Taxes 101 2010 Roth IRA Conversions: Have You Considered All the Factors? Read the Article Open Share Drawer Share this:Click to share on Facebook (Opens in new window)Click to share on Twitter (Opens in new window)Click to share on LinkedIn (Opens in new window)Click to share on Pinterest (Opens in new window)Click to print (Opens in new window) Written by Philip Taylor Published Aug 23, 2010 - [Updated Jul 12, 2019] 3 min read The Traditional Individual Retirement Arrangement (IRA) was created long before the Roth IRA. So when the Roth IRA came along there were many people with Traditional IRAs saying, “hey, I would much rather have that retirement account.” The government decided that they would allow this conversion to take place. But only for people who earned under a certain income level ($100,000). In 2010, the government lifted this income restriction and is letting everyone convert their Traditional IRAs to Roth IRAs. They are also extending the time period in which you have to pay the taxes due on this conversion. Instead of all the taxes being due in the year of the conversion (2010), you can elect to pay your taxes 50% / 50% in 2011 and 2012. For many people, these new Roth conversion rules are a welcomed site. So why would anyone want to make this conversion? Well, the main point that I know you’ll need to consider is how you feel about taxes. With a Traditional IRA you can avoid taxes on money contributed, but you pay taxes on that money and the earnings when you withdraw it in retirement. With a Roth IRA, the money you contribute is already taxed, but when it’s time to retire, you can withdraw the funds and earnings without paying taxes. It’s really a personal preference here, and everyone’s situation is different. Do you think taxes will be higher or lower for you in retirement? If you think taxes will be higher in the future, then a Roth IRA might look more attractive to you. Thus, converting would be worth the hassle. Of course, taxes aren’t the only factor. You should consider: Other differences between Traditional and Roth IRAs. These two accounts differ in more than just how they are taxed. For instance, the Roth IRA qualifications set income restrictions on who can make regular contributions annually. Make sure you learn the difference between the two before moving all your money over. Your ability to pay the taxes. When you convert, you’ll need to pay the taxes on your Traditional IRA funds and earnings. This may be a big cash outlay. Can you handle that kind of payment? Also consider that the extra income may bump you up into a higher tax bracket. How close you are to retirement. It can take a while before the differences in tax treatment (Traditional vs Roth) can have enough effect to make the initial cash outlay a good deal. It may just be too late for this to be worthwhile for you. Your take on the Bush tax cuts. As it stands now, the Bush tax cuts will expire and taxes will go up in 2011 and 2012. If you plan on deferring your tax payment on the conversion until then (i.e. because that’s the only way you can afford it), it will cost you more in taxes if the Bush tax cuts expire. As with any tax-related retirement issue, you need to consult the source to be fully informed. I encourage you to read through the conversion section of IRS Publication 590. And it’s probably a good idea to consult with a tax professional about your situation before you make the move. Previous Post How Can You Find Cheap Summer Vacations Using Social Media? Next Post What are Federal Taxes & Why Do We Pay Them? Written by Philip Taylor More from Philip Taylor 12 responses to “2010 Roth IRA Conversions: Have You Considered All the Factors?” irs told me 2 call u 2 find my tax refund i did with you it was doposit on march 20,2012 and the bank has not resived it and the irs dont have it so i want 2 now were it is Reply i just want u 2 call me about it Reply Hi Delores, Please confirm with the IRS WMR tool to see if the date the IRS is telling you matches what was in their WMR tool. Also, please try and call your bank again. Not all banks have the same lead time for deposits. If you still don’t have an answer please talk to one of our agents at 1.800.4.intuit Thank you, Lisa Greene-Lewis Reply My buddy viists your blog quite often and recommended it to me to read too. The writing style is exceptional and the content is pertinent. Thank you for the insight you offer the readers! Reply Hi Francisco, Thank you. I’m glad you enjoy it. Check back for more interesting topics. Lisa Greene-Lewis Reply Yes, the turbotax software has a bug and does not support rollovers from 2010 non-deductible traditional IRA contributions that you roll over to a roth IRA in the same year. If you were doing the forms by hand you would enter this number in form 8606 line 1. The turbotax interview provides no way to put anything in this line 1. I just e-filed my taxes with turbotax and then mailed a form 1040-X in which I corrected the error in form 8606. Grrr – turbotax! Reply Ronin, Here’s the issue, with no other details, it’s tough to answer your exact question. [img]http://www.joetaxpayer.com/wp-content/uploads/2011/03/taxtable.jpg[/img] This is the chart for 2010 single. By looking at your 2010 tax return you can see you taxable income and whether you may want