In a twist, the new rule would effectively impose a deadline on all Backdoor Roth IRA planning: December 31, Usually, the deadline to worry about from a Backdoor Roth IRA perspective is the deadline to make the nondeductible traditional IRA contribution, usually April 15th of the following year. There is no particular deadline to complete the Roth conversion step. I wrote about how the legislative proposal impacts the approach to Backdoor Roth IRA planning and deadlines here. On October 28th, a new tax proposal came out which did not have the Backdoor elimination proposals.
However, a second new tax proposal issued on November 3rd did contain the Backdoor Roth elimination proposals. Based on the current political landscape, there is significant doubt as to whether any tax proposal is enacted during this Congress.
However, there is at least some chance the Backdoor Roth proposals are enacted. A couple of observations about this rule. First, this rule would have no practical effect on the FI community.
Usually, those in the FI community avoid taxable Roth conversions during high income years. Taxable Roth conversions such as the so-called Roth Conversion Ladder strategy are usually executed during early retirement before collecting Social Security.
Those years often have artificially low taxable income, so a high income cap on the ability to do a Roth conversion is a rule without consequence for the FI community. Second, you might be wondering: why the heck are they changing the tax law 10 years in the future?
Why not now? Taxable Roth conversions, particularly in the near term, increase tax revenue. But by delaying implementation for 10 years, Congress is able to predict that taxpayers, facing a future with no Roth conversions, will increase Roth conversions in and , increasing tax revenues in those years.
Congress is closely divided. There is absolutely no guarantee this bill will pass both houses of Congress and be signed by the President. I will Tweet and blog about any future developments in this regard. FI Tax Guy can be your financial advisor! Find out more by visiting mullaneyfinancial. Follow me on Twitter: SeanMoneyandTax. This post is for entertainment and educational purposes only. It does not constitute accounting, financial, investment, legal, or tax advice.
Please consult with your advisor s regarding your personal accounting, financial, investment, legal, and tax matters. Thanks for the clarifications, Sean. The rules governing IRAs specify a number of deadlines that pertain to different aspects of these accounts. Two important annual deadlines are the Roth IRA conversion deadline December 31 , and the deadline for contributions to an IRA the due date for filing taxes, around April 15 of the next year with no provision for extensions.
A Roth IRA differs from the traditional variety in several ways. To start with, contributions are post-tax, meaning you get no tax deduction for them. Your money grows tax-free and you pay no taxes on distributions as long as you follow the rules. Those rules state that you can withdraw contributions tax-free at any time, but you face taxes and possibly a 10 percent penalty if you withdraw earnings before either of these dates:.
The five-year rule has no exceptions, and always results in taxes and the penalty payment on earnings withdrawn during the period. A Roth rollover is a conversion if it is sourced by a pre-tax retirement account such as a traditional IRA or k. Converted amounts are included in your taxable income for the year. Roth conversion rules allow you to convert cash or other assets in any of the following three ways:.
A separate five-year period for distribution of earnings is associated with the earnings stemming from each separate conversion transaction. Report the recharacterization on your tax return for the year during which the contribution was made. No deduction allowed. You cannot deduct the contribution to the first IRA. Any net income you transfer with the recharacterized contribution is treated as earned in the second IRA. The contribution will not be treated as having been made to the second IRA to the extent any deduction was allowed for the contribution to the first IRA.
Conversion by rollover from traditional to Roth IRA. You receive a distribution from a traditional IRA in one tax year. For recharacterization purposes, you would treat this transaction as a contribution to the Roth IRA in the year of the distribution from the traditional IRA. Was this helpful to you?
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