Tax and Money Tip of the Week
September 21, 2011 | No. 61
IRA Terms You Sould Know

Three Terms Regarding Roth Conversions

There were a lot of discussions this recent tax season regarding the tax law changes on Roth conversions.  Those conversations will likely continue this year, as some changes to your new Roth can be made through October 2011.
 
Here are three terms you should know:
 
Conversion:  A conversion is the act of moving your retirement account assets from one type of IRA to another.
 
You can convert all or part of a traditional IRA to a Roth IRA.  Just remember the amount you convert is taxable, assuming you have no basis in your traditional IRA.
 
Note:  Only conversions made in 2010 allowed you the option to pay one half the tax liability in 2011 and the other half in 2012.  Any conversions made in 2011, and the subsequent taxes, will need to be paid on your 2011 tax return.
 
Recharacterization:  After making a Roth conversion, you can choose to transfer the assets back to your traditional IRA.  Recharacterizing cancels the initial conversion as if it never happened.  This could be good tax planning if the value of the assets decline after you converted.  While the loss is not deductible, you’ll avoid paying tax on the full amount of the initial conversion.
 
For a 2010 conversion, you have until October 17, 2011 to do a recharacterization.
 
Reconversion:  A reconversion is what happens after you convert a traditional IRA to a Roth, later recharacterize, and then decide to make another conversion.
 
A waiting period applies that limits you to one reconversion per year.
 
Give us a call to see if any of these tax planning tips could help you.

Questions or Comments?

You can add comments on the blog, call 919-847-2981, or visit our web site. We look forward to hearing from you.

Mark Vitek, CPA/PFS, CFP®
mark@markvitekcpa.com

…until next week.