NEW YORK (MainStreet) With national attention on the federal budget, debt ceiling and healthcare law, tax payers would be remiss in overlooking the October 15 deadline to complete an IRA recharacterization.
"To recharacterize is to take your traditional IRA that you have not yet paid income tax on and convert it to a Roth IRA or vice versa," said Dan McElwee, a certified financial planner with Ventura Wealth Management.
Investors can re-characterize their rollover or conversion by October 15 of the following year regardless of whether a filing extension has been requested. For example, for a conversion to a Roth IRA in 2013, investors have until October 15, 2014 to re-characterize.
"If you expect your tax rate to be lower in the future, you're better off leaving your traditional IRA alone rather than triggering any taxes now," said Paul Jacobs, a certified financial planner with Palisades Hudson Financial Group in Atlanta.
In a traditional IRA, investors receive an income tax deduction the year they make a contribution to the vehicle and pay income tax after withdrawing funds for retirement. In a Roth IRA, there is no current year tax deduction; however, all gains are income tax free at retirement under the current IRS Code.
Savers can convert traditional IRAs to Roth IRAs, but taxes must be paid at the time of conversion.
"In a Roth IRA if your investments lose money in the first year, you have the ability to reset and pay tax on a lower amount because of the reduction in value of a bad investment," said Michael Goodman, financial advisor with Wealthstream Advisors.