Roth Conversion Conundrum

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retiredjg
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Re: Roth Conversion Conundrum

Post by retiredjg » Sat Aug 24, 2019 12:28 pm

Let's go back to these AGI numbers for a quick example.

2019: 176k - 24k deduction = $152k taxable. If you convert 80k, that brings your taxable income to $232. Let's apply 1/3rd of your basis ($4000) against that leaving you with $8000 basis for the next two years.

So $4000 of your conversion would not be taxed at all. The next 16k of the conversion would be taxed at 22% and the rest ($60k) is taxed at 24%.



2020: 168k - 24k deduction = $144k taxable. Let's convert $100k this year, bringing your taxable income to $244k. Apply another $4000 of your basis against this.

Again, $4000 of your conversion is not taxed. The next $24k would be taxed at 22% and the rest ($72k) taxed at 24%.


2021: 174k - 24k deduction = $150 taxable. Let's convert the remaining $91k to Roth and apply the remaining $4000 basis against this.
Again, $4000 of the conversion is not taxed. The next $18k is taxed at 22% and the rest ($69k) is taxed at 24%


Let's do a comparison to doing all this in one year.

2019: 176k - 24k deduction = $152k taxable.. Converting $271k brings your taxable income to $423k. Applying your entire $12k basis against that gives a taxable income of $411k.

Again, about $12k of the conversion will not be taxed. The next $16k would be taxed at 22%. The next $153k would be taxed at 24% and the remaining $90k would be taxed at 32%.


I've done all this in a hurry and I took lots of liberties (lots of rounding, using the same deduction and the same tax bracket limits each year, using the exact same basis each year) and I probably made a mistake or two (in other words, you should do all this again yourself). But I think it clearly shows that you pay higher taxes if you do all this in one year.

This example should also give you an idea of how the basis is applied against the total IRA over the 3 years. (Do not expect $4k each year. The number will vary but the 3 years will add up to your full $12k.)

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GeekGal
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Re: Roth Conversion Conundrum

Post by GeekGal » Sat Aug 24, 2019 9:17 pm

Thank you for the thoughtful and thorough responses. The examples help a great deal.

One thing I remain confused on is I thought I will be subject to aggregation taxes on the $12,000 now that the post-tax funds are co-mingled with pre-tax funds, and since a conversion from tIRA to Roth IRA is considered a distribution.
But the most recent replies indicate I will not be, and that the $12,000 will be exempted from tax over the course of the conversion period.
Clarification on this would be great. Thank you for your patience with me.

PS - the $271k tIRA funds are not currently invested since I was not sure what I would be doing with them. They are currently in a money market account, but the balance has grown to about $272k.

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FiveK
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Re: Roth Conversion Conundrum

Post by FiveK » Sat Aug 24, 2019 9:34 pm

GeekGal wrote:
Sat Aug 24, 2019 9:17 pm
One thing I remain confused on is I thought I will be subject to aggregation taxes on the $12,000 now that the post-tax funds are co-mingled with pre-tax funds, and since a conversion from tIRA to Roth IRA is considered a distribution.
It might be helpful to avoid the phrase "aggregation taxes," as there is no specific tax by that name.
But the most recent replies indicate I will not be, and that the $12,000 will be exempted from tax over the course of the conversion period.
Clarification on this would be great. Thank you for your patience with me.
Have you done the form 8606 run-through to see how the $12K and $271K are treated?

retiredjg
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Re: Roth Conversion Conundrum

Post by retiredjg » Sun Aug 25, 2019 7:08 am

GeekGal wrote:
Sat Aug 24, 2019 9:17 pm
Thank you for the thoughtful and thorough responses. The examples help a great deal.

One thing I remain confused on is I thought I will be subject to aggregation taxes on the $12,000 now that the post-tax funds are co-mingled with pre-tax funds, and since a conversion from tIRA to Roth IRA is considered a distribution.
But the most recent replies indicate I will not be, and that the $12,000 will be exempted from tax over the course of the conversion period.
Clarification on this would be great. Thank you for your patience with me.

PS - the $271k tIRA funds are not currently invested since I was not sure what I would be doing with them. They are currently in a money market account, but the balance has grown to about $272k.
I don't know what aggregation taxes are either, but I'll try a simpler example.

If the $272k is still in your IRA on 12/31 this year, the IRS sees the IRA as containing $284k in 2019. Of that $284, $272k has not been taxed and $12k has already been taxed. (Yes, I know they were not there at the same time, but the IRS must do the calculation as of the last day of the year.)

So 4.2% of the IRA has already been taxed (your $12k) and 95.8% has not been taxed. If you convert $10k of the IRA to Roth, you will only pay tax on 95.8% of whatever you convert. (In reality, you converted $12k to Roth so you will pay tax on 95.8% of the $12k meaning you will pay tax on $11,496 with your 2019 taxes).

