roth conversion, immediate distr’b, split tax?
I have a client that converted to a Roth in 2010, then took an immediate distr’b from the Roth, and planned to pay the tax over 2011 and 2012. Now the CPA says he can’t split the tax because he says you can’t take a distr’b for 5 yrs from the Roth to do the tax split and says all tax due now! Is this right? Thanks.
Permalink Submitted by Alan Spross on Fri, 2011-04-15 18:41
Yes, that is correct. The 2010 Roth conversion rules include an income acceleration provision that prevents taxpayers from employing a cash flow strategy by converting when they really mean to tap the IRA funds.
That said, the acceleration only applies if the taxpayer takes out funds that are attributed to the conversion itself. If the taxpayer had a balance of prior regular contributions, those would be deemed to come out before the converion funds and would not cause the income acceleration. But the immediate distribution taken by this client suggests he wanted the funds but wanted to defer the tax bill for a couple years, and that does not work.
However, the CPA is wrong about the length of time a 2010 conversion must be held. It only needs to be held in the Roth until 1/1/2012 to avoid income acceleration because the conversion taxes would all be paid no later than the 2012 tax year under the 2 year deferral.