RE: Roth IRA Conversion
I am 82 years old. My total of multiple RMDs for 2010 is $80,000.
1. Do I have to withdraw all of my RMDs before I can convert a $95,000 IRA to the Roth or can I just withdraw these RMDs before the end of the year?
2. Should I have enough federal income tax withheld from my RMDs to pay the tax on my conversions to prevent an underpayment penalty on my federal and state of California income taxes?
Permalink Submitted by mk foss on Fri, 2010-08-20 16:51
You must take all of your RMDs before you can convert an IRA to Roth this year.
If you prefer to pay your taxes by withholding, you could have the expected tax withheld from your RMDs. Federal income tax withholding is voluntary and must be at least 10% of the withdrawal but can be as much higher than 10% as you wish. CA income tax withholding is also voluntary. Some custodians say they can’t withhold CA tax, so if withholding is your plan have it taken from a more cooperative custodian.
You can also prevent undepayment penalties by making estimated tax payments but you would need to attach an additional form (both federal and state) to prove that the extra income all occurred late in the year.
Permalink Submitted by Alan Spross on Fri, 2010-08-20 19:08
bbbcwb,
Correct, but on the withholding issue, 2010 is unique in that most people will elect to defer the conversion income to 2011 and 2012. If you are sure that you will do that, there is no reason to generate 2010 withholding just for the conversion, but if you don’t know whether you might opt out of the deferral and report the conversion in 2010, then you might want to play it safe and have the extra withholding taken from the RMD.
Mary Kay,
Somewhat unrelated, but do you know what happens if a client converts in 2010 in CA and permanently moves to NV 7/1/2011:
1) Client escapes CA tax on the conversion?
2) CA will expect to have the full conversion reported in 2011 and 2012?
3) CA will require the full tax sooner than 2) above?
Or if the move is in reverse with the conversion done in NV and then move to CA:
1) What will client have to do when the fed 1040 for 2011 shows conversion income to prevent that income from transferring to the CA return?
I think you might see some of those in N CA soon. Perhaps the procedures will carry over from 1998-2001 as the scenario is the same……….