to convert to a Roth. But the story doesn’t end there. If you are receiving social security, your income may be high enough that the social security is starting to get taxed. The best method is to go into the TurboTax program and up your IRA deduction by $1000. Then look at the impact to your tax due/refund. If it doesn’t match the percent the chart shows, then the taxation of social security benefits is the likely culprit. If the impact does match, decide if you wish to convert a bit but avoid hitting the next bracket. Best wishes. Reply I think there is a difference between conversion and recharcterization. Look into this. Reply My husband had his company 401-K rolled over to his traditional IRA. Then he had a ROTH IRA established. I am running into the same problem as others. The TT program states that we made more than the limit (which is supposed to be removed for 2010) and that we owe taxes and a penalty for our actions. We would like to have the ROTH taxes paid over 2011 and 2012. TT won’t allow us to do this. Can you help me walk through the program to get my desired result – taxes over the next 2 years. Thank you. Reply Here is a very relevant question that turbotax guys should answer. A lot of people who have contributed to a non-deductible traditional IRA in 2010, and converted that amount to 2010 in the same year, have rouble with turbootax software. The following post gives the full details. Sorry, the post is a little long. I did two things last year related to Roth IRA contribution: 1. I moved all of my Rollover IRA from Vanguard to my employer 401K (trustee to trustee). After this transfer, I do not have any traditional IRA. 2. I contributed $5000 to non-deductible IRA and then converted tIRA to Roth IRA after 2 or 3 days. After this Roth IRA conversion, I do not have any traditional IRA. Now, I have 1099-R from Vanguard and have some trouble entering this information into the Turbo Tax. I am a single mom filing as Head of Household. These are related questions Turbo Tax asked me: Q1: “Any Rollover or Conversions?” My Answer: “I converted the entire distribution of $5000.08 from a traditional IRA to a Roth IRA” Q2: Did you move any part of the converted 5000 from a Roth back to tIRA? My Answer: No Q3: Non-Deductible Contributions to Your IRA. Have you ever made any non-deductible contributions to any IRA? My Answer: Yes (my tIRA Contributions in 2010 was non-deductible, so the answer is Yes, right?) Q4: Lets Find Your IRA Basis of your non-deductible IRA. Total basis as of December 31, 2009: xxxx (What is my total basis on December 2009? Should I enter 0 since I did not have non-deducible tIRA in 2009? Why it asks me 2009 basis instead of 2010?) Q5: Contributions to an IRA or Roth IRA My Answer: Traditional IRA Q6: Is this a repayment of a Retirement Distribution? My Answer: Yes Q7: Tell Us how much you contributed My Answer: Your total 2010 traditional IRA contributions: 5000 Q8: How much of $5000 you contributed to a traditional IRA did you switch, or “recharacterize”, to a Roth IRA? My Answer: Amount switched from a Traditional IRA to a Roth: 5000 After I answered all these questions, the Federal/State Refund amount decreases dramatically, so I think some thing is not quite right. It may think I owe some taxes for this conversion. And also iit did not ask me if I still have tIRA on Dec. 31, 2010 or if my tIRA is non-deducbible contribution. When I keep going, it said that I am not qualified for Roth and I have penalty. Turbo tax thinks that I contribute Roth IRA, not IRA conversion from tIRA. Could some one please help me where I do things wrong or provide any helpful information? Thank you very much! Reply I have entered 2 traditional IRA to Roth ira conversions, one wife, one mine. The 1099-R both show these as taxabable. The 1040 form shows all of it as rollover. I also did have rollovers in the same accounts going in an out of the same accounts. I think there is a bug here. Reply I am struggling with the desirability (net cost when considering tax consequences of converting IRA’s to Roth after age 70. So little computation software is available to calculate the impact if a conversion is made after 70.. vis a vis RMD requirements imposed on IRA’s. Thus, it is not an easy decision to implement as accurate numbers can not be computed for a go-no go decision. Seems like that is intended as it obfuscates decision making to render us old timers vulnerable to unexpected tax liabilities. I wish I was rich enough to buy a Congressman like the “oligarchs” do. 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irs told me 2 call u 2 find my tax refund i did with you it was doposit on march 20,2012 and the bank has not resived it and the irs dont have it so i want 2 now were it is Reply
Hi Delores, Please confirm with the IRS WMR tool to see if the date the IRS is telling you matches what was in their WMR tool. Also, please try and call your bank again. Not all banks have the same lead time for deposits. If you still don’t have an answer please talk to one of our agents at 1.800.4.intuit Thank you, Lisa Greene-Lewis Reply
My buddy viists your blog quite often and recommended it to me to read too. The writing style is exceptional and the content is pertinent. Thank you for the insight you offer the readers! Reply
