In Which Tax Year(s) Should You Include Your 2010 Roth IRA Conversion Income? – Part 2

In Which Tax Year(s) Should You Include Your 2010 Roth IRA Conversion Income? – Part 2

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Part 1 of this blog post discussed the unique situation with 2010 Roth IRA conversions regarding the timing of the recognition of income. Specifically, if you do nothing, 50% of the income from your conversion will be included on your 2011 tax return and the other 50% will be included in 2012. It stated that if you want to report your conversion income in 2010, you will need to make an election to do so.

Part 1 also discussed the fact that, in the absence of Congressional action, our current relatively low tax brackets will be replaced by the pre-2001 tax brackets which are at least 3% higher for most levels of income, and as much as 5% higher for the lowest tax bracket.

How do you decide which tax year(s) you should include your 2010 Roth IRA conversion income? This is indeed a classic “chicken or the egg” dilemma since when you’re deciding on the year(s) of inclusion, you also need to decide how much of your traditional IRA to convert to a Roth IRA in 2010 since these decisions are inter-related.

The starting point in this decision-making process is a comparison of your projected 2010, 2011, and 2012 pre-Roth IRA conversion tax liability to your projected 2010, 2011, and 2012 post-Roth IRA conversion tax liability using the two potential income recognition scenarios: (a) Default, i.e., 50% in 2011 and 50% in 2012, and (b) Election, i.e., 100% in 2010.

Assuming that our current tax brackets will be replaced by the pre-2001 tax brackets in 2011,  here are the 2010 and projected 2011 federal income tax tables for different levels of taxable income for married filing joint tax status:

Taxable Income

2010 Tax Rate

2011 Tax Rate*

$0 – $16,750

10%

15%

$16,751 – $68,000

15%

15%

$68,001 – $70,040

25%

15%

$70,041 – $137,300

25%

28%

$137,301 – $141,419

28%

28%

$141,420 – $209,250

28%

31%

$209,251 – $215,528

33%

31%

$215,529 – $373,650

33%

36%

$373,651 – $384,860

35%

36%

$384,861 or more

35%

39.6%

*Projected rates per fivecentnickel.com assuming 3% inflation rate vs. 2010

In order to decide which income recognition scenario is best for you, you need to calculate and compare your projected 2010, 2011, and 2012 tax liability under each scenario. Part 3 will provide you with an example comparing the use of the 2010 Roth IRA conversion income deferral default to the optional 2010 inclusion.

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