Waiting until the last minute to
get your taxes done
rarely makes sense. But this year, filing for an extension to file
your taxes may be a really smart move -- even if you're ready to
shoot your tax return to the IRS right now.
Sure, it may seem strange to ask for an extension if you already
have your taxes done. But if you took advantage of the
once-in-a-lifetime chance to
convert an existing retirement account to a Roth
last year, then getting a tax extension gives you another six
months to make some important decisions.
Roth IRAs, conversions, and extensions
In 2010, Congress opened the door to everyone to
open a Roth IRA
. Until then, income limitations had prevented high-income
taxpayers from either contributing directly to a Roth account or
converting an existing traditional IRA or 401(k) account to a Roth.
But while the income limit on direct contributions remained, anyone
was allowed to do a Roth conversion last year, regardless of
In addition, those who did Roth conversions last year got a
one-time bonus: they could either choose to add the resulting
taxable income from the conversion on their 2010 tax return or
split it between their 2011 and 2012 returns
. That provision gave tax-averse investors some comfort that they'd
be able to plan for the additional tax liability that comes with
Roth conversions. And now that relatively low tax rates appear to
be locked in at least through 2012, you don't have to worry so much
about a tax hike offsetting the benefit of getting to put off
paying your taxes.
Investors have until their tax deadline this year to make that
final choice about which year or years to include their conversion
income. So without an extension, that would be next Monday. But by
making a simple request to the IRS, you can have another six months
before you need to decide.
Even if you're ready to get going with your return, having another
six months before you lock in a final decision on your Roth
conversion gives you some vital flexibility. In some circumstances,
that flexibility will be vital.
The most important situation you could face is if you need to
reverse your conversion. If your converted Roth has gone down in
value, you can recharacterize the conversion and avoid any tax
liability at all.
So on one hand, if you invested your newly converted Roth a year
ago in shares of losing companies in an otherwise upward-trending
market -- stocks like
Johnson & Johnson
(NYSE: JNJ) in health care,
(NYSE: JPM) and
(NYSE: WFC) among bank stocks, and
(NYSE: TM) in the auto industry -- recharacterizing now seems like
an obvious move. But in six months, it's possible that those stocks
could be back above water. Filing an extension gives you the most
time to determine what your final tax liability will be before you
have to decide when to include it on your return.
On the other hand, if you invested in companies that have posted
only modest gains, you might decide now not to recharacterize. But
in six months, it's entirely possible that a down market would make
it smarter to get your do-over. With stocks including
Procter & Gamble
(NYSE: PG) ,
(NYSE: PEP) , and
) in that category, getting the extension could save you from
having to pay tax on lost money between now and October.
Don't wait to wait!
To get the full six months of extra time, you'll need to file Form
4868 with the IRS on or before next Monday. But that's all there is
to it; you don't need to explain why you want the extension or wait
for special IRS approval.
If you took advantage of the 2010 opportunity to convert your
Roth, you made a smart move. But it's even smarter to maximize its
value by giving yourself another six months before you have to make
a final decision. If your portfolio moves strongly in either
direction, then it may well lead to a much better result for your
If you're scurrying to get your returns done, get the help you
need in the Fool's Tax Center.
is playing it close to the deadline this year. He doesn't own
shares of the companies mentioned in this article.
Johnson & Johnson is a Motley Fool Inside Value
pick. Johnson & Johnson, PepsiCo, and Procter & Gamble
Motley Fool Income Investor
Motley Fool Options
has recommended diagonal call positions on Johnson &
Johnson and PepsiCo. The Fool owns shares of JPMorgan Chase,
Johnson & Johnson, PepsiCo, and Wells Fargo. Motley Fool Alpha
LLC owns shares of Johnson & Johnson. Try any of our Foolish
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