From Traditional IRA to Roth IRA: New Rollover Rules

 

For years prior to 2010, only taxpayers with modified AGI of $100,000 or less generally were permitted to convert a traditional IRA into a Roth IRA. For years beginning in 2010 and after, the AGI limitation has been eliminated. Thus, regardless of AGI, all otherwise eligible taxpayers will be allowed to convert an IRA to a Roth IRA. The amount converted is includible in income as if a withdrawal had been made, but no early withdrawal penalties are assessed.

 

 Two-year income spread if conversion done in 2010. For conversions occurring in 2010, unless a taxpayer elects otherwise, none of the amount is includible in gross income in 2010, with half of the income resulting from the conversion includible in gross income in 2011 and half in 2012. However, income inclusion is accelerated if converted amounts are distributed before 2012. In that case, the amount included in income in the year of the distribution is increased by the amount distributed, and the amount included in income in 2012 (or 2011 and 2012 in the case of a distribution in 2010) is the lesser of: (1) half of the amount includible in income as a result of the conversion; and (2) the remaining portion of such amount not already included in income. The following example illustrates the application of the accelerated inclusion rule.

 

Example. Betty has a traditional IRA with a value of $100,000 consisting of deductible contributions and earnings. Betty does not have a Roth IRA. She converts the traditional IRA to a Roth IRA in 2010, and as a result of the conversion, $100,000 is includible in gross income. Unless Betty elects otherwise, $50,000 of the income resulting from the conversion is included in income in 2011 and $50,000 in 2012.

 

Later in 2010, Betty takes a $20,000 distribution, which is not a qualified distribution and all of which, under the ordering rules, is attributable to amounts includible in gross income as a result of the conversion. Under the accelerated inclusion rule, $20,000 is included in income in 2010. The amount included in income in 2011 is the lesser of (1) $50,000 (half of the income resulting from the conversion); or (2) $80,000 (the remaining income from the conversion). The amount included in income in 2012 is the lesser of (1) $50,000 (half of the income resulting from the conversion), or (2) $30,000 (the remaining income from the conversion, i.e., $100,000 - $70,000 ($20,000 included in income in 2010 and $50,000 included in income in 2011)).

 

Preparer note. While you cannot elect out of the two year spread on only a portion of the conversion income in 2010 (it’s an all or nothing election), husband and wife may each make separate elections for their individual IRA accounts. For example, a wife could elect to report her conversion income in 2010 and her husband could report his 2010 conversion income in 2011 and 2012. This may result a better spread of the income. The same taxpayer is allowed to make separate elections for separate IRA accounts.

 

If you need guidance on answering the question, “should my client convert to a Roth?” check out CPE Link’s Federal Tax Update: Part 2 webcast starting in November. You’ll get a myriad of planning ideas and even access to a simple, but sophisticated, calculator. (Note: The above information was excerpted from Vern Hoven’s manual used in the webcast.) In addition to coverage of the IRA & Individual Retirement area, you’ll get an update on Real Estate & Investment, and Estates, Trusts & Beneficiaries.

 

 

 

This blog

by Sue Anderson - Based on 30 years of experience in continuing education for accountants. Currently program director for online CPE provider, CPE Link. Formerly with the California CPA Education Foundation managing key operational areas including marketing, program development, and distance learning.

More from this blog

Bloggers crew

Steve Knowles has spent 25 years in business and practice in the UK, but he also worked in the states and the years haven't dulled his way of seeing an alternative view to everyone else, and every day is a new adventure.

42125

Joel M. Ungar, CPA is a lifelong resident of the Detroit area and a graduate of The University of Michigan. He is a principal with Silberstein Ungar, PLLC, a Top 15 auditor of SEC public reporting companies.

74249

Allan Boress, CPA, with over 25 years as a practitioner and consultant to the accounting profession. Mr. Boress is the author of 12 published books in 6 different languages, including a best-seller, The "I-Hate-Selling" Book.

47096

Larry Perry, CPA, CPA Firm Support Services, LLC, is the author of accounting and auditing manuals, author and presenter of live staff training seminars, and author of webcast and self-study CPE programs. He blogs about small audits, reviews, and compilations.

