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2011 Roth IRA Conversion Rules

Posted By Miranda Marquit On 06/08/2011 @ 12:21 pm In Retirement | 9 Comments

In 2010, the income limit for Roth IRA conversions famously disappeared. Many people, who had been forced to get a traditional IRA because of higher income could convert that traditional IRA to a Roth version. It is still possible, in 2011, to convert your traditional IRA to a Roth IRA [3]. Additionally, you are still able to rollover a 401k into a Roth IRA without the intervening step of rolling your 401k into a traditional IRA, and then converting the traditional IRA to a Roth.

However, there is a key difference: You can’t spread out the tax payments associated with your Roth IRA conversion.┬áBefore you decide whether a conversion to a Roth IRA is a good idea, consider the tax implications, and how you might be affected by making the move.

Paying Taxes on Your Roth Conversion

One of the things you have have to consider before you decide to go through with a conversion is the tax implication. Contributions to a traditional IRA are general made with pre-tax dollars. This means that you get a tax deduction immediately. The Roth IRA contributions, though, are made with after-tax dollars, and the earnings grow tax-free. That means that when you convert, you will have to pay taxes on the money from the traditional IRA.

In 2010, though, you had the option to spread the tax payments out over two years. If you had made a Roth conversion [4] then, you could have spread the tax liability out, reducing the immediate impact on your pocketbook. In 2011, though, you don’t have that option. Instead, you have to pay the taxes on the conversion amount (which is treated like a withdrawal) immediately — no putting it off.

Before you convert, you need to consider whether or not it makes sense to do so, and whether you can handle the additional hit you will take to your finances by paying for the conversion. However, if you think that taxes will rise in the future, it might be worth it pay some tax now, and not have to pay the higher rate on withdrawals from a traditional IRA during retirement. For some, though, it makes more sense to forgo the conversion, and pay the taxes in smaller increments, later on.

Recharacterization

Some might convert the the traditional IRA to a Roth IRA, and then regret it. If you change your mind, you can decide to recharacterize your conversion, and go back to having a traditional IRA. However, there are limits. You can only recharacterize if you do so by October 15 of the following year. So if you convert in 2011, you can only take it back if you do so by October 15, 2012. Realize, though, that you can’t reconvert back to a Roth IRA in the same tax year as your recharacterization back to a traditional IRA, and you have to wait at least 30 days to switch back to the Roth.

What you decide to do depends on what you think is most likely to help you in the long run. It can help to talk to a financial professional to get the ins and outs of conversion and recharacterization so that you have a better idea of what might work best for you in terms of saving on your tax liability.


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[3] Roth IRA: http://www.bargaineering.com/articles/roth-ira-account-explained.html

[4] Roth conversion: http://www.bargaineering.com/articles/roth-ira-conversion-rules.html

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