New Roth IRA Conversion Rules – Eight Things Investors Should Know by James Lange, CPA/Attorney – Fact 5-8

Disclaimer: Please note that the Tax Cuts and Jobs Act of 2017 removed the ability for taxpayers to do any “recharacterizations” of Roth IRA conversions after 12/31/2017. The material below was created and published prior the passage of the Tax Cuts and Jobs Act of 2017. 

5. The impact of the conversion on your current income tax rate.
By converting to a Roth IRA you are immediately recognizing, in the year of your conversion, income that could propel you into a higher marginal tax bracket. The only way to really sort this challenge out is to crunch the numbers and try to make the best decision based upon your current tax bracket versus your future income tax bracket expectation.

6. Potential estate planning opportunities.
Roth IRAs can, in certain situations, offer estate planning opportunities. For investors that have other sources of retirement income and do not need to use their traditional IRA monies during their lifetime, a conversion can help leave income tax-free Roth IRA monies to heirs for gift and estate planning purposes. Because you pay the income tax on a Roth IRA up front, your heirs inherit this Roth IRA free of income taxes. When considering a Roth IRA for estate planning purposes, please keep in mind that the conversion will immediately reduce your IRA assets if you cannot pay the conversion tax with non-IRA assets and therefore you may have less money available to grow in your retirement plan. Roth IRAs offer tax-free earnings which can be more attractive than the tax-deferred earnings of a traditional IRA. However, if you have less money in your retirement account, this may not bring the results you desire.

7. Tax laws are always subject to change.
Remember, tax laws are always subject to change. Therefore, it is advisable for anyone making this decision and/or other decisions to stay in contact with a financial professional who is current and informed of these rules. When making financial decisions that involve tax laws it is always advisable to think about the “what ifs” and make sure you make the most informed decision.

8. Roth IRA Conversions Made in 2014 Can Be Recharacterized
Under current federal tax laws, all taxpayers have the option of recharacterizing or “undoing” a Roth IRA transaction. When you choose to recharacterize a Roth IRA, you are essentially making an election to place your retirement funds back to the way they were before the conversion.

This process can be completed no later than October 15th of the year following your conversion.  Please remember that under current tax laws, there are restrictions on how you must handle a partial recharacterization of a Roth IRA. You cannot choose to recharacterize only those investments that have declined in value. This is not allowed under the Anti-Cherry Picking Rules.[1] The Anti-Cherry Picking Rules were specifically designed to prevent people who converted to a Roth IRA from recharacterizing only those investments that declined in value. The effect of this rule is to pro-rate all gains and losses to the entire Roth IRA regardless of the actual stock or investment recharacterized. One strategy that is allowed is for an investor to break up their IRA into two separate IRAs and then convert to two separate Roth IRAs. You should familiarize yourself with the IRS laws regarding recharacterization in order to implement this strategy. As a financial advisor who understands these rules, we have experience in guiding clients in this area.


In conclusion, we realize the decision to convert some or all of your retirement account to a Roth IRA is complex. While this article is for informational purposes only and should not be deemed tax advice or an individualized recommendation, we hope that some of these points are helpful to you.

Should you have any question on whether or not you should contribute or convert to a Roth IRA, we welcome the opportunity to help you map out a strategy that will be best for your situation. Saving for retirement has and always will be a priority for most investors. We enjoy helping clients and prospects explore all of their options.



New Roth IRA Conversion Rules – Eight Things Investors Should Know by James Lange, CPA/Attorney – Fact 2 – 4 of 8

2. Married couples who file separately are now allowed to make Roth IRA conversions.
Under the prior rules, married couples who filed separately were not allowed to convert to Roth IRAs (unless they have lived apart for more than one year). The rule changes in 2010 allow married couples who filed separately to convert to a Roth IRA.

3. You can make a partial Roth IRA conversion.
Making a Roth IRA conversion does not have to be an all or nothing decision. Although the rules surrounding partial conversions can be complex, a competent financial professional can help you understand the tax impacts and rules that govern converting some, all or none of your existing IRA to a Roth IRA. Like any other decision, all of the variables of your particular situation should be considered so you can make an informed decision. You should consider running the numbers for your situation to best determine the impact of making a full or partial conversion to a Roth IRA.