Each time you convert something, most but not all of what you convert will be taxed. The percentage changes every year because the size of the IRA is not fixed - it can grow or shrink on a daily basis. This continues each year. When you make the last conversion, all of the money in the IRA will have been taxed just one time.

retiredjg
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Re: Roth Conversion Conundrum

Post by retiredjg » Sun Aug 25, 2019 7:35 am

Maybe the simplest example is this.

You have an IRA with $15k in it. $7.5k came from non-deductible contributions (like your $12k). $7.5k came from deductible contributions (like a rollover from a work plan).

Imagine doing three $5k Roth conversions on this IRA. Each conversion is pro-rated so each conversion contains money that is half taxed and half untaxed. So each time you do a conversion you only pay tax on half of it.

After the 3rd conversion all the dollars are in Roth IRA and each dollar has been taxed exactly one time.

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GeekGal
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Re: Roth Conversion Conundrum

Post by GeekGal » Sun Aug 25, 2019 11:26 am

Woo! :happy
I thought I had made a colossal and irreversible mistake in doing the $12k conversion since I then assumed the $271k tIRA. From what I had read, it seemed like having a year end balance in the tIRA was a bad thing, and thus I was thinking I needed to empty it before end of 2019 to avoid some sort of penalty (either tax or otherwise).

It sounds like I will pay the taxes based on the conversion amount and the corresponding tax rates, as one would expect, but no more. That is a great relief, thank you. :beer
Form 8606 is on my to-do list - I just keep running out of time, but will certainly do it to estimate taxes due, and to strategize how much to convert each year.

I agree that a phased conversion is the best approach for me, but the examples really help to make this clear (thanks again).
Am also thinking I could stretch the conversion of the $271k tIRA out to 2025 (sunset of current tax rates) to fill up the lower tax brackets and ease the tax burden each year. Although in looking at the tax brackets for HoH, there isn't much room left at the 24% rate, and there is also the opportunity cost of forgoing tax free growth in the Roth for the years 2022-2025.

I understand I will pay ordinary income tax on pre-tax contributions in the tIRA that are converted to Roth. Am I on the hook for paying a penalty for converting any of the earnings in the tIRA to Roth?

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FiveK
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Re: Roth Conversion Conundrum

Post by FiveK » Sun Aug 25, 2019 11:28 am

GeekGal wrote:
Sun Aug 25, 2019 11:26 am
I understand I will pay ordinary income tax on pre-tax contributions in the tIRA that are converted to Roth. Am I on the hook for paying a penalty for converting any of the earnings in the tIRA to Roth?
No. No penalty when the tIRA withdrawal is converted to Roth.

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GeekGal
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Re: Roth Conversion Conundrum

Post by GeekGal » Sun Aug 25, 2019 11:31 am

Hmmm OK. Then there doesn't seem to be a significant downside to stringing out the $271k tIRA conversion to Roth until 2025 (except the opportunity cost of tax free growth in the Roth for the years for which I string it out beyond my QW widow status).

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FiveK
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Re: Roth Conversion Conundrum

Post by FiveK » Sun Aug 25, 2019 12:54 pm

GeekGal wrote:
Sun Aug 25, 2019 11:31 am
Hmmm OK. Then there doesn't seem to be a significant downside to stringing out the $271k tIRA conversion to Roth until 2025 (except the opportunity cost of tax free growth in the Roth for the years for which I string it out beyond my QW widow status).
It's all about the marginal tax rate you'll pay on the conversions. In other words, The main reason to prefer one type of account over the other is the comparison of marginal tax rates.

For equal marginal rates, converting earlier (while paying tax from cash on hand) is slightly better. See that wiki article for details.

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Re: Roth Conversion Conundrum

Post by RetiredAL » Sun Aug 25, 2019 2:07 pm

GeekGal wrote:
Sun Aug 25, 2019 11:26 am


I understand I will pay ordinary income tax on pre-tax contributions in the tIRA that are converted to Roth.
GeekGal,

Do remember the taxes on those conversions are normally due at conversion time and must be paid in that quarter.

Yes you may qualify under Safe Harbor tax rules, but I personally would not expose myself late tax payment penalties if I was in your place. Too many things can catch up with you.

