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Can You Still Do a Roth IRA Conversion in 2012?

A couple of years ago, all the talk was about how the income limit for converting your traditional IRA to a Roth IRA was disappearing. In the past, your adjusted gross income needed to be below $100,000 to make the conversion. Then, a move was made to allow anyone to convert in 2010 — regardless of income. Since then, however, the income limit to convert to a Roth IRA [3] has been permanently lifted.

Many people are interested in Roth IRAs because of the tax benefit down the road. The money in a Roth account grows tax free, so you don’t pay taxes when you withdraw money from the account later on. If you expect taxes to rise during your retirement, or if you expect to be in a higher tax bracket, many financial professionals recommend that you use a Roth IRA.

Anyone Can Convert to a Roth IRA — Regardless of Income

Thanks to recent changes, it’s possible for you to convert to a Roth IRA no matter your income. Plus, as long as you move your money from the traditional IRA to the Roth account wtihin 60 days, you won’t have to pay the 10% early withdrawal penalty. If you have been considering making the conversion, you can do it when you want.

However, it’s important to be aware of the tax implications. When you contribute to your traditional IRA, you are getting a tax deduction, since you contribute with pre-tax dollars. Your Roth IRA contributions are made with post-tax dollars, though. This difference means that when you convert you are required to pay taxes on the amount you move. It will be considered income. If you made the conversion in 2010, you had the option to spread out your tax payments over the course of two years. (2012 is the last year to make your tax payment for 2010 conversions.)

Now, though, you have to make your tax payments in the same year that you make the conversion. If you have a rather large amount of money to convert, that could mean a hefty tax bill. So, speak with a knowledgeable professional who can help you figure out how to handle this situation.

Recharacterizating Your Roth IRA Conversion

Still in force with regard to the Roth IRA conversion is the option to recharacterize. This means that you have the option to “take back” your conversion. However, you need to be aware that you can’t do it years down the road. If you want to recharacterize your Roth IRA conversion, you need to have it done by October 15 of the following year. So, if you convert this year, you have until October 15, 2013 to take back the move.

Roth IRA Conversion from a 401k

For the most part, you can’t straight-up convert a 401k [4] to a Roth IRA if you are still working. (You can, however, do a rollover to an IRA after you retire.) If you want to convert from a 401k to a Roth IRA while you are still working, you can only do so with part of your 401k. You can take an “in-service” distribution of a portion of your 401k and put it into a traditional IRA. From there you can convert to a Roth IRA.

There are other stipulations and requirements, so consult with a professional before you make the attempt to convert from a 401k to a Roth IRA.

(Photo: Andreas Kollegger [5])