Converting a traditional IRA to a Roth IRA can leave clients with a hefty tax bill. However, advisors should take note: A conversion can be reversed after the fact, in part or in full, to help clients lighten their tax load.
The challenge, according to Gary Plessl, co-founder of Houser & Plessl Wealth Management Group in Allentown, Pa., is that clients convert a traditional IRA to a Roth IRA during one year but then report the conversion on a tax return prepared the following year. “Therefore,” he says, “clients will do the conversions before they know exactly what their tax return will look like for that year. The IRS provides a great tool to work around this issue: recharacterization, which allows taxpayers to undo a portion of the, or the entire, Roth IRA conversion.”
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