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Roth IRA or In-Plan Conversion Deadline for 2022 Taxation

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“My client wants to complete a Roth conversion. Is there a conversion deadline?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business.  A recent call with a financial advisor from Florida is representative of a common inquiry related to Roth conversion taxation.

Highlights of the Discussion

  • As with any tax-related question, I always start by suggesting individuals talk with their tax advisors regarding their personal financial situations.
  • According to IRS rules, the deadline for completing a Roth IRA or Roth in-plan conversion relates to the year in which your client wants to pay taxes on the conversion. A Roth conversion is taxable in the year it is completed. For example, in order to include the taxable portion of a Roth conversion in income for 2022, the conversion must be completed by December 31, 2022. There is no carryback period for a conversion as there is for making a regular Roth IRA contribution.
  • Note that the IRS just announced the new tax brackets for 2023, and while the same seven tax rates in effect for the 2022 tax year (i.e., 10%, 12%, 22%, 24%, 32%, 35% and 37%) still apply for 2023, there were quite sizeable changes in the width of the income ranges for the various brackets. Therefore, it may be advantageous for your client to compare his 2022 tax bracket to his anticipated 2023 tax bracket when considering the timing for a Roth conversion. Of course, there are other factors that may affect his decision on timing, including how the income from the conversion will affect his applicable tax bracket.

Example:  Soleste and her husband are part of the married-filing-jointly tax-filing category.  For 2022, they anticipate their taxable income will be $180,000. That would put them in the 24% tax bracket. Looking ahead to 2023, they anticipate their taxable income will be about the same (i.e., $180,000). Because of the tax bracket changes for 2023, they will fall into the 22% tax bracket in 2023. Of course, they will have to consider whether the income generated from the conversion will affect which tax bracket applies.

Year/Filing Status Anticipated Income Income Range Tax Rate
2022 Married Filing Jointly $180,000 $178,151 to $340,100 24%
2023 Married Filing Jointly $180,000 $  89,451 to $190,750 22%

Source:  Revenue Procedure 2022-38

Conclusion

The deadline for completing a Roth IRA or Roth in-plan conversion depends on the year in which an individual wants to include the taxable portion of the Roth conversion in income. A Roth conversion is taxable in the year it is completed. To be taxable for a particular year, the conversion must be completed by December 31st.

 

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Taxability of IRA Conversions

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I believe the IRS requires a person to treat a Roth IRA conversion as consisting of a pro rata share of the individual’s pre- and after-tax retirement assets. When determining the taxable amount of a traditional-to-Roth IRA conversion, does my client include his 401(k) plan balance in the calculation?

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.  A recent call with a financial advisor in Illinois is representative of a question we commonly receive related to Roth conversions.

Highlights of Discussion

  • Your client would not include his 401(k) balance when determining the taxable amount of a traditional IRA-to-Roth IRA conversion. Please see IRS Publication 590-A for further guidance.
  • When calculating the taxability of a conversion in this case, your client would include all of his nonRoth IRAs for which he is the direct owner, including traditional IRAs, simplified employee pension (SEP) IRAs, and savings incentive match plan for employees (SIMPLE) IRAs.
  • Retirement accounts that are not considered include
    • Inherited traditional, SEP or SIMPLE IRAs (unless a spouse beneficiary has elected to treat the inherited IRA as his or her own);
    • Defined contribution plans (e.g., 401(k) plans);
    • Defined benefit pension plans;
    • 403(b) plans;
    • 457 plans;
    • Nonqualified accounts and plans; and
    • Annuities (unless they are individual retirement annuities under Section 408(b) of the Internal Revenue Code).
  • The steps for calculating the taxable amount of a traditional IRA-to-Roth IRA conversion are part of the IRS Form 8606, which your client must complete and file to report the conversion.
  • Encourage your client to discuss the conversion with his tax advisor.

Conclusion

Because a traditional IRA-to-Roth IRA conversion is (generally) a taxable and (always) a reportable transaction, investors should consult their tax attorneys or professional tax advisors concerning their particular situations.

 

© Copyright 2024 Retirement Learning Center, all rights reserved