Roth IRA Conversion
Converting to a Roth IRA – I read recently that if you have more than one traditional IRA, such as a SEP or Simple IRA, you’ll have to add up all of them in the calculation to determine how much of the conversion amount will be taxable, even if you aren’t converting all of them. If this is true, please give an example.
Paying the tax – I also read that conversions that are completed in 2010 – you can treat half of the income from the conversion as received in 2011 and the other half in 2012. So, does that mean that none of the conversion amount has to be reported on the 2010 tax return?
Thanks for your help!
Julie
Permalink Submitted by Al Fry on Fri, 2010-01-08 16:44
Have you made any non-deductible contributions to the IRA you want to convert?
Permalink Submitted by Julie Brangenberg on Fri, 2010-01-08 17:28
No. All IRA Contributions were Pre-Tax.
Permalink Submitted by Alan Spross on Fri, 2010-01-08 17:55
As long as all contributions were pre tax, then 100% of any conversion you do is taxable.
That calculation you mentioned only affects those who made non deductible IRA contributions in the past or perhaps rolled over after tax contributions from an employer plan. In that case, a portion of converted amounts would be tax free, and you would have to total all your IRA types (except Roth) to figure the taxable amount.
With respect to the 2010 conversions, the Form 8606 has not yet been printed for 2010. You will have to REPORT the 2010 conversions, but they will not be in your 2010 taxable income UNLESS you opt out of the two year deferral and elect to pay your taxes on the conversion in 2010.
Permalink Submitted by Julie Brangenberg on Fri, 2010-01-08 21:57
Could the participant pay part of the tax in 2010 and split the remainder 50/50 in 2011 and 2012?
Permalink Submitted by Alan Spross on Fri, 2010-01-08 23:10
No. The participant must make the same election for all conversions done in 2010.
However, if the participant is married and the spouse has accounts to convert, the spouses can make different elections. One could defer the income for two years while the other opts out and reports all the income in 2010. This enables use of the marginal tax brackets in all 3 years.
Permalink Submitted by Glen Snell on Wed, 2010-01-20 19:42
Alan, Do you know where I can find scripture and verse on this, or is it simply on a form some place??
Permalink Submitted by Alan Spross on Wed, 2010-01-20 23:27
It is not on a form. It is buried in some tax bill that passed after TIPRA in 2005, and I am trying to locate the specific site. Will keep working on that and post later if I come up with the cite.
I will say that to date no recognized credible source for published retirement data disputes this interpretation. But of course that is not as reassuring as a specific cite.
As for the mechanics of reporting the options, the IRS has not yet published the 2010 edition of Form 8606, which will be central to the reporting procedures. It may also be possible that the 8606 revisions will be extensive enough that the IRS decides to issue a supplemental form.
Permalink Submitted by Bruce Steiner on Thu, 2010-01-21 04:11
Section 408A(d)(3)(E).