At 68 and 70 what do you advise for 2011
Happy New Year. We converted some IRA accts to Roth for 2010 and will pay for them in 2010 (no RMD in 2010). Tried to go back and do more for the stretch over 2011/12 – but the bank would report it all as one lump sum. Scared that we wouldn’t be able to handle the Larger tax with our regular income, Converted income, plus start with a RMD in 2011 … we declined the stretch and will do smaller conversions as we go along. When working and putting money in IRAs, we were in the 25% Tax Bracket. We’re trying to stay in the 25% even with AGI, RMD, and Roth conversion amounts. What is your advice going forward for a couple who turned 68 and 70 in 2010? We believed that we were going to be in a “Lower Tax Bracket” when we retired. NOT!!! Ed is right … that is a big lie! Even if you start out at a lower level, you jump back up when they make you take an RMD!
Permalink Submitted by Alan Spross on Sun, 2011-01-02 01:02
Your post suggests that how the bank reports conversions might affect your decision to convert, but that should not be the case. The bank or other IRA custodian must issue a 1099R for each IRA account for which you had conversions, and if you did several conversions from the same IRA, the custodian just adds up the total on their 1099R. Then if you choose to defer the income for 2 years you complete Form 8606 showing that election or if you choose to report it all in 2010 you check a box on the form and report your conversions in 2010. This is between you and the IRS, and the bank reporting has no affect on this.
Therefore, for the funds that you did convert in 2010, you can still elect to split the income or report it all in 2010, and if both of you converted, one spouse can make a different decision than the other. The 8606 form applies separately to each taxpayer, so if both of you convert you each will have your own 8606 to report your decision.
Therefore you still have tremendous flexibility for 2010 conversions through the recharacterization options and the election when to report. The only thing you cannot do now is to increase the amount of your 2010 conversions. But your decision for 2010 will affect your conversion decision for 2011. If you report your 2010 conversions in 2010, then you now have an open slate for 2011 since no part of your 2010 conversion will be filling your marginal brackets in 2011 and 2012.
For the longer term, you should try to develop a basic plan for converting, but one that is consistent with your other financial planning concerns. While you can play with some of the web based conversion calculators, most of these do not integrate the more detailed aspects into the decision. Some of these are legacy planning for beneficiaries, longevity projections for yourselves including LT care coverage or lack thereof, Medicare B surcharges based on AGI for second year back, chances of an inheritance, and the chances of major tax changes such as a natl sales tax or VAT that could reduce the value of a Roth IRA vrs TIRA. Where you fall in your tax bracket is also an issue. Any year where you have an opportunity to convert in a bracket you expect to be less than your average future marginal rate is a no brainer, while converting at the expected same rate makes more sense if you are just beginning to accumulate Roth balances vrs already having considerable Roth balances. It is a good idea to find a tax planner that can help you with these decisions since you must make several projections of future developments which are guesses. But educated guesses are of much better quality than a seat of the pants approach.
Permalink Submitted by Bruce Steiner on Sun, 2011-01-02 02:36
A forum such as this can be useful for general information, but it is not possible to provide specific advice without knowing additional facts, including your other income and assets, your expected future tax brackets, and your beneficiaries’ expected future tax brackets. But if converting up to the top of the 25% bracket doesn’t get the conversion done within a reasonable time, and if you would otherwise remain in the 25% bracket, you may wish to consider whether it would make sense to convert up to the top of the 28% bracket.