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Roth IRA Conversions - 10 More Questions that Go Beyond the Basics

Last month we covered the basics of a Roth IRA conversion.  (If you missed it, Read it Here). This month we'll discuss a few more mechanics of converting along with conversion strategies to maximize tax savings. Let's get to the Q&A...

1.      First, can you provide clarity on the timing of the conversion and when it’s income for tax purposes?

Income from a Roth conversion is taxable in the year of conversion (e.g.  Income from a conversion done during the 2017 calendar year is reported on the 2017 tax return filed in 2018).

2.      The undo feature from the last Q&A sounds appealing.  Can you talk more about that? 

The technical term is recharacterize.  Let’s say you convert $20,000 of IRA to Roth in 2017. When your CPA is preparing your 2017 tax return you find out the conversion cost (tax) is 40% when you thought it would only be 25%. You decide you don’t want to pay 40%. You can recharacterize (undo) the conversion by moving the $20,000 plus related earnings (or loss) back to traditional IRA.   

3.      Related earnings?  What’s that?

If the $20,000 grows to $21,000 you have $1,000 of related earnings. If you undo the full conversion then you must move the entire $21,000 back to IRA. If you only moved $20,000 back it would’ve resulted in moving $1,000 to Roth without paying any tax (which the tax law does not allow). 

4.      Okay, I understand the mechanics. Can you fill me in on some Roth conversion strategy?

Definitely!  Multiple conversions using different investments can yield significant tax savings. Assume $60,000 is the amount of conversion you want to do in 2017.  Consider doing three separate $60,000 conversions into separate Roth conversion accounts (let’s call them Roth #1, Roth #2, and Roth #3). 

5.      Interesting.  Why would I want three separate conversions?

The three separate conversions should have different investment objectives. For example, Roth #1 could be a U.S. stock fund. Roth #2 could be a foreign stock fund.  Roth #3 could be a bond fund.  This will help to isolate an investment that outperforms from one that underperforms. 

6.      I don’t get it.  Why not combine them all into one conversion account?

You can’t cherry-pick what you want to undo from a single Roth conversion. Assume a scenario where U.S. and foreign stocks are down 20% and bonds are up 5%, you’d want to keep the bond fund (Roth #3) converted and undo #1 and #2. If everything was combined into one conversion, you would undo 2/3rd of the combined (lesser) value. 

7.      I think I got it.   Can you run through the numbers? 

Sure.  Roth #1 and Roth #2, down 20%, would be worth $48,000 each while Roth #3 (up 5%) would be worth $63,000. The total of the three conversion accounts is $159,000. You undo #1 and #2 (totaling $96,000) and put those back to traditional IRA. You are left with $63,000 in converted Roth (in #3).  Remember you pay tax on the value at conversion, which was $60,000. So, you are $3,000 ahead of the game. 

8.      I follow.  So, how is that different than if it was only in one conversion account?

With one conversion account the value would be the same $159,000. Assuming the same goal of keeping $60,000 of the original $180,000 converted, you would move 2/3rd of the value back to IRA and keep 1/3rd of the current value in Roth. That would mean $106,000 back to traditional, leaving only $53,000 in the Roth conversion. So, without the multiple conversion strategy, you would still pay tax on $60,000 but only be left with $53,000 in Roth conversion. Not a good answer. 

9.      Thanks for clearing that up. Anything else we should know? 

You can do more than three Roth conversions. Consider separate conversions for different individual stocks if that’s what you own. Or maybe you have sector funds that you can use. And don’t stop with one year. Once the next year starts up, go ahead and do some more. Remember to keep them separate, though. Don’t commingle Roth conversion assets until you know for sure that you want to keep them converted. Consider keeping a Roth conversion “home” account where you move converted values that you decide to keep. 

10.  Wow.  I didn’t realize how much could be done with Roth conversions. Any last words? 

Have fun with it. It sounds like a bit of work, but having a CPA and financial advisor that work together to execute the conversions and monitor performance to determine what to keep and what to undo makes the process seamless.  


If you missed part 1, here are the basics on Roth IRA Conversions.

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10 Roth IRA Conversion Questions and Answers

Converting traditional IRA (Individual Retirement Account) funds to a Roth IRA can be a powerful tax savings opportunity. Here are some frequently asked questions on the topic:

1. What is the main difference between traditional IRA and Roth IRA? 

A traditional IRA provides tax-deferred growth. A Roth IRA offers tax-free growth.

2. What’s the tax cost of converting to Roth? 

The value of the conversion is ordinary income. The tax cost will depend on your marginal tax rate.   Some taxpayers could pay as high as 40% tax; others may pay nothing.  Many will pay a rate somewhere in between.    Work with your tax/financial advisor to watch for opportune times to convert to Roth.

