Roth Conversion – 2 year spread election
When do you elect to spread 2010 roth coversion into 2011 and 2012? Is it on the date of the conversion or will it be an election with a timely filed 2010 form 1040?
When do you elect to spread 2010 roth coversion into 2011 and 2012? Is it on the date of the conversion or will it be an election with a timely filed 2010 form 1040?
Permalink Submitted by [email protected] on Thu, 2010-03-25 17:30
gsmithjr,
The election will be made when you file your tax return. The default provision will be a 2 year split of the conversion income over 2011 and 2012. You will have to opt out of that provision if you would like to include it all in 2010. Where exactly it will be reported on your return though, is a good question. in 1998, the last time an income spread was offered, the election was made on form 8606 (Nondeductible IRAs) – but back then only IRAs could be converted. Now, both IRAs and plans can be converted, so it remains to be seen exactly where this election will be made. Stay tuned…
Permalink Submitted by Alan Spross on Thu, 2010-03-25 18:05
I agree.
The date of the deadline to opt out is the extended due date for the return. That date is 10/17/2011 but for the extended due date to apply you must either file your original return by 4/15/2011 or file a timely extension by that date. This also applies to the recharacterization deadline. The election is irrevocable after that date.
Regardless of your election, covering your tax liability for the appropriate years will take some detailed planning to avoid underpayment penalties.
Permalink Submitted by Aryn Sands on Thu, 2010-03-25 18:20
Is there an online calculator comparing if you should do the 2 year or not? We know income tax rates are going to go up.
I could do it on my HP but am hoping there is something online to show clients. I realize that it is just an educated guess as to what rates will be but I think that income tax rates will increase faster than the growth one can make on the taxes that are postponed.
Thoughts?
Permalink Submitted by Tom Limroth on Thu, 2010-04-01 11:31
On a joint return, can one spouse elect out of the 2 year spread and the other accept It?
Permalink Submitted by mk foss on Thu, 2010-04-01 22:01
Yes. Each spouse has their own election so it’s fine if one pays the tax in 2010 and the other reports income with the 2011 and 2012 returns.
Also check your state, many follow federal but California allows a separate election, I’m told.
Permalink Submitted by JAMES MAGNO on Tue, 2010-11-23 21:56
I think that a partial election is available ie tax some in year 2010 and also some split between 2011 and 2012
Correct?
Jim M
Permalink Submitted by Alan Spross on Tue, 2010-11-23 22:12
Jim,
No, not possible for a single taxpayer to use all 3 years without converting separately in all 3 years. But if the taxpayer is married to a spouse that also has accounts which can be converted, one spouse can convert an amount and report it all in 2010, while the other defers their conversion to 2011 and 2012.
Permalink Submitted by Michael Moffitt on Thu, 2010-12-02 20:48
Another question on this spread election topic: my client who is 63 wants taxes withheld from TIRA when converting to RIRA, and then wants to spread taxes over 2011 and 2012 returns. Can he withhold taxes and if so, how do the withheld taxes get allocated to 2011 and 2012 returns rather than 2010 return?
Permalink Submitted by Alan Spross on Thu, 2010-12-02 21:15
Any withholding from the 2010 TIRA distribution must be reported in 2010. Only amounts actually converted to the Roth IRA can be deferred for two years. Of course, it is widely recommended that taxpayers be able to pay the taxes on conversions with outside funds, rather than pulling from the IRA since the withheld amount is lost to any type of IRA.
Example: Distribute 100,000 with 20% withheld – 20,000 goes to IRS and is taxable in year of distribution.
80,000 is the Roth conversion amount, and this can be reported @ 40,000 in 2011 and 2012.
As long as client is over 59.5, there is no penalty on the withheld amount. For such taxpayers who lack liquidity due to all assets tied up in TIRA accounts, it is not always a bad idea to withheld from the conversion, but it should be done only after a careful analysis.
Permalink Submitted by Michael Moffitt on Thu, 2010-12-02 22:13
Thanks, Alan!