A Roth IRA conversion lets you turn a traditional IRA into a Roth IRA. Roth IRA conversions are also known as backdoor Roth IRAs. There's no upfront tax break with a Roth IRA, but contributions and earnings grow tax-free. You'll owe tax on any amount you convert, and it could be substantial.
The easiest way to escape paying taxes on an IRA conversion is to make traditional IRA contributions when your income exceeds the threshold for deducting IRA contributions, then converting them to a Roth IRA. If you're covered by an employer retirement plan, the IRS limits IRA deductibility.
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).
Roth IRAs come with some great tax advantages, but converting a traditional IRA to a Roth doesn't make sense for everyone. ... A benefit of a Roth conversion is that it can allow you to pay taxes on traditional IRA assets now instead of later if you expect to be subject to a higher marginal tax rate down the road.
The 5-year rule on Roth conversions requires you to wait five years before withdrawing any converted balances — contributions or earnings — regardless of your age. If you take money out before the five years is up, you'll have to pay a 10% penalty when you file your tax return.
Key Takeaways
Roth IRAs offer several key benefits, including tax-free growth, tax-free withdrawals in retirement, and no required minimum distributions. An obvious disadvantage is that you're contributing post-tax money, and that's a bigger hit on your current income.
Roth IRAs. ... Contributions to a Roth IRA aren't deductible (and you don't report the contributions on your tax return), but qualified distributions or distributions that are a return of contributions aren't subject to tax. To be a Roth IRA, the account or annuity must be designated as a Roth IRA when it's set up.
If you're approaching retirement or need your IRA money to live on, it's unwise to convert to a Roth. Because you are paying taxes on your funds, converting to a Roth costs money. It takes a certain number of years before the money you pay upfront is justified by the tax savings.
But converting money from a 401(k) or IRA to a Roth IRA triggers not only federal income taxes but also taxable income in the state in which you currently reside. ... By doing so, you would be taking money that would be state income tax–free during retirement and making those dollars taxable today.
IRA Conversions — You must complete IRA conversions (from a traditional to a Roth) by Dec. 31 of the calendar year.
The IRS would receive notification of the IRA excess contributions through its receipt of the Form 5498 from the bank or financial institution where the IRA or IRAs were established.
The IRS states that you can make contributions until your tax filing deadline. 5 That date for individual filers is typically April 15 but is May 17 in 2021. You are able to make contributions to your 2021 Roth IRA until April 15, 2022.
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