IRA-Roth Conversions
I have several questions about IRA/Roth conversions. Both my wife and I have IRA accounts and in our 70s. I am thinking about converting her entire IRA to a Roth and paying the taxes due this year. I plan on doing this sometime in November and paying the estimated taxes at that time. Question: should I have been paying estimated taxes before now? I am planning on converting a portion of my IRA to a Roth also this year and paying the taxes when I file my 2011 and 2012 tax returns. Can I do this or do I need to be paying the estimated taxes on a different schedule? I am waiting on Congress to tell me what my tax rate will be in 2011, 2012, etc. Their action will determine when I will pay the taxes and how much I convert.
Also, I am not certain when I can withdraw any of the principal from the Roth. I understand you cannot withdraw any earnings until five years after the conversion, but what about the principal?
I would appreciate any answers.
Thank you.
Permalink Submitted by Alan Spross on Wed, 2010-08-18 21:42
A late year conversion like this will normally trigger an underpayment penalty because the IRS assumes you converted equally throughout the year. You would have to file Sch AI of Form 2210 (annualized income installment method) in order to document that your conversion was done in Nov and that would take care of most of your underpayment penalty, providing that you pay a large estimate by 1/15/11. Your wife plans to opt out of the two year deferral or this would not be a 2010 problem.
You can make a different deferral election from your spouse as you plan, and that enables you to apply each year’s marginal tax rate. For your own conversion you have plenty of time to get your 2011 and 2012 estimates set up correctly to recognize the conversion income you will defer to those years.
With Roth conversions you can always recharacterize all or part of them, so you may want to convert now instead of waiting for Congress. When they do act, you still can recharacterize if need be as late as 10/17/2011. That is also the deadline for opting out of the two year deferral.
With respect to withdrawing the converted dollars, you can do that without tax or penalty, but if you take distributions of dollars YOU convert, it will accelerate your conversion income from 2011 and 2012 back into 2010. This prevents you from converting just to defer taxes and create cash flow. Her conversion would be no problem because she is not deferring the income beyond 2010.
Also, remember that you can recharacterize all or part of any of these conversion before 10/17/2011. So if you have a change of strategy, if your conversions lose money or if you want to reduce the taxable income in any of these years, recharacterization gives you a “do over”.
Finally, remember that your 2010 RMD must be taken before you convert. Then you can convert whatever amount is left or part of it. Your 2011 RMD will be reduced because of your 2010 conversion and your wife’s will be eliminated because she is doing a total conversion.
Permalink Submitted by lloyd frohreich on Thu, 2010-08-19 16:03
Alan: Thanks for your informative reply. Where can I get a copy of Schedule A1, Form 2210. I appreciate your prompt reply.
Thank you!
lefrohre
Permalink Submitted by mk foss on Thu, 2010-08-19 16:23
The Form 2210 is issued each year when the income tax forms come out. The AI schedule is one of the later pages of the form. You can get all tax forms at http://www.irs.gov but the 2010 forms have not been released yet.