People who did Roth conversions in 2010 now face the issue of how to manage the resulting income. With the Bush tax cuts having been extended through 2012, many will want to take advantage of a special rule, which applies only to 2010 conversions, allowing half the income to be taxed on their 2011 return and half on their 2012 return. This isn’t the optimal approach for all people, however. If you did a Roth conversion in 2010 and don’t want the income to be taxed in this manner, there are four ways to get a different result. (more…)
Archive for the ‘Roth Accounts’ Category
Managing Income from a Roth Conversion
Monday, January 10th, 2011Segregate Assets After Roth Conversion?
Saturday, December 11th, 2010On various occasions we’ve discussed the benefits of segregating different assets in separate Roth IRAs when doing a conversion. A reader asks whether it would be possible to achieve the same benefit, or at least a similar one, with assets that were initially converted to a single Roth IRA that was subsequently divided. (more…)
The Tax Deal: Rethink Roth Conversions?
Thursday, December 9th, 2010It’s going to be quite a scramble to figure out what planning moves make sense in light of a suddenly changing tax landscape. One item sure to draw the attention of many is Roth conversions. Will they become more attractive? Or possibly, for some people, less attractive? (more…)
Sophisticated Roth Conversion Planning
Thursday, December 2nd, 2010Suppose you could make a double or nothing bet with your retirement account. That’s not likely to make a lot of sense, given the possibility of losing the bet. But suppose you could bet half your retirement account on some proposition, and bet the other half on the opposite proposition. Does that sound like a pointless exercise? An intriguing article by UNC law professor Gregg Polsky explains how such an arrangement could be used to cut the tax cost of a Roth conversion. (more…)
New Guidance on In-Plan Roth Conversions
Saturday, November 27th, 2010The IRS has released a 12-page notice (PDF) providing guidance in question-and-answer form for employers that want to offer their 401k or 403b participants the opportunity to move money from a regular account to a designated Roth account within the same plan. This guidance was on a fast track so that employers could make this opportunity available before the end of 2010 for those participants who want to take advantage of the special rule, available only this year, to delay the reporting of income from a conversion — splitting it between 2011 and 2012 instead of reporting it as 2010 income. (more…)
Not So Fast on Roth Conversion Within 401k
Thursday, October 21st, 2010Speaking at a conference, a Treasury official said plan sponsors should wait until official guidance is published before implementing the recent law permitting Roth conversions to occur within a 401k plan. Tax Notes reports that the official acknowledged the need for the Treasury to act quickly on this issue. (more…)
A Deadline You Probably Don’t Have to Meet
Saturday, October 2nd, 2010October 15 is the deadline for undoing a 2009 Roth conversion. You’d want to take this action if you’ve learned your conversion didn’t qualify, perhaps because your income was too high that year. (The income limitation was eliminated as of 2010.) You might consider it if your tax situation changed to make it unwise, or if your financial situation makes it difficult for you to do without the tax dollars you had to pay on the conversion.
The most frequent reason for undoing a Roth conversion, though, is a loss of value in the account after the conversion. Relatively few people are in that situation just now: the stock market is higher now than it was at nearly any point in 2009 — and roughly 70% higher than it was at the low point in March of that year. If you made some unfortunate investment choices that leave you with a diminished balance since the date of your conversion you have less than two weeks to evaluate your choices and take action if needed. Most people who converted last year will be able to stick with a decision that worked out well.
Roth Conversions Within Employer Plans
Friday, September 24th, 2010As of September 27, 2010, employees with 401k or 403b accounts can do a Roth conversion without taking money out of the plan — but only if the employer takes steps necessary to permit these conversions. Here are questions and answers about these provisions. (more…)
Aggregation Rule for Recharacterizations?
Tuesday, September 7th, 2010If you have access to Tax Notes, a subscription service for tax professionals from Tax Analysts, you’ll see my letter to the editor in today’s issue, responding to an opinion piece by Lee Sheppard. Last week she suggested the IRS should adopt an aggregation rule for use in Roth recharacterizations, to prevent cherry-picking when undoing conversions. I pointed out that the IRS can’t adopt such a rule in the current state of the law, and more importantly, such a rule would be unworkable. (more…)
Roth Conversion and Medicare Part B Premium
Thursday, July 15th, 2010A Roth conversion can affect the premium you pay for Medicare Part B (the part that provides medical insurance, as opposed to hospital insurance or prescription drug coverage). For the year of the conversion it increases your income, potentially leading to an increase in your premium. On the other hand, in later years when you’re withdrawing money from your retirement account, your income will be smaller as a result of having done the conversion in a prior year, potentially allowing you to pay a smaller premium for many years. The net benefit or detriment will depend on individual circumstances. (more…)
