Don't Miss the Deadline to Undo a Roth Conversion
Sometimes it makes sense to cancel a conversion and get the chance for a do-over.
I converted a traditional IRA to a Roth last year and paid taxes on the money. Since then, however, the investments have lost value. Do I still have time to undo the conversion, get a credit for the taxes I paid and then reconvert the IRA to a Roth to lower my tax bill?
Yes, you have until October 17 to undo a 2015 conversion. You can undo all or part of your Roth conversion (called a recharacterization), get back the money you paid in taxes, and then convert the money again later. If you plan to reconvert the money, you must wait at least 30 days after the recharacterization and until the year after the original conversion -- so you just need to wait 30 days to reconvert your 2015 conversion.
Converting a traditional IRA to a Roth can be a great way to provide tax-free income for retirement. You pay taxes on the money you convert (except for any portion attributable to after-tax contributions), and the Roth grows tax-free after that. But there are several reasons why you might want to undo a Roth conversion:
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Your investments lost value since you converted the traditional IRA to a Roth. You paid income taxes based on the IRA’s value at the time of the conversion. But if the value of the investments has declined since then, you can undo the conversion and then convert the account back to a Roth at the lower value, and pay taxes on the smaller amount.
You're in a lower tax bracket now. If you stopped working or lost your job and will be in a lower tax bracket in 2016 than you were in 2015, you could undo the conversion and reconvert and pay taxes at the lower rate.
The conversion made you subject to the Medicare high-income surcharge. If your adjusted gross income plus tax-exempt interest income is higher than $85,000 if single or $170,000 if married filing jointly, you may have to pay a high-income surcharge on top of your Medicare Part B and Part D premiums. In 2016, that surcharge adds an extra $48.70 to $268 (depending on your income) to your Part B premiums each month, and an extra $12.70 to $72.90 to your Part D premiums each month. (See Medicare Premiums: Rules for Higher-Income Beneficiaries for more information.) But you can undo at least some of the conversion to fall below the income cut-off for the surcharge. You can then spread your conversions over several years to help stay below the threshold each year.
The conversion made more of your Social Security benefits subject to taxes. Whether your Social Security benefits are taxed depends on your provisional income. Your provisional income is your adjusted gross income (not counting Social Security benefits), plus nontaxable interest and half of your Social Security benefits. If it’s between $25,000 and $34,000 and you file taxes as single or head of household, or between $32,000 and $44,000 and you file a joint return, then up to 50% of your benefits may be taxable. If your provisional income is more than $34,000 if single or more than $44,000 if married filing jointly, up to 85% of your Social Security benefits may be taxable. If you undo a portion of your Roth conversion and spread your conversions over several years, you may be able to stay below the income thresholds.
For more information about factors to consider when deciding whether to recharacterize a Roth conversion, see Deadline Nears for Reversing Your 2015 Roth IRA Conversion.
As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.
-
Three Big Ways That Life Insurance Can Be a Lifeline
Life insurance not only provides a safety net for loved ones and leaves behind a lasting legacy, but the cash value can also help during financial hardship.
By Steve Sugumele Published
-
Romance Scams That Target Older Adults Rising: What to Do
Here are some tips to help you avoid falling for a scam, especially when a scammer tries to prey on your affection.
By Patrick M. Simasko, J.D. Published
-
Getting Out of an RMD Penalty
retirement When your brokerage firm miscalculates your required minimum distributions, you have recourse.
By Kimberly Lankford Published
-
Borrowers Get More Time to Repay 401(k) Loans
retirement If you leave your job while you have an outstanding 401(k) loan, Uncle Sam now gives you extra time to repay it -- thanks to the new tax law.
By Kimberly Lankford Published
-
It’s Not Too Late to Boost Retirement Savings for 2018
retirement Some retirement accounts will accept contributions for 2018 up until the April tax deadline.
By Kimberly Lankford Published
-
How Your HSA Can Reimburse You for Medicare Premiums Paid
Medicare Even if your Medicare premiums are automatically deducted from your Social Security check, you can take tax-free withdrawals from an HSA to reimburse yourself.
By Kimberly Lankford Last updated
-
How to Correct a Mistake on Your RMDs from IRAs
retirement If you didn't take out the correct required minimum distribution because your brokerage firm made a mistake, the IRS may show some leniency.
By Kimberly Lankford Published
-
Making the Most of a Health Savings Account Once You Turn Age 65
Making Your Money Last You’ll face a stiff penalty and taxes if you tap your health savings account for non-medical expenses before the age of 65. After that, the rules change.
By Kimberly Lankford Published
-
Reporting Charitable IRA Distributions on Tax Returns Can Be Confusing
IRAs Taxpayers need to be careful when reporting charitable gifts from their IRA on their tax returns, or they may end up overpaying Uncle Sam.
By Kimberly Lankford Published
-
Make the Most of the New Military Retirement Plan
retirement The government is offering a new retirement option so that service members who leave the military before qualifying for a pension can still receive some benefits.
By Kimberly Lankford Published