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The Earlier in
2010 You Convert
to a Roth, the Better
There
are few places in the tax law where one can “”undo”” an
earlier taxable act. The conversion of a traditional
Individual Retirement Account to a Roth IRA is one of these
opportunities where a reversal is possible. Since you can
optimize any time allowed, we suggest looking at the choice
carefully now to see if converting makes sense — and then
if it does, acting as quickly as possible in 2010.
Roth
Conversions and Recharacterizations
Although
it's currently possible for anyone with annual income below
$100,000 to convert an IRA into a Roth, the year 2010 will see
more focus on conversion opportunities because the income ceiling
will be lifted.
Roth
conversion rules allow an investor to recharacterize or “undo”
a conversion. This makes sense when the value of the Roth
declines substantially, making the tax bite disproportionate to
the Roth’s value. The government gives Roth converters the
choice to reverse any conversion, but the recharacterization
election must be made before the tax filing becomes final for the
year of conversion. For those converting in 2010, that time
frame could stretch until October 2011. Thus, if you convert
on Jan. 4, you will have 21 months to measure performance.
If the conversion takes place in November 2010, for example, the
maximum time would be cut to 11 months.
Making
the decision to recharacterize a depreciated Roth even more
practical is the ability to convert a recharacterized IRA back to
a Roth the following calendar year, at a lower value and thus a
lower tax. There does not seem to be a limit on how many
times a very unlucky investor could conceivably convert,
recharacterize and convert again.
I’m
sure the question of who should and shouldn’t convert will be
hotly debated. But one thing seems clear — anyone who is
going to convert should do so in the beginning of the year to give
themselves a maximum amount of time to make the critical
recharacterization decision.
This
article and other articles are provided for
information purposes only. They are not intended to be
an offer to engage in any securities transactions or to
provide specific financial, legal or tax advice. Articles
may have been rendered partly inaccurate by events that have
occurred since publication. Investors should consult
their advisers before acting on any topics discussed herein.
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