planning IRA to Roth IRA conversion in 2010?

[RockyMtn]

Converted today

Converted my TIRA to a Roth this morning. Schwab made it very easy. Opened the Roth on line Monday. Funded the TIRA on Tuesday for 2010 and then waited for the transaction to clear today. Went on line made a few clicks and viola....I have a funded Roth! Never have been able to contribute to a Roth because of wage limits so this one time conversion option was a blessing.

Haven't decided on when to pay the taxes. Probably will do it in 2010 (as opposed to the spreading over 2011 and 2012) as I fear Pelosi and crew have nothing but higher taxes in mind for 2011 and beyond.

 

[Alan]

Went on line made a few clicks and viola....I have a funded Roth!

So, you had to pull a few strings...

Seriously though, that sounds great - I plan to do similar this weekend so am pleased to hear how easy it is.

 

[ronin]

Nuts and bolts question... How do you handle the estimated tax payments? I've read the relevant IRA publication and looked at form 2210 and am going to query my tax prep guy, but not 100% sure how to handle it. Could be a one off deal like in Dec or Jan, or could have a monthly early retirement incentive rollover that could be converted immediately monthly. Got to figure State of Kalieffingornia withholding as well.

 

[jdw_fire]

Converted my TIRA to a Roth this morning. Schwab made it very easy. Opened the Roth on line Monday. Funded the TIRA on Tuesday for 2010 and then waited for the transaction to clear today. Went on line made a few clicks and viola....I have a funded Roth! Never have been able to contribute to a Roth because of wage limits so this one time conversion option was a blessing.

Haven't decided on when to pay the taxes. Probably will do it in 2010 (as opposed to the spreading over 2011 and 2012) as I fear Pelosi and crew have nothing but higher taxes in mind for 2011 and beyond.

your post implies to me that your TIRA is funded with after tax money, some or all. if this is true you may not have any taxes due because of the conversion.

 

[Matt in OH]

Great timing Matt....I posted my prior comment before reading your response, and we're on the same page.

I do not have any taxable IRAs. I used to, but years ago I converted them to Roths and they've been in the Roths ever since. I wish I would have had the Roth more available to me, but unfortunately it was introduced later in my working life, and the income restrictions kept me from participating much of the time. I only have about $80k in Roths today, and after my additional conversion being discussed here it will be about $100k....not as much as I'd like to have.

Wife and I have about 5 more years of *ork, so maybe we can get that to $200k through combination of contributions (both regular and catch-up) and growth. After that, it will be time to wave to my boss politely and drive off (rather than sail off...I'm a car guy not a boat guy) into the sunset.

Now, if I can just find a low-cost producer of suntan lotion.

Dave,

Congrats to you on the retirement plan. I have been funding Roth IRA's for a few years and converted a good chunk last year and have a bout $60K in total for me and my wife. We are unfortunately decades from retirement and unfortunately (fortunately depending on how you look at it) no where near exceeding the limit on funding Roth IRA's so we will continue.

My plan is hopefully to have just the right amount of Roth assets so my taxable assets withdrawn at retirement will just generate enough income each year to utilize my tax deductions or at a minimum keep my taxable income in the low brackets. This is how Roth's provide flexibility. Roth's also provide an opportunity in those few years right at retirement to start taking taxable account withdrawls just enough to stay in the lower rates, any additional withdrawls you may need can be taken from the Roth if need be.

I also just wanted to point with your Roth conversion, in case you are not aware but there is a special rule just for 2010 that any Roth IRA conversion income is deemed to be half recognized in 2011 and the other half in 2012, which allows you to postpone paying the taxes on 2010 conversion. This is the default but you could make an election with your 2010 tax return to claim the income in 2010 if you want. In your case, you may want to make this election as you are likely in the one of the higher two tax brackets (33% and 35% are the current top two) and these are set to go back to prior levels and the highest tax rate for 2011 will be atleast raised to 39.6%. So in your case if you don't make the election $2K of gain will be taxed at 2011 rates and the other $2K would be taxed at 2012 rates. You will have until you file your 2010 return to decide when and how you want to pay the tax. This shouldn't deter, but just wanted to point it out.

 

[RockyMtn]

your post implies to me that your TIRA is funded with after tax money, some or all. if this is true you may not have any taxes due because of the conversion.

Some pre tax some after tax.

 

[Finance Dave]

Dave,

Congrats to you on the retirement plan. I have been funding Roth IRA's for a few years and converted a good chunk last year and have a bout $60K in total for me and my wife. We are unfortunately decades from retirement and unfortunately (fortunately depending on how you look at it) no where near exceeding the limit on funding Roth IRA's so we will continue.

My plan is hopefully to have just the right amount of Roth assets so my taxable assets withdrawn at retirement will just generate enough income each year to utilize my tax deductions or at a minimum keep my taxable income in the low brackets. This is how Roth's provide flexibility. Roth's also provide an opportunity in those few years right at retirement to start taking taxable account withdrawls just enough to stay in the lower rates, any additional withdrawls you may need can be taken from the Roth if need be.

