Roth IRA conversion taxes is also trickier than you are expecting. Here is what to grasp ahead of submitting — or changing price range in 2023

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If you made a Roth individual retirement account conversion in 2022, you may have a more complicated tax return this season, experts say. 

The strategy, which transfers pretax or non-deductible IRA funds to a Roth IRA for future tax-free growth, tends to be more popular during a stock market downturn because you can convert more assets at a lower dollar amount. While the trade-off is upfront taxes, you may have less income by converting lower-value investments.

“You get more bang for your buck,” said Jim Guarino, a certified financial planner and managing director at Baker Newman Noyes in Woburn, Massachusetts. He is also a certified public accountant.

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If you completed a Roth conversion in 2022, you’ll receive Form 1099-R from your custodian, which includes the distribution from your IRA, Guarino said. 

You’ll need to the transfer on Form 8606 to tell the IRS which portion of your Roth conversion is taxable, he said. However, when there’s a mix of pretax and non-deductible IRA contributions over time, the calculation may be trickier than you expect. (You may have non-deductible contributions in your pretax IRA if you don’t qualify for the full or partial tax break due to income and workplace retirement plan participation.)

see a lot of people making a mistake here,” Guarino said. The reason is the so-called “pro-rata rule” which requires you to factor your aggregate pretax IRA funds into the calculation. 

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S&P 500 still down about 14% over the past 12 months as of Jan. 19, you may be eyeing a Roth conversion. But tax experts say you need to know your 2023 income to know the tax consequences, which may be difficult early in the year.

“I recommend waiting until the end of the year,” said Tommy Lucas, a CFP and enrolled agent at Moisand Fitzgerald Tamayo in Orlando, Florida, noting that income can change from factors like selling a home or year-end mutual fund distributions

Typically, he aims to “fill up a lower tax bracket,” without bumping someone into the next one with Roth conversion income.

For example, if a client is in the 12% bracket, Lucas may limit the conversion to avoid spilling into the 22% tier. Otherwise, they’ll pay more on the taxable income in that higher bracket.

“The last thing we want to do is throw someone into an unnecessary tax bracket,” he said. And boosting income may have other consequences, such as reduced eligibility for certain tax breaks or higher Medicare Part B and D premiums.

Guarino from Baker Newman Noyes also crunches the numbers before making Roth conversion decisions, noting that he’s “essentially performing the Form 8606 calculation during the year” to know how much of the Roth conversion will be taxable income.