Roth IRA Conversion
Hello,
I just want to confirm that the taxable income included with a Roth IRA conversion is as of the date the conversion is made (e.g. June 1, 2016) – as opposed to the 12/31 year-end balance. Please advise/confirm. Thank you!
Jason
Permalink Submitted by Alan - IRA critic on Mon, 2016-05-30 19:24
If you are asking what quarter the income is reported for paying quarterly estimates, it is the quarter when the conversion is processed. However, if you have basis in your IRA from non deductible contributions, the AMOUNT of the conversion that is taxable on Form 8606 is determined by the 12/31/2016 balance of all your non Roth IRA accounts
Permalink Submitted by Jason Hochstadt on Tue, 2016-05-31 16:39
Hi Alan, Thanks for the reply. You indirectly answered my primary question – a conversion done on 05/31 with a $100k value would be taxable at the $100k amount – even if the 12/31 value is different. Understood regarding your second point – you can’t separate the cream from the coffee once poured in (Ed Slott analogy in having to include all non-Roth IRAs when factoring in any % pro-rata amount included in taxable income from Non-Deductible IRA contributions). Your answer raises an interesting quandry – as it’s preferrable to do a conversion as early in the year as possible in order to have until 10/15 of the following year to recharacterize if need be. However, a $100k conversion done on 01/15/16, for example, would have required the $100k to be picked up as income for the estimated tax payment paid by 04/15/16, corect? As opposed to doing a $25k per quarterly conversion in 2016 (spreading out the estimated tax liability); however, leaving less time for 75% of the monies to be invested prior to potentially needing to recharacterize? THanks.
Permalink Submitted by Alan - IRA critic on Tue, 2016-05-31 17:04
It depends how the taxpayer satisfies the safe harbor provisions to avoid underpayment penalties. One of those safe harbors is paying equal quarterly estimated payments equal to the tax liability of the prior year (110% of prior year for higher incomes) or 90% of the current year if less. Paying estimates as you go is mostly used by those using the annualized income installment method, which requires use of Form 2210 AI. Most people avoid that form because of the work provided to complete it. So if an early conversion is desired, using the prior year safe harbor at least allows the tax payments to be paid in equal quarterly installments. The average payment date for those 4 installments comes out to 8/1, considerably later than January. Of course, if the taxpayer happens to have a withholding source, it may be possible to set up withholding to occur late in the year avoiding estimated payments altogether.