Convert IRA to Roth in 2010? (1 Viewer)

[Steeler]

http://www.investopedia.com/articles/retir...10.asp?viewed=1

This article says:

On any conversion made in 2010, half of the converted amount may be reported as taxable income in 2011 and the other half in 2012.

Does that mean I can convert an IRA to a Roth on Jan 1st (or whenever in 2010) and pay no taxes at that time? Lets say I want to convert 10K in 2010 to take advantage of this tax break. I think I would pay no taxes at the time of the conversion, and would have $5000 added to my taxable income in 2011 and 2012... Right?As I was typing that I realized something else; if my assumptions are true and you are close to the top of a particular tax bracket, the conversion might push you over into the next tax bracket for those two years... hmmm, I guess that's something to consider as well.

Anyway, input will be appreciated?

 

[Chemical X]

http://www.investopedia.com/articles/retir...10.asp?viewed=1

This article says:

On any conversion made in 2010, half of the converted amount may be reported as taxable income in 2011 and the other half in 2012.

Does that mean I can convert an IRA to a Roth on Jan 1st (or whenever in 2010) and pay no taxes at that time? Lets say I want to convert 10K in 2010 to take advantage of this tax break. I think I would pay no taxes at the time of the conversion, and would have $5000 added to my taxable income in 2011 and 2012... Right?As I was typing that I realized something else; if my assumptions are true and you are close to the top of a particular tax bracket, the conversion might push you over into the next tax bracket for those two years... hmmm, I guess that's something to consider as well.

Anyway, input will be appreciated?

this has been on my radar for quite a while.......if you convert 100k on 1/1/10 from traditional to roth, your line 15b on 1040 would be 50k for YE 2010 and 50k for YE 2011. it could push you into a new tax bracket, but you can always find deductions to offset (charity, etc.). i'd rather pay the taxes now, while working a steady job then worry about them at withdrawal. i think the odds are good that roth distributions in the future will not be taxable, but that tax brackets overall will increase. there are other roth ramifications to think of and i highly suggest you speak with a CPA or tax planner, they are too numerous to discuss here.

 

[Todem]

Talk to your financial advisor as well as your tax advisor. Do not look for the answers here as there are many factors in making this decision.

This is more beneficial if your in a high tax bracket and are unable to contribute to a Roth and this will allow you to have some tax free income in retirement to offset all the pre tax money you are saving. You also need to look at your tax bracket now and anticipated braket going forward to see how much you really can save during retirement and does paying the taxes now out weigh the tax free benefit when distributions are anticipated?

Bottom line there is no simple answer and consult a professional to help educate you to make the right decision.

If your on your own an we are talking about smaller amounts of money their are online calculators to help plug in the scenarios I am talking about.

 

[marshall88]

Any more thoughts on doing this conversion? Does anybody know of any online calculators which help you decide if this is the right move?

 

[Steve Tasker]

Any more thoughts on doing this conversion? Does anybody know of any online calculators which help you decide if this is the right move?

If you've got the funds available OUTSIDE the IRA to pay the taxes associated with the conversion...it's a good option for a lot of people. Vanguard has an online calculator that I fooled around with recently at work, but I ended up making an Excel spreadsheet and figuring it out that way. It was easier to understand that way, IMO.

 

[Jayrod]

The primary issue is how you will pay for the additional taxes. If you aren't 59.5 yet, you can't use a distribution from the Roth funds to pay the tax without a 10% penalty.

But you are correct that a 2010 Roth conversion can be split between tax years 2010 & 2011 (tax due by 4/15/11 & 4/15/12).

However, if you make the conversion, you can elect to revoke that election prior to filing your taxes and undo the whole thing. But if you don't make the election before 1/1/11, you can't make it retroactive. I believe there are issues if you are invested in something that loses its value...I think you may have to revoke the election even quicker than 4/15...but I'm not sure.

One thing a lot of people don't realize is that you can do a partial Roth conversion....you can calculate the amount of tax you think you can afford and just convert that, leaving the rest in whatever other qualified plan you have (traditional Roth, 401k, etc.)

 

[pecorino]

I'm slowly converting a traditional tax-deferred IRA into a Roth, trying to spread out the tax burden over the years so I don't bump into the next tax bracket. I'm loving the conversion as I think it is better to pay taxes now than later in my case.

quick question for those in the know: do I also have to pay local and state taxes on the rollover? I thought I only needed to pay the Feds--is that true?

 

[Steve Tasker]

I'm slowly converting a traditional tax-deferred IRA into a Roth, trying to spread out the tax burden over the years so I don't bump into the next tax bracket. I'm loving the conversion as I think it is better to pay taxes now than later in my case.

quick question for those in the know: do I also have to pay local and state taxes on the rollover? I thought I only needed to pay the Feds--is that true?

Depends on the state and, potentially, on how old you are.

 

[eoMMan]

Only if you are Jewish. You can only do the Roth conversion if you are Jewish.