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What you need to know if you’re considering Roth IRA conversion

Updated: May 3, 2013 12:15PM

Q. I was thinking about converting one of my IRAs to a Roth IRA, but I thought there were some income limits? What
are the rules, and when must this conversion be done for 2012?

A. The rules around Roth IRA conversions have changed so many times in recent years that it’s no wonder you are confused. Ed Slott, CPA and noted IRA expert, answers questions like this at his website He can also direct individuals to IRA experts he has trained.

But here is some basic information for those thinking of converting from a traditional IRA to a Roth IRA in the remaining weeks of this year. First, there is no longer any income limit to do a Roth conversion. Anyone can convert at any time regardless of age, employment or income. The deadline is Dec. 31 — but don’t wait to the last minute.

What you do need is money outside your IRA to pay the taxes that will be due when you file your return in April. The amount of your conversion will be added to your ordinary income — since you received a deduction for your original contributions and have not yet been taxed on the gains in your traditional IRA.

If you’re thinking of using some IRA money to pay those taxes, you’re defeating the purpose of rolling your money into a Roth, which offers future tax-free growth. Any money you withdraw to pay taxes will itself be taxed!

Why would anyone want to convert to a Roth IRA?

♦ Young people should start contributing to a Roth and forgo the deduction, and they should convert small traditional IRAs to a Roth to take advantage of many years of tax-free growth ahead.

♦ Older people may want to convert because Roths do not have mandatory distribution requirements, allowing your IRA to keep growing for your heirs if you do not need to withdraw for living expenses.

♦ And, no matter what your age, if you believe the stock market will continue to rise, you might want to pay the taxes on your existing IRA now — before it becomes even more valuable! And those worried about huge deficits and political discussions about raising taxes in the future might decide it makes sense to pay taxes at the 2012 rate on ordinary income.

One more thing to keep in mind: If you do a conversion in 2012, you have until Oct. 15, 2013, to undo the conversion if you change your mind. That could happen if the stocks or mutual funds in the converted account fall sharply in value. Then you’d be sorry that you converted and paid taxes on the much higher value. Even if you’ve already paid the taxes on the conversion when you file your return in April, you can “recharacterize” (another word for reconversion), and file an amended return and get back the taxes you paid, plus interest!

Seek expert tax help if your situation is complicated. But for most people the rule is simple. Convert to a Roth in 2012 and pay taxes at this year’s rates. You’ll avoid future taxes on the account — if the government keeps its promise!

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