Tax Tip: It's Not Too Late for a Roth IRA Conversion

There is a common misperception about converting regular IRA funds to the Roth IRA, that being that this was a decision that needed to be made and acted upon in 1998. The Roth IRA, a personal retirement account that can be created by any low or middle income taxpayer with earned income, provides tax-free income security for retirement. Annual contributions, which are currently limited to $2,000, are not tax deductible, but all money withdrawn from the Roth after age 59½, including all money earned in the account, is tax-free. There are no strict rules that force you to begin withdrawing money from your Roth at a certain age, nor are there restrictions about how much you can withdraw each year.

In 1998, in an effort to boost the coffers of the federal government (and you were wondering where that unexpected budget surplus came from...) the IRS provided owners of traditional IRAs with an opportunity to convert traditional IRA money to a Roth IRA and spread the tax on the conversion over a four-year period. This procedure was perceived as some sort of gift from the IRS, a one-time-only chance to spread the tax consequences of a taxable event over a four-year period.

The calendar may no longer read 1998, but anyone meeting the conversion requirements can still convert money from a traditional IRA to a Roth and spread the tax over four years – or six years or 10 years, or however many years you want to take. All you have to do is convert the funds at a pace at which you want to pay the tax, keeping in mind that your income must be below $100,000 in any year in which you make a conversion.

If you have money in a traditional IRA and you want to start moving that money to a Roth IRA, and you’d like to spread the tax effects of this event evenly over the next five years, you should take one-fifth of the amount in your regular IRA and convert it this year and pay the tax. Take another portion of the regular IRA and convert it next year and pay that tax, and so on and so on for five years. If there is a year when the taxes are going to be too oppressive for you or when you don't meet the income requirements for a conversion, don’t convert any funds that year, wait until the next year.

Take control of the conversion process, converting funds and paying taxes when it suits you instead of when it suits the IRS.