A conversion is a taxable, reportable movement of assets from either a Traditional IRA (including Traditional IRAs that hold SEP contributions) or a SIMPLE IRA (after a two-year period) to a Roth IRA.
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What should your clients do if an IRA-to-IRA transfer they’ve done is reported to the IRS? Are clients allowed to do prior-year conversions? Does an IRA-to-IRA rollover after a conversion of those same assets violate the one-per-12-month rule?
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Although conversions and recharacterizations are fairly common, many who work with IRAs don’t fully understand how they work. We’ll clear up some common misconceptions about these two types of transactions.
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These days, IRA owners may be noticing a drop in their IRA balances. While discouraging, it might be an opportunity to convert to a Roth IRA. Be sure that you—and your clients—understand how a conversion works.
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Can an IRA owner roll over more than one distribution into an IRA in one year? If not, is there another way to retain the assets in a retirement account? What is the 12-month period for purposes of the one-per-12-month rule?
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Recharacterizations of conversions and retirement plan-to-Roth IRA rollovers are soon to be a thing of the past. Making clients aware of this change before they convert or roll over could lessen any regret or frustration with these transactions later.
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Taxpayers with income too high to make Roth IRA contributions need not rule out Roth IRAs in their retirement planning strategies. They can use other methods to fund Roth IRAs—retirement plan rollovers, IRA conversions, and the backdoor Roth.
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Tax reform legislation no longer allows taxpayers to undo their IRA conversions and retirement plan rollovers to Roth IRAs, which both have potential for heavy tax hits. Here’s a look at recharacterizations during this 2018 transition year.
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