I seem to be confused. As I understand it, a person can convert any part of his traditional IRA to a Roth IRA for any tax year. But he could also convert all in 2010, but allow it to be taxed one-half in 2010 and the other half in 2011. Now couldn't he just convert one-half in 2010 and the other half in 2011 instead? What is the difference aside from the paperwork of doing it all at once vs. over the two years?
Also, since the marginal tax rate goes up with income, it seems that it could less advantageous to convert a large IRA, since the later parts of the conversion would be taxed at a higher rate than if the conversion were spread over a number of years such that the conversion would be at the lower marginal tax rate.
For example:
Assume someone is in the 15% marginal tax rate with $10K of income to spare until he would hit the 25% marginal tax rate, and has $50K to convert. If he would convert it all in 2010, he would have $20K of income due to the conversion, which would result in for 2010, $10K being taxed at 15%, $15K being taxed at 25%, and the same for 2011, with a net result of:
2 * ($10K * 15% + $15K * 25%) = $10.5K
If instead he spread out the conversion over 5 years, the tax rate would be
5 * ($10K * 15%) = $7.5K
I suppose that if the tax rates would go up, this could make sense, perhaps partially. Or if the person wanted to start taking out a good chunk in 5 years, having the conversion done as early as possible would have some benefit. But aside from that, I just don't understand what the big deal is.
Am I missing something here?
Also, since the marginal tax rate goes up with income, it seems that it could less advantageous to convert a large IRA, since the later parts of the conversion would be taxed at a higher rate than if the conversion were spread over a number of years such that the conversion would be at the lower marginal tax rate.
For example:
Assume someone is in the 15% marginal tax rate with $10K of income to spare until he would hit the 25% marginal tax rate, and has $50K to convert. If he would convert it all in 2010, he would have $20K of income due to the conversion, which would result in for 2010, $10K being taxed at 15%, $15K being taxed at 25%, and the same for 2011, with a net result of:
2 * ($10K * 15% + $15K * 25%) = $10.5K
If instead he spread out the conversion over 5 years, the tax rate would be
5 * ($10K * 15%) = $7.5K
I suppose that if the tax rates would go up, this could make sense, perhaps partially. Or if the person wanted to start taking out a good chunk in 5 years, having the conversion done as early as possible would have some benefit. But aside from that, I just don't understand what the big deal is.
Am I missing something here?