ira distribution
Let’s say I choose to convert 20k from a TIRA to a Roth in 2010 and elect to declare 50% in 2011 & 2012. Will a withdrawal from another existing TIRA in 2010 accelerate the converted funds? Also, can I recharacterize part of that 20k in 2010 and then withdraw those funds without accelerating the tax on the remaining converted funds?
Permalink Submitted by Alan Spross on Tue, 2010-10-19 20:50
A withdrawal from a TIRA would not accelerate the income reporting for a Roth conversion. Only a distribution from your Roth of conversions would do that.
If you choose to recharacterize part of the 20k conversion and then withdraw those funds from the TIRA, there will be no income acceleration on the remainder of your conversion either. However, when you withdraw the recharacterized funds from the TIRA, that distribution will be taxable in the year distributed.
To better understand these acceleration rules, note that the intent of them is to prevent you from distributing funds to yourself, but deferring the tax on them by doing a 2010 conversion. You need to hold the funds in the Roth IRA until 2012 to avoid acceleration of the taxes. But if you recharacterize, you have undone the conversion or part of it and you are back to where you started. If you then withdraw funds from the TIRA, it is handled the same way as if you never converted ie taxable in the year distributed from the TIRA.
If you have a balance in your Roth of regular Roth contributions from prior years, you can withdraw them tax and penalty free without accelerating the year your conversion is reported. But if you withdraw converted funds, even converted funds from prior years, then the income reporting is accelerated. A recharacterization is NOT a withdrawal, just a transfer from your Roth to your TIRA.
Permalink Submitted by James Hales on Tue, 2010-10-19 22:07
Thank you for the clarification!
So, it sounds to me that if a person converted $ in 2010 (with the intention of taking the default option),and then realized he needed some of those funds in 2010, he could then recharacterize part of those funds and take a tira distribution in 2010 (taxable for 2010). The remaining converted funds would be accessible in 2012 (taxable for 2011 & 2012).
Permalink Submitted by Alan Spross on Tue, 2010-10-19 22:38
True, but you need not go through with the recharacterization unless your conversion lost value or you had other reasons. If you take the distribution from your Roth conversion you will accelerate the taxes, but only on the amount you take out. That’s the same result you get by recharacterizing and then taking that same money out of the TIRA. The recharacterization gains nothing with respect to the tax due date including any early withdrawal penalty over just taking the distribution out of the Roth. Perhaps you thought that the Roth distribution accelerated all the taxes for the conversion, but it only accelerates the taxes on the amount you distribute.
Also, when you convert you have an open choice whether to defer or opt out and you can change your mind by amending your tax return up until the extended due date of 10/17/2011. A recharacterization can be useful for reducing the amount of taxes due on the conversion, but it has no affect on when the taxes that ARE due must be paid.
If you think you may need to take a distribution but are not sure, you should convert. That way if you don’t need the distribution you are ahead of the game and if you do, your taxes on the distribution you take will be due in the same year as if you did not convert that amount originally, and the taxes on the part of the conversion that remains will still be due in 2011 and 2012.