Roth Conversion Tax Deferral
Husband and wife convert IRAs to Roths in 2010. Wife dies before end of year. Can surviving husband defer the tax for both his and his wife’s conversions to 2011 and 2012, or must the tax for the deceased’s conversion be paid in 2010? I would have thought it would have to be paid in 2010, but Turbo-Tax gives me the option of deferral. If you can defer, how do you report the conversion in 2011 and 2012 as the deceased does not file a return?
Permalink Submitted by Alan Spross on Wed, 2011-03-23 03:28
Yes, the surviving spouse can maintain the 2 year deferral for the deceased spouse, although the option to make a different election for one of them might be worth considering due to the higher tax rates for filing single in 2011 and 2012.
The 2010 8606 form was not released until December and is highly complex given all the options. We may not know exactly how the 2 year deferral for the deceased spouse will be reported until the 2011 version is released. My guess would be that the surviving spouse assumes ownership of the inherited Roth and reports the taxable income on his own 8606. Note that some Roth IRAs have a default provision that automatically makes the surviving spouse the owner without making a formal election. There is no real benefit for the survivor not to assume ownership in the vast majority of cases anyway.
Permalink Submitted by Jim Armstrong on Wed, 2011-03-23 05:31
Actually, the surviving spouse did NOT inherit the Roth IRA – it went to the children along with most of her other financial assets (the husband wanted it that way). I looked at the four possible conversion declaration scenarios (both in 2010, both in 2011/12, hers in 2010/his in 2011/12, and his in 2010/hers in 2011/12) at the difference in federal plus state taxes is relatively small (I guess the marginal rates are the same all years). So, I am inclined to defer. I just am not sure who would and how to report the conversion in 2011/12.
Permalink Submitted by Alan Spross on Wed, 2011-03-23 20:32
Since the surviving spouse did not inherit the Roth IRA, there is no chance to defer the conversion made by the deceased spouse. It must be fully reported in 2010, although the husband can still defer his conversion to 2011 and 2012. The only option therefore, is whether he will defer his conversion or not. This solves the filing question, but not necessarily to his advantage.
Turbo tax must not be aware that the husband is NOT the Roth beneficiary. If that info was requested and provided and TTax still indicates a deferral option, then the program is in error.