Paying Taxes on a 2010 Roth Conversion

By Beverly DeVeny, IRA Technical Expert
Follow Me on Twitter: @BevIRAEdSlott

2010 is coming up fast with its new Roth conversion rules. In 2010 anyone can do a Roth conversion. The income and marital restrictions are permanently removed. In addition, the government is going to give you a deal on paying the taxes due on any conversions you do in 2010.

For 2010 conversions only, the income from the conversion will be included ratably in your income for 2011 and 2012. What that means, for example, is that if you do a conversion of $100,000, then $50,000 will be included in your 2011 income and $50,000 will be included in your 2012 income. The taxes on your 2011 income are due by April 15, 2012 and the taxes on your 2012 income are due on April 15, 2013 (although you might have to make quarterly estimated tax payments for those years).

On the surface, this seems like a pretty good deal. Keep in mind, however, that the $50,000 included in your 2011 income will be taxed at the rates in effect for 2011 and the $50,000 included in your 2012 income will be taxed at the rates in effect for 2012. If income tax rates go up significantly, you could end up paying a lot more tax than you bargained for. But – as an alternative, you can make an election on your 2010 tax return to include all the income from the conversion on your 2010 return and pay the income tax at the rates that are in effect for 2010.