Tax Question re:conversion of IRA to Roth IRA
I am considering conversion of a portion of my and my wife’s IRA’s to Roth IRA’s in 2010. Since we have a substantial amount in the IRA’s, I believe I should spread the conversion over several years to keep he applicable marginal tax rate down. I understand that a conversion in 2010 can split the taxes over 2011 and 2012. My question is – can I also pay a portion of the taxes in 2010? In other words, I would like to convert a substantial portion of the IRA’s in January of 2010 and split the payment of the taxes over 2010, 2011 and 2012 to minimize the taxes. I have to consider that the tax rates are scheduled to increase in 2011 and may go higher. I don’t believe that we will need to withdraw any funds from the Roth IRA’s and it will be left to our heirs. My wife and I are 61 years old and we file a joint return. I’ve received conflicting opinions to this question. I’ve been told that we have to choose either 2010 or splitting the taxes over 2011 and 2012. However, I also receved an opinion indicating that the election is based on the IRA owner, not the joint household and therefore we may be able to convert my wife’s IRA and elect to pay the tax in 2010 and convert my IRA and split the taxes over 2011 and 2012. I would appreciate a clarification on this issue.
Permalink Submitted by Alan Spross on Fri, 2009-10-23 19:46
You are correct. You and your wife can make different elections for your particular 2010 conversion tax reporting. One of you can opt to report their conversion fully in 2010 while the other elects the deferral to 2011 and 2012. Individually, you must make the same decision on all your conversions if you have more than one conversion for 2010.
When both spouses have IRAs to convert you get the advantage of both tax deferral and use of your 2010 marginal bracket if the spouses make different elections. Moreover, the recharacterization option up to 10/17/2011 allows either or both spouses to change their election or reduce their conversion amount after their 2010 tax situation is fully known, as well as the 2011 tax rates.
If one spouse has a basis in their TIRA from non deductible contributions, that spouse should generally convert first because it gets more dollars into the Roth IRA per tax dollar due. And if your plan includes incremental conversions over several years, it may be simpler to just pass on the two year deferral and select your incremental amount to convert each year and report the income each year. Of course, if you are in the top bracket and expect it to increase to 39.6 in 2011, there is a better case to convert a large amount in 2010 and report all of it in 2010 at the lower rate. And if the rate increase does not happen, you can still opt for deferral by extending your 2010 return and filing in Sept 2011 when you have made your final decision. Make sure you meet a safe harbor for underpayment penalties in the event you elect to report all in 2010.
Permalink Submitted by Wayne Johnston on Sun, 2009-10-25 23:28
Thanks so much for your help and response to my question. I asked my Vanguard Flagship representative. He consulted someone and got back to me and said it was not possibe. I will contact the representative to be sure he clearly understood my question and the circumstances. Thanks again. Your response is very helpful.