ROTH conversion

I am going to do a conventional IRA ->> Roth transfer this year with a sizable amount. Is there any advantage to doing it late in the year (December) vs.
now?? If I do it now I would think I'd have to increase my estimated taxes to cover my tax liability for 2010 - but if I wait until December, I can keep from paying estimates for 6 months. Any thoughts??
Thanks for your help! TB
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On 4/16/10 9:32 AM, TB wrote:

You sound like you've made the decision already. I don't know what "sizable" is to you, but it will likely put you into the next tax bracket and maybe the one after that. I continue to believe that wholesale conversion (of all one's IRA assets) is not appropriate for most people. A guaranteed higher marginal rate now to avoid the risk of higher taxes down the road?

Just the opposite. Take all your IRA assets and divide into two Roth accounts. (Convert now). By April '11 file for an extension on your return. In September '11, if you divided wisely, one group would have outperformed the other. If one Roth is negative, recharacterize, leaving just the other. This strategy can be refined to any number of end Roth accounts, to convert only appreciated assets and recharacterize the losers.
The truth is - without having more details. 2010 taxable income, total Traditional IRA balance, age, other retirement assets, etc, the answer I'd offer just scratches the surface of my thoughts. If you offer some numbers, I'm happy to offer more comment. Joe www.joetaxpayer.com
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too many thoghts: If you do it in 2010 you can allocate 50% tf the income to 2011 and 50% to 2012 (none to 2010). They will probably consider this a "carryover" so the income will be in the first quarter each year, making the 2210 AI not the method of choice in those years. Use the last year's tax safe harbor in 2011 and 2012 and the AI Method in 2013..
Further if you intend to convert the full amount and pay the interest for a 2010 conversion you have two considrations:
1. For 2210 AI (annualization) the full amount of conversion income falls in the quarter converted. So it behooves you to make the conversion after Sept 1 of 2010.
2. You don't say how you figure your installments now, but presuming it is the 1/4 of last iyear's tax safe harbor, your conversion won't impact or change them, and the tax can then be paid in April 2011. If you estimated your full year's income for the 90% sarfe harbor, stop that and pay 1/4 of last year's tax each quarter. If you used the AI Method to compute the first installments continue that putting the conversion income into the proper quarter. You will end up (January 2011) paying the amount of last year's tax retroactive to the quarter you made the conversion.
ed
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Well, in addition to what the others wrote there is this additional consideration:
What do you expect to happen to the assets in your IRA over the coming year? Presumably you are expecting them to increase in value. So if your IRA grows in value between now and December, you will have a larger amount added to your income (and thus taxed) if you wait. In other words, what you give up by waiting is some of the tax-free growth of a Roth IRA.
Now, if the IRA loses value, you will have converted at too high a price.
And, of course, this is somewhat unpredictable in the short run, unless your entire IRA is in fixed income securities. So there is some element of risk involved.
By converting early, you will need to increase your withholding or estimated tax payments sooner. But that also gives you more time to spread out the payments. And in the event that there is a significant decline in the value of your Roth, you can always recharacterize the conversion as JoeTaxpayer suggested. So the only question is whether you expect there to be close to no change in value in the account, and whether you can make up for any of that with earnings on the money you would otherwise use to pay the estimated taxes.
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If you are currently using the 1/4 of last year's tax safe harbor to figure your current installments It doesn't make any differene in which quarter you make the conversion because you'll find using the 1/4 of last year's tax safe harbor will be your method of choice for paying the least amount of installments without incurring a penalty, in any year you must recognize the conversion. The remainder of any extra tax will be due the following April.
However, if you had started the year with the A-I method, because it figured a lower first installment than that, it will use the 1/4 of last year's tax safe harbor amounts in the quarter you convert and cumulatively prior quarters and thereafter (because that's less than using the current year's tax that will be increased by the conversion income). Continuing the A-I Method automatically computes this result.
So, presuming the conversion income from the 1/2 conversion in 2011 and 2012 will be forced into the first quarter of those years anyway the amount of 1/4 of the prior year's tax each quarter will be the least required regardless of the amount of conversion income, and the A--I Method won't help you any.. Choosing full conversioin in 2010 will not change the amounts you will pay for any installment if you start out 2010 using the 1/4 of last year's tax safe harbor. Only If you found it advantageous to use the A-I method for the first installments (and / or second and third installments) of 2010 will you have to increase your payments to cover the 1/4 of last year's tax safe harbor for the current (conversion quarter), and past and future quarters. Continue using the A-I Method to prevent early inadequate payments from incurring a penalty.becasue you paid less than 1/4 of the final full year's amount of last year's tax..
So, a conversion is a non-event for estimated taxes if you started the year using the 1/4 of last year's tax safe harbor (just keep paying that same amount each quarter), and if you used the AI Method, only the cumulative difference between the A-I and the1/l4 of last year's tax safe harbor will be assessed in the quarter you convert.
Further to answer your questioins, you don't have to wait until December, early September is just as effective.. It's the last quarter that's pertinent. Also, all you would be deferring would be the A-I difference amount.. So make your choice bsed on investment objectives, not tax payments.
The above logic would apply to anyone paying qyuarterly installments contemplating an IRA to ROTH conversion in any year.
ed
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