By Sarah Brenner, JD
IRA Analyst

If you are considering converting an IRA to a Roth IRA in 2018, time is quickly running out. Here are 5 things you need to know when making a decision:

1. The Deadline – The deadline for a 2018 conversion is the end of the calendar year. There is a common misconception that a conversion can be done up to the client’s tax-filing deadline. That is NOT the case. There is no such thing as a prior-year conversion. The distribution must be taken in 2018 and reported on a 2018 Form 1099-R. It is best not to wait until the last minute. Be sure to leave enough time to complete the transaction.

2. The Trade Off – If you convert your traditional IRA to a Roth IRA in 2018, your pretax traditional IRA funds will be included in your income for 2018. This will increase your 2018 income which may impact deductions, credits, exemptions, phase-outs, the taxation of your social security benefits, and Medicare Part B and Part D premiums; in other words, anything on your tax return could be impacted by an increase in your income. That may sound like a heavy tax burden but keep it in perspective. Remember, the extra income will only be for 2018, the year of the conversion. The trade-off is a big tax benefit down the road. If you follow the rules for qualified Roth IRA distributions, all of your Roth IRA funds, including the earnings, will be tax-free when distributed to you or your beneficiaries.

3. Lock in 2018 Tax Rates – Tax reform has lowered tax rates for many individuals and scaled back the Alternative Minimum Tax (“AMT”). These historically low tax rates will not last forever. There is a window of opportunity to take advantage of them. Like many of the changes under tax reform that affect individuals, the lower tax rates are temporary and scheduled to sunset in a few years. While no one can say for sure what the future will bring, the federal government’s large deficits make higher tax rates in the future a likely possibility. Converting now is a way to lock in the low rates of 2018 and avoid worries about uncertain taxes in the coming years.

4. No Do-Overs – Recharacterization of Roth IRA conversions is gone. Starting for 2018, tax reform does away with your ability to recharacterize a conversion. This means you will need to be sure that converting is the right move as there is no way to undo the transaction. Your 2018 conversion will be irrevocable.

5. Good Advice is a Must – The decision on whether to convert your traditional IRA to a Roth IRA in 2018 is a big one. There is no one definitive answer for everybody. Conversion is by no means a one-size-fits-all proposition. Not sure what’s right for you? Consulting with a knowledgeable tax or financial professional is a great place to start.