Question about Roth conversion

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neuro84
Posts: 66
Joined: Thu Jul 24, 2014 11:25 am

Question about Roth conversion

Post by neuro84 » Tue Sep 01, 2015 4:26 pm

Hi Bogleheads, I'm a resident (31yo) with a grad student wife (31yo), married filing joint. She had an old 403(b) which I rolled over into a traditional IRA with Vanguard this year. After the recent downturn, it has about $12,600 in it right now. I'm assuming we'll be higher than the 15% bracket for the rest of our lives so I would like to convert her TIRA to a Roth now.

In 2015, my income as a medical resident will be about $60k (including some moonlighting pay). Wife will make about $4000 from her grad student stipend, which I believe is taxable income. This puts us at $64k. If we convert the TIRA to a Roth, my understanding is it will add the full $12,600 to our taxable income, putting us around $76k - just over the line for the 25% bracket (cutoff is 74,900).

Questions:

1. How would we be taxed on the conversion? Is the $12,600 taxed at a capital gains rate (which is zero for LTCG in the 15% bracket), or at our marginal income tax bracket?

2. If it pushes us over the line into the 25% bracket, should I split it up over this year and the next? Logistically, my preference is to do it all at once and get it over with, but if it saves us a significant amount in taxes, I'll do half and half.

Thanks in advance for any advice you have to give.

DSInvestor
Posts: 11035
Joined: Sat Oct 04, 2008 11:42 am

Re: Question about Roth conversion

Post by DSInvestor » Tue Sep 01, 2015 4:37 pm

Roth conversion income is taxed as ordinary income at marginal rates (fed and state). If your conversion income pushes you into the 25% tax bracket only the amount that falls in the 25% bracket is taxed at the 25% tax rate. The amount that falls in 15% bracket is taxed at 15%. This is for Federal tax.
Wiki

Topic Author
neuro84
Posts: 66
Joined: Thu Jul 24, 2014 11:25 am

Re: Question about Roth conversion

Post by neuro84 » Tue Sep 01, 2015 4:43 pm

Thank you very much. Shortly after I posted I realized this was probably something covered by the wiki, and it is:

http://www.bogleheads.org/wiki/Roth_IRA_conversion

Sorry for asking a redundant question! But thanks for the help.

retiredjg
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Joined: Thu Jan 10, 2008 12:56 pm

Re: Question about Roth conversion

Post by retiredjg » Tue Sep 01, 2015 4:51 pm

neuro84 wrote:If we convert the TIRA to a Roth, my understanding is it will add the full $12,600 to our taxable income, putting us around $76k - just over the line for the 25% bracket (cutoff is 74,900).
Remember that all of your gross income is not taxable income. Some is taken off the top for personal exemptions and for deductions. I think you can convert the whole thing without going into the next bracket.

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archbish99
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Re: Question about Roth conversion

Post by archbish99 » Tue Sep 01, 2015 5:01 pm

You can also recharacterize part of the conversion back to Traditional any time until the tax filing deadline. Convert the whole thing, do your taxes next year, and if the conversion crosses into the 25% bracket, call and recharacterize however much crossed over. Then wait the required length of time, and convert the leftover again for 2016.
I'm not a financial advisor, I just play one on the Internet.

Topic Author
neuro84
Posts: 66
Joined: Thu Jul 24, 2014 11:25 am

Re: Question about Roth conversion

Post by neuro84 » Tue Sep 01, 2015 5:13 pm

Archbish99, thanks for the heads-up. I had heard about recharacterization but did not know the practical use of this move. I'll go ahead and convert it all, and plan to recharacterize whatever amount pushes over the 25% bracket (if any).

Thanks everyone!

dbltrbl
Posts: 900
Joined: Thu Mar 01, 2007 11:52 am

Re: Question about Roth conversion

Post by dbltrbl » Tue Sep 01, 2015 5:15 pm

Another suggestion you can as a resident put money in a 403b or 401 k depending on your hospial even without a natch in remaining months so you are just under 74900 threshold.

Good Luck.

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