Wednesday, December 26, 2012

2012 IRA Decisions

IRAs are one category where current year decisions can be made in the following year.  For example, 2012 IRA contributions can be made until the due date for the 2012 tax return, April 15, 2013.  In addition, recharacterization of IRA contributions or Roth conversions (completed in 2012) can be done until the due date, including extensions, of the 2012 tax return.

Here how the extended deadline can be useful:
  • Maximize deductions.  Until I do my tax return, I am not sure whether a deductible IRA contribution is what I want to do for a tax year.  Thus, being able to wait until April 15, 2013, enables me to make a decision when I have all the income, deduction and credit information to determine the decision that will minimize our tax liability.
  • Maximize Roth conversion benefits.  For Roth conversions, taxpayers pay taxes on the amount that is converted.  If the value increases, the gain is tax free.  If the value decreases, taxes are still based on the original converted amount.  Thus, the ability to recharacterize in 2013 allows taxpayers to unconvert a Roth conversion that has decreased in value.
In 2012, I will be getting an unspecified amount of  income from my parents estate, which may put our income above the threshold for some tax credits.   The IRA deduction may lower our adjusted gross income enough to qualify for the credits again.   Since we did not do a Roth conversion, we won't benefit from the second IRA extended deadline.

For more on The Practice of Personal Finance, check back every Wednesday  for a new segment.

This is not financial advice. Please consult a professional advisor.

Copyright © 2012 Achievement Catalyst, LLC

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