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By Jeffrey Brooks, CPA, CFP, MBA for Jbrooks Wealth Advisors, PC, a Professional CPA and CFP Firm  jeff@jbrookswa.com  602-292-2009  Please consult with your professional tax CPA regarding your specific circumstances!

Did you convert taxable IRA funds to a Roth IRA at the end of December 2012? If you did, you still have some time to reverse the conversion. Why would you want to reverse the conversion?  The most common reason is that your personal income taxes are higher than you expected and you are looking for a way to reduce your income taxes.  Let us take Bob’s (not real client’s name) situation.  Bob, converted $40,000 on December 29th from his regular “traditional” taxable IRA to a Roth IRA.  Bob’s thought process was that his business was only going to make $20,000 and therefore the additional income from the conversion of $40,000 would not move him into a higher tax bracket and would not cause a lot of additional tax. Unfortunately for tax reasons, Bob’s business had taxable income of $90,000.  Therefore, Bob owes a lot of taxes because of the addition of the conversion to the Roth IRA.

Bob, only has 60 days to reverse the Roth conversion.  On the 59th day in February, Bob’s investment advisory, converts the Roth IRA money back to Bob’s regular traditional IRA. Bob’s taxable income drops by $40,000 and Bob doesn’t owe as much in income taxes.

John (not real name), I have been trying to get the tax software to reflect no penalty or tax on your son Sam’s Roth IRA distribution of $1,000. The answer should be zero taxable since there is no appreciation on the mutual fund since the funds were in a $1 a share money market account.

After “hitting my head against the monitor”, I figure it out:
Form 8606 Page 2, Part III, line 22 needed to be filled out reflecting the $1,000 of Roth IRA that when contributed to a ROTH in a previous year was NOT tax deductible. If the investment was in a mutual fund with appreciation (increase in value), there would be tax and penalty on the appreciation because your son is under 59.5 years. Someone who has had the Roth in their account for 5 years and is over 59.5 years would avoid the penalty but would still owe tax on the appreciation.

Here is my question, how much more money does your son Sam have any other Roth IRAs? I will need that for 2012 so could you send it to me asap so making an error in 2012? Thank You. I am happy I was able to avoid the tax and penalty! Jeff