Roth IRA Conversions: NOW Is The Time

The Roth IRA is truly one of the best deals in the history of investing. Tax free accumulation and withdrawals. Nothing else compares. It occurred to me recently that very few clients use them, and even fewer have done a Roth IRA Conversion.

That may be because a Roth conversion is treated as a taxable distribution from your traditional IRA. If you do a Roth Conversion before year-end it will also inflict a bigger tax bill for this year. Possibly both federal and state tax bills will be higher.

However, there may be a couple of reasons you may want to consider one this year:

1. Lower income tax rates. If the Bush tax cuts expire at year-end, this may be the lowest tax rates you will see for the foreseeable future. So a 2012 Conversion will mean you pay today’s lower tax rates on the extra income triggered by the Roth Conversion. Keep in mind qualified distributions after age 59 1/2 are totally federal income tax-free.

2. You will avoid the new 3.8% Medicare surtax on investment income. By doing the conversion this year, you won’t have to worry about the extra tax hit that was created to help fund the new healthcare legislation. The actual income created from the 2013 conversion would not count as investment income for purposes of the 3.8% surtax, it could raise your Modified Adjusted Income. As a result, that could cause some or all of next year’s investment income to get hit by the surtax. So if you do a conversion this year, you don’t worry about it at all.

The combination of the Bush tax cuts disappearing and this annoying 3.8% Medicare surtax has been called Taxmageddon. A Roth Conversion done this year is a real deal. It will allow you to keep more money in your pocket, especially if you have a large conversion. Bottom line: NOW is the time to do a conversion.

Do Overs
Another great thing about doing a Roth conversion is that you can always change your mind. You have till October of 2013 for the “do over”, or recharacterize a 2012 conversion. Let’s say you go ahead and bite the bullet and do a conversion before year-end. Then the markets and your Roth take a plunge. Other than considering a jump from a tall building, you would still have to fork over the extra 2012 income tax on a value that evaporated. Convert back and it’s like it never happened! So you wouldn’t owe any extra 2012 tax from the now reversed conversion.

As I said before, the chance for lower taxes for converting, plus avoiding the 2013 surtax and beyond, plus the do over provision, equals a great time for a Roth IRA conversion. The fact is, it needs to be done before year-end 2012. Do you want tax-free accumulation and withdrawals on your IRA investments? Feel free to write to me at  david@lexwealth.com, or call me at (859) 225-2596 so I can assist you with a Roth conversion today.