holding period before distribution without penalty from Roth
In the 2010 conversion from IRA to Roth
a: can the Roth be an account that has previously been used for contributions to Roth and has a small balance in it?
b: if yes, does the 5 year holding period apply to the converted amount, since the Roth would have already been in existence for 5 years previously
c: will the conversion trigger AMT if the rest of income is mostly short term CG
d: are there any restrictions on deductions in the 2011/2012 that can be used against that income to reduce the taxes?
Permalink Submitted by Alan Spross on Mon, 2008-06-02 20:40
Bill,
1) Yes, conversions can go into an existing Roth account. The only downside is that in the event of recharacterization of the conversion, the earnings determination will have to include the results of the entire account, not just the conversion funds. Most IRA custodians should still be able to handle the math.
2) The 5 year holding period for conversions is a different one than the 5 year holding period for earnings to be qualified. It would apply unless you are over 59.5 when the distribution occurs. You should also know that if a 2010 conversion is withdrawn prior to 2012, it will accelerate some of the taxes you would otherwise have deferred to 2011 and 2012.
3) Under current rules, a conversion could result in AMT because the taxable income could then exceed the amount of the AMT exemption. This exemption is determined by Congress each year, often very late in the year, so planning is more difficult.
4) No major deduction restrictions are scheduled under current law, however the marginal rates per the Bush tax cuts expire 12/31/2010 including the cap gains rates.
Note that a 2010 conversion can still be recharacterized by 10/15/2011 in part or totally if developments suggest that action. By that time you will probably know most of your 2011 tax situation and certainly will know 2010. You can also opt out of the 2 year deferral if you wish and report all the conversion income in 2010. But you cannot split multiple conversions between the two options, it’s either all in 2010 or all split between 2011 and 2012.
Permalink Submitted by bill weaver on Tue, 2008-06-03 05:05
Thanks ED, A little bit of clarification on point 2:
I am already over 59 1/2, so does that mean that shortly after doing the conversion to the existing Roth, I could begin to withdraw tax free with no penalty of some of the converted funds. Actually, I hope that it will be just the growth over the original funds, but want to be sure in both cases.
Also on point 4, would that possibly mean that the deferred taxes paid in 2011 & 2012 would be at the old, much higher rates, or are they grandfathered in since the action occurred in 2010?
Permalink Submitted by Alan Spross on Tue, 2008-06-03 05:22
Bill,
I’m not Ed, but –
Yes, after 59.5 (even if you converted prior to 59.5) you can withdraw the converted funds without the early withdrawal penalty, even the next day.
Point 4 – the tax rate for the portion of the 2010 conversion taxed in both 2011 and 2012 would be at the rates applicable in those years, NOT the year of the actual conversion. For that reason, the prospect for higher marginal rates after 2010 is worrisome. However, you could opt to report all the income in 2010 if you wish, although that in itself may raise your marginal rate for 2010 into a higher bracket. In other words, come 2011, the “OLD” rates may well be lower than the current rates in 2011. Tough to predict at this time, but the election will definitely have an affect.