Roth IRA conversion and long term capital loss carryover

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ieee488
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Roth IRA conversion and long term capital loss carryover

Post by ieee488 »

I have about $20K in capital loss from 2009 tax year.

Would it make sense to do a Roth conversion this year?

With this capital loss carryover, a friend was suggesting that I should consider converting some of my Traditional IRA to Roth IRA.

I probably should have done it last year...

I should also mention that I was unemployed for 4 months in 2010.

Make sense?
DSInvestor
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Post by DSInvestor »

If you can convert to Roth with little or no tax cost, go for it. The 20K capital loss carryover may reduce your ordinary income by 3K assuming they are not used up to offset realized capital gains. The 3K income reduction provided by capital loss carryover will help reduce the tax cost of your conversions but the real issue is the actual tax cost of the conversion.

Turbotax has updated their taxcaster tax calculator for 2010:
http://turbotax.intuit.com/tax-tools/

With the above calculator, you can estimate your tax liability without Roth conversion against the tax liability with Roth conversion. If you find that you can convert with little or no tax cost, do the conversion.

The 3K income reduction can be entered in section called "Other Income" as -3000 Long term capital gain. Your Roth conversion amount could be entered as IRA distribution.

If you make contributions to Traditional 401k, reduce your wage income by the amount of your Trad401k contributions.
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grabiner
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Re: Roth IRA conversion and long term capital loss carryover

Post by grabiner »

ieee488 wrote:I have about $20K in capital loss from 2009 tax year.

Would it make sense to do a Roth conversion this year?

With this capital loss carryover, a friend was suggesting that I should consider converting some of my Traditional IRA to Roth IRA.

I probably should have done it last year...

I should also mention that I was unemployed for 4 months in 2010.
The unemployment, not the carryover, is a good reason to consider converting now. You are probably in a lower tax bracket this year because of your lower income (and because you have $3K of capital losses to offset ordinary income). If you are temporarily in the 15% bracket but are in a 25% bracket in most years and expect to retire in a 25% bracket, converting up to the top of the 15% bracket is an unusually good deal because you will pay 15% tax now instead of 25% tax later. If you can pay the tax with taxable money, it's a good idea to convert up to the top of your expected retirement tax bracket.

For more details, see Roth IRA conversion on the Wiki.
Wiki David Grabiner
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ieee488
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Post by ieee488 »

Based on my pay stubs up to Oct 31 and extrapolating the last months, it looks as if even with the unemployment, I am still in the 25% marginal tax bracket using the Turbo Tax calculator.

Darn!
scotts
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Post by scotts »

For planning purposes remember that if you received Unemployment Compensation while unemployed it is taxable income. In 2009 the first $2400 was excluded but think that is one of the many temporary changes that may not be continued.
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ieee488
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Post by ieee488 »

Yes, I did include the entire unemployment in the calculations.

Looking back, I should have done a partial conversion in 2009. I was also unemployed 4 months there and also had about 6 weeks of no income since I took an unpaid leave of absence FMLA.
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grabiner
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Post by grabiner »

ieee488 wrote:Based on my pay stubs up to Oct 31 and extrapolating the last months, it looks as if even with the unemployment, I am still in the 25% marginal tax bracket using the Turbo Tax calculator.
Even so, if you expect to retire in the 25% bracket and can pay for your conversion with taxable money, it's still a good idea to convert up to the top of the 25% bracket every year, and you'll have more room this year.
Wiki David Grabiner
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ieee488
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Post by ieee488 »

grabiner wrote:
ieee488 wrote:Based on my pay stubs up to Oct 31 and extrapolating the last months, it looks as if even with the unemployment, I am still in the 25% marginal tax bracket using the Turbo Tax calculator.
Even so, if you expect to retire in the 25% bracket and can pay for your conversion with taxable money, it's still a good idea to convert up to the top of the 25% bracket every year, and you'll have more room this year.
I may have an engineering degree, but I am not good at this sort of thing.

Since the conversion has to be done by Dec. 31, 2010, and I won't get all of my 1099s until early 2011, how does one go about knowing how much to convert?
cliffedelgado
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Post by cliffedelgado »

ieee488 wrote:
I may have an engineering degree, but I am not good at this sort of thing.

Since the conversion has to be done by Dec. 31, 2010, and I won't get all of my 1099s until early 2011, how does one go about knowing how much to convert?
The same technique of estimating/extrapolating your remaining months of income can be applied here as well. Estimate your 1099s. Estimate your deductions/exemptions etc. You had to do that for the turbotax tax calculator as well right ?
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ieee488
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Post by ieee488 »

Thanks.

The hardest to guesstimate may be the 1099s from my mutual funds. Not sure if any of them do a distribution in December.
kaneohe
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Post by kaneohe »

Find out from the broker how long it takes to do the conversion....mine at Schwab took just a few days last yr.
That gives you a deadline to shoot for. In the coming wks you should be able to get better estimates (call them or sometimes their website will have info)from the fund companies about upcoming distributions which you can use to get better calculation......be sure you are clear if they are giving you DEC estimates only or total for the yr.......usually it's DEC only so you'll have to add in earlier distributions. bottom line........you still have time to get the info and it will get better as time goes by..........don't cut it too close w/ broker....they get busy that time of yr.
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tfb
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Post by tfb »

Even if you over- or under-estimated by a few hundred dollars, it's still not a big deal. Only the extra amount in the next bracket is taxed at the next bracket.
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earlyout
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Post by earlyout »

A common practice is to make a conservative estimate of your taxes without the conversion and then convert more than enough fill the desired tax bracket. When you complete your taxes next spring, you can recharacterize the excess conversion back to the traditional IRA. The recharacterization process will be simpler if you create a new Roth account to make the conversion.

EO
kaneohe
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Post by kaneohe »

earlyout wrote:A common practice is to make a conservative estimate of your taxes without the conversion and then convert more than enough fill the desired tax bracket. When you complete your taxes next spring, you can recharacterize the excess conversion back to the traditional IRA. The recharacterization process will be simpler if you create a new Roth account to make the conversion.

EO
when you do it this way, do your 2010 taxes end up the same even tho you did this final transaction in 2011 ?.....
ex:
1) A converts 10K in 2010
2) B converts 11K in 2010, recharacterizes 1K in 2011
Maybe it's the "equivalent" of making TIRA contribution for 2010 in Mar 2011 in that you still get credit for it in 2010.
earlyout
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Post by earlyout »

kaneohe wrote:
earlyout wrote:A common practice is to make a conservative estimate of your taxes without the conversion and then convert more than enough fill the desired tax bracket. When you complete your taxes next spring, you can recharacterize the excess conversion back to the traditional IRA. The recharacterization process will be simpler if you create a new Roth account to make the conversion.

EO
when you do it this way, do your 2010 taxes end up the same even tho you did this final transaction in 2011 ?.....
ex:
1) A converts 10K in 2010
2) B converts 11K in 2010, recharacterizes 1K in 2011
Maybe it's the "equivalent" of making TIRA contribution for 2010 in Mar 2011 in that you still get credit for it in 2010.
In either case, the taxable income for 2010 from the Roth conversion would be $10,000. Although there are some special cases, usually the recharacterization is done prior to filing the tax return. The Fairmark forum has info.

EO

edited to add reference to Fairmark
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