Roth IRA Conversion tax free?

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jimmieg
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Joined: Sun Feb 26, 2012 7:25 am

Roth IRA Conversion tax free?

Post by jimmieg »

Is my thinking flawed? In retirement, no income besides Social Security, RMD and some taxable interest/dividends.
My wife's IRA goes 100% to QCD. For 2020, I will have about $11000 additional I can withdraw from my IRA beyond my RMD before reaching our $27000 standard deduction.
Could that $11,000 additional IRA withdrawal be converted to open a Roth without tax consequences as income would still fit into our standard deduction?
Is there a factor I am missing?
HomeStretch
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Re: Roth IRA Conversion tax free?

Post by HomeStretch »

Your income from RMDs and interest/dividends will be $16k for 2020? Check whether the additional income from the Roth conversion pushes your Social Security income into the taxable range.

The 2020 standard deduction is $24,800 for married filing joint filers. There is an additional $1,300 per person at age 65+ or blind.
Last edited by HomeStretch on Fri Jan 10, 2020 3:26 pm, edited 1 time in total.
Silk McCue
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Re: Roth IRA Conversion tax free?

Post by Silk McCue »

That seems right.

What you may be missing is that you might benefit by converting up to the point just below where your first SS$ would become partially taxable. Hard to say as we have no insight to total investments, what vehicle they are in.

Cheers
livesoft
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Re: Roth IRA Conversion tax free?

Post by livesoft »

I have done Roth conversions each year for the past several years. I use tax-prep software after the December fund distributions each year to model the taxes over a wide range of Roth conversion amounts and then narrow down to the Roth conversion amount that makes the most tax sense for me. I guess my income sources and tax credits are too complex to just get a number from looking at tax tables. But I get a leg up on my tax return, too.

My point is that relying on simple answers from people on the internet may not give you what you intended to find out.
Last edited by livesoft on Fri Jan 10, 2020 4:21 pm, edited 1 time in total.
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Carl53
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Re: Roth IRA Conversion tax free?

Post by Carl53 »

It depends on your SS income. With 16k in non-SS income, you could have about $68700 in SS income and pay no income tax, assuming you are both 65. Nearly 11k of the SS would be taxable but in the zero bracket. With $30k in SS, you could convert $7933 without paying federal income tax despite $3467 of SS being taxable. Use your 2019 tax software to estimate the amount. The equation for the amount of taxable SS does not change year to year, only the tax brackets and standard deduction are adjusted.

edit:
Livesoft makes an excellent comment about using your tax software in December to confirm your status. I'm using my personal tax spreadsheet for the numbers I calculated above.
JW-Retired
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Re: Roth IRA Conversion tax free?

Post by JW-Retired »

jimmieg wrote: Fri Jan 10, 2020 3:15 pm In retirement, no income besides Social Security, RMD and some taxable interest/dividends.
My wife's IRA goes 100% to QCD. For 2020, I will have about $11000 additional I can withdraw from my IRA beyond my RMD before reaching our $27000 standard deduction.
One needs to understand the way taxation of Social Security works. Basically, the more "other" income you have the more of your Social Security gets taxed. See https://www.bogleheads.org/wiki/Taxatio ... y_benefits

How much of each kind of income do you have? You could naively think you are in one tax bracket for IRA withdrawals and it's really 1.5 or 1.85 that much.
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Topic Author
jimmieg
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Joined: Sun Feb 26, 2012 7:25 am

Re: Roth IRA Conversion tax free?

Post by jimmieg »

Thanks, friends, for your very helpful comments. The point at which taxation of SS kicks in was not a factor I was looking at.

As always, this board has been helpful not only in the accumulation phase, but now the spend-down phase. I had not figured that would be as complex.
Silk McCue
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Re: Roth IRA Conversion tax free?

Post by Silk McCue »

jimmieg wrote: Sat Jan 11, 2020 1:09 pm Thanks, friends, for your very helpful comments. The point at which taxation of SS kicks in was not a factor I was looking at.

As always, this board has been helpful not only in the accumulation phase, but now the spend-down phase. I had not figured that would be as complex.
I came across this excellent tax calculator a couple of months back after someone here recommended it. One nice feature is that it will show you the SS dollars being taxed. It is great for being able to make changes to various types of income to see how "the next dollar" is taxed.

https://www.mortgagecalculator.org/calc ... ulator.php

Start out getting your base info correct and then start adding in Taxable IRA distributions to simulate conversions.

Cheers
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grabiner
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Re: Roth IRA Conversion tax free?

Post by grabiner »

Silk McCue wrote: Fri Jan 10, 2020 3:25 pm What you may be missing is that you might benefit by converting up to the point just below where your first SS$ would become partially taxable. Hard to say as we have no insight to total investments, what vehicle they are in.
It may be worth converting even if it makes SS partially taxable. If $1 of income makes 50 or 85 cents of SS taxable at 12%, that is a marginal tax rate of 6% or 10.2%, which is still a better deal than withdrawing the same money at a 12% tax rate in a later year.
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Topic Author
jimmieg
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Re: Roth IRA Conversion tax free?

