Tax Turkey to Avoid #3: Missing your state's 529 plan tax break deadline
Tax Turkey to Avoid #5: Losing FSA money you left in your health care account

Tax Turkey to Avoid #4: Not moving some traditional IRA money to a Roth account

Reviewed and updated Nov. 23, 2023

We're into the Thanksgiving weekend and still noshing on leftover turkey. (Or, in my case, pumpkin pie.)

But here's a Tax Turkey you shouldn't let linger.

Don't wait to look into converting, in full or partially, your traditional IRA to a Roth IRA.

Individual retirement savings options: IRAs, or individual retirement arrangements (although most of us read the A as account), have long been a popular way for individuals, with or without a workplace retirement plan, to save for their post-work year.

The original version, now known as a traditional IRA, debuted in 1975, after being authorized the prior year in the Employee Retirement Income Security Act (ERISA).

Owners of a traditional IRA put in pre-tax money and, in some instances, can deduct their annual contributions. When the contributions and earnings are distributed in retirement, or as demanded by the recently tweaked required minimum distribution (RMD) rules, the withdrawals are taxed at ordinary income tax rates.

The Roth IRA, which gets its moniker from the late U.S. Sen. William Roth who championed the plans, appeared as a retirement saving option in 1998. A Roth IRA is funded by after-tax contributions. Since Uncle Sam has already gotten his cut of the money in the account, Roth IRA distributions are tax-free. Plus, there's no RMD for these accounts.

Stock market trigger: Every person's financial situation is unique, so there are valid reasons for opening and maintaining a traditional IRA. That's why the great traditional IRA to Roth conversion debate continues. 

But things change.

So it's a good idea to evaluate your circumstances and see whether it would be a wise move to convert at least some of your traditional IRA into a Roth.

One factor that could come into play in any traditional-to-Roth move is the stock market. As the graph below from Trading Economics shows, the market has rebounded a bit of late. However, most indexes are flat or down a bit from their 2022 closing levels.

US Stock Market Index Wednesday Nov 22 2023 snapshot

As I noted in an earlier post, a down market could make it a good time to convert a traditional IRA to a Roth. The reason is that when you move untaxed traditional IRA money into a Roth version, you must pay tax on the converted amount. Doing so when the value of your traditional IRA is lower will produce a smaller conversion tax bill.

If moving your full traditional IRA amount to a Roth kicks you into a higher tax bracket, consider converting just a portion.

Inflation's influence: Bear market matters and IRA conversions also are discussed in this weekend's Saturday Shout Out piece.

Melanie Waddell talked with IRA expert Ed Slott for his take on converting a traditional IRA to a Roth account in these current turbulent economic times. That interview with Slott's advice is in her ThinkAdvisor piece, Inflation Has Created an Unprecedented 4-Year Roth Conversion Opportunity.

Again, do your homework and explore whether a possible Roth IRA conversion works for your personal tax and financial situation.

Of course, such financial figuring can be done after you've had your fill of turkey. But if you do find that a tax-free Roth IRA conversion is right for you, avoid this fourth tax turkey by shifting to that savings option when your account trustee opens for business next week.

It could make you very thankful when you do retire.

2023's Tax Turkeys 🦃 🍗 🦃 to Avoid

  1. Not adjusting your incorrect withholding
  2. Not collecting your employer's maximum 401(k) match
  3. Missing your state's 529 plan tax break deadline
  4. Not converting at least some traditional IRA money to a Roth IRA
  5. Leaving (and losing) money in your flexible spending account (FSA)


Addendum, Sunday, Nov. 27, 2022: The goal of Don't Mess with Taxes is to talk turkey when it comes to tax matters. But if you're looking for some literal turkey talk, check out my November post at my tumblr tax blog, Tumbling Taxes. It includes a video of Texas turkey callers.

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