2010 conversion
when people do a 2010 conversion, a 1099R is generated reflecting how much was converted and if any taxes withheld. client will have 2 years 2010 and 2011 to pay the taxes. correct?
when people do a 2010 conversion, a 1099R is generated reflecting how much was converted and if any taxes withheld. client will have 2 years 2010 and 2011 to pay the taxes. correct?
Permalink Submitted by Alan Spross on Tue, 2009-10-06 19:43
No. The income is reported 50% for 2011 and 50% for 2012, none in 2010. The taxpayer can also opt out of the deferral and report ALL the income in 2010 if they wish. Also, it is better NOT to have withholding taken on Roth conversions. If taxpayer is under 59.5, the withholding will be taxed AND penalized because it is not rolled over. But if this is already ordered, if the taxpayer has the funds available, they can add them to the Roth IRA, which will complete the conversion and eliminate any penalty.
For a 2010 conversion, the deferral options are another big reason to avoid conversion withholding, since the withholding will automatically apply to 2010 only.
Permalink Submitted by kathleen Lane on Wed, 2009-10-07 03:33
Can you confirm this is how it works:
I decide to convert $100,000 of an IRA account to a Roth IRA in the year 2010.
Option 1:
I report $50,000 of income in the year 2011 and pay the appropriate tax.
I report $50,000 of income in the year 2011 and pay the appropriate tax.
Option 2:
I report $100,000 of income in the year 2010 and pay the necessary taxes.
Does it make any difference when you convert in the year 2010? At what point will the account be treated as a Roth account….where by there are no RMDs and no taxes.
If you are required to take an RMD….do you need to do in the year 2010 if you convert your account?
Is the distributions from the accoung in the year 2011 and 2012 tax-free?
thanks
Permalink Submitted by Alan Spross on Wed, 2009-10-07 04:02
Your options 1 and 2 are correct. I assume in Option 1 you meant 2012 for reporting the second $50,000.
It makes no difference when your convert in 2010. Assuming this is your first Roth IRA contribution of any type, it is immediately a Roth with no RMDs, but to be totally tax free (ie. “qualified”), the Roth must be held 5 years and you must be over 59.5.
If you have a traditional IRA balance on 12/31/09 and will have reached 70.5 in 2009, you will have a 2010 RMD from the traditional IRA before you can convert. You would have to take out the RMD, and then convert whatever portion of what was left after taking out the RMD. You cannot convert the RMD. If you convert your entire traditional IRA in 2010, there will be no RMD in 2011 because you will have no traditional IRA balance on 12/31/2010.
With respect to Roth distributions in 2011, the taxation depends on which reporting option you elected (see your Option 1 and 2). If you elect Option 1 with 50% of the income reported in 2011, and then take a distribution of $x also in 2011, then you will have to report 50% plus $x as your income in 2011. You lose the deferral on any distributions of these conversions taken before 2012. If you chose Option 2, then your 2011 distribution would be tax free because you reported the entire conversion in 2010. However, if you are not yet 59.5, there would be a 10% penalty because you would not have held the conversion 5 years.
The answer above is different if you had a Roth IRA prior to doing the 2010 conversion, because the 5 years may already have been met. And your distributions would come from the prior Roth balance first before the new conversion dollars came out.