Double Tax on Conversion
Hi Ed,
Hope this finds you wlll and you remember me…..I know you meet tons of individuals.
Can you please shed some light….a retired client of mine over 59 and a half converted his IRA (37K) in 2010 w the original custodian. We then transferred the Roth (using a transfer form) to Allianz. He got a 1099 with the code T. He talked with his enrolled agent who told him that means:
If he spreads the taxes over the 2 years (2011 and 2012) he will also pay taxes from the conversion in 2010. In short, he pays taxes twice….on the 37K. This does not make sense.
If he converted and just left it there, no problem to spread the tax consequence over the 2 years.
Please help!
Thank you,
Nancy Fromm in Phoenix
[email protected]
480-556-6600
Permalink Submitted by Alan Spross on Tue, 2011-02-01 17:35
I am not Ed, but will address your question.
You are correct, there is no double taxation. The 1099R description does not make much sense, since the actual conversion 1099R should have a Code 7 and show the TIRA account number. The T coding is for a Roth distribution, but you indicated you did a direct transfer to another Roth custodian, and therefore the Roth to Roth transfer should not have been reported at all. If the custodian incorrectly reported the Roth transfer as a distribution, then the client will have to show it as a rollover on line 15 of his 1040. It will also cause issues if he wants to do an indirect rollover in the next 12 months because you are only permitted one indirect rollover within that time frame. He should retain documentation in case he needs to do an indirect rollover from Allianz to show that the prior transfer was direct and not indirect.
To your original question, the client will report the 2010 conversion on Form 8606 where the default election is the two year deferral. This will not result in any taxable income in 2010, and 18,500 will be added to his 2011 and 2012 return (less if he has some basis in his TIRA from non deductible contributions). No double taxation, but the conversion DOES have to be reported.
I assume he probably misunderstood the EA. It does not seem likely that an EA would come up with something that illogical.