Traditional IRA to Roth IRA Conversion tax question

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Traditional IRA to Roth IRA Conversion tax question

Postby optimus » Thu May 09, 2013 9:50 pm

I want to roll my traditional IRA to my Roth IRA to consolidate my accounts. How do I calculate how much taxes I owe on the conversion?
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Re: Traditional IRA to Roth IRA Conversion tax question

Postby bertilak » Thu May 09, 2013 10:01 pm

The amount is treated as straight income.

This means it is usually not a good idea to do it all at once as you will end up paying the taxes in a higher bracket.

I look at my last year's taxes to see how much headroom I have until the next bracket and only convert that much. An estimate is fine. No big deal if you go over or under a bit. This past year I bumped up my withholding to approximate the extra tax I pay for the conversion. Came out almost even!

That said, there are some thresholds that can trigger how Social Security (and perhaps other income?) is taxed but I am not familiar with the details. I think I am safely below any of that.
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Re: Traditional IRA to Roth IRA Conversion tax question

Postby BL » Thu May 09, 2013 10:25 pm

Find a Taxcaster program online or 2012 TurboTax or similar free or cheap program online and put in the numbers.
Your rate starts at your highest rate and then it depends on whether you get into the next bracket. Unless you are in a low bracket now, you may not want to do it while you are working. Higher income sometimes eliminates certain credits, too.
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Re: Traditional IRA to Roth IRA Conversion tax question

Postby rfburns » Thu May 09, 2013 10:32 pm

bertilak wrote:The amount is treated as straight income.

Agreed. It all depends on your tax bracket. It could be from free to getting bumped up into the next bracket.
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Re: Traditional IRA to Roth IRA Conversion tax question

Postby optimus » Thu May 09, 2013 10:47 pm

Hi all,

I will not hit the next bracket. My salary is around $70K and my IRA account is around $5K.

I'm going to put my numbers into turbo tax to see how much I will be paying.
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Re: Traditional IRA to Roth IRA Conversion tax question

Postby grabiner » Thu May 09, 2013 10:57 pm

optimus wrote:I will not hit the next bracket. My salary is around $70K and my IRA account is around $5K.


Another reason to check with tax software is to see how the change interacts with other tax provisions. For example, if you are single, increasing your income from $70,000 to $75,000 will reduce the amount of student loan interest you can deduct, and will reduce the Lifetime Learning Credit; thus you might wind up paying more than 25% of the $5000 in tax if you claim either of those benefits.

Check your state taxes as well; not all states tax IRA conversions, and states which do tax them may have different rules. (In NJ, for example, all IRAs are considered non-deductible, so if you contributed $5000 to an IRA last year and convert it for $5400 this year, you owe tax only on $400 because you didn't deduct the $5000 when you made the contribution.)
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Re: Traditional IRA to Roth IRA Conversion tax question

Postby optimus » Thu May 09, 2013 11:26 pm

Very helpful thanks grabiner!

If I do a conversion, it doesn't count towards my 2013 IRA contributions, right? I already contributed $5500 to my Roth for 2013.
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Re: Traditional IRA to Roth IRA Conversion tax question

Postby grabiner » Thu May 09, 2013 11:41 pm

optimus wrote:If I do a conversion, it doesn't count towards my 2013 IRA contributions, right? I already contributed $5500 to my Roth for 2013.


This is correct.
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Re: Traditional IRA to Roth IRA Conversion tax question

Postby Peter Foley » Thu May 09, 2013 11:52 pm

Are you single or married? Do note that a conversion adds to your taxable income and that is the number you should be aware of. If you have $70,000 in gross income your taxable income could be much less. Subtract out any 401k contribution, subtract your exemption(s) and your standard deduction (or itemized deductions). Single tax bracket for 2013: 15% on taxable income over $8,925 to $36,250. [Example: 70,000 less 17,500 in 401k = 52,500. 52,500 - 15,000 in itemized deductions = 37,500. 37,500 - 3900 exemption = 33,600. Bingo - you are in the 15% bracket. Not too tough to do if you own a house and are in a state with higher than average income taxes.]

At first glance, however, you appear to be in the middle of the 25% bracket if you are single. That means you will pay about $1250 in additional taxes for Federal and xxx? for state.
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