2011 Roth Conversion Income Limit

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White Coat Investor
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2011 Roth Conversion Income Limit

Post by White Coat Investor »

What is the Roth conversion income limit in 2011?

Is there no limit as in 2010 if congress does nothing?

Is there no limit as in 2010 only if congress extends the "bush tax cuts?"

Will the income limit be reinstated (presumably $100K again) in 2011 whether or not congress extends the bush tax cuts?

I searched the forum, Ed Slott's forum, the Fairmark forum and the web and couldn't find an authoritative answer. I've seen sources that say it expires in 2011, and others that say it continues, so if you can please point to a source that would be great.
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tfb
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Re: 2011 Roth Conversion Income Limit

Post by tfb »

EmergDoc wrote:Is there no limit as in 2010 if congress does nothing?
Correct. Source: http://www.fairmark.com/rothira/expand.htm
The Tax Increase Prevention and Reconciliation Act, which became law in May 2006, eliminates this limitation beginning in 2010.
Tax Increase Prevention and Reconciliation Act
SEC. 512. CONVERSIONS TO ROTH IRAS.
(a) REPEAL OF INCOME LIMITATIONS.—
(1) IN GENERAL.—Paragraph (3) of section 408A(c) (relating
to limits based on modified adjusted gross income) is amended
by striking subparagraph (B) and redesignating subparagraphs
(C) and (D) as subparagraphs (B) and (C), respectively.

... ...

(c) EFFECTIVE DATE.—The amendments made by this section
shall apply to taxable years beginning after December 31, 2009.
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Monk
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Post by Monk »

Bump.

This hopefully deserves a smidge more attention from the forum, given that this identical question will no doubt be posed several more times over the coming year. I'd like to make my 2011 nondeductible TIRA contribution, and immediately convert to a Roth. EmergDoc asked about the 2011 income limit for conversion a year ago, but is the answer from TFB still accurate?

thanks
Winthorpe
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Re: 2011 Roth Conversion Income Limit

Post by Winthorpe »

EmergDoc wrote:What is the Roth conversion income limit in 2011?
I have been seeking an answer to this question for quite a while, too.

Recently, I was listening to a Merriman "Sound Investing" podcast by Phuc Dang CPA, CFP. He states that "starting in 2010 and going forward" the income limit for conversion has been removed.

The link to this 12/16/2010 podcast follows. Start listening at 5:00 minutes to here him address this issue:

http://www.merriman.com/soundinvesting/ ... fore-2011/
midwestyank
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2011 income limit conversions

Post by midwestyank »

We recently visited our advisor & she recommended paying all our 2010 conversion tax this year (2011),rather than splitting it between 2010 & 2011. That way, we could convert a similar amount in 2011 by staying within our tax bracket. Otherwise she said, we'd only be paying tax on the $15k we converted this year & the other half next year. So we could convert another ~30k in 2011 & pay that tax next year (before the anticipated increase by congress) & before we hit the next income tax bracket.

Is this accurate information? I thought I read in the WSJ that there still weren't any income limits.
John Thacker
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Re: 2011 income limit conversions

Post by John Thacker »

midwestyank wrote:We recently visited our advisor & she recommended paying all our 2010 conversion tax this year (2011),rather than splitting it between 2010 & 2011. That way, we could convert a similar amount in 2011 by staying within our tax bracket. Otherwise she said, we'd only be paying tax on the $15k we converted this year & the other half next year. So we could convert another ~30k in 2011 & pay that tax next year (before the anticipated increase by congress) & before we hit the next income tax bracket.

Is this accurate information? I thought I read in the WSJ that there still weren't any income limits.
There aren't income limits, but what your advisor is saying is quite possible. It's only for a 2010 conversion that you can split the tax across two years. For a 2011 conversion, you must pay all the tax on your 2011 return (in 2012).

Suppose that, say, you're married filing jointly with taxable income outside of this of around $107,000. That puts you in the 25% bracket. If you don't split and pay tax on the full $30k of conversion income each year, you stay in the 25% bracket (tops at $137.3k) and pay .25 * $30k = $7500 in tax each year for a total of $15000.