Post by jimmieg »

Thanks so much for the informative responses. And yes, I was leaving out the impact of taxation on SS benefits. My suspicion that I would have $11,000 additional dollars to convert tax free to Roth turns out to be closer to $8000.

The tax free withdrawal will happen, as I suspect it will offset withdrawing some taxable anticipated discretionary or unplanned spending down the road. But, I have to determine if putting a smaller amount away in a Roth annually for 4-5 years is that helpful in the big picture vs just investing it in our cash management account. Or just pay some tax on SS. I guess only hindsight could determine that.

The help from folks on this board like you during the accumulation phase is proving to be just as helpful during the withdrawal phase.

Thanks!
mbcruiser
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Re: Roth IRA Conversion tax free?

Post by mbcruiser »

a quick online calculator since entire amount converted would be taxable. It's easy to use using various what if scenarios;
https://cotaxaide.org/tools/Estimated%2 ... t.html[url][/url]
It automatically computes SS portion (if any) that would be taxable.
Carl53
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Re: Roth IRA Conversion tax free?

Post by Carl53 »

Silk McCue wrote: Sat Jan 11, 2020 1:18 pm
jimmieg wrote: Sat Jan 11, 2020 1:09 pm Thanks, friends, for your very helpful comments. The point at which taxation of SS kicks in was not a factor I was looking at.

As always, this board has been helpful not only in the accumulation phase, but now the spend-down phase. I had not figured that would be as complex.
I came across this excellent tax calculator a couple of months back after someone here recommended it. One nice feature is that it will show you the SS dollars being taxed. It is great for being able to make changes to various types of income to see how "the next dollar" is taxed.

https://www.mortgagecalculator.org/calc ... ulator.php

Start out getting your base info correct and then start adding in Taxable IRA distributions to simulate conversions.

Cheers
Nice calculator. Note that while it comes up with a 2020 title, it is actually a calculation for 2019 tax year. I suppose they might come out with a new one prior to year end.
mbcruiser wrote: Sat Jan 11, 2020 4:11 pm a quick online calculator since entire amount converted would be taxable. It's easy to use using various what if scenarios;
https://cotaxaide.org/tools/Estimated%2 ... t.html[url][/url]
It automatically computes SS portion (if any) that would be taxable.
I got a 404 error with this link.
Silk McCue
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Re: Roth IRA Conversion tax free?

Post by Silk McCue »

Carl53 wrote: Sat Jan 11, 2020 5:46 pm
Nice calculator. Note that while it comes up with a 2020 title, it is actually a calculation for 2019 tax year. I suppose they might come out with a new one prior to year end.
Glad you liked it.

If is for 2019 Taxes for filing in 2020. The standard deduction bears that out along with the tax bracket calculations.

Please note the description at the the top of the page.
1040 Tax Estimation Calculator For 2020 Taxes
Enter your filing status, income, deductions and credits and we will estimate your total taxes. Based on your projected tax withholding for the year, we can also estimate your tax refund or amount you may owe the IRS next April. Please note this calculator is for the current 2019 tax year which is due in April of 2020. We also offer calculators for the recently passed 2018 & 2017 tax years.
Cheers
TonyDAntonio
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Re: Roth IRA Conversion tax free?

Post by TonyDAntonio »

livesoft wrote: Fri Jan 10, 2020 3:40 pm I have done Roth conversions each year for the past several years. I use tax-prep software after the December fund distributions each year to model the taxes over a wide range of Roth conversion amounts and then narrow down to the Roth conversion amount that makes the most tax sense for me. I guess my income sources and tax credits are too complex to just get a number from looking at tax tables. But I get a leg up on my tax return, too.

My point is that relying on simple answers from people on the internet may not give you what you intended to find out.
Livesoft, do you make your entire yearly Roth conversion in the last week of the year or do you just 'top off' at the end of the year based on what the tax software shows?
Thanks
livesoft
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Re: Roth IRA Conversion tax free?

Post by livesoft »

TonyDAntonio wrote: Sat Jan 11, 2020 6:39 pmLivesoft, do you make your entire yearly Roth conversion in the last week of the year or do you just 'top off' at the end of the year based on what the tax software shows?
Thanks
I top off. However, I have to be careful not to create a mess with the earlier conversion(s). My spouse is working and gets an unknown bonus in the December. The bonus is not guaranteed, too.
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chipaway
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Re: Roth IRA Conversion tax free?

Post by chipaway »

Carl53 wrote: Sat Jan 11, 2020 5:46 pm I got a 404 error with this link.
I removed " [url " from the end of the link and it worked:

https://cotaxaide.org/tools/Estimated%2 ... sheet.html
TonyDAntonio
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Re: Roth IRA Conversion tax free?

Post by TonyDAntonio »

livesoft wrote: Sat Jan 11, 2020 6:42 pm
TonyDAntonio wrote: Sat Jan 11, 2020 6:39 pmLivesoft, do you make your entire yearly Roth conversion in the last week of the year or do you just 'top off' at the end of the year based on what the tax software shows?
Thanks
I top off. However, I have to be careful not to create a mess with the earlier conversion(s). My spouse is working and gets an unknown bonus in the December. The bonus is not guaranteed, too.
Thank you. I top off too and took your advice two years ago to use tax software (last year's) to do the estimates.
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