ROTH-2010 CONVERSION
I am planning to convert 50000 to a ROTH in2010 and to withdraw 80% of amount in 2010 soon after I convert. I plan to pay taxes in 2010 and 2011 tax years. I am 69 years old. Can I do this without any penalties?
Jim
I am planning to convert 50000 to a ROTH in2010 and to withdraw 80% of amount in 2010 soon after I convert. I plan to pay taxes in 2010 and 2011 tax years. I am 69 years old. Can I do this without any penalties?
Jim
Permalink Submitted by Alan Spross on Sun, 2010-03-21 18:55
Jim,
If you withdraw parts of your 2010 conversion prior to 2012, the income reporting will be accelerated into the year of distribution. The purpose of this provision is to limit the two year tax deferral to those who will retain their conversions at least until 2012. Otherwise, the provision would be used to effectively withdraw funds from the TIRA and not pay the taxes for two years.
In your example of a 50,000 conversion in 2010, since you plan to withdraw 40,000 also in 2010, then 40,000 would be taxable in 2010 and the other 10,000 in 2011. If you waited until 2011 to withdraw the 40,000, then all 50,000 would be reported in 2011 and nothing in 2012. There are no other penalties, just the acceleration of the year you would otherwise be reporting the 2010 conversion.
Note that if you already have a Roth account prior to this conversion, you can withdraw those existing funds without accelerating the income on your 2010 conversion. You will not accelerate the income until you actually remove funds that came from the particular conversions in 2010.