My husband retired last year so this is our first year with no wages. We have enough in taxable accounts so that we won't need to take Social Security until the first one turns 70 in 5 years. Basically there are six years with fairly low income. An ideal time to convert IRAs. However, complicating this is about $750,000 of stock sitting in a taxable account with a $25,000 basis. We have been selling that stock off in the past few years and sold $100,000 this year. It just keeps increasing in value. The $750,000 is the current balance.
I did a quick calculation today, assuming that we converted $40,000 from a conventional IRA to a Roth IRA. The federal tax went up by $12,000. A 30% tax!
Rough numbers -
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Ordinary income - 42,100 Qual Div + LTCG - 115,000 AGI 157,100 Itemized Ded - 14,000 Personal Exemp - 8,100 Taxable Income - 135,000
If I add in $40,000 Roth conversion, then $60,000 would be taxed at ordinary income rates, ($75,900-$60,000) at 0%, and $99,100 LTCG taxed at 15%, for a total tax of $8,068 + $0 + $14,865 = $22,933.
Ouch. A $12,000 tax on a $40,000 Roth conversion.
First, is my math correct? Did I miss something?
Next, what do you recommend going forward? Yes, $750,000 is a lot in a single stock, but if it went to $0 it would not affect our retirement. The company is a well run 100-year old American manufacturer. Should we just continue to sell it off $100K - $200K per year and not worry about Roth conversions? Should we dump all of it this year, then do Roth conversions in future years? What things should I consider in making this decision?