by Scott Moser CPA/PFS, MST

Wouldn’t it be nice to have greater control over your taxable income before you finalize your return each year?   Well, stop dreaming because Congress provided a nifty tool to allow you to do just that; the Roth IRA Conversion.  This tool allows you to generate additional taxable income which can be helpful to fully utilize current lower tax brackets giving you significant control over your tax results. Once your tax return is nearly complete, if your taxable income is too high, you can undo the conversion reducing your tax to your target amount. The critical point to note is that you must complete the conversion before each December 31st but you have 10 ½ months after yearend to decide to undo the conversion. 

Here’s is another idea.  Many workers don’t fully fund current retirement plans.  This is a missed opportunity. Let’s say you could make an additional $10,000 in retirement contributions that you normally don’t fund. So this year, you make the extra $10,000 contribution reducing your taxable income.  Then you convert the $10,000 to a Roth IRA increasing your income by $10,000. For current income tax purposes, your transactions are neutral but what you have accomplished is growing your Roth balance by $10,000-- and you still have the opportunity to undo the conversion before filing your tax return providing you with more control over your taxable income. Another bonus for Washington State taxpayers with employment income from states with income taxes, this strategy can eliminate the state income tax on your retirement contribution!  

I know what you’re thinking:  I might need that $10,000 for living expenses so I don’t want to lock it up in a retirement plan and pay a penalty if I withdraw the funds before I’m age 59 ½. That is a risk - but consider that you can generally withdraw conversions held in the Roth more than five years plus all contributions without incurring a penalty.  Plus, amounts not subject to penalty can be withdrawn first. So if turns out you will need the funds, you can get access to them but if you don’t, you will enjoy tax free savings for life from an account that enjoys numerous other tax benefits:

• Greater creditor protection than a savings account
• No Required Minimum Distributions at age 70 ½
• Generally not included in assets for college aid qualification
• Reducing exposure to estate tax via pre-paying the income tax upon withdrawal
• Take the bite out of future threatened higher tax rates
• Great for holding investments that are not tax-efficient; require complicated record keeping or tax reporting

Finally, and best of all, the client who demonstrates to us they have the highest total Roth IRA balance(s) on 12/31/2012 will receive a $500 discount on their 2012 tax fee!