You still have time to maximize the benefits you get from
. Such moves can cut your taxes, this year and beyond.
For 401(k) plans, make sure your 2013 contributions are at the
level you want. And re-set the contributions for 2014 if you
Most important: Be sure you're getting the full employer
match, if one is offered. If you don't, you're losing free
Pay special attention if you switched employers in 2013 and
you participated in two plans. You can contribute up to $17,500
altogether to the 401(k)s for this year, or up to $23,000 if
you'll be 50 or older on Dec. 31.
For IRAs, convert traditional IRAs to Roths by year-end if you
expect your tax bracket to rise or stay the same in retirement.
Converting now, you'll gain nearly a year in the quest for
After a conversion, all Roth IRA distributions are tax-free
after five calendar years and after age 59-1/2. All 2013
conversions have a Jan. 1, 2013, start date.
You'll hit the five-year mark in a little over four years --
on Jan. 1, 2018 -- by acting now.
When you convert, think big. Do a large conversion. Don't
worry now about whether the numbers work.
You can recharacterize -- which is IRS jargon for reverse --
all or part of the conversion until Oct. 15, 2014. The amount you
revise will go back into your traditional IRA.
You'll owe income tax on the amount you convert. So if you
change your mind, any part of the conversion that you return to
your traditional IRA in 2014 cuts the tax you'll owe on the 2013
By the time you prepare your 2013 tax return next year, you'll
know your exact taxable income. Then you or your tax pro can
reduce the conversion so it fits into your tax bracket.
For the best after-tax result, do multiple Roth IRA
conversions. Segregate the accounts by asset classes, market
sectors or even individual securities.
This will give you planning flexibility next year when you
recharacterize. You can hold on to your winners and undo laggards
to save tax.
Here's an example. Say you like two mutual funds: ABC and
You convert $100,000 of your traditional IRA to two $50,000
Roth IRAs. One holds ABC shares, the other holds XYZ shares.
Suppose next October, the price of ABC is up. That Roth IRA is
now worth $70,000. But XYZ has dropped, so that Roth IRA is down
If you still like XYX long-term and want to hold it, you
should recharacterize that Roth IRA back to a traditional IRA.
Why pay tax on a $50,000 conversion to own a Roth IRA now worth
You can do another conversion of XYZ late in 2014 and hold the
company's shares in the new Roth IRA.
Meanwhile, you can retain the ABC Roth IRA. You'll pay tax on
a $50,000 conversion and have a $70,000 Roth IRA.
Eventually, you can withdraw gains tax-free. That's the reason
for the conversion. You can even sell the fallen-value XYZ shares
and then recharacterize, as long as you left sale proceeds in the
If you don't want to pay tax on a full $50,000 conversion, you
can recharacterize some of your ABC Roth IRA, too. You'll know
exactly how much to convert to stay in your tax bracket.
If you had simply converted to one big Roth IRA, holding ABC
and XYZ shares, you would have converted $100,000 but wound up
with a $95,000 Roth IRA. Any recharacterization would mean giving
up profits as well as losses.