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    Roth Conversion

    I converted part of my IRA into a Roth IRA last year. I am now doing my taxes and discovered that I could have converted more without going into a higher tax bracket. I know that I am beyond the April 15th deadline for making IRA contributions. But if I had discovered this prior to April 15th, could I have converted additional amounts from my IRA to a Roth for 2004?

    #2
    Roth Conversion

    You are mixing two separate rules. One rule says you have until April 15th following the close of a tax year to contribute money to an IRA for that tax year. So for 2004 contributions, you had until April 15th, 2005 to make the contribution.

    The second rule says that you can convert money in a traditional IRA into a Roth IRA if you pay tax on the conversion. Nothing in that rule says anything about having until April 15th of the following year to make the conversion. The conversion is taxable in the year you convert. So you had until December 31, 2004 to convert any of your traditional IRAs into a Roth IRA and have it taxable in 2004.

    If you are trying to maximize the tax benefit of a conversion, such as maximizing a lower tax bracket, you would then use the re-characterization rules. Under the re-characterization rules, you have until the tax return due date, including extensions to re-characterize a Roth conversion back into a traditional IRA.

    So how it works is as follows: Letís say you want to maximize the 15% bracket in 2005. You think you have about $8,000 to go before you hit the 25% bracket. So you convert $10,000 on December 28th, 2005 from your traditional IRA to a Roth IRA, just to make sure you really will use up all of that 15% bracket. Now, you file an extension because you are a procrastinator, like the rest of us, and in June of 2006 you discover that $3,000 of that $10,000 taxable conversion is taxed at 25% rather than at 15%. So you re-characterize $3,000 back into a traditional IRA before the extension deadline of August 15th, 2006. Result? You only include $7,000 of the conversion in taxable income for 2005. You thus are able to maximize the 15% tax bracket in 2005 to the exact dollar.

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