2010 Roth Conversion and Distribution
Retired client over age 59.5 with small Roths over 5 years old needs his 401(k) money now. Can he convert entire amount to a Roth in 2010, deferring taxable income until 2011/2012, then strip out all except enough to keep Roth going without tax repercussions?
Permalink Submitted by Alan Spross on Wed, 2010-01-13 20:48
Al, the new distributions would be tax free, but they might accelerate the tax due date for the income deferred to 2011 and 2012. But since he had prior qualified Roth balances, those balances should be available for distribution prior to tapping any of the conversion dollars. While ordering rules no longer apply to qualified Roths like this, it only seems equitable to allow the Roth balance prior to conversion to be distributed first without accelerating the income reporting for the conversions.
But once client took out the pre conversion qualified balance and started tapping into the conversion before 2012, he will move the income reporting date for more of the deferred income into the year of the conversion distributions.
The IRS has only provided an example of how this works with non qualified Roths under the ordering rules, but no specifics when the Roth is qualified. But it only seems logical to allow the pre conversion balances to be distributed before any conversion income is move forward into the year of distribution.
Permalink Submitted by charles lore on Sat, 2010-01-16 15:34
Allan…. If I am understanding this a 2010 conversion to a ROTH followed by a 2010 distribution of those some converted dollars will moved the income recognition to 2010 instead of 2011/2012? What if he took the money out in 2011?
Permalink Submitted by Alan Spross on Sat, 2010-01-16 18:13
If the distribution was in 2011, the amount distributed would be added to the amount that would otherwise have been reported in 2011. That would then reduce the amount remaining to be taxed in 2012. In effect, the distribution would move income that would otherwise be taxed in 2012 into 2011.
The result of these rules is to prevent 2010 conversions from being done when cash is needed instead of taking simple TIRA distributions, but not having to report the income for two more years. This rule makes the result the same as a TIRA distribution and the conversion 5 year holding period makes the result the same with respect to the early distribution penalty as well.