If you are among the many who converted a traditional IRA to a Roth in 2010, you have some big decisions to make this year.
The Tax Guy, Bill Bischoff at Smart Money recently outlined the most important ones.
When should I report the income from a 2010 conversion? The benefit of a Roth IRA is paying the tax upfront rather than when you withdraw the funds during retirement, thus locking in a known tax rate. Now, though, you still have to choose whether to report that income during 2010, or elect to spread it out evenly in 2011 and 2012 (50/50.) For most, stretching it out will be the best option. Still, for some it might be better to report it all in 2010, for instance if last year was a particularly bad year in terms of income, and you expect the next two years to be much better – bumping you into a higher bracket.
Should I reverse that conversion? Maybe. It will depend upon your individual circumstances, but at any rate you can postpone your decision until October 17th – extended tax filing deadline – and you could always simply “re-characterize” your IRA back into a traditional one, avoiding the tax if that is no longer the best option. (For example, if your Roth IRA takes a dive early in the year, since you’d still be paying taxes on the conversion amount that you’ve also lost.)
Should I opt to extend my 2010 return? The short answer is YES. As long as you file for your extension by April 18, you will have until October 17th to make final decisions about your 2010 Roth conversion. By October, you’ll have a better handle on whether you should reverse your conversion, declare the income and pay the tax in 2010, or spread it out over 2011 and 2012. Extending also makes it much simpler should you decide to reverse the conversion – you won’t have to file an amended return.
Hiring Senior Life Care Planning is not inexpensive. However, in most cases we save your parent’s wealth, reduce your time involvement, give you peace of mind, and eliminate the potential pitfalls and risks of long distance care giving, for more information see our website.
Tags: 2010 tax filing, extended deadline, income deferral, IRA conversion, Roth IRA