2010 Roth characaterization rules – please correct/confirm
Here is my understanding of the new rules for 2010. Please confirm/correct my understanding.
1) The ability to recharacterize TIRA to Roth regardless of income will be allowed for tax years 2010 AND AFTER.
2) If the recharcterization is done in 2010, then the tax due can be divided and paid in tax years 2011 and 2012. Otherwise, for later years, the tax is due in the same year as the recharacterization.
3) Under the current version of the law, this, in effect will eliminate the income limits for Roth IRA CONTRIBUTIONS in 2010 and after since the taxpayer can fund a non-deductable IRA and then immediately recharacterize it to a Roth.
Thanks.
Permalink Submitted by Al Fry on Sat, 2008-01-05 22:10
Everything sounds ok, except the word recharacterize normally means reversing one transaction and replacing it with another. Going from a TIRA to a Roth is normally referred to as a conversion.
Permalink Submitted by Alan Spross on Sat, 2008-01-05 23:36
As Al indicated, it’s a “conversion” you are referring to.
One very minor change to your #2 point:
For 2010 conversions, the taxable income by default is deferred 50% to 2011 and 50% to 2012. However, in 2010, taxpayer can opt out of the default rule and report the entire amount of conversion income in 2010. Starting in 2011, the choice disappears and you report each year as you convert, as you must prior to 2010.
Opting out seems to make sense for those who will be making incremental conversions in each of those years, otherwise income will not be spread equally and none of the 2010 bracket will be applied to conversions, while the total of all 3 years would be bunched into 2011 and 2012 when tax rates will likely be higher than now and higher than in 2010, when some of the Bush tax cuts sunset.
As for recharacterizing those 2010 conversions, there is no indication that the extended due date will be further extended, therefore by 10/15/2011 you would need to make your decision without fully knowing either your 2011 or 2012 taxable income or deductions. Some of the beneficial hindsight of recharacterization strategies will go up in smoke.