Illinois tax question

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Angelus359
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Illinois tax question

Post by Angelus359 » Sun Apr 06, 2014 7:49 pm

Illinois has a 5% flat tax

If I contributed to traditional IRA, and then converted to Roth IRA, would it avoid the tax?
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jared
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Re: Illinois tax question

Post by jared » Sun Apr 06, 2014 7:57 pm

Angelus359 wrote:Illinois has a 5% flat tax

If I contributed to traditional IRA, and then converted to Roth IRA, would it avoid the tax?
Yes.

wx27
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Re: Illinois tax question

Post by wx27 » Sun Apr 06, 2014 9:17 pm

Angelus359 wrote:Illinois has a 5% flat tax

If I contributed to traditional IRA, and then converted to Roth IRA, would it avoid the tax?
As long as you are qualified to take a deduction on the traditional IRA contribution.

http://thefinancebuff.com/deduct-and-co ... tions.html

Nukeboilermaker
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Re: Illinois tax question

Post by Nukeboilermaker » Sun Apr 06, 2014 9:27 pm

Illinois is a state where any eligible tIRA withdrawals are tax exempt, a rollover falls in that category as an eligible withdrawal. Not every state has this perk (judging by your verbiage you appear to understand that fed taxes are still due).

Cheers,
Nuke

P.S. Bobs not my name is a great campaigner on this specific perk.

Angelus359
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Re: Illinois tax question

Post by Angelus359 » Sun Apr 06, 2014 10:32 pm

Can someone explain to me how the process works?

Assume only dealing with Vanguard.

As I understand it, doing this *closes* the traditional IRA account, which is fine, because my traditional IRA value is 0 at the moment.

If I add money to my traditional IRA, and I already have a Roth IRA, then do a roll-over, does it create a second Roth IRA, or does it just create a bigger Roth IRA?

Is there something complex I have to do, or can I just call up vanguard on the phone and ask them to convert it?

Does the roll over money count as a "contribution" for the sake of money I can take out if absolutely necessary? (I'd like to avoid it)

Can this be done in the same year as making the traditional IRA? Fill the 5500, then like, the next day convert it?
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wx27
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Re: Illinois tax question

Post by wx27 » Sun Apr 06, 2014 10:40 pm

Angelus359 wrote:Can someone explain to me how the process works?

Assume only dealing with Vanguard.

As I understand it, doing this *closes* the traditional IRA account, which is fine, because my traditional IRA value is 0 at the moment.

If I add money to my traditional IRA, and I already have a Roth IRA, then do a roll-over, does it create a second Roth IRA, or does it just create a bigger Roth IRA?

Is there something complex I have to do, or can I just call up vanguard on the phone and ask them to convert it?

Does the roll over money count as a "contribution" for the sake of money I can take out if absolutely necessary? (I'd like to avoid it)

Can this be done in the same year as making the traditional IRA? Fill the 5500, then like, the next day convert it?
Not complex and can be done online, if you wish.
Contribute to Traditional IRA, then convert/exchange into the Roth IRA. If you have an existing Roth IRA at Vanguard, it will just convert into there, no second Roth created.

If the converted amount contains any gains since the original contribution, that part likely cannot be taken out early, but the original contribution amount should be available if absolutely necessary.

This can be done the next day.

Angelus359
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Re: Illinois tax question

Post by Angelus359 » Sun Apr 06, 2014 10:55 pm

If I max my traditional IRA out, by investing weekly, every Monday, over the course of the year, and then late December, convert it to Roth IRA, would it be better, than just investing in my Roth?

I'd save 5% on state taxes, but lose out, by having taxes on the earnings.

I don't have enough money right now, without digging into my emergency fund too deep, to do it all at once.

Right now, I make 34 thousand per year, and am single, but not head of household. That makes my current tax rate 15%, I believe.

Hmm... Maybe I'll do some math.

Well, the biggest market jump in recent history was 33% in a year. (.15*.33)*100 is 5%. I guess it would be worth the risk. Any opinions on this?


