With a traditional individual retirement account, you’ve probably been able to sock away your money tax free, unless you take part in a qualified employer plan, like a 401(k). You also haven’t had to pay income tax on the earnings stemming from your IRA. For traditional IRAs, taxes kick in when you pull the money out of the account – usually after you retire and are in a lower tax bracket than you are today.
On the flip side, if you have a Roth IRA, contributions are not tax deductible, but when you make qualified withdrawals, they are tax free.
What does that mean for me now?
Because you most likely received a tax break with your traditional IRA, you now have to pony up the cash to pay taxes on those initial contributions, along with any earnings
you’ve chalked up along the way. That means you need to tell the IRS that you converted your traditional IRA to a Roth IRA.
When do I need to report the conversion on my tax return?
The IRS gives you two options for reporting the conversion. You can report it all on your 2010 tax return, or you can report half in 2011 and half in 2012.
If you are in for a big raise, or if your income took a beating in 2010, you may face a higher tax rate in 2011 and 2012. In those cases it can make sense to report the entire conversion when you file your 2010 tax return.
However, if you don’t expect any big changes in your income in the next couple of years, it can make more sense to report it in 2011 and 2012, and split the amount you owe evenly over those two years. If you opt for this choice, there’s no need to report anything on your 2010 income tax return.
About the Writer
Susan Ladika has been a writer and editor for 25 years. Her freelance work has covered everything from business to travel to science to international issues, and have appeared in such publications as Science, Town & Country, HR Magazine, Developer, The Wall Street Journal-Europe, The San Francisco Chronicle, and many others. She has also done extensive editing as a newspaper and wire service editor holding positions such as the Tampa Tribune Bureau Chief.
Tax Questions?
Related Articles
->Missed the Deadline to Contribute to Your 401K & Exploring an IRA
->Whether You’re Rich or Poor, 2010 is Important for IRA Tax Planning
->When a Roth IRA is a Better Option Than a 529 Plan
->Getting Help with Roth IRA Tax Questions
->Why A Roth IRA Makes Sense For a Teenager
->Will a Roth IRA Conversion Trigger Self Employment Tax?
