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I found this similar question, but the comments made to the one and only answer is confusing my understanding of it...

Right now I just have one traditional IRA that I opened in 2016, funded from a 401k rollover. In 2016 my lower income put me in a lower tax bracket and I didn't really make any new contributions to the IRA.

I read somewhere, it's a good idea, in a "lower tax bracket/income year" to convert some of the traditional IRA funds, to Roth IRA, since you'll be taxed at a lower bracket.

Can I still open a Roth IRA this month (Feb 2017) and transfer most of the trad. IRA funds into it, and have those funds be taxed for my 2016 taxes?

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No. The "last year" choice is for new deposits. i.e. I have until tax day this year to make the deposit for tax year 2016.

Conversions are made as of the date they occur, in other words, a conversion is for the tax year reflecting the date the conversion itself happened.

The recharacterization, if any, will undo the conversion up until you file, including extension. In that case, say you had this idea in March, 2016. You converted then. Now you are doing your taxes and see that you had a better year than you anticipated. You have the ability to recharacterize that conversion, moving the funds/shares back to the traditional IRA, and treating it as if it never converted.

This last scenario is why it's a great idea to convert a bit of one's IRA each year to Roth. To keep this opportunity open. Especially if their portfolio has individual stocks. Say my shares of Extreme Widget are $10 and I convert 1000 shares to Roth. They double in value and I sell. I converted and paid tax on $10K, but I now have $20K in the Roth. I dropped my effective tax in half. Now say it dropped by half. I recharacterize. Instead of having $10K of post tax money buy those shares in the Roth, the recharacterization makes that loss less awful.

  • So for the "bad scenario" where the shares dropped in price: you'd recharacterize those contributions from Roth back to trad. IRA, so that you're not hit with the loss plus having to pay tax on the amount you contributed? Am I understanding this right? – unknownprotocol Feb 27 '17 at 0:10
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    Yes. Exactly. If the converted funds grow, keep it, if a drop, consider recharacterization. This trick also let's you fine-tune your choice at tax time, so if you converted your way to the next bracket, just recharacterize enough to get back to lower one. It's not all or none. – JoeTaxpayer Feb 27 '17 at 0:20
  • Got it! Darn I should have opened a Roth in December... Thanks alot for clearing that up Joe! – unknownprotocol Feb 27 '17 at 0:41
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    Most welcome! May you live a long life and take advantage of this and other tricks for decades to come. – JoeTaxpayer Feb 27 '17 at 0:42

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