IRA/401k conversion to affect prior year taxes

Submitted by Nancy Latvis on Thu, 2018-04-05 15:57

I want to know if I can convert some of my IRA’s and 401ks in 2018 to use in my 2017 taxes. I will be 70 1/2 this year and have not converted any IRA;s or 401ks to date.



Submitted by Alan - IRA critic on Thu, 2018-04-05 16:33

  • The distribution for a 2017 conversion must be done in 2017. Any conversions you do this year will be reported on your 2018 taxes. And because 2018 is an RMD distribution year you would first have to complete your 2018 RMD before converting additional amounts. You may not want to have your RMDs, SS benefits, any pensions, AND a conversion all taxable in 2018 despite the reduced tax rates. So if you convert any amount this year, it probably would be a small conversion.
  • While you can delay your first RMD until as late as 4/1/2019, and then take 2 RMDs in 2019, you cannot delay your RMD and convert in 2018, since a conversion is treated as a distribution and your first distribution in an RMD year is applied to your RMD. However, because you have both 401k and IRA accounts, you could take the RMD from the type of plan with the lowest balance, and convert an additional amount from that plan in 2018, while deferring the RMD for the other type of plan to 2019. There are lots of confusing choices involving your first RMD year and of course that only happens one time. The best strategy depends on the amounts and your total tax picture for each of the first two years.
  • Finally, one more option. If you have a 401k with highly appreciated employer shares, you have the option of considering NUA (net unrealized appreciation). It requires a lump sum distribuiton from the plan where the shares go to your taxable account and count toward the RMD from the 401k. If you defer the RMD to 2019 for that particular plan, you could cover two years of RMDs with the share distribution. You would then pay the lower LT cap gain rate when you eventually sell those NUA shares. NUA is usually only viable if your cost basis for the shares is under 30% of what they are currently worth.
  • For RMDs, all your IRA accounts can be aggregated and the total RMD taken from any of the IRA accounts. But each 401k plan must separately satisfy the RMD for that plan.

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