Roth Conversion – Pay tax over 3 years?
I have a client and his wife that will be out of work for all of 2010, 2011 and 2012 with virtually no income in all 3 years. We want to maximize the amount of IRA to Roth Conversion to take full advantage of the tax brackets for each year. I have read everwhere that when you do a Roth conversion, you can choose to declare all of the income in 2010 [u]OR[/u] split the income between 2011 and 2012. However, I want to do both as we want to push some income into 2010 as well. If we do a Roth conversion for [u]his[/u] IRA and elect to split the income between 2011 and 2012, can we then do another Roth conversion for his [u]WIFE’s[/u] IRA and choose to take all of that income in 2010? We want to declare some Roth conversion income in each of 2010, 2011 AND 2012. Any insights appreciated.
Anyone else have any other strategies that could accomplish the same thing?
Permalink Submitted by Alan Spross on Tue, 2010-08-17 23:19
You can do as proposed.
An individual must make the same deferral option for all their 2010 conversions, leaving no way to get the two year deferral and still use the 2010 marginal bracket. However, a spouse is not bound to select the same deferral treatment as the other spouse, and as a result if they make different elections, the marginal brackets for all 3 years can be utilized.
They each have until 10/17/2011 to make the final election on deferral and also to recharacterize all or part of the conversions. These two variables, both retroactive elections, are often used together after the entire tax picture for 2010 is known and most of the tax picture for 2011.
Permalink Submitted by Brian Wruk on Wed, 2010-08-18 00:32
Thank-you for your answer. One last clarification, if we distribute $70k from her IRA only and move only $20k into her Roth and $50k is a distribution, do we have to declare the $50k in 2010 (we have no choice) or can that $50k be split between 2011 and 2012 as well? In other words, does a distribution from an IRA [u]have[/u] to go into a Roth in order to choose between 2010 [u]OR[/u] 2011/2012?
Permalink Submitted by Alan Spross on Wed, 2010-08-18 02:27
Yes, the choice only exists for Roth conversions. Distributions that are not converted, both RMDs and others must be fully reported in the year distributed. In other words, the special conversion rules for 2010 have no affect whatsoever on the usual reporting regimen for other distributions and vice versa.