I also just wanted to point with your Roth conversion, in case you are not aware but there is a special rule just for 2010 that any Roth IRA conversion income is deemed to be half recognized in 2011 and the other half in 2012, which allows you to postpone paying the taxes on 2010 conversion. This is the default but you could make an election with your 2010 tax return to claim the income in 2010 if you want. In your case, you may want to make this election as you are likely in the one of the higher two tax brackets (33% and 35% are the current top two) and these are set to go back to prior levels and the highest tax rate for 2011 will be atleast raised to 39.6%. So in your case if you don't make the election $2K of gain will be taxed at 2011 rates and the other $2K would be taxed at 2012 rates. You will have until you file your 2010 return to decide when and how you want to pay the tax. This shouldn't deter, but just wanted to point it out.

Yes I was aware of the tax treatment and plan to pay it all in 2010...it's a fairly small amount.

Dave

 

[JustNtime]

Nuts and bolts question... How do you handle the estimated tax payments? I've read the relevant IRA publication and looked at form 2210 and am going to query my tax prep guy, but not 100% sure how to handle it. Could be a one off deal like in Dec or Jan, or could have a monthly early retirement incentive rollover that could be converted immediately monthly. Got to figure State of Kalieffingornia withholding as well.

I did my conversion last month, but I made sure the tax I paid in 2009 was more than what I paid in 2008 for both state and feds. Yes, I will have a big tax bill to pay, but no underpayment penalties. For grins, I made an estimated tax payment to the state this weekend, since I could do it online without filling out any #$%@! forms and I had some funds laying around earmarked for this. I know making estimated tax payments to fed is no where near this easy - although I could have easily adjusted my pension withholdings to make the added payments. I played with turbotax this weekend and assured myself NO penalties would be assessed. So I have an interest free loan until the tax is filed in Apr.

If I do another conversion this year with paymnents split between 11/12. I could get some more interest free loans with some careful planning to avoid those underpayment penalties.

BTW: I'm looking at these tax payments as 'Roth IRA contributions' for last year. Since I'm using after tax money to pay the tax bill and I have no 'earned' income, it's the only way I know to add money to my Roth.

 

[kaneohe]

. I know making estimated tax payments to fed is no where near this easy -
.

EFTPS: The Electronic Federal Tax Payment System
I haven't personally used this but I've read good things about it . Learned about it from someone here.

 

[JustNtime]

EFTPS: The Electronic Federal Tax Payment System
I haven't personally used this but I've read good things about it . Learned about it from someone here.

Well, I went there and before you can make a payment to the feds- you have to enroll - la dee dah - They can just wait for 'their' money...

Yes, Virginia is much more efficient and took their money without the la dee dah. In addition, you can file your taxes free there (after you get your numbers off your fed return) - just takes a partial reinput of some minimal data (after you're in their system). I double check their answer against the turbotax number and don't pay the state filing fee to turbotax. I've done it for last several years and don't understand why the feds can't do the same thing. It would probably put tons of people out of work and play havoc with the already shakey economy...

 

[Alan]

At the weekend I converted my after tax tIRA to a Roth. After researching my 401(k) a little more using this website
Rubicon Inc. 401k Rating by BrightScope

I decided to hold off rolling over my 401(k) to an IRA until next year ('cos then I could convert my tIRA in total with minmum tax bite.)

In future years I'll continue to do more conversions.

 

[misanman]

Grandkids as Roth beneficiary

What do people think about creating Roth accounts with grandkids as beneficiaries? If/when they inherit the account they'd have maybe 40 years or more before they'd need it for their retirement. Is this feasible? Or maybe they'd just spend it as soon as they got it.

 

[Gotadimple]

Re: Paying Federal Taxes

Like any on-line service, you need to register to use it. Unlike most other on-line banks (because your transfer of taxes to the Feds is a bank transaction), you must wait for your password to arrive in the mail.

After that, setting up the transaction is very easy (including setting up a recurring transaction).

Paperwork? Not needed until you file your taxes.

-- Rita

 

[JustNtime]

GD - Registering online o.k.
Enrolling and waiting for mailed password ~ DUMB... Somehow mail sitting in an unlocked box at the end of my driveway is more secure than an online transaction w/ 128 bit encryption. And when it comes to making estimated tax payments I'd be glad to give my password to anyone who wishes to make a payment for me.

When you efile you don't have to wait for a mailed password, so this is just dumb. OH well, I guess I'll just keep their money until I file -- no penalty -- no harm -- no foul. I doubt it will seriously impact the national debt.

 

[Nords]

What do people think about creating Roth accounts with grandkids as beneficiaries? If/when they inherit the account they'd have maybe 40 years or more before they'd need it for their retirement. Is this feasible? Or maybe they'd just spend it as soon as they got it.

Well, you'd be dead so you wouldn't have to see how they handled the situation.

As other long-term members on this board have pointed out, I'm perhaps overly concerned about the debilitating effects of affluenza. That concern is probably particularly acute when you achieved your own ER without benefit of being a beneficiary. In our case we tell our kid that not even her grandkids would inherit from us in time to make a difference to their lives, and anyway we'd probably spend it all before anyone had to worry about inheritances.

It's whatever is important to you. It'd certainly give them a rainy-day fund in case of health problems or other disasters. OTOH you may feel strongly about making a charity a beneficiary in order for someone else to get the help when they need it most and have the most motivation...