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

The rules governing IRAs specify a number of deadlines that pertain to different aspects of these accounts. Two important annual deadlines are the Roth IRA conversion deadline (December 31), and the deadline for contributions to an IRA (the due date for filing taxes, around April 15 of the next year with no provision for extensions).

Understanding Roth IRAs

A Roth IRA differs from the traditional variety in several ways. To start with, contributions are post-tax, meaning you get no tax deduction for them. Your money grows tax-free and you pay no taxes on distributions as long as you follow the rules. Those rules state that you can withdraw contributions tax-free at any time, but you face taxes and possibly a 10 percent penalty if you withdraw earnings before either of these dates:

• Five years after the first day of the tax year in which you made your initial contribution to the Roth IRA.
  
• Age 59 1/2.     
  

The five-year rule has no exceptions, and always results in taxes and the penalty payment on earnings withdrawn during the period. You (or your beneficiary) may be able to avoid the 10 percent penalty on withdrawals of earnings before age 59 1/2 for any of these reasons:

• You die.
  
• You become permanently and totally disabled.
  
• You use the distribution to purchase, construct or rebuild a first home.
  
• You have unreimbursed medical expenses exceeding 7.5 percent of your adjusted gross income.
  
• You pay medical insurance premiums while unemployed.
  
• You have qualified higher education expenses.
  
• You are subject to an IRS levy.
  
• You receive a qualified reservist distribution.
  

Unlike a traditional IRA, you’re never required to take distributions from a Roth IRA during your lifetime, and you can contribute to the Roth IRA at any age. You cannot roll over a Roth IRA to any account other than another Roth IRA.

Understanding Roth Conversions

A Roth rollover is a conversion if it is sourced by a pre-tax retirement account such as a traditional IRA or 401(k). Converted amounts are included in your taxable income for the year. Roth conversion rules allow you to convert cash or other assets in any of the following three ways:

1. A rollover distribution in which you receive a distribution from a traditional IRA or qualified employer account and deposit some or all of it in the Roth IRA within 60 days.
   
2. You arrange a trustee-to-trustee transfer, where cash or other assets from an existing traditional IRA or qualified employer account are transferred directly to a Roth IRA.
   
3. You arrange a same-trustee transfer when the same trustee maintains the sending and receiving accounts. You can accomplish this by opening a Roth IRA and doing a direct transfer, or by redesignating a traditional IRA to be a Roth IRA.
   

A separate five-year period for distribution of earnings is associated with the earnings stemming from each separate conversion transaction. There is no limit on or waiting time for multiple conversions within the same year.

Conversions From a Qualified Employer Account

If you convert money from a qualified employer account to a Roth IRA via a rollover distribution, your employer will withhold 20 percent of the distribution. This means you will have to come up with the missing 20 percent if you want to maximize your conversion. If you don’t maximize your conversion, you will not earn tax-free growth on the full amount of the rollover. Furthermore, if you miss the 60-day deadline for completing the conversion, you permanently lose tax-free growth on the distribution. You can avoid these problems by arranging a trustee-to-trustee transfer, which has no deadline or withholding requirements. Some qualified employer plans include a separate Roth account. Any rollover from such a Roth account to a Roth IRA is tax-free, as you’ve already paid the taxes on the money. You also don’t pay taxes if you roll over any post-tax money in a traditional qualified employer plan to a Roth IRA.

The Demise of Recharacterizations

As of the 2018 tax year, recharacterizations of IRA conversions are no longer permitted. Before 2018, you could recharacterize, or undo, a conversion from a traditional IRA to a Roth IRA. The effect was to erase a conversion, treating it like it never happened. Under the current regulations, once you convert to a Roth IRA, you cannot change your mind.

Advantages of a Roth IRA

Several advantages are available from a Roth IRA:

1. You might reduce your tax bill by doing a conversion this year if you expect to be in a lower tax bracket now than when you must start taking required minimum distributions from your traditional account.
   
2. You can continue to contribute to a Roth IRA after age 70 1/2 and earn tax-free growth, without ever having to withdraw money during your lifetime.
   
3. Your beneficiaries can inherit money from your Roth IRA tax-free, except for earnings inherited during the five-year period from the first contribution or from the conversion responsible for the earnings.
   
4. A Roth IRA can be useful if you’ve maxed out your pretax contributions to a traditional IRA and qualified employee plan.
5. You do not need to have any earned income to perform a Roth IRA conversion.

Disadvantages of a Roth IRA

A Roth IRA has a few disadvantages:

1. You forego an immediate tax deduction on contributions.
   
2. You can only roll over a Roth IRA to another Roth IRA.
   
3. Required minimum distributions apply to Roth IRA beneficiaries.
   
4. Your contributions to a Roth IRA might be reduced or eliminated if your income exceeds certain limits.
   

Roth IRA 2018 Contribution Limits

You can contribute the lesser of your earnings and $5,500 ($6,500 if age 50 or older) to a Roth IRA in 2018. For married couples filing jointly, your maximum contribution is reduced if your modified adjusted gross income (MAGI) is between $189,000 and $198,999 and eliminated for higher incomes. The analogous range for single filers is $120,000 to $134,999.

Roth IRA 2019 Contribution Limits

You can contribute the lesser of your earnings and $6,000 ($7,000 if age 50 or older) to a Roth IRA in 2019. For married couples filing jointly, your maximum contribution is reduced if your MAGI is between $193,000 and $202,999 and eliminated for higher incomes. The analogous range for single filers is $122,000 to $136,999.

Reporting a Roth Conversion

If you convert your traditional account to a Roth IRA, you will receive a copy of IRS Form 1099-R showing the taxable amount resulting from the conversion. For conversions from an IRA, use this figure to complete Part II of IRS Form 8606. You then transfer this amount to IRS Form 1040. If you convert from a qualified employee account to a Roth IRA, you don’t use Form 8606 and directly transfer information from Form 1099-R to Form 1040.