Actually, if I add 5500 to my traditional IRA, and it **loses** money, and I convert to Roth, wouldn't that technically lower my AGI for the year, compared to only doing Roth?
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tfb
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Re: Illinois tax question

Post by tfb » Sun Apr 06, 2014 11:11 pm

Angelus359 wrote:Actually, if I add 5500 to my traditional IRA, and it **loses** money, and I convert to Roth, wouldn't that technically lower my AGI for the year, compared to only doing Roth?
It does not.
Harry Sit, taking a break from the forums.

Angelus359
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Re: Illinois tax question

Post by Angelus359 » Sun Apr 06, 2014 11:18 pm

tfb wrote:
Angelus359 wrote:Actually, if I add 5500 to my traditional IRA, and it **loses** money, and I convert to Roth, wouldn't that technically lower my AGI for the year, compared to only doing Roth?
It does not.
I'm confused

Assume base AGI of 35,500

Deposit 5500 into traditional IRA
AGI drops to 30,000
Market crashes before I convert.
5500 becomes 4000
Convert 4000 to Roth IRA
AGI becomes 34,000.

Is this against the rules?
What am I not understanding?
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wx27
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Re: Illinois tax question

Post by wx27 » Mon Apr 07, 2014 1:05 am

Angelus359 wrote:
tfb wrote:
Angelus359 wrote:Actually, if I add 5500 to my traditional IRA, and it **loses** money, and I convert to Roth, wouldn't that technically lower my AGI for the year, compared to only doing Roth?
It does not.
I'm confused

Assume base AGI of 35,500

Deposit 5500 into traditional IRA
AGI drops to 30,000
Market crashes before I convert.
5500 becomes 4000
Convert 4000 to Roth IRA
AGI becomes 34,000.

Is this against the rules?
What am I not understanding?
For your deductible IRA scenario, it looks correct to me. The flipside is if the market appreciates prior to conversion, AGI goes up and you pay more federal taxes on the conversion than if you contributed directly to the Roth.
There's no 'free lunch' with respect to federal taxes. But the main point of this thread was the ability to do the contribute/deduct/convert to take advantage of Illinois's tax treatment of IRAs.

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tfb
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Re: Illinois tax question

Post by tfb » Mon Apr 07, 2014 1:09 am

Angelus359 wrote:I'm confused

Assume base AGI of 35,500

Deposit 5500 into traditional IRA
AGI drops to 30,000
Market crashes before I convert.
5500 becomes 4000
Convert 4000 to Roth IRA
AGI becomes 34,000.

Is this against the rules?
What am I not understanding?
Sorry, I didn't know you were going to wait for a crash. Remember you aren't limited to converting once a year.
Harry Sit, taking a break from the forums.

Angelus359
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Re: Illinois tax question

Post by Angelus359 » Mon Apr 07, 2014 9:24 am

You can convert more often? Oh. I didn't know that.

I was suggesting this, based on the assumption of converting once per year.

Converting more often is probably better then.

Can you do a partial conversion? For example, if I got a raise, and I came closer to the 25% taxable mark, not convert the whole thing, to use some of it to stay under the 25% mark?
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wx27
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Re: Illinois tax question

Post by wx27 » Mon Apr 07, 2014 9:51 am

Angelus359 wrote:You can convert more often? Oh. I didn't know that.

I was suggesting this, based on the assumption of converting once per year.

Converting more often is probably better then.

Can you do a partial conversion? For example, if I got a raise, and I came closer to the 25% taxable mark, not convert the whole thing, to use some of it to stay under the 25% mark?
Yes, you can do a partial conversion. It's not an all-or-nothing type of deal.
There's no IRS limit to the number of conversions you can do per year.

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Phineas J. Whoopee
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Re: Illinois tax question

Post by Phineas J. Whoopee » Mon Apr 07, 2014 10:05 am

To help clarify:

You can make as many conversions of Traditional IRAs to Roth IRAs as you like. There's another related concept we've been discussing, which is:

You can't do more than one rollover per year, but you can do as many trustee-to-trustee transfers as you like, although the trustees may well charge fees for it.

