the 2-year Roth spread and recharacterizing
Suppose taxpayer T converted $50,000 to a Roth IRA in 2010.
Suppose T files his 2010 tax return on March 1, 2011 and elects the two-year spread.
Suppose on October 10, 2011 T recharacterizes 1/2 of his original conversion back to a regular IRA.
Am I correct that the original election to spread the conversion amount over 2 years still applies to the remaining 25,000 converted and that it is irrevocable?
(I.e., T files an amended return for 2010 to report the recharacterization but he cannot change his mind about the 2 year spread and have the 25,000 all taxed in 2010 because he already elected the 2-year spread on the original return? Does it matter if he amends his return by October 15, 2011, the extended due date for a 2010 return? )
Permalink Submitted by Alan Spross on Fri, 2011-02-11 21:57
Before 10/17/2011 any or all of the conversion can be recharacterized and the deferral election changed. The deferral election does not become irrevocable until 10/17/2011.
Taxpayer could amend the return prior to 10/17 to report the reduced conversion amount and could also opt out of the deferral resulting in taxable income of 25,000 in 2010 (assuming no basis).
After 10/17/2011 taxpayer can no longer change the deferral election or recharacterize additional amounts, although he could amend the return for other purposes.
I would expect quite a few taxpayers to recharacterize part of their conversion and then plan to reconvert in 2011. They might then be inclined to opt out of the deferral and report the reduced conversion in 2010 and plan to convert or reconvert in 2011 and 2012. They would then be applying the marginal brackets for all 3 years for conversions knowing now that the tax rates will remain the same in 2011 and 2012 as they were for 2010. That said, the number of these may be less than otherwise for two reasons, first the positive market performance throughout 2010 and second the end of uncertainty about 2011 and 2012 rates.