Client can convert all or part directly to a Roth IRA without first rolling to a TIRA. As you suspected, since the fund cannot go back to the 401k in the event of recharacterization, the recharacterization must direct the funds to a TIRA account, either a new one or existing one. Deadline for that is 10/17/2011 for 2010 conversions.

Second question brings into play just about every aspect of client’s financial picture and estate plans, and to make it even more difficult, it must factor in a guess regarding future tax rates and particularly LT cap gain rates for any NUA stock. Obviously, things are much somewhat easier if client elects to limit the analysis to only his own situation and disregard benefits for heirs. There is always some benefit to tax diversification when things are as unsettled as they are today, so you would look at client’s total Roth assets vrs pre tax retirement assets vrs non retirement assets, and if this is the first Roth, that would argue for a larger conversion. It would take several pages to cover all the various factors involved here.

Note that if client reaches 70.5 this year, he must take out the RMD prior to converting the 401k. And like IRA conversions, he will have a choice on reporting the conversion income in 2011 and 2012 or to opt out and report it all in 2010.

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He gets an automatic extension to 10/17/2011 (10/15 is on weekend) as long as he files his 2010 return on time. But actually filing an extension might be more efficient as it will eliminate amending the 2010 return if something changes. But he loses the extended due date if he NEITHER files on time or files a timely extension.

10/17 is the deadline not only for recharacterizing, but also for opting out or changing the year that the conversion will be reported. You have the option to mix and match these elections in several combinations. Even more elections for joint filers since the spouse can make different elections than the taxpayer. This would allow all 3 years of marginal brackets to be applied to conversions as long as both spouses have assets to convert.

Generally, waiting until the last couple months provides the best overall tax picture since gains (or losses) have had a chance to accumulate longer, the tax situation for 2010 is fully known, and for 2011 mostly known. 2012 would still have to be a calculated guess however since Congress has established the habit of passing tax changes very late in the year and sometimes even retroactive. For example, the qualified charitable distribution for 2010 has still not been extended, and it is probably only 50-50 that it will be. Generally, the deeper and longer the recession, the less likely that tax increases will occur, but as soon as recovery is under way- watch out. Also, Roth IRA holders should watch carefully for proposals to pass a VAT, since a VAT makes TIRAs somewhat more valuable in relation to Roth IRAs.

Waiting longer also eliminates certain personal situation changes such as major health problems, receipt of an inheritance, and any other sizeable windfalls or expenses.

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The default for 2010 conversions is reporting them 50% each in 2011 or 2012. But you can “opt out” of that deferral and report the entire amount in 2010. This election will be included in the new 8606 for 2010.

For example, if you converted 200,000 with the intent to report half in 2011 and 2012, but later decided that you would rather use your 2010 bracket, you could recharacterize half and report the remaining 100k in 2010. You could then do conversions in 2011 and 2012 for the amount you wanted included in those years. You might also decide to just fill up your current bracket in 2010 and if that amount was 35,000, you could recharacterize all but 35,000 and avoid inflating your bracket. If you filed your 2010 return in April, but then changed your mind, you could recharacterize prior to 10/17 and then amend your 2010 return.

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If you have a balance in both TIRA and Roth IRA accounts, here are some instances where you might use the TIRA for distributions in excess of any RMD:

-if you have alot of deductions, eg medical, charitable contributions, state income or sales taxes, etc. Long term care or nursing home costs in particular.
– if you are otherwise in a lower than normal bracket due to a low income year
– if you want to accelerate income without converting more and incurring more tax
– qualified charitable distribution (QCD), if it is extended by Congress – RMD can be included here
– in a divorce consider the TIRA for transfer per decree to ex spouse who is in a lower bracket
– if you think your Roth assets are low in comparison, use the TIRA distribution in lieu of a conversion and distribution from Roth
– in late stages of life use TIRA if you are in a lower bracket than heirs will be – Roth will be more valuable to them
– you will be moving from a low income tax state to a high income tax state or will be leaving a state with favorable basis recovery rules
-you need funds that will be rolled back, but have used up your one Roth rollover per year

Of course, now that ANYONE can convert to a Roth, some of the above that preserve Roth assets are not that vital anymore. The main cases are where you can get money out of the TIRA at a reduced tax rate.

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