Friday, November 18, 2011

Tax Treatment of a Distribution From a 2010 Conversion

Assume you did a Roth conversion in 2010 in the amount of $100,000. This is your one and only Roth IRA. In 2011 you take a distribution of $10,000 from the Roth IRA. Under the Roth ordering rules, it will be deemed that the $10,000 was distributed from the $100,000 2010 conversion. What is the tax treatment of that distribution?

Convert in 2010 and Included Total Amount in Income in 2010
Under Age 59 ½ - no tax on the $10,000 distribution but there will be a 10% penalty due on the 2011 return
Over Age 59 ½ - there is no tax or penalty on the distribution

Convert in 2010 and Split the Income Over 2011 and 2012
$50,000 is slated to be included in 2011 and $50,000 in 2012 income
2011 Tax Return - the amount included in income is now increased by the $10,000 distribution. $60,000 will now be included in 2011 income. If under age 59 ½, the 10% early distribution penalty must also be paid on the $10,000 distribution.
2012 Tax Return - the amount of the 2011 distribution is subtracted from the $50,000 that was slated to be included in income. $40,000 will now be included in 2012 income.

The total conversion amount of $100,000 has now been taxed - $60,000 in 2011 and $40,000 in 2012.

This is a simplified example since this is the only Roth IRA involved. If an individual has other Roth IRAs that were in existence before the 2010 conversion, the example becomes more complicated. You should check with a knowledgeable advisor on the tax treatment of a distribution. You can find a listing of Ed Slott trained advisors on our website, 

By IRA Technical Consultant Beverly DeVeny and Jared Trexler
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