By contrast, if you split the tax on the first conversion, then you pay .25 * $15k = $3750 for tax year 2010 (in 2011), and pay the same $3750 for tax year 2011 (in 2012). However, that brings your 2011 taxable income up to $107k + $15k = $122k. If you converted another full $30k, then the last $15k would be in the 28% tax bracket, so you'd owe tax on the second conversion of $3750 + .28 * $15k = $3750 + $4200 = $7950. Total tax of $3750 in 2011 and of $3750 + $7950 = $11700 in 2012, for a total of $15450.

That's $450 in extra taxes paid in exchange for delaying $3750 of taxes from tax year 2010 to 2011. Worth it if you think you can get a 12% return on your $3750 in a year, but I doubt it.

On the other hand, you could choose to only convert another $15k in 2011. However, while normally what you'd be losing out on would only be taxes on the extra earnings until you manage to convert it all, if rates go up, you lose more, because your conversion will be taxed at the new higher rate.
TheGuru1
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Couple of things here, guys

Post by TheGuru1 »

It is NOT the tax that can be split over 2 years; it is the income that can be split. That is an important distinction if you are applying for financial aid for colleges and you unwittingly inflated your income due to a Roth IRA conversion in a year in which a child or children of yours are applying for financial aid.

The income splitting option is only available for conversions done in 2010. The income can then be split over tax years 2011 and 2012 or you can elect to pay all the tax on the additonal income from conversion in tax year 2010 (with your 2010 return at this point).

Any coversions in 2011 or later years will not have the income splitting options. Taxes on additional incomes will be due with those respective years returns (or estimated payments may need to be made to avoid penalties).
Bob's not my name
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Re: Couple of things here, guys

Post by Bob's not my name »

TheGuru1 wrote:in a year in which a child or children of yours are applying for financial aid
In a calendar year preceding the calendar year in which your child is applying for financial aid for the school year beginning in the second calendar year. For example, financial aid for the 2011-2012 academic year is based on your income in 2010. Financial aid for the 2013-2014 academic year is based on your income in 2012.

Parents of children entering college in 2013 may not consider the financial aid impact of recognizing income from a 2010 conversion in 2011-2012 -- that is, one wouldn't naturally consider that one's Roth conversion in 2010 might affect one's financial aid for the spring semester of 2014.
AQ
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Post by AQ »

The idea to convert my IRA to Roth just occured to me so I searched the forum and found this. But still not quite sure.

1. No income limit at all going forward? Then it means everyone can do a Roth IRA then by first doing a traditional IRA and then converting it. What did I miss?

2. If no income limit at all, what time is best for someone with highly volatile income? I expect to have my fed tax rate at 35% this tax year, and probably 33 next year, though both years I expect to pay AMT. Does it matter if I convert my IRA right now, or wait until 2012? My total traditional IRA is around 40K. Much of them are not-deductible anyway so my tax liability is only for the capital gain part.

3. If you can point me a more updated link/ reference, I would appreciate it very much.

Thank you.
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Post by interplanetjanet »

AQ wrote:1. No income limit at all going forward? Then it means everyone can do a Roth IRA then by first doing a traditional IRA and then converting it. What did I miss?
This is how the law has been for some time (no limit after 2010). Congress can always pass another law that puts a limit in place.
2. If no income limit at all, what time is best for someone with highly volatile income? I expect to have my fed tax rate at 35% this tax year, and probably 33 next year, though both years I expect to pay AMT. Does it matter if I convert my IRA right now, or wait until 2012? My total traditional IRA is around 40K. Much of them are not-deductible anyway so my tax liability is only for the capital gain part.
If you're paying AMT then your marginal rate will not be 33% (it might be 32.5% if you're in the lower part of the phaseout area). It might be 35% at the upper part of the phaseout area, though past a certain point you will probably "punch through" the 35% bracket and back into the 28% AMT bracket (after you have phased out your entire AMT deduction but before your "normal" tax rises higher than your AMT tax). This makes things interesting:

http://thefinancebuff.com/2010-and-2011 ... ckets.html

Can you roll the deductible portion of your IRA into a 401k or 403b plan? This might make more sense than doing a Roth conversion (it also preserves that option for some point in the future). This would let you do nondeductible IRA contributions and immediate Roth conversions going forward without paying additional taxes.

