1) Yes, this can be done. However, for the 2010 conversion the taxpayer would have to opt out of the two year deferral to 2011 and 2012 to prevent the loss of use of the 2010 marginal bracket. In your example, if the tax deferral for the 2010 conversions was worth retaining, the taxpayer could just extend the conversion period by one year, ie conversion would include 60k in 2009, 120 k in 2010 reported as 60 each in 2011 and 2012, 60k in 2013 and 2014. The 5 year conversion plan would just end one year later.

2) Your results are logical, but must pass the test of many assumptions including the consistency of annual earnings and market dislocations which seem to be occurring more frequently with two just in the last decade. There is also the issue of the deficit’s affect on future tax rates, both federal and state.

There is also the recharacterization opportunity to undo a conversion that has lost value or will be taxed at a higher rate than planned. The deadline date for these is 10/15 following the year of conversion, and is an opportunity to do the conversion over at a later date to prevent paying taxes on phantom values or at a rate higher than planned.

Unless estate considerations are important, conversions for those up in years is more questionable since they have a shorter time frame for the earnings to offset the current taxes paid. Generally, the first dollars converted are the most beneficial because they provide a source of tax free distributions later on if needed and also reduce future RMDs that would otherwise put them into a higher bracket. But as the RMDs are reduced and eventually that higher bracket is erased, the benefit of additional conversions disappears at some point. Considering all the variables and unanticipated occurrences, I would be careful about overdoing conversion amounts. Doing just enough to fill the current bracket is conservative and reduces the chance of overpaying for the conversions.

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The 5 year holding period for each conversion only relates to the 10% early withdrawal penalty due if those conversion dollars are distributed before the 5 years is up. It does not affect earnings taxation. For earnings taxation there is a totally different 5 year requirement that starts with the first year of any Roth contribution, whether regular or a conversion. Taxpayer must also reach 59.5 in addition to the 5 year holding period for earnings to be tax free. All 10% penalties for conversion holding requirements also disappear at 59.5.

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Exhibits look fine, although it is not clear whether the results are based on an early year conversion (which IRA gets the earnings), and whether tax payments are assumed to be made using quarterly estimates or only after earnings are credited). Almost all Roth sources will recommend paying the taxes with outside funds rather than from the Roth IRA or TIRA, but this issue is more critical prior to age 59.5 because of the early withdrawal penalty. Granted, you cannot assume people will have the funds available from other funds to pay the conversion taxes. The other factor to hope for is that Congress does not pass a VAT tax, which would devalue all retirement accounts, but the Roth more severely relative to the TIRA, assuming a VAT would be in lieu of additional income tax rates.

Using either the TIRA to pay taxes via withholding from the conversion distribution or making quarterly estimates from the Roth IRA, the tax impact is the same after 59.5. In other words, the withdrawal from Roth conversion funds will be tax and penalty free and the 5 year holding requirement for conversions ends at 59.5. And since earnings in the Roth come out last, no one should be withdrawing any earnings until well after the 5 year period has ended and the earnings will then be tax free.

It would be interesting to do the same exhibit with taxes paid by outside funds, but then you have the added issue of lost earnings on the tax dollars with respect to growth of the taxable savings.

If someone converts under 59.5, then the tax payments will be hit with the 10% penalty, so that should be avoided. But the conversion holding period ends at 59.5, eg. if they convert at 57, they only need to avoid tapping the Roth for 2.5 years because the penalty will end at 59.5.

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Agreed. Get too detailed and they will lose contact with the main points.

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