Best Laid Plans of Mice and 8606 Roth Converters

[sengsational]

So back in October I decide I'm going to convert about $40K out of traditional IRA to a Roth, and elect to split it up into two tax years. This should max out my tax bracket, I figure, without going into the next higher tax bracket*.

So last year I opened the 2009 tax software and plugged in my 2010 estimates, including $20K traditional to Roth conversion (half of what I plan to convert, since I'll be splitting it). It says I owe $2600, so I make an estimated payment to the IRS for that amount.

Today, I load basically the same data into the 2010 tax software, including my estimated payment, and it says I'm getting this huge tax refund! Then I look at the 8606 and I see that if you choose to pay over two tax years, it also advances it out of 2010! (you pay in 2011 and 2012).

Am I the only numskull that thought it would split between 2010 and 2011?

I can re-characterize $20K back, right? (and pay taxes on $20K now)?

--Dale--

* My strategy was to convert just enough to get me up to the very top of the 15% bracket, but not into the next bracket. If I don't convert any this year, I'm "wasting" that 15% space.

 

[jimnjana]

You can elect on Form 8606 to have entire amount of IRA converted in 2010 taxed. Your other option is to elect to have half taxed in 2011 and 2012.

 

[Free To Canoe]

You can also undo the Roth transaction.

Free to canoe

 

[kaneohe]

You should be able to do as you are thinking. Be sure to check the box
on line 19 F8606 to tax in 2010. The default is to split in 2011/12.
Be sure to complete the recharacterization before you file......ask the broker how
long it takes.

 

[swampwiz]

* My strategy was to convert just enough to get me up to the very top of the 15% bracket, but not into the next bracket. If I don't convert any this year, I'm "wasting" that 15% space.

This is basically my strategy as well, although I am doing the conversions up to the 0% bracket, which because of $3K/yr capital losses for as a far as the eye can see , is about $12.5K/yr. (BTW, I earn my income while living abroad, with the amount being low enough that living expenses zero out any income there.)