Some other item related to Roth Conversions that have come up in client conversations in the past few weeks that I’d like to pass on.
First -- if you are Married Filing Jointly and you both have traditional IRAs you want to convert to Roth plans, the decision about whether to pay the tax in full at conversion or pay it over two years can be made differently by each individual. (See the previous post for more on this.) Even though the decision can be made separately for each social security number, once a taxpayer decides the timing all converted IRAs in 2010 are subject to that election.
The option to elect to defer the taxes on your conversion is for 2010 only (at least at this point), however the ability to convert regardless of your income will continue. For people who hit the income limits on contributions to a Roth, and who think tax rates are likely to go up, this creates an opportunity to continue shifting retirement savings.
The said, even if you want to convert, it may not be practical to convert all your IRAs in one year (and therefore pay all the taxes at once). But you could make a plan to convert over time, and take the tax hit in a way that fits into your budget.
In addition, you still have the opportunity to contribute to a non-deductible IRA and convert that, again without considering income limitations. One caveat here is that the IRS considers the tax consequences of all your IRAs when you go to convert. Here’s an example straight from the Practical Tax Expert:
Jane has made 15 $2,000 contributions ($30,000) to her non-deductible IRA. This year, when the balance in the account is $40,000 she converts it to a roth IRA. Jane also has an IRA that she established with a rollover from a former employer’s 401(k) plan that has $60,000. If she converts only the non-deductible IRA into a Roth IRA, she can use only $12,000 of her basis (($30,000/$100,000 X $40,000) and is taxed $28,000 ($40,000 - $12,000).
So the good news you can “re-balance” your retirement portfolio if your “bearish” on tax rates. (I’m using that term assuming the definition is that bears think tax rates are going up. I just can’t make the image work of being bullish on taxes and thinking you’ll have more of them.) The bad news is that the IRS continues to stalk your retirement savings at every turn.