3 year spread for Roth conversion
We have a client with $150,000 in a traditional IRA. He is considering a Roth conversion in 2010, but wants to spread the tax liability over three years rather than just two. If he would elect to do a $50,000 conversion in June, then convert the remaining $100,000 in December, can he elect different treatment for each conversion? In other words, could he elect to treat the June conversion as current year taxable income and defer the income on the December conversion until 2011 and 2012? Thus making $50,000 taxable in each of the next three tax years?????
Thanks in advance for any input!
Permalink Submitted by tomd37 on Mon, 2010-06-07 16:54
If they are all his own IRAs (none are spouse’s), he can only make one election of either current year or 2011/2012. Spouse, if any, can make a different election. That is my understanding.
Tom D.
Permalink Submitted by Scott Garrison on Mon, 2010-06-07 17:52
So the election to spread the income over two years is based on the account owner, not by the individual distributions, or by the account? What if this guy had two accounts that make up the $150,000 ($50,000 account and $100,000 account)? Does that change anything? Or is the trigger still that it is his taxpayer ID regardless of how many account numbers? Sorry for playing the devil’s advocate, but I’m trying to fully understand.
Permalink Submitted by Alan Spross on Mon, 2010-06-07 19:52
The taxpayer is the determining factor regardless of how many IRA accounts he may have. As Tom indicated, since the election applies to each taxpayer, the taxpayer’s spouse can make a different election and therefore if the spouse has accounts to convert, the couple can effectively spread the conversion amounts over 3 years.
Assuming only the taxpayer can convert in your example, he does not have to make a final decision on whether to opt out of the two year deferral or not until 10/17/2011, which is also the deadline to recharacterize all or part of his conversion. By then his 2010 tax can be computed to the dollar depending on the election he makes and his 2011 tax bill and tax rates are mostly determinable as well. This provides a considerable amount of retroactive flexibility with respect to 2010 conversions.