Defer income to 2018?

Question

Can I defer income to 2018 where the tax brackets are more favorable than 2017 by doing the following strategy?  I don't want to tie any more money up in tax deferred accounts, but if I make a deposit to my sep-ira or simple-ira for 2017 and then in 2018 roll it into my roth ira I will get to deduct the contribution on 2017 taxes and pay income taxes on the same amount in 2018, right?  But then can I withdraw the deposit from my Roth IRA without penalties?  (I am under 59 1/2 years of age. My existing Roth is only 1 year old.)

Mark S. · Answer

@Todd Willhoite,

This is the best article/blog post I’ve ever seen on they topic by a very reliable source:

https://www.kitces.com/blog/understanding-the-two-5-year-rules-for-roth-ira-contributions-and-conversions/

Look at the section about conversion rules and the intention of the conversion rules.

Short answer to your question is 5-year waiting period on conversion PRINCIPAL if you’re under 59.5.  The idea is to prevent people from doing what it appears you’re trying to do.

Michael Plaks · Answer

@Jim T.

Your plan has my thumbs up. No need for a Roth conversion. Just in and out of the regular IRA.

I recommend you space the two transactions, to be on the safe side.

Michael Plaks · Answer

@Todd Willhoite

Good thinking, sir. You can do the contribution / rollover / conversion part - but not the withdrawal part. It will be subject to early withdrawal penalty, because your Roth is only 1 yr old. Needs to be 5 years.  @Mark S. linked a very good blog post, albeit very long and technical.

Jim T. · Answer

Todd, you are a genius, at least I think you are.

My situation is a little different. My wife and I are over 59 1/2 and we each have Roth IRAs for many years (over 5). Based on your scenario, I am wondering if I can do something similar. I am past the income limits to deposit into Traditional IRAs (because I have a 401k at work) but my wife has earned 0 in 2017.

My plan, deposit $6500 into my wife's Traditional IRA  this year and roll it into the Roth next. Well, actually, I can deposit into the Traditional this year and just withdraw it next.  either way, deducting with the old tables, declaring the income with the new.

For me, in the 25% bracket this year and 22% next, I should save 3% of $6500 or $195 in my pocket.

I will wait for the experts to chime in to determine of this plan will work.

Michael Plaks · Answer

Yes, there will be penalty. You cannot avoid the penalty unless you qualify for one of the exceptions.

Todd Willhoite · Answer

@Michael Plaks if put it in a traditional ira or sep or simple then if pull it out next year won't I have the 10% penalty since I am under 59 1/2?

Todd Willhoite · Answer

Well, thought about $10-$20,000, but more is better.

Defer income to 2018?

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