4. What is your age and time horizon?
Should you elect to convert to a Roth IRA, there is a 10% federal penalty on any withdrawal made within the first five years from that Roth IRA. Also, like with other retirement accounts there is a 10% federal tax penalty on any withdrawal made prior to the age 59 ½ (unless an exception applies). This needs to be factored in when making your decision as to whether or not you should convert all or some of your IRA funds to a Roth IRA.

An advantage of the Roth IRA is that investors over the age of 70 ½ are not subject to Required Minimum Distributions (RMDs) and therefore those investors who do not need to use the money to live off can continue to grow these funds tax-exempt. A qualified financial professional can help you map out, based on your age and time horizon, a strategy that is most likely to avoid or minimize the impact of penalties involved with Roth IRA conversions.

New Roth IRA Conversion Rules – Eight Things Investors Should Know by James Lange, CPA/Attorney – Fact 1 of 8

Although Roth IRAs have been available since 1997, starting in the year 2010 many financial firms and companies started marketing campaigns discussing Roth IRA conversions.

Prior to the year 2010 there were income limits to both contributing and converting to Roth IRAs. However, the Tax Increase Prevention and Reconciliation Act (TIPRA) of 2005 made some modifications to those rules starting in 2010 that still apply today. For over a decade, Roth IRAs were available only for individuals under certain income limitations. Income restrictions still exist in terms of contributions to a Roth IRA; however, in 2010, changes have removed these restrictions for Roth IRA conversions. These changes have opened a window for investors who were previously excluded from converting to a Roth IRA to consider this conversion.

Many financial firms are capitalizing on these new rule changes with heavy marketing, but like every important financial decisions, this decision needs to be made with extreme care and is best determined case-by-case. For an investor that already has a traditional IRA or retirement plan it is best to discuss with a financial professional whether converting to a Roth IRA is the right move before making any decisions.

Here is Fact 1 of 8 that can help you weigh your decision.

Fact 1. The income limitations for Roth IRA conversions has been removed under previous IRS laws.
Prior to 2010, households with modified adjusted gross incomes exceeding $100,000 were not eligible for Roth IRA conversions. While restrictions still exist for contributing to a Roth IRA, there is no longer an income limit for who can convert an existing traditional IRA or employer plan to a Roth IRA. The IRS’s removal of these income limitations has created a marketing opportunity for financial companies to promote and encourage investors to explore this option. As we mentioned earlier, this is a major financial decision and it is typically in your best interest to discuss your situation with someone who understands all of the moving parts involved.


[1] As identified in IRS Notice 2000-39

Important Tax Birthdays

The “Happy Birthday” song is traditionally sung to celebrate the anniversary of someone’s birth. In 1998, the Guinness Book of World Records proclaimed that very song as the most recognized song in the English language, followed by “For He’s a Jolly Good Fellow.” Its roots can be traced back to a song entitled, “Good Morning to All,” which was written and composed by American sisters and kindergarten teachers, Patty and Mildred Hill in 1893.

Throughout the years, many other versions and styles of the “Happy Birthday” song were created. One of the most famous versions of this song was sung by Marilyn Monroe to then U.S. President John F. Kennedy in May 1962. Another famous version of the song was sung by John Lennon and Paul McCartney. They shifted the melody to a traditional rock song and increased its complexity and style on their unforgettable double album, “The Beatles” (commonly referred to as the “White Album”) in 1968.

Traditionally, birthdays are fun events, but when it comes to taxes, birthdays have a special place. From a tax standpoint, birthdays are not always “fun” and very often are different and not created the same.

The table below contains some important tax birthdays (after the age of 50) that can dramatically affect your income taxes:

It is very important that as you plan for or reach any of these milestone birthdays that you are working with a qualified financial advisor who can review your specific situation to determine what tax reduction strategies would be best for you.

