traditional to roth conversion
I am 61 and considering converting my traditional IRA to a Roth in 2010. Total assets are 1.5 million. If I convert in 2010 can I take distributions tax-free from my 1.5 million converted amount. I will pay the tax with personal funds and wait 5 years before taking any distributions of the earnings on this 1.5 million amount. Also would if start my 5 year waiting period to fund a small roth ira today?
Permalink Submitted by Alan Spross on Fri, 2008-06-20 23:01
Yes, you can take distributions tax and penalty free on the converted amount any time you wish, although if you defer the tax on the conversion to 2011 and 2012, a withdrawal prior to 2012 would accelerate the income tax payment.
Your 5 year holding requirement for qualified distributions starts with the first year you make a regular or conversion contribution. Therefore, if you qualify to make a regular contribution this year of any amount, your 5 year holding period would end 1/1/2013, and earnings would be tax free as of 2013. There is no 5 year holding period for conversions because you are already over 59.5.
You probably have an overall plan for the conversion, but obviously converting that much in 2010 will inflate your income tax bracket substantially even with the two year deferral that splits the conversion income in half. Bush tax cut marginal rates expire after 2010 so there could be a large increase in 2011. However, note that you can opt out of the two year deferral if you wish and report the entire conversion in 2010, which is an option that may pay off.
However, if you decide to convert lower incremental amounts over several years, you can probably reduce the marginal rate you will pay. Bottom line is that you do not want to pay a higher rate for the conversion than your average rate in retirement is estimated to be.