Roth Conversion Taxation
A taxpayer wants to convert $100,000 in 2010. Can he choose to have $50,000 of it taxed in 2010 and the remaining $50,000 taxed over 2011 and 2012? I think it is an all or nothing deal, but wanted to be sure. If he can’t split up the taxes that way, can he instead convert the $100,000 into 2 separate Roth accounts ($50,000 each) and then choose to pay the tax on one Roth in 2010 and spread out the taxes on the other Roth over 2011 and 2012?
Also, can the same taxpayer re-characterize only a portion of the conversion (say $25,000) if he changes his mind by 10/15/11, or does the entire conversion have to be re-characterized? If not, would it make a difference if the original conversion was done to two separate Roth accounts?
Thank you!
Permalink Submitted by Alan Spross on Thu, 2010-12-16 22:49
A taxpayer’s only option is to defer all their 2010 conversions to 2011 and 2012 OR opt out and report all of them in 2010. It does not matter how many conversions are done. However, a taxpayer’s spouse can make a different election on their conversion than the taxpayer does.
All or part of any 2010 conversions can be recharacterized prior to 10/17/2011. That date is also the deadline to decide on the tax deferral option above. Of course, changing the election after filing the return will require an amended return. If not sure, perhaps taxpayer should extend their return.
Eg suppose taxpayer wants to convert 100k and defer 50 to 2011 and 2012. Later he decides he wants to use the tax brackets for all 3 years. If so, he could recharacterize 67k of the 2010 conversion and opt out of deferral. Then do new conversions of 33k each in 2011 and 2012.
There is tremendous flexibility to make after the fact decisions here.
Permalink Submitted by John Wannen on Wed, 2010-12-29 17:16
I didn’t think you could recharacterize a portion of the Roth conversion. That was the point behind separate Roth IRAs based on gain/loss. No?
Permalink Submitted by Alan Spross on Wed, 2010-12-29 17:30
You can recharacterize any portion of a Roth conversion you wish and can even do two recharacterizations, eg you recharacterize 50% of your conversion and then realize that you do not wish to maintain any of the conversion, so you then recharacterize the other half.
A recharacterization must include an earnings calcalution while the conversion was in the Roth. Converting to separate Roths keeps the earnings of the investments separate from each other and you could retain the best performing conversion and recharacterize the other one. But if the conversion is to only one Roth account, the gains of one investment and the losses of the other can offset each other. Therefore, to use the cherry picking strategy of retaining the best conversion you would keep them separate. But this does not prevent you from recharacterizing part of one conversion and a different part of the other conversion or part of the conversion if you converted into only one Roth account.