What should I do about my Roth conversion?

First, I'd get a copy of TurboTax and confirm the $60K is right. If you are MFJ with $120K taxable income, you are $20K from blowing through the 25% bracket, and everything above $212,30 is taxed at 33%.

The $60K is possible, but it also implies you are willing to spend 1/2 year's net on the tax to shift to Roth (if my guess is correct).

In general, I suggest that people convert only enough to top off the current bracket, although for high savers, the difference from 25 to 28 doesn't bother me.

You've answered your own question - you can recharacterize 1/2 or whatever percent you wish and save some money, esp if half the conversion costs you 1/3 the federal tax. The 12% increase in value doesn't negate this.

gives a good chart to see the numbers as well.

/Joe

Nice clear website. I actually am doing it on HRBlock at Home. It says that if i take it all this year I have $38,000 in tax and $20,000 in AMT. If I don't take it this year I have no tax at all. NYS is pretty much 5% no matter what.

I am essentially living off investments now, so my future will be all the same; if I have good market gains I will have high income, if I don't I will have very little income. I didn't pay any taxes in 2008 or 2009; too bad I didn't convert then. If unlucky and 2011 and 2012 are bad, then I won't pay much tax by deferring the conversion; I just don't know.

I thought the conversion was a one time thing and I had to jump on it. Is that not true? I figured the values were low and should go up and if they didn't go up I would just reconvert; and they did go up

12%. I sure hate to give that back. Its all so complicated.

It is not. The only thing that applied only to 2010 was the income split between 2011-12. The "conversion for all" provision is permanent. Until Congress changes it.

Phil Marti VITA/TCE Volunteer Clarksburg, MD

As Phil answered, just the splitting over two years is a one time deal.

You are the ideal candidate for "rate smoothing." (Don't look it up, I made up the term.) It simply means that if I understand you correctly, you have high income years as well as low. Look back and see your marginal rate each year, and yes, AMT means that regardless of what the rate tables suggest, the next $100 earned or converted may not produce the increase in taxes at the rate expected. Knowing that history, I'd embark on a plan to make partial conversions each year and minimize my lifetime taxes.

Two thoughts to add - Convert what you will, use the recharacterization to get your taxable income line to the exact number you wish. I do just this for a retired woman, her last dollar taxed at 15%, but avoiding the next one at 25%.

Once you decide and this year is behind you, you should wait 30 days if you recharacterized. Then, for the 2011 conversion choose 2 groups of investments to convert. e.g. $50K in bonds get converted to new Roth A, and $50K in S&P to Roth B. When you are looking at the recharacterization next year, your decision may be simpler this way. If S&P shot up, that's what stays. Recharacterize from the lower performing group. This strategy can be made as complex (uh, 10 conversions with $20k tranches in each) to the simple two account process. You are permitted to recharacterize from the chosen Roth so long as the Roths are separate. You can't just pick the losses out of one account containing multiple assets. /Joe

Okay, I ran a bunch of numbers through HRBlock. The best result seems to be recharacterizing $100,000. That lowers my tax rate from 29% to 15%, so I save $14,000 on the $100,000 that remains converted. Since my investments are up 12%, $12,000 will become taxable, costing perhaps $4,000 in extra tax later on. So I will save $10,000.

It might be better off to wait until October to make this decision. If the investments go back down, then I will probably want to recharacterize even more. If they go up dramatically, I will want to recharacterize less.

Do I have to get an extension to do this? Do I have to pay the full slug with my extension and get it back when I file in October, or something else. If I understand what I have read, in future years I will have to have had less than $100,000 in income to convert, which will be a bad year for me, but 2010 will quality. Then I can convert, but will have to hope that the the year I convert in (say 2011) is also a bad year so I have a low tax rate on the conversion. Is that right? It is probably worth mentioning, that while my income is pretty high, I also have extremely high deductions which are producing these weird AMTs.

As I typed this, I realized I might be confused. I converted $200k that has grown to $224K. If I recharacterize $100,000, than $112,000 goes back to a traditional IRA. Is that correct, or something else. It is all in one fund.

You have been very helpful in this; I appreciate it.

15% rate on the 12K is $1800.

Fair enough.

Yes. File for extension. Taxes will accrue interest if owed. Extension doesn't delay need to pay what 'should' be due.

In 2010, the limit of $100K was removed. Permanently. Until congress changes its mind. There was a one time chance to pay the tax in 2010 or

50/50 '11/'12. It's confusing for most. No worries.

One final set of questions and I will know everything about Roth conversions!

1) If I get an extension and find out I underpaid $10,000 in October because I did something I didn't expect, what would the interest be? 2) If I convert in 2011, can I recatagorize by 10/12, or was that just for 2010? (I realize the law might change, but as it stands now). 3) If I want to recatagorize $100k of the converted $200k, and it has grown by 12%, I am really putting $112k back, right?

Thanks every so much

1 - There are two things. There may be a penalty, this depends on whether you paid 90% of yearly tax due or at least 100% of prior year's bill (110% for high income earners). I've owed some large money with no penalty by staying within this range. Then you have the interest, will give you the table of rates, it changes quarterly and is 3% right now. 2 - as it stands, you may very well file an extension every year, and extend that recharacterization date to 10/15. That is not a one-time deal. 3 - Yes, the $100K is recharacterized along with its portion of the gain. (this is where I am admittedly a bit fuzzy. $100K cash + $100K stock grow at different rates, if these were in the same roth conversion, you can't recharacterize say, just the cash, it's 50% of the account to back out any. To have the option of picking just the low growth asset, it should have gone into multiple Roths. I hope a Roth expert will set us both straight. If not, ask the broker if they have an in-house expert.)

Very welcome.

Hot off the press;

rate is 4%.

In CA, if your income is more than $1,000,000 then you can no longer use prior year AGI (110% of last year's income).

That 4% a year. So from 4/15 to 10/15 is 6 months. If they compound monthly, interest will be

10000*(1+0.04/12)^6-10000 1.67

Do I understand it properly that they pay 4% on overpayments. That pretty much makes putting it off until October the best choice. Oh, 4% yearly, so 2% until October, right?

You got me there. I've always called overpaying "an interest free loan to the government". Not sure when they start paying. Phil?

It's only an overpayment if you filed your tax return and are filing an amended return. So if you file your tax return 4/15 then amended it, you get interest money back. If you filed an extension or didn't file at all, then you won't get interest back.

Can i file my income tax, choosing to pay my Roth tax in 2010, then ammend the return in October recharacterizing half and getting a $14,000 refund WITH interest; or is my only option to file an extension and forgo the interest? They sure don't make it easy!

Yeah, this sounds reasonable. You filed a tax return that was accurate, then made changes that you were entitled to that were accurate. You get interest on the refund. The IRS 4% is way better than what banks are paying, which is less than 0.5% at most banks. It could take them 2 months to process your amended return though, and you'd have to pay federal + state tax on the interest.