Basic Question
I converted two of my IRAs last year (non-deductible) to Roth IRAs and have decided to bite the bullet and convert my deductible IRAs. I am over 59 1/2. If I do that in 2011, I assume the taxes will be paid for that event by April 2012 or can I split that payment as allowed for 2010 conversions? Second, can I transfer the account into the already established Roths or should I keep these accounts segregated?
Permalink Submitted by Peter Lingane on Thu, 2011-11-03 15:39
I trust that tomd37 appreciates that there is no such thing as a “nondeductible IRA” and that the recovery of basis on converting any IRA is proportional the the value of the converted IRA to the value of all IRAs. For example, assume two “nondeductible IRAs” worth $10,000 each and two “deductible IRAs” worth $90,000 each. Converting the nondeductible IRAs is a $20,000 distribution, basis is $2,000 ($20,00 / ($20,000 + $180,000)) and taxable income is $18,000.
Permalink Submitted by Alan Spross on Thu, 2011-11-03 22:02
Peter is correct, and this issue raises the question about how you filed your 2010 return. Since your 2010 conversion would be partly and probably mostly taxable, if you did not complete the 8606 correctly, you might have opted out of the two year deferral thinking that your conversion was tax free. But if you reported it correctly and chose to defer the taxable income to 2011 and 2012, then half the taxable amount will be reported on your 2011 return. Then, if you also convert additional amounts in 2011, the taxable amount of your 2011 conversion would be added to the half carried to 2011 from your 2010 conversion.
As for the 2011 tax bill, unless you meet a safe harbor, you will incur an underpayment penalty if you just wait until April, 2012 to pay the amount due.