The distinction, which is a technical one but given the outcome of a recent tax court case may be relevant to some of us, is in a rollover the original trustee writes a check to you, and within 60 days you write a check to the new trustee. In the mean time you have the use of the money. In a transfer the trustees move the funds between themselves and they never come directly into your hands.

An additional aspect we've not been discussing, because it was always true and doesn't relate to the recent court case, is that in a rollover the original trustee is legally required to withhold 20% of the total for federal income taxes, but in order to have the rollover be a non-taxable event the check you write to the new trustee must be 100% of the original total. You have to finance the other 20% yourself until such time as you can get it back (by filing your federal return, or reducing your quarterly estimated payments, or reducing the withholding from a job, or whatever).

To summarize: You can do as many conversions and as many trustee-to-trustee transfers as you like. What is now more restricted than in the past is the specific procedure called a rollover, which involves your taking possession of the funds while they're between trustees, and your having to finance a 20% withholding until you can recover it.

PJW

Angelus359
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Re: Illinois tax question

Post by Angelus359 » Mon Apr 07, 2014 3:28 pm

If I convert tIRA to rIRA, does it sell, and just transfer the money, or does it actually just move the shares?

As I am only doing with tIRA, and rIRA, and only vanguard, it appears the rollover is not something relevant to my situation. I have a government IMRF pension, not a 401k, from work. IMRF is 96% funded.

So this is a plan of action.

Invest in tIRA mutual fund, automatically, every Monday enough to max out IRA contributions.

Once a month or whenever I feel like it, convert whatever I added to my tIRA to rIRA (leave a few bucks to keep the fund open), without closing the tIRA account.

That should save 275$ in state taxes per year, with the possibility of more, OR less taxes on federal, but unlikely so much more on federal, that it would surpass the state.

If I get a raise, to bump me to 25%, then I just convert less.

Seems simple enough.

Thank you guys for being so helpful!
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Re: Illinois tax question

Post by jmndu99 » Mon Apr 07, 2014 4:32 pm

Angelus359 wrote:Illinois has a 5% flat tax

If I contributed to traditional IRA, and then converted to Roth IRA, would it avoid the tax?
By the way, our 5% income tax was supposed to be temporary

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Re: Illinois tax question

Post by placeholder » Mon Apr 07, 2014 4:33 pm

Roth conversions can be done in-kind although you want to make sure that there is no tax withholding.

Angelus359
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Re: Illinois tax question

Post by Angelus359 » Mon Apr 07, 2014 4:44 pm

jmndu99 wrote:
Angelus359 wrote:Illinois has a 5% flat tax

If I contributed to traditional IRA, and then converted to Roth IRA, would it avoid the tax?
By the way, our 5% income tax was supposed to be temporary
Just like our toll roads.
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wx27
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Re: Illinois tax question

Post by wx27 » Mon Apr 07, 2014 4:50 pm

Angelus359 wrote:If I convert tIRA to rIRA, does it sell, and just transfer the money, or does it actually just move the shares?
I've done this at Vanguard before and it just shows a sell in the tIRA and a buy in the rIRA with a money transfer, and done same day so share quantity is the same. Their systems probably net the exchange order so the actual fund doesn't do anything and this is merely a bookkeeping exercise.

Angelus359
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Re: Illinois tax question

Post by Angelus359 » Mon Apr 07, 2014 6:46 pm

wx27 wrote:
Angelus359 wrote:If I convert tIRA to rIRA, does it sell, and just transfer the money, or does it actually just move the shares?
I've done this at Vanguard before and it just shows a sell in the tIRA and a buy in the rIRA with a money transfer, and done same day so share quantity is the same. Their systems probably net the exchange order so the actual fund doesn't do anything and this is merely a bookkeeping exercise.
Thank you for your information.
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