ROTH 2010 Conversion tax questions
Hi, I am a ‘brand-new’ forum person as of yesterday. My question[b]S[/b] are in regards to the 2010 ROTH roll-over conversion, etc. I took advantage of that this past year, did my homework as they say up front before jumping in; but now I have tax questions that I thought I were answered before getting in.
[color=#00BF00][b]History:[/b][/color] I had my money with my employment, and I had an independent ROTH with a company, which was opened first few days of 2005 i.e. Jan 2010 it had been open for 5 years. I am older than 59 1/2. I wanted to do the 2010 ‘thing’ and capture all monies into another company. So employment monies(company 1), which is tax-deferred was moved to ROTH (conmpany 2), then that money and all ROTH money was transferred to (company 3). ROTH account at conmpany 2 is still open with $0.00…al were ‘fully qualified’ and NO TAXES PAID AT THAT TIME for (company 1).
[color=#0000FF][b]QuestionS[/b]:[/color]
1) I was told, company 3 does not fall under the 5 year ‘seasoning’ timeframe, as the 5 year clock starts when you initially open a ROTH and if you move/transfer your ROTH to another company the clock does NOT get reset – correct?
2) I want to spread my taxable amount due to the IRS from (company 1) and pay in taxable years 20111 & 2012; but was told the amount yopu intend to pay in 20111 & 2012 had better be in your W-2 account by the end of that calendar year, as when the IRS sees that there is not enough money in your W-2 account to cover your taxes, the IRS will automatically put you on paying your taxes by the quarter i.e. just like a business – is that true?
3) I want to use my money in (company 3) to pay my taxes with; I have seen and read where, “…you can not use your conversion money, the money you rolled-over OR the earnings from said UNTIL THE 5 YEAR SEASONING CYCLE HAS BEEN COMPLETED. ** Please refer to history, I will be 64 in April of 2011. My ROTH account with (company 3) in taxable year 2011 will have been open for six(6)+ years…counting from initial opening with (company 2, and time with (company 3). Is my seasoning timeframe fullfilled?
Permalink Submitted by Alan Spross on Tue, 2011-01-11 19:31
1) Correct, it doest NOT get reset. Therefore, your Roth IRA is fully qualified and remains so no matter how many times you transfer it.
2) Somewhat correct. For 2011 when you will include 50% of your converted amount, you must come up with the taxes and your normal W-2 withholding will not be enough unless you have it increased enough to cover the taxes for your conversion income. If you do NOT want to increase your salary withholding, then you will need to send in quarterly estimates to bring your tax payments up to the required amount. There are two ways to go here, the first is to fully cover your tax bill so you owe nothing, and the other option is just to pay in enough to avoid a penalty and then pay the rest when you file.
To avoid a penalty, you must meet a “safe harbor” and there are two possibilities. The first is to have withheld an amount equal to your tax liability for 2010, which will probably be less since you have no conversion income in 2010. So your current withholding might be enough to avoid a penalty. The other safe harbor is to pay in 90% of your 2011 tax liability, but that is not easily estimated so most people use the first safe harbor. Remember, if you meet the safe harbor you avoid any penalty for underpayment, but you still owe the difference in April.
So using the prior year tax liability, 2011 should be fairly easy, but come 2012, you would have to increase the payments because your 2011 taxes included half the conversion. So 2012 is probably the first year you would need to either pay quarterly estimates or increase your salary withholding.
The IRS will not force you to use any particular method or pay quarterly to avoid an underpayment penalty, but if you underpay they will bill you for the penalty.
3) As stated earlier, your Roth IRA was fully qualified at the beginning of 2010, so you can now forget about the 5 year holding requirements or any taxes on distributions.
That said, you must still deal with a rule that says you cannot distribute conversion money prior to 2012 without moving forward the date when your taxes are due. Congress did not want people to convert in 2010 just to delay tax payments and then take money out of the Roth. You can avoid this problem by not taking any distributions from your Roth IRA until 2012. If you took out amounts this year, it would result in more taxes due for 2011 instead of for 2012, ie you would move the tax due date forward. Again, this is NOT an extra tax, it just takes some of your conversion income out of 2012 and places it in 2011 because you took out conversion money in 2011. If you use the first safe harbor I mentioned above based on your 2010 tax liability, there should be no need to take anything out of your Roth until 2012 to pay taxes, but then you may need to.