2010 roth ira conversion
What do you consider to be the key elements to consider when looking ahead to the 2010 conversion of a retirement plan to a roth ira? My client makes well over 100K, so there is no possible way to get MAGI down below 100K. His first option will be to look at converting about $1 million of ira to a roth in 2010 – which he seems to want to do.
I’m considering things like the immediate tax burden coming from the conversion, time to make up the loss (present value of tax bill),
What other elements need to be considered?
Permalink Submitted by Bruce Steiner on Tue, 2009-02-03 16:28
Assuming he has sufficient non-IRA assets to pay the tax, the tradeoff between converting all at once and spreading the conversion out over a number of years is the benefit of getting more money into the tax-free Roth environment sooner versus the bunching of income into a higher bracket in a single year (or two years in the case of a conversion in 2010). Other choices include converting over a number of years after retiring (or his wife doing so after his death); or not converting at all if his beneficiaries will be able to dribble the money out at lower tax brackets after his death (or after the deaths of him and his wife).
Permalink Submitted by Alan Spross on Tue, 2009-02-03 19:08
Also consider that a taxpayer has the choice to either report the entire conversion in 2010 income OR to report half in 2011 and the other half in 2012.
The recharacterization deadline remains 10/15/2011, the same date as the extended due date of the 2010 return. By this date, there will be a much better indication of the marginal rates that replace those expiring in 2010. It is currently expected that the higher brackets will be increased by that time, possibly even sooner.
Therefore, any 2010 conversion will get the benefit of a retroactive look at it’s value with the options to either:
1) Recharacterize all or a portion
2) Opt out of the 2 year tax deferral in case rates rise starting in 2011 or 2012.
3) Assessing the gains or losses in the conversion vrs the prevailing tax rates due.
It seems likely that a large lump sum conversion will be more viable for higher income- higher asset taxpayers than middle or lower middle income taxpayers, who may benefit more by doing incremental conversions.
With respect to multiple conversion, opting out of the 2 year deferral must apply to all or none of those conversions. If you do NOT opt out, the 2010 bracket will not be utilized for ANY conversion dollars.