2010 Roth Conversion Rules
Here’s the actual language from the law H.R. 4297, ‘‘Tax Increase
Prevention and Reconciliation Act of 2005″.
(b) ROLLOVERS TO A ROTH IRA FROM AN IRA OTHER THAN
A ROTH IRA.—
(1) IN GENERAL.—Clause (iii) of section 408A(d)(3)(A)
(relating to rollovers from an IRA other than a Roth IRA)
is amended to read as follows:
‘‘(iii) unless the taxpayer elects not to have this
clause apply,[b] any amount required to be included in
gross income[/b] for any taxable year beginning in 2010
by reason of this paragraph shall be so included ratably
over the 2-taxable-year period beginning with the first
taxable year beginning in 2011.’’.
I’m unclear as to the interpretation of the bolded section above as it pertains to being able to spread taxes on Roth conversions made in 2010 over two years (2011 and 2012) or 3 years (2010, 2011, and 2012) “Any amount” does not necessarily mean “all amounts”. Say that I convert $90,000 in 2010 and choose to declare $30K as a taxable IRA distribution for 2010. In this case, the remaining $60K could be regarded as constituting “any amount required to be included…”, and therefore I could split that between 2011 and 2012 – thereby effectively spreading out the 2010 conversion over 3 tax years. The wording in the bill seems ambiguous to me – will this need to be clarified by an IRS ruling in 2010?
Permalink Submitted by Alan Spross on Wed, 2009-05-06 22:19
“Any amount” should be interpreted to mean “whatever the amount is” or “THE amount” that would ordinarily be reportable in 2010. This is not an amount you can choose to split between the two year deferral and opting out on the deferral altogether. If you do multiple conversions in 2010, the same treatment must be elected for all 2010 conversion amounts. You cannot opt out on specific conversions or parts of conversions and elect to report only those conversions in 2010, while deferring the rest. However, one spouse could go with the automatic deferral and the other spouse could opt out on all their own conversions. This does give joint filers, both with TIRAs more options in managing the tax bill.
Another possible reason for the selection of “any amount” is that a TIRA with a basis will result in a conversion being only partially taxable. If your TIRA has a basis of 10% from non deductible contributions and you convert 90,000, the amount included in gross income will be 81,000. You would either report 40,500 in 2011 and 2012 OR opt out and report the full 81,000 in 2010. For those doing incremental conversions every year, opting out makes more sense, otherwise you cannot use any of your 2010 bracket for conversions. This would effectively limit your total conversions for 2010 through 2012 to 2/3 of the amount you would otherwise convert if you wanted to convert just enough to stay in your current marginal bracket. It would also be noted that “any” amount was also the verbiage included in the original Sec 408A(d)(3), so the use of this word is not new to HR 4297.
In summary, you cannot elect to split your 2010 conversions over 3 years, other than the situation where one spouse defers and the other opts out. For a single person, the choice is either 100% in 2010, OR 50% in 2011 and 50% in 2012.
I will agree that the word “any” here could just as well been replaced with the word “the”, and the intent would be more clear. However, I have not heard that this wording has resulted in any discussion of technical corrections.
Permalink Submitted by Bill Lohss on Wed, 2009-05-06 23:28
Thank you Alan for your reply. Are you the same Al that I was talking to about this on Bogleheads? In any event, I take your explanation as correct for my planning purposes. As you explained, since I am doing annual conversions based on marginal tax rate considerations, it looks like I’m better off to opt out and just continue to do what I’ve been doing for 2010-2012. I was really hoping that 2010 would give me an opportunity to convert a larger amount in that year from TIRA to Roth. It would, but apparently at a cost of higher cumulative tax over 2011 and 2012 for converting the total I would otherwise have converted over the 3 years. Maybe the Feds will take this thing away anyhow, so nobody can stretch taxes over 2 years. Any chance of that?
Permalink Submitted by Alan Spross on Wed, 2009-05-06 23:40
Not the same – I have not posted on Bogleheads.
I doubt very much if this will be rescinded. The US Treasury badly needs the tax revenue that will be generated by these conversions, and the expectation is that many high income, high asset taxpayers will convert as they have been shut off from both regular Roth contributions and conversions up till now.
Note that for those deferring the taxes, some control of that tax bill will be lost because tax rates could increase considerably in 2011 and 2012, but the recharacterization deadline for 2010 conversions will remain 10/15/2011. Therefore, taxpayers will not have an exact picture of their 2011 tax picture and only a superficial idea of their 2012 situation when the recharacterization deadline hits. You will have more control of this doing separate conversions in each year, with their own recharacterization deadlines.
Permalink Submitted by Bill Lohss on Thu, 2009-05-07 01:40
Thanks Alan – I had not even thought of the tax angle and the recharacterization deadline date if everything is done in 2010. Sounds like another reason to stick with my normal plan of converting each year and opting out of the 2-year deferred tax for 2010 conversions. As another option to consider: if I were to decide to split 2010 conversion amounts between 2011 and 2012, this means that I don’t have to declare (or pay tax on) any TIRA distributions that were converted to a Roth in 2010. This would allow me to take another TIRA distribution in 2010 that is not converted but instead is put into a taxable investment, correct? For example, I had planned to convert $30K from my TIRA in 2010, 2011, and 2012. Instead I could take a $90K distribution, roll $60K to a Roth, and put the remaining $30K into a taxable investment. I would pay tax for the 2010 tax year on the $30K, but split the $60K Roth conversion between tax years 2011 and 2012. Not as good as getting the whole $90K into a Roth, but it would let me get $60K in right away in 2010. Of course, you point out that I might have to deal with higher taxes on the $60K conversion beginning in tax year 2011 which I’d be stuck with after 10/15/11
Permalink Submitted by Alan Spross on Thu, 2009-05-07 02:46
You could do that if you feel that getting 30,000 extra into the Roth a year early is worth having another 30,000 lose tax deferral by going into a taxable account. It is true that your IRA taxable distributions/conversions would be split equally over the 3 years. One reason for doing as you suggest might be if you will need some funds to pay the conversion taxes. This would provide those funds, but if you are not yet 59.5 you would incur the 10% penalty on the taxable distribution, but that is also true if you had taxes withheld from the conversion itself.