New Rules for Roth IRA in 2011
There has been so much commotion about the Roth IRA conversion event in 2010, I was curious to see what the big things to look out regarding the Roth IRA for 2011.
The only big thing that comes to mind would be the option to recharacterize if the conversion was a bad idea. Anything else I’m missing?
Permalink Submitted by Alan Spross on Thu, 2010-11-18 20:26
No. In 2011, the rules are the same as 2010. except that there is no two year deferral option to report the income. Whatever is converted in 2011 must be reported in 2011, along with any amounts that must be reported as half of a 2010 conversion. The income limits disappear permanently after 2009. Recharacterization deadline remains as always, ie 10/15 of the following year.
A small change for 2011 is the max modified AGI limit for regular Roth contributions. The phaseout range for joint filers rises from 167k to 177k in 2010 to 169k to 179k in 2011. Single filers go from 105-120 to 107-122.
Roth conversions within qualified plans will also be available for the first time starting now, but 2011 will be the first full year.
Permalink Submitted by Joseph Arsenault on Fri, 2010-11-19 19:56
Has anyone mentioned here that you need to have a “distributable event” to qualify for an internal conversion with your 401k? This is how I read the new provision and would love to be proven wrong as I feel this really falls short of what was needed..
Permalink Submitted by Alan Spross on Fri, 2010-11-19 21:23
Joe, you are right that the employee must qualify for distributions, but the plan can also be amended to limit those distributions to the purpose of doing the in plan conversion. That way, these plans do not lose assets to IRAs, and retaining assets was the prime driver of the in plan conversion in the first place.
Permalink Submitted by Joseph Arsenault on Fri, 2010-11-19 21:29
Thats a good point. I wish they would have made it more flexible however, so someone under 59 1/2 with elective contributions to a non-Roth 401k could convert while still working. It would make younger retirement dollars more powerful for those people. At least people don’t stay with one employer as long as they used to. 🙂
Permalink Submitted by Jeff Rose on Tue, 2010-12-21 02:42
[quote=”[email protected]“] Roth conversions within qualified plans will also be available for the first time starting now, but 2011 will be the first full year.[/quote]
Hey, Alan. I just now re-read this and realized I didn’t quite understand. Are you saying that conversions will be allowed for employees that are currently participating in a 401k plan (for example)?
Thanks ahead for the clarification. 🙂
Permalink Submitted by Alan Spross on Tue, 2010-12-21 18:19
Yes, this was included in the Sept, 2010 Small Business Tax bill.
The QRP obviously must offer a designated Roth option, and many plans will not be ready to process conversions by the end of 2010, but many plans will offer these conversions soon. There are some disadvantages compared to a Roth IRA conversion, eg there is NO recharacterization option for an in plan conversion.
Benefits people wanted this option to allow plans to retain assets that otherwise would be distributed out of the plans for Roth IRA conversions. Here is the IRS Release on these conversions:
http://www.irs.gov/pub/irs-drop/n-10-84.pdf