Contact us today to discuss some of these strategies. If you are a Western Pennsylvania resident, schedule a free initial consultation with us by calling us at 412-521-2732.  Residents outside of Southwestern Pennsylvania should call for more information. Jim’s services are available via the phone or through the Internet. Send an e-mail to

Important Tax Birthdays

Some things to consider about your Retirement Plan

In 2013, the maximum 401(k) contribution is $17,500 (plus a $5,500 catch-up contribution for those 50 or older by the end of the year). If you are self-employed, you have other retirement savings options. We will review these alternatives with you when you come in for your appointment. One of my favorites for many one person self- employed businesses is the one person 401(k) plan.

In light of the new increased tax rates effective in 2013, plus the addition of the new Medicare surtax on Net Investment Income, higher income taxpayers may want to consider switching from Roth 403(b) and Roth 401(k) elective deferral contributions back to tax deductible contributions. The current savings may outweigh the benefits of tax-free growth on the Roth accounts. As mentioned earlier, the focus moving forward for higher income taxpayers is toward reducing adjusted gross income.

You can also contribute to an IRA for 2013 up through April 15, 2014. The maximum is $5,500 with a catch-up (for taxpayers 50 or older) provision of $1,000.

– Excerpt from Jim Lange’s 2013 Year-End Tax Report


The Clear Advantage of IRA and Retirement Plan Savings during the Accumulation Stage

If you are working or self-employed, to the extent you can afford to, please contribute the maximum to your retirement plans.

Mr. Pay Taxes Later and Mr. Pay Taxes Now had identical salaries, investment choices, and spending patterns, but there was one big difference. Mr. Pay Taxes Later invested as much as he could afford in his tax-deferred retirement plans—even though his employer did not match his contributions. Mr. Pay Taxes Now contributed nothing to his retirement account at work but invested his “savings” in an account outside of his retirement plan.

Please look at Figure 1. Mr. Pay Taxes Later’s investment is represented by the black curve, and Mr. Pay Taxes Now’s, by the gray curve. Look at the dramatic difference in the accumulations over time—nearly $2 million.

There you have it. Two people in the same tax bracket who earn and spend an identical amount of money and have identical investment rates of return. But, based on the simple application of the “Pay Taxes Later” rule, the difference is poverty in old age versus affluence and a $2 million estate.

Can't see this image - go to and download the book!

Retirement Assests, IRAs vs. After-Tax Accumulations

Retire Secure! Pay Taxes Later – The Key to Making Your Money Last, 2nd Edition, James Lange, page. xxxi

A Roth Can Benefit Heirs

Part 10 of 10 Things You Must Know About Roth Accounts

Unlike traditional IRAs—which you must begin to tap at age 70 1/2—Roth IRAs have no minimum distribution requirements for the original owner. So, if you don’t need the money, it can grow in the tax shelter until your death. If your spouse inherits the account, he or she never has to make withdrawals, either.

If the Roth IRA passes to a nonspouse heir, the rules change. They are required to take minimum distributions starting the year following the death of the original owner, or empty the account within five years of the account owner’s death. Distributions, though, will still be tax-free and can be stretched over the beneficiary’s life time.A young child or grandchild who inherits a Roth has the potential for decades of tax-free growth.

Wealthy taxpayers may find another estate-planning advantage to a Roth conversion. The taxes paid on a Roth conversion will be removed from their taxable estate.


Kiplinger Online

You Can Take a Mulligan

Disclaimer: Please note that the Tax Cuts and Jobs Act of 2017 removed the ability for taxpayers to do any “recharacterizations” of Roth IRA conversions after 12/31/2017. The material below was created and published prior the passage of the Tax Cuts and Jobs Act of 2017. 

Part 9 of 10 Things You Must Know About Roth Accounts

Roth IRA conversions come with an escape hatch. If you converted $50,000 but the Roth is now worth $35,000, you would still owe tax on the $50,000. Undoing the conversion—known as a recharacterization—wipes away the tax bill. Recharacterizing can also pay off if you can’t afford the tax bill or the conversion unexpectedly pushes you into a higher tax bracket.

You have until October 15 of the following year to undo a conversion. So a 2013 Roth IRA conversion can be reversed up until October 15, 2014.

But note: While you can now convert a traditional 401(k) to a Roth 401(k) within a company plan, an in plan conversion cannot be reversed.