3. What do you mean by “opportune times”?

Think of it as tax bracket management. If you have a lower income year and have room in a lower tax bracket, you can fill that bracket up with Roth conversion. Might you have some unused deductions?   Opportunity depends on your situation. Some retirees may benefit by converting to Roth each year before being subject to higher Medicare premiums or before required IRA distributions force them into a higher bracket. 

4. Does a Roth conversion make sense for everyone? 

No.  A general rule of thumb is comparing what tax rate you would pay today vs. tax rate in retirement.

5. Can I do a partial conversion?

Yes!  Most likely you’ll only want to convert a portion of your IRA to avoid going into higher brackets.

6.Should I request that tax be withheld on a conversion? 

No. The withholding would be treated as a distribution and would not be part of the conversion. Make estimated tax payments or adjust withholdings from other income sources to cover taxes. 

7. Can I undo a conversion? 

Yes, this is called a recharacterization, but it must be done before the extended due date of the tax return.  (i.e. October 15th of the year following the conversion)

8. Why would I want to recharacterize (undo) a conversion?

One reason to “undo” is because the value of the Roth decreased significantly (why pay tax on a $50,000 conversion that is now worth $44,000). A second reason is because the optimal amount to fill a tax bracket was less than you thought (e.g. You thought you could bring in $50,000 of income at the 15% tax rate, but it turns out you only had $25,000 of room. You can undo 50% of the conversion.)

9. Can I convert my work 401(k) to Roth 401(k)? 

Yes, you can, but your plan must allow for it. It’s very important to note that a recharacterization (“undo” option) is not available for 401(k) conversion. 

10. Is there anything else I should know?

We’ve covered the basics here and only began to touch on considerations. Next, we’ll focus on Roth conversion strategies involving multiple conversions and different investments; that and more in next month’s article.  

How Can DHJJ Financial Advisors Help?

Do you have a question about a Roth conversion?  E-mail Terry at This email address is being protected from spambots. You need JavaScript enabled to view it. ; he may include it in next month’s article.


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A Year-End Income Tax Projection Is Key To Year-End Tax Planning

A Year-End Income Tax Projection Is Key To Year-End Tax Planning

Where has the year gone? With the holiday season soon in full swing you may not give year-end tax planning the attention it deserves. Too often taxes are only thought of when they need to be paid or when a tax return needs to be filed; this can be costly. There could be actions to take before year-end to minimize your tax bill or to take advantage of a unique tax situation you are in.

It’s imperative that a year-end tax projection be done to see where 2016 income stands to arrive at an estimate of taxable income. The projection is the starting point to see what the tax is on the next dollar of income or what the tax benefit is on the next dollar of deduction. Due to the alternative minimum tax (AMT) and certain phase-outs you cannot assume that your next dollar of income or deduction will be at your marginal tax rate. For example, many taxpayers in the $200,000 to $300,000 income range would fall into a marginal tax rate of 25% to 28%, but, most taxpayers in this income range actually pay tax at a 35% rate on an additional dollar of income because they are subject to the AMT and phase-out of the AMT exemption.

Here are just a few of the questions to address with year-end planning:

  • Should I accelerate income? Or defer?
  • Am I subject to the Alternative Minimum Tax? Am I in the “phase-out range” of the AMT exemption?
  • Should I give more to charity this year? Or is next year better? Should I consider a donor advised fund?
  • Have I paid in enough tax to protect me from underpayment penalties? What can I do if I haven’t?
  • Should I make large equipment purchases this year or next? How much can I buy and write off 100%?
  • If I’m going to owe state income taxes, is there a benefit to paying before 12/31?
  • Am I utilizing all of my deductions? What can I do if I am not?
  • Should I realize capital gains? Should I realize capital losses? How much? Short-term or long-term?
  • Does a Roth IRA conversion make sense? How much?
  • Should I convert some of my 401(k) to Roth 401(k)? Can I?

The above are some of the more common questions that your tax advisor can answer for you. There are many more items to consider based on a taxpayer’s unique situation.

To get started you should provide your tax advisor with your 2016 information (mainly what has changed from 2015, assuming they have your 2015 return). They can run a projection and analyze some “what-if” scenarios in order to discuss year-end moves to consider.

When the clock strikes midnight on New Year’s Eve it will be too late to act. Make an early New Year’s resolution to save some tax on your 2016 tax return by looking at your 2016 tax situation today.

How DHJJ Financial Advisors Can Help If you have questions on year-end tax planning and how it may play a part in your future financial planning, please contact DHJJ Financial Advisors at 630-420-1360 or email Terry Cicero at This email address is being protected from spambots. You need JavaScript enabled to view it.

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