“Complaints and confusion often surround the notion of ‘reversing’ a Roth IRA conversion,” says the new statement from Equity Trust Company. The company goes on to explain what such a reversal entails. “The popularity of Roth IRA conversions has grown since 2010, when the income requirements that limited who could convert from a Traditional IRA to a Roth IRA were lifted. But just as the popularity in these conversions increased, so did the confusion around the little known strategy of re-converting back to a Traditional IRA from the Roth IRA.”
This confusion arises from a lack of knowledge about IRS rules. Typically, you have until the due date for filing your federal tax returns, which after extensions is October 15, to “test out” your Roth conversion. Converting from a traditional to a Roth IRA is a taxable action. In some cases, your Roth IRA’s value decreases after the conversion and therefore your tax bill may be higher in relation to your account.
Continues the Equity Trust Company statement, “For example, an account that is worth $10,000 on May 1 is converted to a Roth IRA, but because of market changes, the account is only worth $8,000 on September 15. That person will be liable for tax on the $10,000, and in this case, the person might want to reverse course back to his or her Traditional IRA. There would still be an opportunity to redo the conversion if the market again changes, but that person cannot reconvert in the same year as of the conversion and the waiting period between undoing the conversion and redoing it must be at least 30 days.”
So before doing a conversion for next year, get all the information you need from the tax experts at the IRA Financial Group today. Give us a call at 800.472.0646 today and don’t forget to follow us on Twitter @BergmanIRA!