Pay Roth IRA conversion taxes 2010 or wait ?
I converted a Traditional IRA to a Roth on April 30,2010. I can either pay taxes on the conversion in the 2010 tax year or split it between 2011 and 2012 tax years.
Will the tax tables be the same in 2011 and 2012 as they are for 2010 ? Would there be any advantage paying the taxes in the 2010 tax year ? If I wait until the tax year 2011 to pay the taxes on the conversion, can I still recharacterize (10/15/2011 deadline)if the investment value happens to decline ?
Permalink Submitted by Alan Spross on Mon, 2011-02-07 20:25
You can still recharacterize all or part of your 2010 conversion up to 10/17/2011. You can also change your mind about whether you wish to report the conversion in 2010 or later up to 10/17. Flexibility includes combining a partial recharacterization with a change of year for reporting the income remaining.
The tax rates and tables will be essentially the same for 2011 and 2012 as for 2010, but of course your own income and deductions might change. For larger conversions, if everything else is equal it is best to defer the income, but the savings also depends on where you fall in the brackets. For small conversions, it may be the same whether you defer or not.
Note that managing these conversions can make for challenges in avoiding underpayment penalties for your withholding or estimates.
Permalink Submitted by Billy Anderson on Tue, 2011-02-08 01:11
In my case, it makes the total tax for two years much higher if the taxable comversion income is spread over two years, because a two year spread makes a lot more of my two year’s social security income taxable.
Permalink Submitted by Alan Spross on Tue, 2011-02-08 01:55
Yes, that can happen because of the effective higher rates while SS income is added to AGI. In some cases if you can hold the inclusion mostly to a single year you can avoid the higher effective rates for two years of SS income phase ins. Once the full 85% of SS income is added, the marginal rate actually drops since even when you hit the 25% bracket, that is less than the 27.75% phase in rate.
There are so many variables interacting, the most efficient way to analyze your situation is to enter various scenarios in your tax software, and assume no major surprises in the 2011 and 2012 tax provisions. You might have an increased inflation adjustment in the brackets, exemptions and standard deduction for 2012 if inflation continues to increase.
Permalink Submitted by Anonymous (not verified) on Tue, 2011-02-08 06:20
Thanks for the input. I will be starting social security this year. If I understand correctly, then paying taxes on the Roth conversion in 2011 will count as income and thus increase the amount of social security that will be taxable. If that is the case, I may be better off paying the tax on the conversion in 2010.