claim entire roth conversion on 2010 tax year
Client has a 401(k) balance of $2.5m. He is 61 and has an annual income of $1m. He wants to take an in service distribution of 100% of his balance from his company plan as a transfer to a Roth IRA. He also is convinced that his taxes will go up in 2011 and beyond so significantly that he thinks it would be better to claim all of the transfer for 2010 and pay all the tax, instead of taking advantage of the tax liability spread out over the next couple of years. Can someone look into their crystal ball and give me an idea of if this is a valid thought process or not?
Permalink Submitted by Alan Spross on Thu, 2010-10-14 19:45
Since he is in the top bracket, the rate for most of his taxable income could go from 35% to 39.6%, either in 2011 or in some later year. He has until 10/17/2011 to decide whether he will recharacterize all or part of his 2010 conversion and also to decide whether he will defer the income or opt out and report it all in 2010. There is all sorts of flexibility with these options. For example, if all the current rates are extended for 2011 only and he still wants to split the income, he could recharacterize half his 2010 conversion and report the remainder in 2010 and do another reconversion after the required waiting period in 2011 and report that one in 2011. Meanwhile he can have different scenarios tested with tax software before locking in the 2010 conversion.
As far as higher rates in the future, it appears to just be a question of which year they will begin.