Roth Conversion and Tax Election
After estimating his income for the next 3 years, a client has $15,000 of the 15% bracket left each year that we can use to convert part of his IRA to a Roth. So the plan is to convert $30,000 in 2010 and include $15,000 each in 2011 & 2012 tax years. This still leaves $15,000 of the 15% bracket available for 2010. Is it possible to do an additional conversion and elect to pay it in 2010? In other words can you do two different conversions and elect different tax treatments for each?
Permalink Submitted by Alan Spross on Wed, 2010-11-17 21:30
No. The same election must be made for all of a taxpayers conversions. However, if the taxpayer is married and the spouse has retirement accounts to convert, the spouse can make a different election and that solves this problem.
If the above does not apply, the best bet is to simply convert 15,000 or the applicable taxable amount each year and opt out of the deferral. Each year’s marginal bracket will then be applied, but the client gets only half the amount in the Roth this year. But all 45,000 could be in by Jan, 2012, a little more than a year from now. This might also give the client more control over his 2012 tax bill, since some of that control is lost with a 2010 conversion because the recharacterization deadline is 10/17/2011.
The final decision does not have to be made now. For example, he could convert the 30,000 and if he then decides to go year by year instead, he can extend his return in the spring and then recharacterize half the conversion and opt out of the deferral by October. The recharacterization deadline allows considerable flexibility and hind sight.