IRA Conversion to Roth

[Burke]

Effective in 2010, any amount can be converted to a ROTH and the tax paid ratably over tax years 2011 and 2012. I am interpreting this to mean that no tax is due in 2010 (unless elected by the taxpayer) and that 50% of the converted amount will be reported in each of the succeeding two years. {"The amount of tax reported over this 2-year period will be accelerated if there is a distribution of any converted amounts prior to 2012. The amount included in income in the year of the distribution is increased by the amount distributed, and the amount included in income in 2012 (or 2011 & 2012 in the case of a distribution in 2010) is the lesser of:
1) 1/2 of the amt includible in income as a result of the conversion; and
2) the remaining portion of such amount not already included income." } (TTB, 13-14).

I am having a hard time interpreting this. In the case of a taxpayer who is already in RMD, a distribution will have to be taken in 2010, 2011, and 2012 barring any change in the distribution rules. If he converts 100% of his IRA in 2010, how will this work to avoid being taxed twice on the RMD in 2011 and 2012?

[JohnH]

Maybe I'm missing something here, but it seems that the 2010 conversion exceeds the RMD for 2010. Once the money is in the Roth (2010), RMD is no longer an issue.

[Burke]

Yes, of course you are right if he converts 100%. I guess I was thinking if he only converted some of it. But assuming the TP has no other ROTH's which have already met the 5-yr rule, then he will be prevented from taking any distributions (not only prior to 2012 to meet this one-time conversion rule) but for 5 years following the date of conversion to meet the tax-free distribution rule. Correct? And if he dies in 2011, since we won't be filing a tax return for 2012, obviously, looks like the bene's will have to pay the (remaining) tax. Client wants me to advise and I need to cover all the possibilities.

[OtisMozzetti]

tax rates during 2010 vs. tax rates during 2011 and 2012

Effective in 2010, any amount can be converted to a ROTH and the tax paid ratably over tax years 2011 and 2012. I am interpreting this to mean that no tax is due in 2010 (unless elected by the taxpayer) and that 50% of the converted amount will be reported in each of the succeeding two years. {"The amount of tax reported over this 2-year period will be accelerated if there is a distribution of any converted amounts prior to 2012.

Stepping back for a moment to the IRA conversion forest instead of the RMD trees, I would note that the election to report the income from a conversion during 2010 over the two years 2011 and 2012 would move the income into years when ordinary tax rates are scheduled to be higher than during 2010. During 2010, however, the 0% rate on some capital gains and dividends will probably be in effect and will likely go away during 2011 and 2012. Therefore, certain taxpayers would still be entirely pleased to convert a traditional IRA of certain size into a Roth IRA during 2010 and to pay tax on the conversion ratably over years 2011 and 2012.