Generally, taxpayers aim to minimize their taxes, and likewise, financial advisers and C.P.A.s provide guidance to help you avoid triggering a taxable event. However, you may find more than a few recommending you consider a Roth conversion, before year-end.
If you convert pre-tax money in an IRA to a Roth IRA, you will have to pay taxes at your current marginal rate on the amount converted. Yes, that could mean a higher federal and state bill for 2012. However, with the increasing likelihood of rising tax rates next year, accelerating income into this year may be a beneficial move for certain investors.
Currently, there is no income limit for a Roth conversion. Therefore, it may be beneficial to convert funds in a pre-tax IRA to a Roth, to potentially avoid higher future tax rates on your eventual withdrawals. Qualified withdrawals from a Roth IRA are free from federal income tax. Additionally, withdrawals are not required, so a Roth may result in additional money being transferred to your heirs.
Furthermore, in 2013, investors are scheduled to see a 3.8% Medicare surtax on investment income for those with modified adjusted gross incomes (MAGI) above $200,000 for individuals and $250,000 for married filing jointly. While a Roth conversion in 2013 would not be considered investment income, it could increase your MAGI above the threshold, subjecting other investment income to the Medicare surtax. This surtax, combined with potentially higher marginal rates, makes 2012 attractive for conversions.
If this is something you’d like to consider, talk to your financial adviser or C.P.A. sooner than later as your window for a conversion is narrow. An expert can help you estimate how a conversion will affect your taxes and your investments.
William G. Lako, Jr., CFP®, is a principal at Henssler Financial, and a co-host on Atlanta's longest running, most respected financial talk radio show "Money Talks," airing Sundays at 10 a.m. on Talk 920 AM, WGKA.