2010 Ira to Roth Conversion
Concerning a traditional Ira to Roth Ira conversion in 2010:
If you elect to the option to spread your tax liability between 2011 and 2012, when is the resulting tax actually due in those years? Is it due with your tax return for 2011 and 2012 or with estimated tax payments for each of those years, or have some other rules been established for the this particular tax liability?. I do understand this is counted as ordinary income.
I’m trying to avoid a possible penalty for not having paid the taxes due in the appropriate time frame in 2011 and 2012.
Mark
Permalink Submitted by Alan Spross on Thu, 2010-12-23 19:01
It would be handled like any other spike in income for 2011 and 2012. For most people, this is best handled using the prior year tax liability safe harbor of either 100% or 110% (income over 150k) being paid in some combination from withholding or quarterly estimates.
For 2011, if you timely pay in based on your 2010 tax liability, you will therefore avoid underpayment penalties, but you STILL might owe a considerable amount when you file. For 2012, you would use 2011 tax liability for the safe harbor, but here you would owe less in April, 2013 because the prior year also included the same conversion dollars.
For 2013 when you have a drop in taxable income, you might reduce your estimates using a new target of 90% of the 2013 tax liability. This takes more planning since you are targeting to an unknown figure.
Am not sure, but those who fall short and are forced into the annualized income installment method, since the 2011 conversion liability was incurred in 2010, my guess is that it would have to be fully recognized in the first quarter of 2011 instead of equally over all 4 quarters. Same for 2012. This means that if you fall short of your safe harbor target, the annualized income installment method will not be of much help.
This is also an issue if you elected to report your entire conversion in 2010 and you are doing the conversion in the last quarter. If you use quarterly estimates in 2010 but will not equal the 2009 safe harbor. even if you pay a large quarterly next month to cover your entire 2010 tax liability, you can still get a bill for underpayment of the earlier quarters. But in this case using the annualizied installment method would reduce any underpayment penalty because the conversion was done in the last quarter.
Of course, any recharacterization would also work to reduce any incurred underpayment penalty.