Roth Conversion Income Deferral Over Two Years No Longer Permitted

Posted by on Monday, July 16th, 2012 in Blog

A special provision of the tax law allowed individuals who made Roth conversions in 2010 to split that conversion income equally over 2011 and 2012. That was a great tax deal.

However, as some individuals are discovering, this seemingly favorable provision is causing tax problems for clients whose financial situations have taken a turn for the worse. The sudden loss of employment or general economic downturn has caused some clients to deplete their assets faster than expected.  This may leave them unable to pay the tax owed on the conversion, as originally planned.

During years in which the “normal” conversion rules apply, this is not a problem, thanks to the ability to re-characterize. Roth conversions can be re-characterized, or changed, up until Oct. 15 of the year following the calendar year of conversion. If a full re-characterization is made, the full tax burden created by the conversion is nullified.

But the same is not true for 2010 Roth conversions that took advantage of the two-year deal. The deadline to re-characterize a 2010 conversion was Oct. 15, 2011.

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