When is the Roth conversion deadline?

Roth conversion deadline

The deadline for transferring funds in retirement and other accounts to a Roth IRA is December 31 of the year in which taxes will be paid on the transferred funds. Retirement savers may want to convert a different type of account into a Roth IRA because withdrawals from Roth IRAs can be taken income tax-free. Conversions also allow higher income earners to evade income limits on Roth contributions. A transfer that occurred on or before December 31 in that year will be taxed. After this date, the transfer for the following year will be taxed. The date of the transfer can affect how much tax is due on the transfer, as well as the individual’s overall tax rate. A financial advisor can help you decide if and when to convert an IRA or other account into a Roth IRA.

Roth IRA Conversion Basics

Funds in IRAs and other financial accounts can be converted to Roth IRAs as long as the owner pays taxes on the transferred money before it is placed in a Roth IRA. Retirement savers may choose to convert a different type of account into a Roth IRA because the money in a Roth IRA can be withdrawn later without paying taxes. Roth IRAs also aren’t subject to the required minimum distribution rules that make it necessary for savers to take money out of their retirement accounts after a certain age.

Roth IRA conversion deadline

Taxpayers are required to pay taxes on the money transferred to a Roth IRA and taxes are due for the year in which the conversion was completed, and the deadline for the transfer is December 31 of that year. Transfers that occur between January 1 and December 31 of the year will be taxed as they occur during that year. After December 31, taxes will be charged based on the following year’s return.

The deadline for converting from a Roth IRA is different than the deadline for making a Roth IRA contribution. Roth IRA contributions made through April 15 of any year are included in the prior year’s returns. However, Roth IRA conversions that occur after December 31 for the current year have been reported.

Knowing how the transfer deadline works helps retirement savers manage their tax liability. For example, making a Roth IRA conversion before December 31st will save money, all else being equal, if the tax due on that conversion is lower than if it was made the following year. However, if the transfer will push the taxpayer into a higher tax bracket for that year, it may be best to make the transfer after December 31 or spread it out over several years.

Roth IRA conversion process

Roth conversion deadline

Roth conversion deadline

Converting a Traditional IRA to a Roth IRA requires filling out a form or following some simple instructions from the brokerage or other company where the Roth IRA will be housed. However, there are two important issues that require attention before engaging in this process.

The first involves another deadline. The IRS requires that money withdrawn from an IRA be transferred to a new IRA or another retirement account within 60 days. If such rollover is not completed within that time, the account owner may owe a penalty of 10% on the funds withdrawn plus any income taxes due at the owner’s normal rate. Instructing a brokerage firm or other financial institution to handle the transfer will avoid this possibility. But account holders who withdraw IRA money to deposit into a Roth IRA could incur significant financial costs if they are late by the 60-day deadline.

Another major consideration is that taxes must be paid on the transferred funds before the transfer can be completed. Roth IRAs are funded with after-tax money. This means that the owner must pay taxes at the usual rate on the money being transferred. Finally, one-way Roth IRA transfers. Funds transferred to a Roth IRA cannot be reverted back to their previous state.

bottom line

Roth conversion deadline

Roth conversion deadline

Roth IRA conversions can save on taxes in retirement, avoid having to take required minimum distributions and eliminate income limits on Roth IRA contributions. Funds from retirement and other accounts can be transferred to Roth IRAs as long as the tax due is paid at the time of the transfer. The transfer must be completed within the year in which the taxpayer wishes to pay taxes. Transfers that occurred after December 31 of a given year are considered to have occurred within the following year for tax purposes.

Retirement tips

  • Consider talking to a financial advisor before making decisions about converting a Roth IRA. They can help you find the right tool to invest your assets. Finding a financial advisor doesn’t have to be difficult. Matches the free SmartAsset tool You are with up to three vetted financial advisors serving your area, and you can interview your own advisors at no cost to determine which one is right for you. If you are ready to find a counselor who can help you achieve your financial goalslet’s start.

  • SmartAsset’s Federal Income Tax Calculator can help you estimate how much you’ll owe in taxes. Simply enter your income, location, and filing status and you’ll get a personalized forecast of how much you’ll owe in federal income taxes, including FICA. You’ll also get a breakdown of your marginal and effective tax rate.

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Post What is the Roth Conversion Deadline? It first appeared on the SmartAsset blog.

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