Recently, I received a host of questions about Roth conversions. So instead of answering one question, I’m going to tackle several today.
Q. Dan, what can I do if I converted more than I should have?
A. You are stuck with the amount you converted. It used to be you could reverse or “recharacterize” any portion of a Roth conversion but that is no longer permitted. However, if one makes a contribution to a Roth IRA and find they wish they had put that in a traditional IRA, they can recharacterize the contribution. This often happens when people have more income than they thought they would when they made the contribution and find themselves ineligible to contribute to a Roth IRA.
Q. Is there a particular time of year I should be doing the conversion?
A. Generally, I slightly favor waiting until near year end. To get the intended effect of a conversion, you must convert the right amount. As mentioned, you cannot reverse a conversion so if you convert too much and you put yourself in a higher tax bracket or trigger other costs, you’re stuck with the bill. If you convert early in the year, you can only estimate the amounts of wages, bonuses, interest, dividends, earnings, capital gains, medical expenses, and ither items that matter. If you wait until later in the year, you’ll be using more year-to-date actual numbers.
Q. Can a Roth conversion be counted as part or all of my required IRA RMD?
A. No. Required Minimum Distributions (RMD) cannot go in any type of retirement account, IRA or Roth IRA. Once the RMD is satisfied, you can then convert to a Roth account as much as you want over and above the RMD amount.
Q. With so many retirees annoyed by the taxes on unneeded RMD, why would a retiree convert more money to a Roth IRA and pay even more taxes than the RMD requires?
A. People convert because they would rather pay taxes now than pay later at a higher rate. For instance, a common reason to convert some retirement account money after the RMD is satisfied is the so-called “widow’s penalty.” This can apply when a spouse dies, and the survivor must file as a single taxpayer beginning for the tax year after the year of death. The tax schedule applicable to a single filer is less favorable than the schedule that applies to a joint tax return.
Q. I have three IRAs. One is normal, another a rollover from a 401(k) plan and the third one I contributed to a on a non-deductible basis. Which one should I convert first? The non-deductible one would cause the least taxes but is that best?
A. It doesn’t matter which one you convert, the taxes will be the same. All IRAs are aggregated together for this purpose and considered one IRA. Regardless of which account is converted you will have to deal with the notorious pro-rata rule. The taxable amount of a conversion is determined on Form 8606.
Q. I am planning on making a series of Roth conversions over the next few years. Do I need a separate account for each Roth conversion?
A. You can have as many IRA or Roth IRA accounts as you want but you do not need to have a separate account for each conversion. In the past, there were some interesting strategies regarding recharacterizations that depended on using multiple accounts. With recharacterizations of conversions prohibited, that is no longer an option.
Dan Moisand, CFP® has been featured as one of America’s top independent fee-only financial planners by at least 10 financial planning publications and practices at one of America’s most decorated independent firms. For more info, e-mail him at dan@moisandfitzgerald.com, visit moisandfitzgerald.com or call Dan at 321-253-5400, Ext. 101.
Originally published on FloridaToday. Read the original article here.