Conversion Process
If you took an TIRA distribution 30 days ago and now wanted to convert it:
Should you first roll back and then convert internally at the custodian OR simply roll it directly to the Roth?
I am a bit torn about which way to go because the tax reporting is different in each case. I realize my 60-day rollover is used up in the former case, but the tax reporting is easier with the 02 code. Any suggestions? Is there a best choice taking aside the “used up” rollover issue mentioned above.
Thanks,
pko
Permalink Submitted by Alan Spross on Sat, 2010-10-30 20:18
pko,
I woundn’t use up the one rollover by rolling the distribution back to the TIRA just to get a code 2 if you then converted by direct transfer. Assuming pre age 59.5 the 1099R would be coded with a 1 if the distribution was paid to you, but that becomes moot if you do an indirect rollover including a Roth conversion rollover.
This scenario is also closely related to a solution to the one rollover rule. If you took a distribution with the intent to convert, but then changed your mind, you could not roll it back to the TIRA if you had already used up your one rollover. Therefore, in order to get the rollover back to the TIRA, you could convert the distribution and then recharacterize the conversion back to the TIRA. That gets the money back to the TIRA without doing a chargeable rollover since neither the conversion OR the recharacterization count against the one rollover rule.
Your 1040 and 8606 will look the same whether you convert by indirect rollover or direct transfer. The only difference between the two methods is Box 7 coding on the 1099R (1 or 2 vrs 7). I may be missing what you meant with reference to reporting being easier with the 02 code, as I don’t see a difference based on the coding. You never need a 5329 with a conversion.
Permalink Submitted by Anonymous (not verified) on Sat, 2010-10-30 20:57
Thanks Alan:
I agree with you about going directly to the Roth.
The reason I looked at both scenerios is that I somehow thought getting the code “2” is better to understand for the IRS. They clearly approve of the 60-day rollover option. Now that I think about it, rolling and then converting is actually more to report.
pko
Permalink Submitted by Anonymous (not verified) on Sun, 2010-10-31 18:32
Alan or anyone else:
I had another conversion question so I am just tacking it on here:
If someone (under 59 1/2) converted x dollars in 2010 and then took that money out this year (with the intend to keep it), do they even have the ability to do another conversion this year and spread the tax liability over 2011 and 2012?
Note: The IRA pool prior to 2010 had no contributions in it.
Thanks,
pko
Permalink Submitted by Alan Spross on Sun, 2010-10-31 21:10
Yes, the 2 year deferral is still available. Both conversions would be reported, and the special 2010 edition of Form 8606 would then require that the amount of the withdrawn conversion income be accelerated into 2010. There is no opt out election made.
Example : First convert 20,000 and then distribute it. (10% penalty will also apply).
Then convert 30,000
8606 will show total conversion of 50,000, initially taxed 25k in 2011 and 2012. But the 20k distribution accelerates the tax from 2012 to 2010 and the result is 20k taxed in 2010, 25k in 2011 and 5k in
in 2012.
Better to recharacterize the first conversion, then withdraw it from the TIRA. Will still have 20k taxable income and 10% penalty in 2010, but the second conversion can then be taxed @ 15k in 2011 and 15k in 2012 and this provides a longer deferral of the tax bill.