Roth Conv. Tax & Quarterly Payments
If a client who is making quarterly estimated tax payments converts their traditional IRA to a Roth IRA and chooses the 2011/2012 split option, when will the income be incurred? Would the first 50% be considered earned in the first quarter of 2011 and the second 50% considered earned in the first quarter of 2012? Or would it be considered earned in the last quarter of each year, or spread out throughout each year?
Permalink Submitted by Alan Spross on Tue, 2010-04-13 17:56
I don’t know whether the IRS has ruled on this question or not, and I cannot determine how they dealt with it for the 1998 Roth conversions reported over 4 years. There are two conflicting possibilities here:
1) If the conversion was done in the first quarter of 2011, the income would be first quarter 2011 income. So if done prior to that, it would also be first quarter income.
2) However, the tax code says a 2010 conversion is reported “ratably” in 2011 and 2012. Does “ratably” just refer to the two year annual split or does it extend to each quarter of each year as well?
But if the client is using one of the safe harbors for estimates, all he has to do is meet the safe harbor (100% or 110% for higher incomes of his 2010 tax liability) in order to eliminate any penalty. If for some reason, 2010 tax liability is expected to be more than 2011 despite the conversion, then 90% of the 2011 tax liability would also be a safe harbor against underpayment. Most people would probably use the first safe harbor for 2011 and 2012, and switch to the 90% of current year for 2013 when taxable income would probably drop. If he misses the safe harbor and decides to use a 2210 to report under the annualized income installment method, that is when the question of which quarter the conversion is reported would come into play. But most people avoid the annualized installment method because of the complexity of the 2210.
A tougher question is how to deal with estimated taxes if the client does not know whehter he is going to opt out of the two year deferral or not. If he opts out in 2011 then he is almost sure to be far short with his 2010 estimates. And if he pays them anticipating opting out and does NOT opt out, then the IRS holds his money for a year before he gets it back or more likely leaves it in the IRS to apply to 2011.