Conversion Scenerio (Taxation)
I realize this topic may have been somewhat discussed in great detail, but here is just a scenerio:
Client (60) only has Roth money from a conversion in 2009.
Tax bracket is always the same/earnings never touched
Client converts 50K in 2010.
Client takes out 2009 conversion money in 2010 and 25K of the 50K converted this year.
#1 No Penalty applies on all, but can he/she still spread 2010 conversion taxes over two years?
#2 If he/she takes the 25K out in 2011 (everything else remains), I assume two year spread is definitly OK?
Thanks.
pko
Permalink Submitted by Alan Spross on Sat, 2010-02-06 21:57
1) Prior to distributions, 2010 conversion would be reported at 25k in 2011 and 25 k in 2012.
2010 Distribution will result in 2009 conversion money coming out tax and penalty free. However, the 25 k distribution of 2010 conversion money will accelerate the 2010 conversion reporting to 25k for 2010 and the balance of 25k in 2011.
2) Change to 25k of 2010 conversion now distributed in 2011 instead of 2010. Income reporting is still accelerated to 50k reportable in 2011 and -0- in 2012.
The acceleration provision results in income from a distribution of 2010 conversion money prior to 2012 being added to the amount that would have been reported for the current year of 2011. That produces a figure of 50k reported in 2011, and therefore there is nothing left to be reported in 2012.
Permalink Submitted by Anonymous (not verified) on Sat, 2010-02-06 22:46
Thanks alan:
I was trying to figure out some type of “edge” using this two year spread opportunity for someone who needs to tap into their IRA going forward. So it appears, just taking a normal distribution from a Rollover IRA for what you need is probably the easiest approach. I can not find a scenario where there is tax or delay advantage given that situation. Can you think of anything?
pko
Permalink Submitted by Al Fry on Sun, 2010-02-07 00:15
Alan, I have a similar question. Client has several Roths all fully qualified (over 59.5; 1st Roth started in 1998). He just converted his 401(k) to a seperate new Roth, planning to spread the taxes. Are you saying aany withdrawal from his old Roths in 2010 or 2011 will accelerate the tax on the new Roth? In other words, from an IRS perspective, he only has one Roth?
Permalink Submitted by Alan Spross on Sun, 2010-02-07 00:53
Al,
I have not seen the actual Regs on this, if there are any. If the Roth is not yet qualified the ordering rules still apply, so funds withdrawn come first from specific prior contributions to the 2010 conversions.
A book written by a noted tax attorney on Roth IRAs states that distributions taken from pre conversion dollars does NOT result in acceleration of conversion taxes. The ordering rules make the determination of when the 2010 conversion is being distributed quite simple. It is after the balance of all regular and pre 2010 conversion dollars have already been distributed.
Now, with a qualified Roth as in your example, the ordering rules no longer apply to distributions. The entire balance is now in a single pot of dollars. It only seems equitable that since the taxpayer had a right to withdraw the entire pre conversion account balance tax and penalty free at the time, that distributions up to the pre conversion balance would not be deemed to come from the 2010 conversion. This does not reflect what happens if the market collapses again and all the values are degraded. And of course, what seems equitable will not necessarily find its way into the IRS Regs. So I am guessing here.
I have been unable to locate any Regs to determine exactly how the IRS intends to handle this situation, and either they don’t exist or I simply cannot find them. This issue is not addressed in the original 2005 TIPRA tax bill that enabled the 2010 conversion rules.
Several poster seem to be searching for ways to distribute funds through the conversion process and delay the taxes. Those acceleration provisions are going to blindslide those who are not aware of the acceleration provision. So this is another area that Congress or the IRS needs to clarify, and fast. There have already been plenty of 2010 conversions and some will now be changing their mind and want to withdraw the money and still defer the taxes……….