Kiplinger Online

Evan Wolfson to Appear on Lange Money Hour

Be sure to tune in to KQV 1410AM tomorrow, Wednesday December 4th, at 7:05pm EST to listen to one of the greatest civil rights leaders in our country speak about the marriage equality movement in our country and the situation for same-sex couples in our state.

Evan Wolfson, a Pittsburgh native, is a former Director of Lambda Legal, author, and founder of  He was also named one of Time magazine’s 100 Most Influential People Alive in 2004.  His contributions as a lawyer and a leader to the LGBT civil rights movement in our country is undeniable and inspiring.

If you can’t tune in, will be streaming the show live on Wednesday night and re-airing it the following Sunday morning at 9:05.  Don’t miss this historic and important show!

Also, if you are a resident of Western PA and in a same-sex relationship, or you know someone who is, consider joining us for our free workshops starting at 9:30am on December 7th at the Wyndham Pittsburgh University Center.

You can read the full invitation here:  PA Same-Sex Couples Can Now Take Advantage of the Defeat of DOMA to Cut Taxes and Increase Wealth.

The Backdoor Roth IRA

Rebecca Katz: Let’s take another question. This one is from Robert in Zanesfield, Ohio, who says, “For an upper-level tax bracket investor, when does it make sense to convert from a Roth to a regular IRA, and explain a ‘back-door’ IRA.” We’ve talked a little bit about the upper-level tax bracket issue, but what is a back-door IRA? Maria?

Maria Bruno: The back-door IRA is sometimes also likened to a contribute-and-convert strategy. In essence, for high-income earners who really make too much earned income to be able to contribute to a Roth IRA outright, there’s always the option to invest in a traditional IRA. Anyone can do that, as long as you have earned income of course. The question is whether the contribution would be deductible or not. With this back-door Roth feature, what you could do is contribute to a traditional IRA and then shortly thereafter convert it to a Roth. So it’s really a two-step process to get to a Roth, where you wouldn’t be able to do it directly because your earned income is too high.

So it’s a two-step strategy and there’s a couple of things to keep in mind. One is you want to do the conversion relatively quickly after the original contribution, so that the account doesn’t accumulate earnings, because if it does, then you might have a small tax burden there. So you want to consider that.

Also, if you have other IRAs that you’re not converting, traditional IRAs that you’re not converting, for the purpose of calculating the basis or any tax consequences—so you may not have consequences specifically on the back-door—but if you have other IRAs you’re not converting, the IRS requires you to aggregate all of those IRAs and potentially, you could be triggering some taxes. So the strategy works most seamlessly if someone does not have any other traditional IRAs they’re not converting.

Joel Dickson: What we have seen also is, investors will actually do conversions of traditional IRAs to make the back-door easier and to facilitate that in the future—again if it makes sense instead of—we always have to think about partial conversions or so forth. But there may be cases where it makes sense to convert all of the traditional IRA and now that back-door opportunity is available to you each year, if done for new money, without doing this.

Just so it’s clear, the reason that this back door is open, is that—as Maria mentioned—there are income limits on Roth IRA contributions directly. However, there are not any income limits on doing conversions. So you might have income that doesn’t qualify you for direct Roth contributions, but you can still do a conversion, and that’s where this “contribute to a non-deductible traditional IRA” comes in, and then convert it.

Maria Bruno: Right, so this really wasn’t a strategy prior to 2010, but now it is a strategy. We have information on if someone wants to go and take a look at that in terms of what the income limitations are and things like that, to help determine whether you can contribute outright or whether you need to do some type of back-door strategy.

Important information

All investing is subject to risk, including the possible loss of the money you invest.

For more information about Vanguard funds, visit or call 877-662-7447 to obtain a prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.

Withdrawals from a Roth IRA are tax free if you are over age 59½ and have held the account for at least five years; withdrawals taken prior to age 59½ or five years may be subject to ordinary income tax or a 10% federal penalty tax, or both.

This webcast is for educational purposes only. We recommend that you consult a tax or financial advisor about your individual situation.

© 2013 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor.