Want to convert a traditional IRA to a Roth?
Be sure you take tax reform into account. President Trump and the GOP-controlled Congress want to lower tax rates and scrap many deductions as part of their desire to overhaul the tax system. If they’re not able to pass comprehensive reform, then odds are they’ll settle for temporary tax cuts without all the trappings of a broad overhaul bill.
Present and future tax rates are key in figuring whether a Roth conversion makes sense. If you expect the tax rate you’ll pay in retirement will be the same as or higher than the rate on the conversion, then switching to a Roth can pay off taxwise, as long as you don’t have to tap IRA funds to pay the tax bill on the conversion. If your tax rate in retirement will be lower, tax-free Roth payouts are less advantageous. You’ll pay more tax on the conversion than you’d save later on.
Most would be wise to delay Roth conversions until tax changes are enacted, which may very well not happen until sometime next year. You don’t want to convert at this year’s 39.6% maximum rate only to see the top rate fall in 2018 to around 35%.
But if you want to gamble, you can convert now and undo the switch later… provided you act timely. You have until Oct. 15 of the year following the conversion to transfer the funds back to a traditional IRA. This is called a recharacterization.