Hi Francisco, Thank you. I’m glad you enjoy it. Check back for more interesting topics. Lisa Greene-Lewis Reply
Yes, the turbotax software has a bug and does not support rollovers from 2010 non-deductible traditional IRA contributions that you roll over to a roth IRA in the same year. If you were doing the forms by hand you would enter this number in form 8606 line 1. The turbotax interview provides no way to put anything in this line 1. I just e-filed my taxes with turbotax and then mailed a form 1040-X in which I corrected the error in form 8606. Grrr – turbotax! Reply
Ronin, Here’s the issue, with no other details, it’s tough to answer your exact question. [img]http://www.joetaxpayer.com/wp-content/uploads/2011/03/taxtable.jpg[/img] This is the chart for 2010 single. By looking at your 2010 tax return you can see you taxable income and whether you may want to convert to a Roth. But the story doesn’t end there. If you are receiving social security, your income may be high enough that the social security is starting to get taxed. The best method is to go into the TurboTax program and up your IRA deduction by $1000. Then look at the impact to your tax due/refund. If it doesn’t match the percent the chart shows, then the taxation of social security benefits is the likely culprit. If the impact does match, decide if you wish to convert a bit but avoid hitting the next bracket. Best wishes. Reply
My husband had his company 401-K rolled over to his traditional IRA. Then he had a ROTH IRA established. I am running into the same problem as others. The TT program states that we made more than the limit (which is supposed to be removed for 2010) and that we owe taxes and a penalty for our actions. We would like to have the ROTH taxes paid over 2011 and 2012. TT won’t allow us to do this. Can you help me walk through the program to get my desired result – taxes over the next 2 years. Thank you. Reply
Here is a very relevant question that turbotax guys should answer. A lot of people who have contributed to a non-deductible traditional IRA in 2010, and converted that amount to 2010 in the same year, have rouble with turbootax software. The following post gives the full details. Sorry, the post is a little long. I did two things last year related to Roth IRA contribution: 1. I moved all of my Rollover IRA from Vanguard to my employer 401K (trustee to trustee). After this transfer, I do not have any traditional IRA. 2. I contributed $5000 to non-deductible IRA and then converted tIRA to Roth IRA after 2 or 3 days. After this Roth IRA conversion, I do not have any traditional IRA. Now, I have 1099-R from Vanguard and have some trouble entering this information into the Turbo Tax. I am a single mom filing as Head of Household. These are related questions Turbo Tax asked me: Q1: “Any Rollover or Conversions?” My Answer: “I converted the entire distribution of $5000.08 from a traditional IRA to a Roth IRA” Q2: Did you move any part of the converted 5000 from a Roth back to tIRA? My Answer: No Q3: Non-Deductible Contributions to Your IRA. Have you ever made any non-deductible contributions to any IRA? My Answer: Yes (my tIRA Contributions in 2010 was non-deductible, so the answer is Yes, right?) Q4: Lets Find Your IRA Basis of your non-deductible IRA. Total basis as of December 31, 2009: xxxx (What is my total basis on December 2009? Should I enter 0 since I did not have non-deducible tIRA in 2009? Why it asks me 2009 basis instead of 2010?) Q5: Contributions to an IRA or Roth IRA My Answer: Traditional IRA Q6: Is this a repayment of a Retirement Distribution? My Answer: Yes Q7: Tell Us how much you contributed My Answer: Your total 2010 traditional IRA contributions: 5000 Q8: How much of $5000 you contributed to a traditional IRA did you switch, or “recharacterize”, to a Roth IRA? My Answer: Amount switched from a Traditional IRA to a Roth: 5000 After I answered all these questions, the Federal/State Refund amount decreases dramatically, so I think some thing is not quite right. It may think I owe some taxes for this conversion. And also iit did not ask me if I still have tIRA on Dec. 31, 2010 or if my tIRA is non-deducbible contribution. When I keep going, it said that I am not qualified for Roth and I have penalty. Turbo tax thinks that I contribute Roth IRA, not IRA conversion from tIRA. Could some one please help me where I do things wrong or provide any helpful information? Thank you very much! Reply
I have entered 2 traditional IRA to Roth ira conversions, one wife, one mine. The 1099-R both show these as taxabable. The 1040 form shows all of it as rollover. I also did have rollovers in the same accounts going in an out of the same accounts. I think there is a bug here. Reply
I am struggling with the desirability (net cost when considering tax consequences of converting IRA’s to Roth after age 70. So little computation software is available to calculate the impact if a conversion is made after 70.. vis a vis RMD requirements imposed on IRA’s. Thus, it is not an easy decision to implement as accurate numbers can not be computed for a go-no go decision. Seems like that is intended as it obfuscates decision making to render us old timers vulnerable to unexpected tax liabilities. I wish I was rich enough to buy a Congressman like the “oligarchs” do. Reply