roth 2010

[bobbee25]

Has anyone looked into the 2010 roth. It sounds as if you will be able to split the amount moved in 2010 and pay taxes in 2011 ans 2012.
I am wondering if you will be able to split it for 3 years, in aother words
120K conversion in 2010, pay on 40K for 3 years.

 

[harley]

Nope, just the two years. You'll be paying taxes on the 2010 move in 2011 and 2012. If you paid a third in 2010 you'd have to have done the conversion in 2009.

 

[WilliamG]

Good clarification Harley. Some write ups are not clear enough that 2010 conversion taxes are NOT paid along with 2011 and 2012 taxes, but actually in those years when you will be paying tax on other income for 2010 and 2011 respectively.

 

[Gearhead Jim]

Good clarification Harley. Some write ups are not clear enough that 2010 conversion taxes are NOT paid along with 2011 and 2012 taxes, but actually in those years when you will be paying tax on other income for 2010 and 2011 respectively.

Some of us still need to be clarified.
If we do the conversion during 2010, when and how do we pay the taxes?

 

[Gotadimple]

You can pay half the taxes in 2011 with your 2010 Income Tax, the other half in 2012.

-- Rita

 

[WilliamG]

Whooooah!
My understanding was that when converting in 2010, you would be able to pay half the tax when filing that year (for 2010 in 2011) and the remaining half the following year (2011 tax year filed in 2012).
Before I replied I thought I'd google again and check and found the following article. This one says you can delay paying til TAX years 2011 and 2012 which makes OP's original question very salient. Any CPAs out there know the correct answer for sure!

Follow these five steps today to your Roth conversion in 2010 - MarketWatch

 

[WilliamG]

Sort of indirect substantiation, but I found this thread on Bogleheads and the interpretation there is you can either pay the tax on a 2010 conversion on A) your 2010 taxes, or B) have it equally split on your 2011 and 2012 taxes.

Bogleheads :: View topic - Roth Conversion Rules for 2010?

 

[bobbee25]

That brings us back to the original question.

If I convert 120K in 2010.
Can I pay on 40k and then split the remainder for 2011 and 2012.

 

[WilliamG]

That brings us back to the original question.

If I convert 120K in 2010.
Can I pay on 40k and then split the remainder for 2011 and 2012.

Per the Boglehead reference above the answer would be no.
You can either pay on $120k in 2010 or $60k in each of 2011 and 2012.

That's the way I read the two links I made, but I'm no CPA and hope to get the answer nailed down before 2010!

 

[Martha]

WilliamG, you have it right. As things are a bit muddy on this issue in this thread, here is a link to the statute:

Conversions to Roth IRAs

The pertinent part:

. . . unless the taxpayer elects not to have this clause apply, any amount required to be included in gross income for any taxable year beginning in 2010 by reason of this paragraph shall be so included ratably over the 2-taxable-year period beginning with the first taxable year beginning in 2011.

 

[jdw_fire]

does it have to be split evenly between tax years 2011 and 2012?

 

[Gotadimple]

does it have to be split evenly between tax years 2011 and 2012?

Yes. That's what "ratably" in Martha's quote above means.

 

[Barbara McNulty]

Re: ROTH's...I took an "incentive pkg." and quit the school district. But, since I am not working, I can no longer contribute to a ROTH ..any suggestions where I can put the $6,000 this year that won't be taxed when I take it out?

 

[samclem]

Barbara,
Do you anticipate having any earned income at all this year (full time job, part time job, maybe a small side business?). If so, you'd be able to plunk money into a 401K/solo401K/IRA, or any of the Roth variants of these.
Other than that, there is the usual option of tax-free Municipal bonds, but these tend not to pay very high interest rates, and the market has gotten a little more "challenging" these days, as some municipalities may not have sterling credit.

 

[Barbara McNulty]

Thank you. Would I be able to contribute the amount only of what I would earn in part time work?

 

[samclem]

Thank you. Would I be able to contribute the amount only of what I would earn in part time work?

Yes, the amount you can contribute to these accounts is limited to your earned income. But, this income doesn't have to come from an employer. If you set up a small side business (selling crafts, tutoring, etc) and make a profit after paying all your expenses, then that income would also qualify as earned income.

Also, before you go to great lengths to figure out how to shield money from taxes, be sure to think through what your 2009 tax situation will be. Did you receive this chunk of change in 2009, or was it in 2008? Will you have other income? Look at what what you'll likely earn this year and determine what your marginal tax rate will be. Lots of us get into the habit of going to great lengths to avoid paying taxes on our investments and other income over the course of our working lives, and this habit deserves a re-look once you quit full-time employment. Many new semi-retirees find that they are in the same low tax bracket they'll likely be in for years. When you are working, you don't want to pay 28% tax on your money if you'll later be retired and paying 10-15% on your lower income. Once you retire, the urgency to avoid the taxman is significantly reduced if you find you'll pay the same rate now as you'll probably pay when you take it out. Yes, it's nice to defer taxes and earn interest on the tax savings, but the problem's magnitude is significantly less.