Using a Traditional IRA as an Income Diversion Tool

Posted by Lee Reams Sr. on

Making a deductible Traditional IRA contribution in one year and then converting it to a Roth IRA in the next year has the effect of moving the income from the first year to the second year. For example, a taxpayer made a Roth contribution in 2016 and then later it is determined his income in 2017 will be in a substantially lower tax bracket.  He can recharacterize the 2016 Roth contribution into a deductible traditional IRA for 2016 (provided his deduction isn’t limited because he participates in an employer plan and has MAGI above the limitation threshold) and then convert it to a Roth IRA in 2017.  If the taxpayer did not make a contribution during 2016, the strategy can still be executed by making a traditional IRA contribution for 2016 before the April 18, 2017 contribution deadline.

 

This strategy can be used to move income to a year with a lower tax bracket, reduce AGI and increase the health insurance premium tax credit, increase deductions limited by AGI, etc.

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