Deadline for Traditional to Roth IRA Conversions is December 31st

If you’ve been considering converting your Traditional IRA into a Roth IRA in 2006, you’ll want to pretty much do it now, as the money has to leave your Traditional IRA by December 31st. Given that Friday is that last business day available, you only have 2 days left! The good news is that you can still undo the conversion up until October 15th of 2007 without penalties from the IRS. There will be extra paperwork and possible broker transfer fees though.

I’ve been putting this off all year to see how our income picture turns out, but I need to get on the ball and make some decisions.

References: IRS Pub 590, Fairmark.

Comments

  1. I did my conversion paperwork earlier in the day. Called Vanguard and had to fill out some forms that they sent via email. Then had to FedEx overnight to make sure they receive them before 4PM on Friday. If you are working with Vanguard, better get on it.

  2. Be careful, if you haven’t had taxes withheld (from say your paycheck) in anticipation of doing this, you may owe a penalty (if you owe > $1000). I would not recommend having taxes taken out of your IRA money.

  3. Yeah I converted $11,000 last week. I didn’t withhold taxes. Ready for the hit, though. And I did it all in Schwab with a simple phone call. Ugh paperwork is not my style.

  4. J.T. – There is no penalty no matter how much you underwithhold, as long as you withheld as much in 2006 as you owed for your 2005 taxes. You will have to pay the tax owed by April 15th though, even if you file for an extension on your return.

  5. Thanks for the reminder!

  6. Do you ever worry that Roth rules might disappear sometime between now and when you turn 59.5? Maybe tax law will even friendlier towards IRA investing by the time we reach that age. I’ve given thought to recharacterizing my IRA to a Roth but find I don’t wan’t to pay Uncle Sam until I have to. ~Russ

  7. Nice site. One comment on this comment below*–it’s unlikely IMO that tax law will be friendlier in the future (US government has many unfunded liabilities due to Social Security–read the book by Scott Burns et al “The Coming Generational Storm”). Also it is UNLIKELY IMO that the US will tax Roth IRA converters again sometime in the future. It’s not illegal (borderline illegal but IMO not clearly illegal), but it’s not fair and the bad press will they will get is not worth it. Much easier is to simply raise taxes on everybody else–this is legal, fair and no expensive court battles needed. –Ray Lopez

    * Do you ever worry that Roth rules might disappear sometime between now and when you turn 59.5? Maybe tax law will even friendlier towards IRA investing by the time we reach that age. I?ve given thought to recharacterizing my IRA to a Roth but find I don?t wan?t to pay Uncle Sam until I have to. ~Russ

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