Tax Rules for Roth Conversions

Now that it’s 2010, anyone can convert a traditional IRA to a Roth IRA, regardless of income. We’ve answered many questions about Roth conversions in our FAQs on the New Roth Conversion Rules article and our Roth Conversions for Everyone special report. Here are answers to a few more of your questions about IRAs and IRA conversions.

If both spouses convert their traditional IRAs to Roths in 2010, can one opt to pay his or her tax when the couple file their 2010 return and the other spread the tax bill over 2011 and 2012?

Yes. One special benefit of converting a traditional IRA to a Roth in 2010 is that this is the only year you can choose to spread the tax bill over your 2011 and 2012 returns. But you can also pay the taxes when you file your 2010 return. Because each spouse owns his or her IRA separately, one can pay the taxes on a conversion for 2010, and the other can delay paying taxes on a conversion until filing their 2011 and 2012 returns, says Mark Luscombe, principal tax analyst with CCH, a tax-publishing company.

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Spreading the tax bill on the conversion over those three years can help if you want to minimize the increase to your income each year and avoid moving into a higher tax bracket. Having a particularly high income in one year could also affect your eligibility for certain tax credits and deductions, and it could affect your Medicare Part B and Part D premiums (see Health Care Reform and Roth Conversions for more information).

Another way to spread the tax liability over three years would be to convert only one-third of the amount each year instead of doing it all in 2010. But you may want to convert more money now -- and take advantage of this year’s special tax rule -- if you think the value of your investments will increase in the future.

The downside to spreading the tax bill over several years, however, is that you could end up having to pay more in taxes if tax rates rise after 2010.

See The Complexities of Roth Conversions for more information about the issues to consider when deciding whether to convert and when to pay the tax bill.

Has the provision allowing people 70½ or older to contribute up to $100,000 from an IRA to a charity without counting it as income been extended for 2010?

Not yet. From 2006 through 2009, IRA owners who were 70½ or older could make a tax-free distribution of up to $100,000 for the year from their traditional IRAs to a charity. The rule was particularly helpful for retirees who were required to take minimum distributions from traditional IRAs that had increased significantly in value through the years -- and who would owe a big income-tax bill on their withdrawals -- but didn’t need the money. If you took advantage of the rule, you couldn’t double dip on tax benefits by also claiming a charitable deduction, but you avoided having to include the IRA distribution in your adjusted gross income.

This provision expired at the end of 2009, and Congress has not yet extended the law for 2010. We’ll keep you posted on new developments.

If the law does not get extended, you can still use money from your IRA (or any other account) to give to a charity and take a charitable deduction for the contribution if you itemize your tax deductions when you file your tax return.