Converting your money to a Roth IRA from a traditional IRA or other retirement account can help you take advantage of the benefits of a Roth IRA, including tax-free qualified distributions and no required minimum distributions (RMDs) in retirement.
However, you’ll need to meet the Roth conversion deadline of Dec. 31 in order for your conversion to apply to the current tax year. If you wait until April, your Roth IRA conversion will count toward next year’s taxes instead.
Since you’ll have to pay taxes on the amount you convert, it’s important to understand the Roth IRA conversion deadline and how it might impact your tax bill.
- You can convert money from a traditional IRA, 401(k), or other retirement account into a Roth IRA, even if your income is too high to make direct contributions to a Roth IRA.
- A Roth IRA conversion could make sense if you expect to be in a tax bracket that is equal to or higher than the one you’re in now when you retire. It may also be a fit if you want to access the other benefits of a Roth account.
- While the federal tax (and IRA contribution) deadline falls in mid-April, the Roth IRA conversion deadline is Dec. 31.
Why Would You Do a Roth IRA Conversion?
A Roth IRA comes with benefits that could make a conversion worthwhile. For one, you contribute post-tax dollars to a Roth IRA so you can make tax-free qualified withdrawals in retirement. Paying taxes now instead of later could be advantageous if you’re in a lower tax bracket than you expect to be in the future.
Because the IRS sets income limits on Roth IRAs, however, you might need to do a Roth IRA conversion to access the benefits of a Roth account.
Roth IRAs also don’t require minimum distributions like traditional IRAs do. If you don’t need your Roth savings in retirement, you’re allowed to leave the money in your account without penalty, perhaps to pass it down to your beneficiaries.
What’s the Deadline for a Roth IRA Conversion?
The deadline for a Roth IRA conversion is Dec. 31. If you made a conversion anytime between Jan. 1 and Dec. 31, 2021, for example, that conversion would count toward tax year 2021.
The federal tax deadline, on the other hand, falls in mid-April. As an example, if you made a contribution to an IRA between Jan. 1 and April 18, 2022, that amount would count toward your 2021 taxes.
Because of these different deadlines, it’s possible that your contribution and conversion could apply to two different tax years, even if you do them back to back. For example, a traditional IRA contribution on April 1, 2022, would count toward your 2021 taxes, while a Roth IRA conversion on that same date would apply to your 2022 taxes.
Backdoor Roth Conversions
If your income exceeds the Roth IRA limits set by the IRS ($144,000 for single filers and $214,000 for joint married filers), it’s still possible to contribute by converting or rolling over your money from a traditional IRA or other retirement account.
This approach is called a backdoor Roth IRA and Congress is working on legislation that could prohibit the conversion of traditional 401(k)s and IRAs to Roth IRAs.
Since there’s no income limits on traditional IRAs—and no limits on Roth IRA conversions—you can convert as much as you like. However, it’s important to be aware of the tax implications of backdoor Roth conversions.
Although your traditional IRA contributions are pretax, you’ll need to pay taxes on the amount before transferring it into a Roth account. The money you withdraw may be subject to a pro rata rule, by which the IRS considers some or all of your retirement savings together instead of separating pretax and after-tax dollars.
Finally, remember that a Roth IRA conversion only works in one direction. In previous years, you could reverse a conversion via recharacterization, but that option is no longer available. Once your money is in a Roth IRA, you can’t convert it back.
A Note on Withdrawing Your Conversions
Since you contribute post-tax dollars to a Roth IRA, you can take distributions tax-free anytime after the age of 59 ½. In the case of a Roth IRA conversion, however, you must wait five years before you can withdraw your contributions, regardless of age. If you try to take out your money before that time, you’ll be subject to a 10% penalty.
The Bottom Line
Backdoor Roth conversions are legal ways to get around the income limits for Roth IRAs and enjoy the benefits of a Roth account. While you’ll need to pay taxes on the converted amount now, you can enjoy tax-free distributions in retirement.
Since the Roth IRA conversion deadline is Dec. 31 for it to apply to the previous tax year, it’s important to consider the tax implications of your conversion upfront. Converting too much at once could bump you into a higher tax bracket and cut into some of your savings. If this is the case, it might be advantageous to convert smaller amounts over several years rather than a large sum all at once.
Frequently Asked Questions (FAQs)
How do you do a Roth conversion?
There are three main ways to do a Roth conversion:
- Roll over a distribution from a traditional IRA, 401(k), or other retirement account into a Roth IRA. You have 60 days to complete the rollover.
- Transfer the funds from your traditional account at one financial institution to your Roth account at another institution.
- Transfer the funds from one account to the other at the same institution.
When does a Roth conversion make sense?
A Roth conversion can make sense if you expect to save money on taxes by converting your pretax savings now rather than waiting until retirement. This might be the case if you’re in a lower tax bracket now than you expect to be in the future. A Roth conversion might also be beneficial if you want the option of eliminating required minimum distributions in retirement or withdrawing your contributions fee-free after five years.
How do you pay taxes on a Roth conversion?
You’ll pay taxes upfront on a Roth conversion so that your post-tax dollars can grow within the account. To manage your tax liability, it might be beneficial to convert smaller amounts over multiple years, rather than a large amount all at once.
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