Anyone looking to convert should really seek the help of a financial professional or be comfortable with the consequences if they do make an error.

What if I want to put income in all 3 years – 2010, 2011, 2012? Can I do that?

If so, would it have to be 33/33/33? Or is the only requirement that the 2011 and 2012 portions be the same, e.g. 30/35/35?

Thanks!

B

Those considering conversion should also take into account that 50% of your Roth distribution is taxed independently in each of those years. So if you get a bump in earnings that puts you in a higher tax bracket, it’s not advantageous to spread out the tax payment.

For instance, say you have a $100,000 taxable distribution, and you’re current tax rate is 25%. You may think this means you owe $25,000, of which you can pay $12,500 in 2011 and $12,500 in 2012.

But, each 50% is taxed at your personal income tax rate in the tax year in which you pay the tax.

So, if you get a bonus or pay raise which puts you in the 35% tax bracket for year 2012, you end up owing $17,500 in that year instead of $12,500.

So as you say… Proceed with caution! Make sure you think everything through before committing to a 2010 Roth IRA conversion.

Longer answer: they should really run some numbers and make guesses about what the future brings. At that income level, it seems like tax rates have to really go up for the conversion to be wildly successful (assuming income tax on distributions is the only thing that matters). However, it always makes sense to do some “what-if” work.

Regarding the small contribution limits, they may be able to sock away a little more with Roth 401(k) contributions. If they make that much, let’s assume they have some influence in the company and can lobby to get the Roth feature added. Self employed individuals can do a Solo 401(k) with the Roth feature.

I’d assume these people have substantial retirement savings and will be in a high tax bracket at retirement no matter what they do. They might decide that converting makes sense even if tax rates don’t go up because it provides diversification and peace of mind (or “insurance” – that they can afford – against income tax rates skyrocketing). Or maybe not.

An estate tax problem is a distinct possibility for those high earners. Converting, taking the hit at a rate that may be lower than estate tax rates (but who really knows what’ll happen with the estate tax?), getting money out of the estate, and helping (presumably wealthy) heirs may make sense. Again, it depends what’s going on with each individual.

Maybe they run a business that has substantial operating losses (or they will soon) – it may be possible to time a conversion with those losses – not just in 2010.

Ultimately, we all have to decide what we think is likely to happen, and what we’re willing to risk. Then we have to do something or nothing, and live with the outcome. For people who make more than 370k, it’s well worth their time to fiddle with the numbers or pay smart people to do it for them.

Regarding tax rates immediately after 2010: they may choose NOT to spread out the payments over the next 2 years, or they might be able to convert and then “un-convert” in early 2011 if things look bad. Of course, anybody thinking of this should work with an accountant to make sure they follow all the rules and do things the easy way.

The contribution amounts before seemed so pathetically small, but at the same time the 35% bracket seems like it will go to 39.6% next year.