The code does not require such guess work with other IRA related matters. If you misestimate your income such that you cannot make the type of contribution that was made, recharacterize the contribution or remove the excess contribution before the April filing deadline without much fuss or cost if corrected quickly enough.
The code even recognizes the income estimation problem in other matters. For instance, you don’t have to contribute to a 2018 IRA in 2018. You can wait as late as April 15th of 2019. This gives taxpayers the ability to see exactly what their income will be and make an appropriate contribution.
Tax preparers and custodians may cringe at this suggestion but why not let Roth conversions fall under the same rules? If recharacterizing a conversion will not be allowed, how about permitting the execution of a 2019 Roth conversion as late as April 15th, 2020 after the income is determined? Such a provision would eliminate the game of seeing how the investments did after a conversion yet give people the ability to plan better. I wonder how much tax revenue has been lost because people won’t convert due to their uncertainty about the taxes.
Speaking of Roth conversions, why is it permissible for a beneficiary to convert a deceased worker’s 401(k) into an Inherited Roth IRA but a beneficiary of a traditional IRA, or an Inherited IRA, cannot convert any of those account into an Inherited Roth IRAs?
Granted, we haven’t seen many situations in which we were anxious to convert to an Inherited Roth IRA. Inherited Roth IRAs are subject to required minimum distributions (RMD). This means makes the tax-free growth potential less enticing. Moreover, the RMDs mean that clients who are beneficiaries of Inherited IRAs who want to do conversions to Roth accounts should prioritize converting their personal IRAs anyway because such a client’s personal Roth IRAs are not subject to RMDs.
One last item. Let’s sync up the zero rate on long-term capital gains with the lower marginal tax brackets. It was this way for years and made filing and planning so much simpler for everyone.
Now, I am fully aware that I don’t know what I don’t know and my puzzlement about the rationale for some of these rules may be misplaced. I know many of these things are the result of negotiations. To get a piece of legislation done, compromises are made. I understand and I realize several of the differences I highlighted are not big. To me, that is a good reason to eliminate the differences rather than let them stand.
Dan Moisand, CFP, has been featured as one of America’s top independent financial advisors by Financial Planning, Financial Advisor, Investment Advisor, Investment News, Journal of Financial Planning, Accounting Today, Research, Wealth Manager, and Worth magazines. He practices in Melbourne, Fla. You can reach him at [email protected].