To reverse a conversion by returning an account to traditional IRA status, you must submit the required form to your Roth IRA trustee or custodian by October 15 of the year following the conversion. If October 15 falls on a weekend, the deadline is the following Monday. You may currently be in the 12% tax bracket. Thanks to disciplined saving, however, you expect that you’ll be in the 22% tax bracket after you retire.
Or you may be firmly convinced that tax rates will generally rise in the future, which will raise the tax bracket from 12% to 15%. In either case, the switch would allow you to now pay a lower tax rate instead of a higher tax rate. Converting IRA funds into a Roth IRA in a low tax bracket is a sound tax strategy, but be careful here. Note that it is advisable to consult a tax professional before making decisions if you want to convert non-deductible contributions and have other IRA assets.
When you transfer 401 (k) funds or traditional IRA funds to a Roth account, you take contributions before taxes and transfer them to an account that is intended for after-tax contributions. So even if you earn too much to contribute directly to a Roth IRA, you can still contribute to a traditional IRA and then make a conversion. Converting a traditional IRA to a Roth IRA can result in tax-free growth and the ability to withdraw funds tax-free in retirement. The contributions you make from your paycheck to a traditional 401 (k) are pre-tax, just like most traditional IRA contributions.
Because of these factors at the end of the year, it is advisable in most years to wait until the end of the year before making the switch. These limits may lower the amount you can contribute or prohibit you from making any contributions to the Roth IRA at all. Don’t assume that you can make a non-deductible IRA contribution and then immediately convert it into a Roth IRA with no tax implications. It’s an alternative to the traditional, non-taxable 401 (k) rollover, which would transfer your savings into a traditional IRA.
Otherwise, the IRS assumes that part of your conversion is taxable based on the composition of your non-deductible and deductible IRA balances. If you’ve left a job and still have money in your former employer’s 401 (k), you can convert some or all of that money into a Roth IRA. If you switch to a Roth IRA and extend your tax return, you usually have until October 15 of the following year to reverse it. But what if you convert a traditional IRA, which is subject to income tax on all income and deductible contributions, and then discover that you would have been better off if you hadn’t converted it? Thankfully, it’s possible to reverse a Roth IRA conversion by using a “recharacterization.”
In a Roth conversion, funds held either in a traditional IRA or in a standard 401 (k) are transferred to a Roth IRA. I understand that if I have more taxable income than I’d like, I can reverse the Roth conversion and pay the money back to the traditional IRA.
