The deadline for converting funds in retirement and other accounts to a Roth IRA is Dec. 31 of the year for which taxes will be owed on the converted funds. Retirement savers may want to convert a different type of account to a Roth IRA because withdrawals from Roth IRAs can be taken free of income tax. Conversions also allow high earners to evade income limits on Roth contributions. A conversion occurring on or before Dec. 31 will be taxed in that year. After that date, the conversion will be taxed for the following year. The conversion date can affect how much tax is owed on the conversion, as well as an individual’s overall tax rate. A financial advisor can help you decide whether and when to convert an IRA or other account to Roth IRA.
Roth IRA Conversion Basics
Funds in IRAs and other financial accounts can be converted to Roth IRAs as long as the owner pays taxes on the converted funds before they are placed in the Roth IRA. Retirement savers may choose to convert a different type of account to a Roth IRA because funds in a Roth IRA can be withdrawn later without owing taxes. Roth IRAs also are not subject to the Required Minimum Distribution rules that make it mandatory for savers to take money from their retirement accounts after a certain age.
Roth IRA Conversion Deadline
Taxpayers have to pay taxes on funds converted to a Roth IRA and the taxes are due for the year during which the conversion has been completed the deadline for the conversion is Dec. 31 of that year. Conversions taking place between Jan. 1 and Dec. 31 of the year will be taxed as happening during that year. After Dec. 31, taxes will be levied based on the following year’s return.
The Roth IRA conversion deadline is different from the Roth IRA contribution deadline. Roth IRA contributions made up until April 15 of any year are included on returns for the previous year. However, Roth IRA conversions taking place after Dec. 31 are reported for the current year.
Knowledge of how the conversion deadline works help retirement savers manage their tax liability. For instance, doing a Roth IRA conversion before Dec. 31 will save money, all else equal, if the tax owed on that conversion would be less than if it were done the following year. However, if the conversion would push the taxpayer into a higher tax bracket for that year, it may be better to do the conversion after Dec. 31 or spread it out over several years.
Roth IRA Conversion Process
Converting a traditional IRA to a Roth IRA requires filling out a form or following some simple instructions from the brokerage or other firm where the Roth IRA will be housed. There are two important matters that require attention before engaging in this process, however.
The first involves another deadline. The IRS requires funds withdrawn from an IRA to be rolled over into a new IRA or another retirement account within 60 days. If this rollover is not completed within that time, the account owner may owe a 10% penalty on the withdrawn funds as well as any income taxes due at the owner’s regular rate. Instructing a brokerage or other financial institution to handle the conversion will avoid this possibility. But account owners who withdraw IRA funds for deposit into a Roth IRA may incur significant financial costs if they delay past the 60-day deadline.
Another key consideration is that taxes on converted funds must be paid before the conversion can complete. Roth IRAs are funded with after-tax money. This means the owner must pay taxes at their regular rate on the money being converted. Finally, Roth IRA conversions are one-way. The funds converted to a Roth IRA cannot be converted back to their previous status.
The Bottom Line
Roth IRA conversions can save on taxes in retirement, avoid having to take Required Minimum Distributions and escape income limits on Roth IRA contributions. Funds from retirement and other accounts can be converted to Roth IRA accounts as long as the tax owed is paid at the time of the conversion. A conversion has to be completed during the year during which the taxpayer wants to pay the taxes. Conversions occurring after Dec. 31 of a given year are considered to have occurred during the following year for tax purposes.
Tips for Retirement
- Consider talking to a financial advisor before making decisions about a Roth IRA conversion. They can help you figure out the right vehicle to invest your assets. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- SmartAsset’s Federal Income Tax Calculator can help you estimate how much you will owe in taxes. Just enter your income, location and filing status and you’ll get a customized projection of how much you’ll owe in federal income taxes, including FICA. You’ll also get a breakdown showing your marginal and effective tax rate.
Photo credit: ©iStock.com/DNY59, ©iStock.com/AndreyPopov, ©iStock.com/designer491