Roth IRA Conversion: 2010 or 2011 / 2012?
The conventional wisdom when doing a Roth IRA conversion in 2010 is to advise your clients to take Congress’ generous offer and wait to pay half the tax in the 2011 tax year and the other half in the 2012. However, it will be better for many of your clients to attribute the income to the 2010 tax year because of the tax increases that start in 2011:
· the 10% tax bracket sunsets. This means that those filing Joint tax returns will pay 15% instead of 10% on the first $17,200 of income ($8,600 Single), an $840 tax increase.
· the marriage penalty will return. Taxpayers who file a Joint return will pay 25% on $29,050 of their income instead of 15%. This is a $2,905 increase for Joint tax payers with Adjusted Gross Incomes of $174,800 or more.
· the 31% income tax bracket will be replaced by 33% and the 35% tax bracket has been replaced by 39.6%.
· If HR 3200 becomes law, add a 1% surcharge to the 31% tax bracket, a 2% surcharge to the 39.6% tax bracket, and a 4.4% surcharge on income that exceeds $1,000,000 – that’s 44%.
So what does this mean in dollar and cents terms? Here are the tax calculations for a $1,000,000 Roth IRA conversion for a retired married couple, filing a joint return, who have an Adjusted Gross Income of $250,000 and itemized deductions of $50,000:
2010 Taxes Without Roth IRA Conversion: $41,811
2010 Taxes With $1,000,000 Roth IRA Conversion: $386,848
Roth IRA Conversion Cost: $345,037
2011 Taxes Without Roth IRA Conversion: $43,484
2011 Taxes With $500,000 Roth IRA Conversion: $241,716
2012 Taxes Without Roth IRA Conversion: $43,173
2012 Taxes With $500,000 Roth IRA Conversion: $240,280
Roth IRA Conversion Cost: $395,339
In this situation, your client would save over $50,000 in Federal Income Taxes by attributing the $1,000,000 income from the Roth IRA Conversion to 2010 instead of $500,000 in 2011 and 2012. Clients who have lower incomes and/or smaller rollovers may find that splitting the income between 2011 and 2012 is ideal, but in this situation, this is clearly not the case.
Take home message: Before making a Roth IRA Conversion recommendation, first calculate the income tax ramifications for your client.
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Tuesday, August 4th, 2009