Roth Conversion

Submitted by Frank Hausner on Sun, 2011-02-13 01:04

My wife and I file jointly and have each converted an existing Traditional IRS to a Roth IRA in 2010:

Can one spouse include the converted IRA income and pay all the taxes on the 2010 return, and can the other spouse spread the converted IRA income and taxes, equally on the 2011 and 2012 returns?

Or must both spouses pay all in 2010 or both divide equally in 2011 and 2012?

Does IRA conversion income add to the MAGI amount, for the purpose of calculating any Medicare Part B premium adjustments?

Thank you for your kind attention to this matter,
Frank Hausner



Submitted by Alan Spross on Sun, 2011-02-13 02:14

Frank,
Absolutely! While a spouse must make the same election on all of their individual conversions in 2010, they do not have to make the same election as the other spouse does. Making different elections allows you to use your marginal tax bracket in all 3 years, 2010-2012 joint returns.

The other news is not so good. The conversion MAGI will count toward determining your Part B surcharge in the second year after the year you report the conversion income. Perhaps by using all 3 years, you can stay under the lowest surcharge tier, but depending on where you fall in the brackets (bottom vrs top of the bracket) you might be better off concentrating the conversion income to limit your surcharge to one year, ie if you can do that without inflating your basic tax bracket. But remember that getting hit with the surcharge for your conversion might also mean that you do not get hit with it later due to the higher RMDs on the portion you do not convert.

Of course, you can also recharacterize part of either spouse’s conversion to pare down the MAGI to the level that creates the tax you are willing to pay including the surcharge. There is so much flexibility that it can become mind boggling, but you can get tax software and enter various scenarios, but they do not integrate the Part B surcharge, so you would have to manually figure that part.

Submitted by Frank Hausner on Sun, 2011-02-13 13:47

Thank you alan-oniras for you quick and comprehensive response!
Frank

Submitted by Nelson Rivers on Tue, 2011-04-05 20:24

In 2010 I earned $4,500, had taxable interest of $14,000 and make a Roth Conversion from Traditional IRA of $150,000. As a single person, what effect with this have on my Medicare premiums? Also, would a similar conversion in 2011 and 2012 affect my Medicare premiums?
Thanks
Marie S.

Submitted by Alan Spross on Tue, 2011-04-05 21:17

Yes, it will temporarily increase both your Part B and Part D premiums. But in the long run it may prevent higher premiums in your 80s when your RMDs will get large if you do not convert and eliminate some of those RMDs.

Note: The year you pay the surcharges is two years after the income tax year. So if you convert in 2010 and decide to report the entire conversion in 2010, then your surcharge year will be in 2012.
Or if you use the 2 year deferral where you would report 75k of the conversion in 2011 and 75k in 2012, your surcharge will be less, but will be in two different years, 2013 and 2014.

Note that your total surcharges are less if you defer the income to 2011 and 2012 because you will avoid the higher surcharge tier when your MAGI is over 160k. Perhaps you are converting at too fast a rate, but it will take detailed analysis to determine how much you should convert and at what rate per year. If you equate your surcharges to a tax rate and add them to your income tax marginal rates you can look at that total rate to determine whether it is good to convert and how much to convert. The Medicare surcharge is probably overrated since it really equates to a higher marginal rate of only 1 to 1.5% or so, slightly higher than that now that Part D has also been added.

See attached to help you see where you are in the surcharge tiers:
http://www.kiplinger.com/features/archives/medicare-costs-for-2011.html?…

Submitted by gerard noronha on Wed, 2011-04-06 12:39

could not find an answer to this question…if one uses roth ira monies to buy an annuity, is it tax free…if anybody can respond…thanks….gerry

Submitted by Alan Spross on Wed, 2011-04-06 20:11

A Roth IRA could be transferred to a Roth IRA Annuity tax free.

Or a distribution from a Roth IRA that is otherwise tax free could be used to purchase a non qualified annuity, but there is no rollover directly to a non qualified annuity from an IRA. Distributing funds from a Roth IRA to buy a non qualified annuity is a very bad decision. If you want an annuity get a Roth IRA annuity and it will not be a taxable event. Distributions from a Roth IRA annuity follow Roth tax rules, not annuity tax rules.

Submitted by gerard noronha on Wed, 2011-04-06 21:07

thanks alan for the prompt response…I will check out a Roth Ira Annuity….gerry

Add new comment

Log in or register to post comments