Roth IRA- Take a Bite Out of Taxes by Year-End

Remy Schneider, Tax Manager
December 2012

Perhaps you have been contemplating a Roth conversion.  If so, now may be the right time to take advantage of this opportunity.  A Roth IRA allows you (or your beneficiaries) to take distributions of principal and earnings, penalty-free and tax-free, if you follow certain rules regarding age-limits and timing of distributions.

Converting a traditional IRA or other qualified plan (some 401K plans may be eligible for conversion) requires paying tax now on the amount converted.  Still, the benefits of converting to a Roth before the end of 2012 may be worth the cost. Some of these benefits include:

  • Triggering tax at relatively low rates now, before the Bush tax cuts end as scheduled for 2013;
  • Paying tax on a lesser amount, because any future appreciation is tax-free;
  • Potentially lessening the hit from the new 3.8% Medicare surtax on investment income, which begins in January 2013; and
  • Escaping required minimum distribution (RMD) rules during your life. RMD rules do not apply to most Roth IRAs, so if you don’t need the money, you can save it for your heirs, who may be able to receive the money tax-free as well.

The conversion is reversible.  Therefore, if you later determine that the Roth conversion is not desirable, you can unwind the transaction as late as the date you timely file your 2012 personal tax return (including extensions).

If you are interested in converting to a Roth IRA before year end, please contact your BNN advisor or Jean McDevitt.

Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.

Pursuant to requirements imposed by the Internal Revenue Service, any tax advice contained in this communication (including any attachments) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any tax-related matter.  Please contact us if you wish to have formal written advice on this matter.