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|Subject: Re: Company-funded profit sharing retirement acc||Date: 4/14/2010 2:15 PM|
|Author: aj485||Number: 66951 of 82831|
In the articles I've read about the 2010 Roth conversion I've seen it written both ways, using spreading out the taxes and/or the income.
Well, it says "income" in IRS Pub 590, so the articles stating 'taxes' are mischaracterizing it.
Conversions to Roth IRAs. Beginning in 2010, the modified AGI and filing status requirements for converting a traditional IRA to a Roth IRA are eliminated.Also, for any 2010 rollover from an IRA other than a Roth IRA to a Roth IRA, any amounts that would be included as income will be included in income in equal amounts in 2011 and 2012. You can choose to include the entire amount in income in 2010.
Note: You don't have to make this choice until you file your taxes for 2010, so you will have until mid April 2011 to make the choice.
Ultimately by splitting the income into those two years you are effectively splitting the taxes over that two year period.
Yes, but not necessarily splitting the amount of tax that you would have paid based on the 2010 rates - which is why it's important to make the distinction, especially with the bracket change expiration that is occurring.
Not knowing what the current administration will do with the tax rates after 2010 does make the decision to pay the tax in 2010 or 2011/2012 much more difficult for the higher income earner, especially as you mentioned if the amount of the conversion is substantial.
The crux of the matter is - the current administration doesn't have to 'do' anything with the tax rates for them to change - the current administration would actually have to do something in order to prevent the changes from occurring. The cuts that have been in place for several years are due to expire at the end of 2010. That will change the tax brackets from 10%, 15%, 25%, 28%, 33%, and 35% to 15%, 28%, 31%, 36%, and 39.6%. So assuming that nothing is done, on a $100k conversion, by counting the income in 2010, someone may pay $35k vs. paying $19.8k each year by counting the income in 2011 and 2012, for a total of $39.6k, so nearly $5k more.
And you will notice that it's not just the upper brackets - the 10% bracket changes to 15% - so someone doing a $10k conversion may pay $750 each year by counting the income in 2011 and 2012, for a total of $1500 vs paying $1000 by counting it all in 2010. So on a percentage basis, someone in a low tax bracket can be even more affected - $1500 vs. $1000 is a 50% increase, while $39.6k vs. $35k is a 13.1% increase.
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