-janet
FedGuy
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Re: 2011 income limit conversions

Post by FedGuy »

midwestyank wrote:We recently visited our advisor & she recommended paying all our 2010 conversion tax this year (2011),rather than splitting it between 2010 & 2011.
Wait...you can do that? I thought that, once you had filed your 2010 tax returns electing to split any Roth conversion income between 2011 and 2012, you were committed. I did a big conversion last year and indicated that I'd split the income between 2011 and 2012; now I'm trying to figure out the best way of doing additional Roth conversions, and had taken as a given that I was going to have conversion income both this year and next from last year's conversion. Is it really possible to say, "Nah, let's just have everything I did in 2010 count for 2011 and nothing for 2012"?
allancoleman
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Post by allancoleman »

Although there is no income limits for Roth conversions now , Medicare recipients will want to be careful to not exceed an adjusted gross income of $85K filing single and $170k for a couple filing a joint return or your Medicare Part B premium taken out ot your monthly Socal Security check could more than double . :( . See Medicare & You for more details . And finally also keep in mind that the Roth conversion deadline is December 31st of each calendar year and NOT the tax return deadline in April as it is for Roth contributions . :!:
Last edited by allancoleman on Tue Sep 20, 2011 11:37 am, edited 1 time in total.
tms
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Re: 2011 income limit conversions

Post by tms »

FedGuy wrote:
midwestyank wrote:We recently visited our advisor & she recommended paying all our 2010 conversion tax this year (2011),rather than splitting it between 2010 & 2011.
Wait...you can do that? I thought that, once you had filed your 2010 tax returns electing to split any Roth conversion income between 2011 and 2012, you were committed. I did a big conversion last year and indicated that I'd split the income between 2011 and 2012; now I'm trying to figure out the best way of doing additional Roth conversions, and had taken as a given that I was going to have conversion income both this year and next from last year's conversion. Is it really possible to say, "Nah, let's just have everything I did in 2010 count for 2011 and nothing for 2012"?
You cannot do that! For 2010 conversions, you can either include the income in 2010, or split the income between 2011 and 2012. It's all or nothing. The only caveat is that each spouse can choose differently.

I did a conversion in 2010, about twice what I normally might do, and I am now waiting until 2013 to consider any additional conversions.
tms
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Re: 2011 income limit conversions

Post by tms »

tms wrote:
FedGuy wrote:
midwestyank wrote:We recently visited our advisor & she recommended paying all our 2010 conversion tax this year (2011),rather than splitting it between 2010 & 2011.
Wait...you can do that? I thought that, once you had filed your 2010 tax returns electing to split any Roth conversion income between 2011 and 2012, you were committed. I did a big conversion last year and indicated that I'd split the income between 2011 and 2012; now I'm trying to figure out the best way of doing additional Roth conversions, and had taken as a given that I was going to have conversion income both this year and next from last year's conversion. Is it really possible to say, "Nah, let's just have everything I did in 2010 count for 2011 and nothing for 2012"?
You cannot do that! For 2010 conversions, you can either include the income in 2010, or split the income between 2011 and 2012. It's all or nothing. The only caveat is that each spouse can choose differently.

I did a conversion in 2010, about twice what I normally might do, and I am now waiting until 2013 to consider any additional conversions.
One possibility - you might be able to re-characterize the 2010 conversion by Oct 15 and amend your return, and then re-convert (wait at least 30 days) before the end of this year. I think this is allowed.

Then, you would be able to report 100% of the income in 2011.
Alan S.
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Post by Alan S. »

Yes, that is allowed.

None of the 2010 conversion elections become irrevocable until 10/17/2011. That means that you could:
1) Fully or partially recharacterize and reconvert after waiting period
2) Just change the election to report the income in 2011/2012 to 2010 or vice versa without recharacterizing
3) Or - more likely do a combination of 1 and 2 that would partially recharacterize and elect to report the remaining conversion in 2010. Then do a new conversion after the 30 day waiting period for 2011, and do another conversion for 2012. By doing this you can use your marginal tax bracket for 3 years instead of 2 and extend your recharacterization options for 2011 and 2012 into the future.

After 10/17, none of the above remain as options.
Note: Election to now report the conversion income in 2010 may produce some underpayment and late pay penalties for 2010 taxes.
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