Can a Roth Conversion Be Applied to the Previous Tax Year?

The deadline for executing a Roth IRA conversion for a given tax year is Dec. 31 of that year. This can cause some confusion, since you generally have until April 15 of the following year to add new money to a Roth or traditional IRA. But that only applies to new contributions, not to conversions.

Why Convert

As of mid-2012, income tax rates are slated to be markedly higher in 2013 than they were in 2012. By converting amounts in a traditional IRA or other tax-deferred retirement plan to a Roth IRA, you are essentially "locking in" the lower tax rates. Otherwise, you would have to pay the higher ordinary income tax rates on any withdrawals you make. Converting to a Roth IRA also allows you to avoid having to pay RMDs — required minimum distributions — beginning April 1 of the year after the year in which you turn 70-1/2.

Conversion Disadvantages

The chief disadvantage to converting assets in a traditional IRA to a Roth IRA is the immediate tax liability you create. You must declare any amounts you convert as ordinary income for the year. This extra income may result in pushing you into a higher overall marginal tax bracket than you otherwise occupy. The additional income could potentially disqualify you from making IRA contributions. In some states, it could affect unemployment compensation.

Should You Convert?

Many planners recommend converting to a Roth IRA if you expect to be in a higher tax bracket in retirement than you are in now, and if you are able to pay the income tax with resources outside your Roth IRA. This maximizes the efficiency of your conversion. You should also be in a position to keep your assets in the Roth IRA for at least five years before you begin withdrawals.

Estate Tax Considerations

As of 2012, the law assesses estate tax up to 35 percent on assets over $5.12 million in an estate, except where inherited by a surviving spouse. As of 2013, the estate tax is scheduled to be even higher. By converting to a Roth IRA, you move any taxes you pay out of your taxable estate and out of reach of the estate tax. For this reason, a Roth IRA may allow you leave more dollars to your heirs than a traditional IRA, once you take estate taxes into account.

Photo Credits

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About the Author

Leslie McClintock has been writing professionally since 2001. She has been published in "Wealth and Retirement Planner," "Senior Market Advisor," "The Annuity Selling Guide," and many other outlets. A licensed life and health insurance agent, McClintock holds a B.A. from the University of Southern California.

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