The ERISA consultants at the Columbia Management Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. A recent call with an advisor in Pennsylvania is representative of a common inquiry involving Roth IRA or Roth in-plan conversions. The advisor asked:
“What is the deadline to complete a 2012 Roth conversion?”
Highlights of Discussion
• In order for a taxpayer to consider either a Roth IRA or Roth 401(k) in-plan conversion for 2012 tax purposes, he or she must complete the conversion no later than Monday, Dec. 31, 2012.
• Don’t confuse the 2012 conversion deadline with the deadline for making a 2012 Roth IRA contribution, which is April 15, 2013.
• A conversion (to a Roth IRA or within a 401(k) plan) requires the individual to count any pre-tax dollars that he or she converts as additional taxable income for the year of conversion.
• A 2012 Roth conversion may have its advantages over a 2013 conversion, considering the additional health care taxes that will apply to certain individuals beginning in 2013. For example, generally, as defined by the Patient Protection and Affordable Care Act (PPACA), the 3.8% Unearned Income Medicare Contribution Tax is assessed on the lesser of net investment income or modified adjusted gross income (MAGI) over the threshold amount. (A precise explanation of the calculation is beyond the scope of this article.) A 2013 Roth conversion would increase a person’s MAGI for this purpose.
• Keep in mind also that an individual who converts in 2012 and files his or her taxes on time would have until Oct. 15, 2013, to “undo” (i.e., recharacterize) the conversion without tax implications or penalties and later can reconvert the amount after a prescribed time period, if desired.
Conclusion
There may be a number of clients who are considering a Roth conversion for 2012. It is important to be aware of and meet the deadline in order for it to count toward 2012 income taxes rather than 2013. Financial advisors who can demonstrate their knowledge of Roth conversion rules set themselves apart from the average advisor and are better positioned to support their clients.
The Columbia Management Retirement Learning Center Resource Desk is staffed by the Retirement Learning Center, LLC, a third-party industry consultant that is not affiliated with Columbia Management. For informational purposes only. Please consult a tax advisor or attorney for specific tax or legal needs. © 2012 Columbia Management Investment Advisers, LLC. Used with permission.
