401k to Roth IRA concersion
CORRECTION: Taxpayer converted $11,500.00 in 2010 from her company’s 401k to a Roth IRA which was established in 12/20/2004… THe original Roth IRA had a balance of $ 3,105.30 on 01/01/10 which she withdrew in 2010 . She divided the taxable conversion amount into 2 years and was to report $ 5,750.00 in 2011 and $ 5,750.00 in 2012.. However, she withdrew $ 11,000.00 this year from her Roth IRA which is attributable totally to the 2010 401k conversion. She is under the age of 59 1/2. I believe that the 10% penalty applies because the converted Roth IRA was only 1 year old at the time of withdrawal but, how much is now taxable this year of the $ 11,000.00 2011 withdrawal??? Does she still have to pay taxes on the $ 5,750.00 for the 2010 conversion? And again, how much is taxable on the $ 11,000.00 20011 early Roth IRA withdrawal??? Thanks,
Permalink Submitted by Alan Spross on Fri, 2012-03-16 20:07
Taxpayer’s options for the 2010 conversion was either to split the income between 2011 and 2012 OR to check the box on line 24 of the 2010 8606 to report it all in 2010. There is no option to report half in 2010 and half in 2011. By “this year” I assume you mean 2011 for the 11,000 distribution.
Therefore there are a few issues here. First, if she paid taxes in 2010, did she check the box on line 24? If so, she needs to amend 2010 to report the entire taxable conversion in 2010. On the other hand, if she did not check the box, she overpaid in 2010 and should get a refund for the 2010 overpayment. This needs to be resolved first.
The distribution in 2011 will accelerate the reported income from 2012 to 2011 if this was her only Roth balance. However, she has another Roth IRA to which she made an unstated contribution amount. The value of that Roth of 3,105 does not matter. For example if she contributed 4,000 in prior year regular contributions, then the first 4,000 she withdrew comes from those regular contributions, NOT from the 2010 conversion. This is all calculated on Part III of the 2011 8606. The regular contributions come out first without tax or penalty. After that balance has been accounted for, then the 2010 conversion money comes out. If 4,000 of the 11,000 distribution was from prior contributions, then she only took out 7,000 from the conversions regardless of what account the distribution came from. The whole 11,000 would be taxable in 2011 and nothing in 2012. If 5,500 was already taxed, this needs to be addressed as stated in the prior paragraph.
The early withdrawal penalty of 10% for a conversion not held 5 years is due for the amount attributed to the 2010 conversion that was taken out. If 4,000 came from regular contributions and 7,000 from the conversion, then the 10% tax would only apply to 7,000. The reason for these rules is to prevent people from converting and then withdrawing to get around the 10% penalty and also from converting to delay taxation only to take the money out prior to 2012.
This situation is already complex, but if the 2010 8606 was incorrect it will make this a more of a mess to get correctly reported. FIrst, start with the 2010 8606 to see if the box is checked on line 24. Also, determine the total amount of regular contributions she made in the past that were not taken out previously.
Permalink Submitted by Luis J Vazquez on Fri, 2012-03-16 20:51
I stand corrected…. Taxpayer elected to declare 50% ion 2011 and 50% in 2012…. Then she received a early Roth distribution of $ 11,000.00 in 2011….
Permalink Submitted by Alan Spross on Fri, 2012-03-16 21:14
That eliminates one big problem.
But she still needs to know how much in prior regular Roth contributions she made and the amount of conversions done prior to 2010, less prior year distributions taken from these amounts. This is needed to determine how much of the 11,000 distribution came from the 2010 conversion, since the older conversions and contributions come out first. This is where most Roth owners do not keep adequate records.
The end result will be that 5,750 will be taxable for 2011 PLUS the amount of the distribution allocated to the 2010 conversion. The maximum possible taxable income is the entire 11,500, but it does not sound like it will be that bad. The remaining 2012 income will be 11,500 less the amount of income reported in 2011.