Deadline for Roth Conversions at Preferential Tax Rates: December 31, 2012
Published: November 21, 2012
Market Trend: Beginning in 2013, a new 3.8% Medicare tax will apply to certain investment income, and income taxes generally may increase if the Bush tax cuts expire. Thus, individuals could have difficulty structuring their financial affairs in a tax efficient manner given the current uncertainty regarding future tax rates.
Synopsis: Owners of traditional IRAs who are considering a Roth conversion may wish to do so in 2012. Conversions after 2012 could be subject to higher income tax rates if the Bush tax cuts expire as scheduled on Jan. 1, 2013. Further, post-2012 conversions will increase the IRA owner’s modified adjusted gross income for purposes of determining whether the owner exceeds the income thresholds for application of the new 3.8% Medicare tax on net investment income (although the Medicare tax itself would not apply to the taxable income resulting from the Roth conversion). Taxpayers may retroactively reconvert the Roth IRA back to a traditional IRA before the taxpayer’s filing deadline (including extensions) for his or her 2012 tax return without penalty if recommended by subsequent changes in the tax laws or the taxpayer’s circumstances.
Take Away: Regardless of whether tax reform occurs or the Bush tax cuts expire, certain tax increases under President Obama’s health care legislation will take effect in 2013. Accordingly, owners of traditional IRAs should analyze (1) the potential benefits of a Roth conversion for their particular circumstances, and (2) whether doing the Roth conversion in 2012 would increase the conversion benefits given the tax changes scheduled for 2013, keeping in mind the opportunity for a retroactive re-conversion if circumstances later change.
