is concerned, there is no waiting period to be able to access your converted funds. If you are younger than age 59 ½, however, distributing converted funds within 5 years of your conversion generally results in a 10% penalty on those amounts. The real benefit of the Roth IRA conversion is in the long-term tax-free compounding, so if you think you will need to tap your Roth IRA funds relatively soon, it’s probably not a good idea to convert in the first place.
Q: I’ve made Roth IRA conversions in the past. Are there any new rules I need to be aware of for 2013?
A: The Roth IRA conversion rules haven’t changed much lately. However, there are always changes and new wrinkles in the tax law that can factor into whether or not a Roth conversion makes sense. For instance, beginning in 2013, there is an additional 3.8% surtax on any net investment income that exceeds your applicable threshold. Although IRA distributions are not considered net investment income, a Roth IRA conversion will increase your total income, and could result in the 3.8% surtax being assessed on greater amounts of other, net investment, income. 2013 Roth conversions could also result in the loss or reduction of your personal exemptions and itemized deductions. This was not the case in recent years.
Q: Can I put my new Roth IRA conversion in my existing Roth IRA account?
A: There is nothing in the tax code that stops you from doing this, but if there is any chance that you might recharacterize this conversion, you should consider putting it in a separate, new Roth IRA. That will make doing a recharacterization easier. Once you have passed the recharacterization deadline, you can combine your Roth IRA accounts with no worries.
- By Jeffrey Levine and Jared Trexler