It is considered earned income? Capital gains? Pension payments?
I might or might not have to pay significant taxes in 2010; no way to know for 14 months or so. If I do a conversion now and convert back in 2011, do I lose anything but the time i spent working on it?
And finally, I was told that one reason to do it is that the tax rate will go up significantly in 2011. Is that correct?
Ordinry income.
Reversing the conversion in 2011: You lose the two-year spread.
Tax rates in 2011: Such has not been determined yet. However, historically, the tax rates are at an all-time low, except for its first couple of years when they were instituted.
Line 15 of the 1040. No special tax calculation involved.
Phil Marti Clarksburg, MD
What is a two-year spread? I should have added that I am no longer putting anything into my IRA, since I no longer have any earned income. I "thought" reversing the conversion would just be making it like it never happened. But perhaps not.
If you have a basis, i.e. after tax contributions in an ordinary IRA, then you have compute 15b via 8606, the taxable amount. I had a minor surprise doing this the first time a couple days ago. The fractional basis is based on the 12/31 value of all IRAs (reported to IRS), not the day you did the Roth conversion.
Coincident to the lifting of income rules on the ability to convert, there is a one-time offer regarding payment of taxes on the conversion.
A conversion in 2010 can be divided in two, and half the amount added to income in each of tax years 2011 and 2012.
With no earned income, do the math carefully so the conversion doesn't put you into a higher tax bracket. My warning is just that one should avoid having the conversion put you well into the 25% bracket when a smaller amount will just be taxed at 15%. There are a large group of retirees who should simply 'fill the 15% bracket' each year with well planned conversions. Fewer will benefit from a wholesale conversion.
Joe
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