Roth Conversions pay tax in 3 years?
I have a couple of clients who are considering fairly large Roth conversions. I know that they will have the option of choosing to pay taxes either this year or split this over 2011 and 2012. Can we do one conversion in which 1/3 of the assets are converted and we choose to pay taxes in 2010 and then a second conversion of the remainder of the assets and choose the delayed tax payment in 2011 and 2012? This would effectively split the taxes over three years. If this is allowed, would we need these to be in separate accounts for tracking purposes? Thanks for your input.
Permalink Submitted by Alan Spross on Thu, 2010-03-18 19:57
Unfortuneately, this is not allowed.
The same election must be made for all Roth conversions in 2010, ie. to either take the two year deferral to 2011 and 2012 or to opt out of the deferral and report the conversions in 2010. However, if the clients are married to spouses who also have accounts to convert, each spouse can make a different election regarding deferral. This would accomplish the objective of using the marginal rate in all 3 years.
If the plan is to do incremental conversions over several years to fill up but not exceed the current tax bracket, the taxpayer would probably opt out of the deferral and just report each year’s conversions as they have done in the past. This provides better control of taxable income and some insurance against tax rate increases that might occur in 2011 and beyond.