86491
Sandra Wiley, COO and Shareholder, is ranked by Accounting Today as one of the 100 Most Influential People in Accounting as a result of her prominent role as an industry expert on HR and training as well as influence as a management and planning consultant. She is also a founding member of The CPA Consultant's Alliance. Sandra is a certified Kolbe™ trainer who advises firms on building balanced teams, managing employee conflict and hiring staff.
19719

Maria Calabrese, CIR, Human Resources manager for Fazio, Mannuzza, Roche, Tankel, LaPilusa, LLC in Cranford, New Jersey, Maria's topics revolve around the world of: Mentoring, Performance management, and The "Y Generation," a.k.a. "The whY generation".

54178

William Brighenti is a CPA, Certified QuickBooks ProAdvisor, and Certified [Business] Valuation Analyst, operating an accounting, tax, and QuickBooks consulting firm in Hartford, Connecticut, Accountants CPA Hartford.

78763

Ken Garen, CPA, is the co-founder and President of Universal Business Computing Company (www.ubcc.com), a software development firm of high-volume, high-productivity accounting and payroll technology.

24395

Eva Rosenberg, MBA, EA, is the publisher of TaxMama.com, and author of the weekly syndicated Ask TaxMama column. She provides answers to tax questions from taxpayers and tax professionals worldwide.

62537

Amy Vetter, CPA, CITP is the CPA Programs Leader for Intacct Corporation responsible for leading the CPA/BPO Partners nationally.

33755
Brian Strahle is the owner of LEVERAGE SALT, LLC where he provides state and local tax technical services to accounting firms, law firms and tax research organizations across the United States. He also writes a weekly column in Tax Analysts State tax Notes entitled, "The SALT Effect." For more info, visit his website: www.leveragestateandlocaltax.com
100383
Scott H. Cytron, ABC, is president of Cytron and Company, known for helping companies and organizations improve their bottom line through a hybrid of strategic public relations, communications, marketing programs and top-notch client service. An accredited consultant, Scott works with companies, organizations and individuals in professional services (accounting, finance, medical, legal, engineering), high-tech and B2B/B2C product/service sales.
24952

Rita Keller is a nationally known CPA firm management consultant, speaker, author, mentor and blogger. She has over 30 years hands-on experience in CPA firm management, marketing, technology and administrative operations.

51023
Stacy Kildal is the mom of two fantastic kids, an Advanced Certified QuickBooks ProAdvisor, Certified Enterprise Solutions ProAdvisor, Sleeter Group Certified Consultant, a nationally recognized member of the Intuit Trainer and Writer Network, and co-host of RadioFree QuickBooks.
26750
Michael Alter's blog specializes in providing practical advice to those who seek greater profitability and practice management tactics that enhance deeper client relationships.
31068

Sally Glick, CMO, Principal, Marketer of the Year in 2003 and AAM Hall of Famer in 2007, leads a lively discussion of the constantly expanding roles of marketing and the professional marketers that drive this initiative in accounting firms of all sizes.

97638

The IMA Young Professionals Blog features the insights of IMA’s Young Professionals Committee. Committee members share advice and experiences on careers, continuing education, work/life balance, and other issues affecting young accounting and finance professionals.

32252

FEI Financial Reporting Blog provides highlights from SEC, PCAOB, FASB, IASB, and other regulatory news, including reporting under Sarbanes-Oxley Sect 404. It is written by Edith Orenstein, Director of Technical Policy Analysis at FEI.

108489

Sue Anderson has 30 years of experience in continuing education for accountants. Currently she is the program director for online CPE provider CPE Link.

59175

Jim Fahey is COO of Apple Growth Partners, a regional CPA firm in Ohio. His focus is on the effective and efficient use of technology within the firm by all team members.

38388
Caleb Newquist is the Editor-in-Chief of Sift Media US, overseeing content for both AccountingWEB and Going Concern.
65223

Leita Hart-Fanta, CPA, CGFM, and CGAP is the author of "The Yellow Book Interpreted" and owner of Yellowbook-CPE.com a website devoted to training for governmental auditors.

90916

AccountingWEB is more than just a U.S. team of journalists and financial and technology experts - we have an international side, too! Members of our British team who publish AccountingWEB.co.uk share their ideas, insights, and perspectives from across the pond.

52045