Pass Thru Deduction-Roth Conversion Question

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cusetownusa
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Pass Thru Deduction-Roth Conversion Question

Post by cusetownusa »

Does it make sense to do a Roth Conversion to max out the 20% pass through deduction?

Being self-employed and below the pass through deduction threshold I believe I will be able to take advantage of the 20% pass through income deduction.

The way I understand it is that I will be able to deduct 20% of the lesser of my Pass through income and our joint taxable income. After all the deductions for tax-advantage accounts and the standard deduction, my taxable income will be about $50,000 less than my pass through income.

My plan is to do a Roth conversion from my SEP IRA in the amount of the difference between our taxable income and my pass through income (roughly $50,000). Based on the federal tax bracket I will end up paying about $9,000 of additional federal taxes to convert $50,000 which works out to about an 18% marginal rate. My thinking is that I will probably be in a higher marginal tax bracket in retirement.

Does this make sense to do? Or is my thinking way off?
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Hayden
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Re: Pass Thru Deduction-Roth Conversion Question

Post by Hayden »

I'm planning on doing the same. Makes sense to me.
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cusetownusa
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Re: Pass Thru Deduction-Roth Conversion Question

Post by cusetownusa »

Hayden wrote: Fri Jul 20, 2018 7:19 am I'm planning on doing the same. Makes sense to me.
Are you going to wait until the end of the year to make one big conversion or are you converting some now? My initial plan was to do one conversion at the end of the year when I know exactly how much to convert. But now I am thinking I should convert some now so that it has more time to "grow" in the Roth account versus the pre-tax account. Of course if the markets tank between now and the end of the year I would have been better off waiting to convert.
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Hayden
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Re: Pass Thru Deduction-Roth Conversion Question

Post by Hayden »

cusetownusa wrote: Fri Jul 20, 2018 9:28 am
Hayden wrote: Fri Jul 20, 2018 7:19 am I'm planning on doing the same. Makes sense to me.
Are you going to wait until the end of the year to make one big conversion or are you converting some now? My initial plan was to do one conversion at the end of the year when I know exactly how much to convert. But now I am thinking I should convert some now so that it has more time to "grow" in the Roth account versus the pre-tax account. Of course if the markets tank between now and the end of the year I would have been better off waiting to convert.
I'm waiting. My money is invested in bond funds. Seem more likely to go down than up.
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FiveK
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Re: Pass Thru Deduction-Roth Conversion Question

Post by FiveK »

cusetownusa wrote: Thu Jul 19, 2018 1:15 pm Does it make sense to do a Roth Conversion to max out the 20% pass through deduction?

Being self-employed and below the pass through deduction threshold I believe I will be able to take advantage of the 20% pass through income deduction.

The way I understand it....
The only software I've seen that even attempts to implement something to do with the 20% pass thru is the personal finance toolbox spreadsheet. If its calculations match your perception, there is a good chance your perception is correct....
Chicago60
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Re: Pass Thru Deduction-Roth Conversion Question

Post by Chicago60 »

I do not mean to hijack this topic, but I have a question on a related topic: any idea (with sourcing if you have any) whether deductions for a solo 401K by a sole proprietor are deducted before the 20% pass through deduction, or not?
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cusetownusa
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Re: Pass Thru Deduction-Roth Conversion Question

Post by cusetownusa »

Chicago60 wrote: Fri Jul 20, 2018 3:10 pm I do not mean to hijack this topic, but I have a question on a related topic: any idea (with sourcing if you have any) whether deductions for a solo 401K by a sole proprietor are deducted before the 20% pass through deduction, or not?
You get the 20% deduction on the lesser of your taxable income (family taxable income if married and filing jointly) or pass through income. Your taxable income is the amount after all pre-tax deductions (including solo 401k) and standard deduction.

Kitce has an excellent article regarding the 20% pass through deduction. If this applies to you the article is a must read.
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