Tax planning with Roth conversions

Yes, 2010 was the year of the Roth, and you may have
converted your traditional IRA to take advantage of the
one-time option to postpone recognizing the income. As
you know, half of the related tax bill will be due with
your 2011 tax return.

End of story? Not exactly. You can still take advantage
of a planning window that may save you money. Under the
rules, you have until October 17, 2011, to change your
mind about the original conversion.

The tax term for the “do-over” election is
recharacterization. It works like this: Say the value
of the assets you converted to a Roth during 2010 has
declined. That means if you had waited until now to
convert, you would have ended up paying less tax.
Reversing your 2010 decision puts you back in the
position you were in before the Roth conversion and
wipes out your original tax liability.

Even better, you can still do another traditional-to-Roth
IRA conversion after recharacterizing. While the option
of splitting the income over future years is no longer
available, you can achieve the same effect by
reconverting over a multi-year period. Just be aware
that time restrictions may apply on this strategy.

Haven’t converted to a Roth yet? You still have time to
decide if a full or partial Roth conversion makes sense
for you this year. A potential tax-reducing suggestion:
Transfer investments from your traditional IRA to a Roth
during a market dip. You’ll capture after-conversion
growth without owing additional tax.

For details or assistance, give us a call.

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