I am considering converting part of a Traditional IRA to a Roth IRA. Part of my income is from self-employment. I may not know until my taxes are calculated by my accountant (February/March 2006) if my adjusted gross income will be under the 100K maximum which would permit me to make such a conversion.

I know that contributions to a Roth IRA for 2005 may be made up to the April 15, 2006 tax-filing deadline. Is there a similar IRS provision allowing the conversion of a Traditional IRA to a Roth IRA for the year 2005 to be done by April 15, 2006?

Many thanks in advance for your help.

Stewmart

Greetings, Stewmart, others may verify but I believe that conversion must be done by 12/31 of the CURRENT year in which you wish to convert. In other words, no 4 month extension to apply the conversion to the prior year.

You'd also want to be asking when the taxes owed based on the conversion are due and I am betting they are tied to the year in which you convert. So that depends on if you pay quarterly estimated taxes or if you could possibly increase your withholding on the part of your income that is NOT from self-employment to account for at least the amount of withheld tax that keeps you covered under the Safe Harbor rules for having had sufficient tax withheld.

More questions than answers, I suppose! We will both benefit from waiting for a more expert reply.

xraymd

Greetings, Stewmart, others may verify but I believe that conversion must be done by 12/31 of the CURRENT year in which you wish to convert. In other words, no 4 month extension to apply the conversion to the prior year.

You'd also want to be asking when the taxes owed based on the conversion are due and I am betting they are tied to the year in which you convert.

Correct on both counts. Since we're in the last tax "quarter" already, any tax due on an IRA conversion now would be due on either 1/15 or 4/15.

If you can meet any one of the safe harbor exemptions from estimated tax underpayment penalties, you can delay paying the bulk of the remaining tax until 4/15/06. There are programs available that will do the calculations for you and tell you the minimum current tax payment required. Search for estimated taxes annualized income calculators. I've used QITC from edcosoft in the past.

Ira

Hi xraymd,

Many thanks for your helpful reply. I hope others can confirm your responses although I believe you are correct on all points. I will just have to do my best at the end of this year to determine whether or not my 2005 AGI will be under the $100K maximum permissable for an IRA to Roth conversion.

Stewmart

Hi Ira,

I greatly appreciate your confirmation of xraymd's responses.

My accountant assures me I have already met one of the estimated tax underpayment penalty safe harbors with the payments I've made this year. I will certainly double-check all the details with him before any IRA to Roth conversion.

Many thanks, again.

Stewmart

Many thanks for your helpful reply. I hope others can confirm your responses although I believe you are correct on all points.

He is. Although it's hard to prove a negative, I'll give it a whirl. The general rule is that transactions are reported on the return for the tax year in which they occur. There is a special provision for IRA contributions that allows contributions made before the unextended due date of the return to be "deemed" to have been made during the previous tax year. There is no corresponding provision for conversions, so by default they go on the return for the year in which they happen.

I will just have to do my best at the end of this year to determine whether or not my 2005 AGI will be under the $100K maximum permissable for an IRA to Roth conversion.

Don't oversweat it. You can always "undo" an illegal conversion through a recharacterization. The deadline for doing so for a 2005 transaction would be 10/15/2006. If you think this might be an issue, do the conversion into a Roth account that contains nothing else. That will greatly simplify the recharacterization process if it's needed. I'm pretty sure there's an article along the line of "How many Roths do you need?" in the FAQ that addresses this.

Phil

I'm pretty sure there's an article along the line of "How many Roths do you need?" in the FAQ that addresses this.

Phil



++++
++++


Here is the link:

http://www.fool.com/school/taxes/1999/taxes991203.htm

You can always "undo" an illegal conversion through a recharacterization. The deadline for doing so for a 2005 transaction would be 10/15/2006. If you think this might be an issue, do the conversion into a Roth account that contains nothing else. That will greatly simplify the recharacterization process if it's needed.

Hi Phil,

Many thanks for pointing out the recharacterization provision if I need to undo the conversion. That's excellent advice which will greatly ease my worries about improperly estimating my AGI for 2005.

Stewmart

Hello sunrayman,

My thanks to you for the link you provided. It clearly spelled out why a separate Roth account for a conversion could be (in my case, will certainly be) a wise move.

Stewmart

You can also decrease your 2005 MAGI by upping your pre-tax contributions to your 401K (if you're not at the max already), or by selling a few stock losses you may have been thinking of selling anyway.

I may not know until my taxes are calculated by my accountant (February/March 2006) if my adjusted gross income will be under the 100K maximum which would permit me to make such a conversion.

Stewmart...my first post on this board. If you think your AGI might exceed the max, any way you can defer some income until 2006?

Salecat

Hello Salecat,

Thanks for your post. Deferring income until next year is definitely something I am taking into consideration. I won't know until the latter part of December if this is necessary and/or possible.

Thanks again for your suggestion.

Stewmart