Need Help on New 2010 Conversion Option

Submitted by Newt Pearson on Mon, 2009-12-28 16:59

Thinking through some strategies for 2010 converting .

A person converts 50 in June 2010 and another 50 in Oct…

Qt 1 – When is deadline for declaring this to be under new option and is it done on tax return ? Deadline for declaring it under old option and how is it declared ?

Assuming it is under new option and with NO 8606 $…

Qt 2 – As I understand , 50 will be reported in 2011 and 50 in 2012 … if 30 is rechar’ed …
a. Is 20 reported in 2011 and 50 in 2012 or
b. Is math 100 -30 = 70 and 35 reported in each of 2011 and 2012 ?

Qt 3- Is the final deadline for rechar’ing Oct 15 2011 ( same as the old option ) or is it Oct 15 2012 the year after the converted amt is actually reported on return . Would the amt reported in 2012 have a Oct 15 2013 rechar’eding deadline ? I think this is wishful thinking but want to be sure.

Thanks

Concerning beneficiaries …

Qt 4 – If surviving spouse is bene. of deceased spouse’s ROTH , is survivor forced to ever take RMD and if so at what age ?

Qt 5 – If it’s a Non Roth , can surviving spouse convert it and , if yes , is it survivor’s age or would be age of deceased ?



Submitted by Alan Spross on Mon, 2009-12-28 17:45

1) The deadline for choosing all the options is the extended due date (10/17/2011) if the return is filed on time or extended on time. Otherwise it is 4/15. This means that you could file the return as usual by 4/15, but if you change your mind by 10/17 you would have to amend the return. If you really are on the fence on what to do, it is best to just file an extension and pay what you think you will owe by 4/15.

The IRS has not released the new version of Form 8606 and it might not be out for awhile. That form will contain the bulk of the conversion reporting, however it is also possible that the IRS will release a separate form of some type for 2010 to go along with the 8606. By “old option” I assume you mean that you would report the entire conversion for 2010, and since this will require you to opt out of the two year deferral, there will have to be a clear place for you to elect to opt out, most likely on the revised 8606 for 2010.

2) b would be correct here.

3) Yes, 10/17/2011 because 10/15 is on a weekend. As of 10/17 no further changes can be made to the reporting options nor can any recharacterizations be done on any part of a conversion done in 2010. 10/15/2012 would only come into play if you did a separate conversion in 2011, and 2013 if you did a separate conversion in 2012. If you did these separate conversions in 2011 and 2012, the income would be added to the portion deferred from the 2010 conversion(s).

Submitted by Newt Pearson on Mon, 2009-12-28 17:58

Thanks Alan . Hope you’re enjoying the holidays .

Anyone out there who can address Qts 4 and 5 ?

Thanks

Submitted by Alan Spross on Mon, 2009-12-28 19:22

Newt,
Sorry, I overlooked them.

4) It depends on the Roth agreement’s default options for a sole surviving spouse. Some agreements (eg Vanguard) indicate that if the survivor fails to take an RMD as beneficiary they become the Roth owner. Other agreements automatically make the spouse the Roth owner. These two situation eliminate any RMD requirements.

However, Schwab handles it differently. They allow the surviving spouse to make a specific election to be treated as beneficiary, and if the spouse makes this election, then RMDs must begin no later than when the decedent would have reached 70.5. The only situation where this might be an advantage would be in the Roth is not yet qualified and the surviving spouse wants to tap non qualified earnings in the Roth and wants to avoid the 10% penalty that would be incurred if they assumed ownership. They would have to take RMDs to preserve inherited status in that rare situation.

Submitted by Newt Pearson on Mon, 2009-12-28 19:46

Thanks Alan

Qt 5 – (See above) Can surviving spouse ( as beneficiary ) convert deceased spouses Ira to roth prior to survivors 70 1/2 age ?

1 more

Qt 6- If 1 spouse converts using the new option ( 1/2 applied to each of 2011 and 2012 ) and that spouse dies after the conversion , let’s say in 2010…will the conversion remain ?

Sorry for perhaps some strange questions but the 2 of us have $ to convert much of which we hope can be pasted on in the form of roths. I want to evaluate every angle and “what if” before I make final decision for 2010. Am I correct that children must take rmd of inherited ira’s irregardless of whether they are roths or not ?

Thanks as usual
Newt

Submitted by Al Fry on Tue, 2009-12-29 00:53

Q. 5: an inherited IRA cannot be converted to a ROTH. However if the spouse takes over the TIRA as the new owner, then of course it can be converted to a ROTH.

Q. 6: I’ll leave that to the other Alam.

Submitted by Alan Spross on Tue, 2009-12-29 01:11

5) Sole surviving spouse can assume ownership of the TIRA and then convert it to a Roth IRA at any time. If the decedent spouse passed prior to their RBD, this conversion can be made without any RMD being taken out first.

6) Yes, the conversion will remain unless the sole surviving spouse wants to recharacterize it. And if the survivor want the conversion to stand, they have an option that a non spouse beneficiary does not. They can opt to continue the two year deferral for the conversion taxes. They must make that choice no later than 10/17/2011, although the IRS has not yet specified whether this option will be on the 8606 or done some other way.

Yes, non spouse Roth beneficiaries must take RMDs on Roth IRAs as well as for traditional IRAs. The difference is that the Roth distributions will be tax free unless the beneficiaries tap into earnings before 5 years from the first Roth contribution has passed.

Submitted by Newt Pearson on Tue, 2009-12-29 17:16

Alan and Alfry

Thanks . Happy New Year

Newt

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