Roth IRA Considerations

If you have made substantial investments in oil & gas stocks through your IRA, now might be a great time to make a Roth conversion of one or more of such investments.  If such stocks recover (and a recent article in The Atlanta Journal and Constitution reported that local gas prices are expected to hit $2.85 per gallon by summer (and they are near $2.20 now), there is a very good chance that this “down” sector will recover in the next few months.  So, for example, if you transferred $10,000 of an oil & gas stock from a traditional IRA to a Roth IRA now, and the stock went up in value to $15,000 by June, you would reap a tax-free growth of $5,000, assuming the appreciation held and you thereafter hold the investment until age 59½ (and meet other Roth holding requirements).  One of the beauties of a Roth conversion is it can be undone to any degree by a “re-characterization” by the due date of the taxpayer’s return (plus any extension).   The ordinary due date of an individual’s Form 1040 is April 15^th.   However, anyone can get an automatic 6-month extension until October 15^th.  Getting the extension can provide more time to decide whether re-characterization is desirable.  So, for example, if the $10,000 stock did not increase in value, or even decreased in value, the Roth conversion could be undone by the due date of the taxpayer’s return, and the investment returned to the traditional IRA (from which any future distributions would produce ordinary income). Re-characterizations are not possible with respect to Roth 401(k) accounts.  The Obama Administration has proposed stopping “backdoor” Roth conversions.    A backdoor Roth is essentially a nondeductible IRA contribution followed by a Roth conversion.  There ordinarily is no issue if a traditional IRA does not exist.  However, if a traditional IRA exists, it must be aggregated with the IRA in which the nondeductible contributions exists, and then any Roth conversion must come pro rata from the pre-tax and nondeductible asset totals.