Year-End Tax Moves For IRAs


You may want low tax rates to continue, but waiting too long to find out if that's really going to happen could have important consequences for your retirement savings.

Sure, most Americans want some aspect of the Bush tax cuts extended, according to a recent Gallup Poll, but the jury is still out on how it will break down—whether all, some or none of the tax cuts will be extended.

Don't procrastinate on your own tax decisions waiting for President Obama's economic advisers and members of Congress to negotiate in Washington.

For some IRA investors, waiting a month or more may mean missing out on another potential tax break that could result in substantial savings.

"When it comes to your retirement account and processing certain transactions, IRA custodians usually have a cut off date that's a couple of weeks or a few weeks before the end of the year," says Denise Appleby of Appleby Retirement Consulting in Grayson, Ga.

So now is the time to face the big dilemma: to convert to a Roth IRA—or leave the money in a traditional IRA. Transferring money from a regular IRA to a Roth means paying taxes now, but you won't have to pay taxes when you take the money out in retirement.

Is It Worth It?

You have to crunch the numbers to see which option is best for you. Beth Gamel, a CPA and personal financial specialist at Pillar Financial Advisors in Waltham, Mass., says, "For most people, they really need to do the math, because most people really don't want to pay taxes before you absolutely have to."

You can change your mind. Even if you decide to make the switch now, remember Roth IRA conversions don't have to be set in stone.

"If you change your mind, you can have it reversed by October 15 of next year," Appleby says. "So as long as those funds leave your retirement account by December 31 of this year, if you change your mind later on, you can undo the transaction."

One-Time Perk

But there's a good reason to make that conversion in the next few weeks. If you convert your IRA to a Roth by the end of the year, you can take advantage of a one-time benefit.

You have the option to spread the tax hit over the next two years: 2011 and 2012. You'll still have to pay taxes on IRA money that you transfer to a Roth, but at least you won't have to pay that tax all at once on your 2010 return—that is as long as you do the conversion by December 31.