2010 Roth Conversion to Recharacterization
I did a 2010 Roth Conversion and planned to spread the taxes over 2011 and 2012. The amount converted was chosen so that I would not be bumped up into the next higher tax bracket or lose any deductions. In August 2011, I received an unexpected promotion that increased my income beyond the limit I had calculated for the 2010 Roth Conversion to stay in the lower tax bracket. Consequently, I lost my student loan interest deduction in 2011 tax filing. Then my aunt died in Dec. 2011 and I (and my sister) are listed as beneficiaries on her traditional IRA and will need to take a mandatory distribution by Dec. 2012. The additional income in 2012 will further impact my total income placing me in a higher tax bracket (and I will lose my student loan deduction again in 2012. The instructions for the recharacterization on a 2010 Roth Conversion are confusing since the taxes were paid in 2011 (and will be paid 2012). I received a tax refund in 2010, paid my taxes on time in 2011. Does that mean I can file for an extension until Oct. 15th, 2012 and recharacterize the 2010 Roth conversion? If I cannot recharacterize, what other options do I have to mitigate the tax consequence. If there is no solution to the above, then do I need to begin paying
estimated taxes in 2012 for the 2010 Roth conversion? thank you in advance, dlk
Permalink Submitted by Alan Spross on Tue, 2012-05-29 17:14
Unfortuneately, the deadline to recharacterize your 2010 Roth conversion was 10/17/2011.
One risk of taking the two year deferral is the type of unplanned events that can occur over this longer time frame. However, if your 2010 conversion has produced a gain it might not have been worth it to recharacterize even if you met the deadline since recharacterization would transfer your potentially tax free gains to your TIRA where they would eventually become taxable. In other words, the short term additional taxes due may eventually be recovered since your Roth conversion will reduce your future taxes and RMDs. And even if your conversion has not produced gains up to now, there is a good chance that there will be gains before you opt to withdraw funds from your Roth IRA.
For now, all you can do it try to defer 2012 income or increase your deductions this year to offset the additional conversion income and the other income. Perhaps you can use the inherited IRA RMD to fund an increase in your 401 contributions and that will offset the taxes on the RMD.
You do need to plan your estimated tax payments for 2012 OR you can increase your withholding from any sources such as salary. You can also instruct the inherited IRA custodian to withhold any amount you wish from your 2012 RMD, even 100%. The benefit of withholding over estimated payments is that even if you take the RMD in December, the withholding is deemed to have been paid equally each quarter and could make up for a shortfall on your first quarter estimate. You may need to use a combination of estimates and withholding.
Permalink Submitted by Greg Henson on Tue, 2012-05-29 17:54
Depending on what you are contributing now, you could also increase your contributions to a 401k, or another retirement plan, to defer the taxes until retirement. That will effectively lower your taxable salary for this year and might even keep you in the lower tax bracket.