Hello,
When stock market dropped in early 2020 we converted a fairly large amount of a simple IRA to a Roth IRA.
We don’t have an issue paying the tax on the conversion, but because it would put us over $150,000 in income for the year I believe we would lose the unemployment exclusion that was recently passed.
Can we spread the income from this over 3 years or did the money actually have to be pulled out of the account?
Thanks
Since the conversion was done in 2020, and conversions can no longer be recharacterized, you are stuck with the 85k of taxable income. A distribution from the Roth IRA you might do this year will not affect your 2020 income, and might generate a higher 2021 taxable amount if you pulled out gains. Also conversions not held 5 years until withdrawn incur a 10% penalty on the taxable portion of the conversion. I don’t see any benefit for taking a Roth distribution, rather it would be a costly move.
To complicate to this, we also took a $75,000 withdrawal from our Roth IRA in September 2020. These were 100% contributions before 2020. Not sure how/if that affects any of this
If your Roth distribution came entirely from prior regular Roth contributions, there is no tax or penalty on the distribution. Hopefully you are keeping track of your Roth IRA basis because you will have to report this distribution on Form 8606 and the form asks for your regular Roth IRA contribution basis (line 22), and if that does not cover your distribution, you would be drawing from conversions, maybe even the 2020 conversion. There would be a 10% penalty if that happened because you did not hold the conversion 5 years. Again, this Roth distribution will not further increase your 2020 taxable income as long as it all came from past regular contributions.
for my clarification – the 10% penalty on conversions less than 5 years old does not apply if over age 59 1/2, correct? -m
Permalink Submitted by Alan - IRA critic on Tue, 2021-04-06 17:59
You cannot spread the conversion income over 3 years. Further, even if you qualified for a CRD and converted 100k, you stlll could not report the income over 3 years, because a CRD taken from a pre tax plan is not eligible to be repaid to a Roth IRA. If your conversion was invested in stock based investments, your conversion was probably so beneficial that loss of the UC exclusion would pale in comparison.
I don’t follow your question about pulling money out of the account. ??
Permalink Submitted by Shaun Ebert on Tue, 2021-04-06 19:08
By pulling the money out, I mean pull the money out of the account, and not a conversion. Yes we have done quite well on the conversion. Transferred around $85k which is now worth over $150k.All that said, by losing the unemployment deduction, we are talking an extra $6,000 in extra tax liability. So if the code allowed us to spread the conversion over 3 years, it would obviously help.