If you are using conversion $ to pay the taxes, just have the taxes withheld as part of the conversion. If you are paying the taxes from some other source, make sure the payment is paid by the quarter's due date of the conversion.

retiredjg
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Re: Roth Conversion Conundrum

Post by retiredjg » Sun Aug 25, 2019 2:35 pm

GeekGal wrote:
Sun Aug 25, 2019 11:26 am
I understand I will pay ordinary income tax on pre-tax contributions in the tIRA that are converted to Roth. Am I on the hook for paying a penalty for converting any of the earnings in the tIRA to Roth?
No. The contributions are pre-tax and the earnings while in tIRA are pre-tax....they are treated the same. They get taxed identically when tIRA is converted to Roth.

retiredjg
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Re: Roth Conversion Conundrum

Post by retiredjg » Sun Aug 25, 2019 2:40 pm

GeekGal wrote:
Sun Aug 25, 2019 11:31 am
Hmmm OK. Then there doesn't seem to be a significant downside to stringing out the $271k tIRA conversion to Roth until 2025 (except the opportunity cost of tax free growth in the Roth for the years for which I string it out beyond my QW widow status).
I'm not sure that stringing it out is going to help much either. It could if you would still be in the 22% bracket beyond QW status. But it seems you are saying you expect to be in the 24% tax bracket then.

There is no benefit to converting at 24% in 2024 over converting more at 24% in 2022.

retiredjg
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Re: Roth Conversion Conundrum

Post by retiredjg » Sun Aug 25, 2019 2:44 pm

RetiredAL wrote:
Sun Aug 25, 2019 2:07 pm
Do remember the taxes on those conversions are normally due at conversion time and must be paid in that quarter.
Do they have to be paid in that quarter or could she just increase her withholding at work to cover the conversion?

If you are using conversion $ to pay the taxes, just have the taxes withheld as part of the conversion.
Do not do this under age 59.5. That would be an early withdrawal and subject to a 10% penalty.

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FiveK
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Re: Roth Conversion Conundrum

Post by FiveK » Sun Aug 25, 2019 3:36 pm

retiredjg wrote:
Sun Aug 25, 2019 2:44 pm
RetiredAL wrote:
Sun Aug 25, 2019 2:07 pm
Do remember the taxes on those conversions are normally due at conversion time and must be paid in that quarter.
Do they have to be paid in that quarter or could she just increase her withholding at work to cover the conversion?
If using estimated tax instead of withholding to satisfy tax liability, the payments must be "timely" so on or before the due date shown on form 2210 for the period in which the income occurred.

If using withholding instead of estimated tax to satisfy tax liability, any time within the tax year will work.

retiredjg
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Re: Roth Conversion Conundrum

Post by retiredjg » Sun Aug 25, 2019 3:40 pm

Don't some people use both?

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FiveK
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Re: Roth Conversion Conundrum

Post by FiveK » Sun Aug 25, 2019 3:48 pm

retiredjg wrote:
Sun Aug 25, 2019 3:40 pm
Don't some people use both?
Yes.

If you have withheld enough to fit into one of the safe harbor rules (in other words, if you are not one "Who Must Pay Estimated Tax"), then the timing of any estimated tax payments (including not making any) is irrelevant.

If you are one "Who Must Pay Estimated Tax" then the timing of any estimated tax payments is relevant.

RetiredAL
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Re: Roth Conversion Conundrum

Post by RetiredAL » Sun Aug 25, 2019 4:23 pm

retiredjg wrote:
Sun Aug 25, 2019 2:44 pm
RetiredAL wrote:
Sun Aug 25, 2019 2:07 pm
Do remember the taxes on those conversions are normally due at conversion time and must be paid in that quarter.
Do they have to be paid in that quarter or could she just increase her withholding at work to cover the conversion?

If you are using conversion $ to pay the taxes, just have the taxes withheld as part of the conversion.

Do not do this under age 59.5. That would be an early withdrawal and subject to a 10% penalty.
Good warning about using conversion $ when under 59.5. Since I'm long passed that age, it slipped my mind.

I'm not a tax pro, but my understanding is that is correct. However, there are not many month's left to crank up the withholdings.

Yes, I understand there are 101 ways (figuratively) to make the taxes whole, but having read of the many woe-be-me stories here at BH's on many different subjects, is it really worth taking the risk that you'll get everything right to not get ding'd, on a process you may never have done before.

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Re: Roth Conversion Conundrum

Post by RetiredAL » Sun Aug 25, 2019 4:38 pm

FiveK

I commend you on your excellent explaining to GeekGal. IMO, she started in a panic, is now satisfied that it's not a big deal, and she has a plan on how to move forward.

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GeekGal
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Re: Roth Conversion Conundrum

Post by GeekGal » Thu Sep 19, 2019 7:36 pm

Dear BHs,

Yes, thank you for your help! I am in awe of the thoughtful responses on this post and others.

I am hoping to ask for help on my calculation of taxes due. I set up a spreadsheet that includes income, deduction, conversion amount, basis, etc.

For income I included:
- wages for my husband before he passed away and myself,
- dividends (Question 1: should I not count these if they will instead be at 15% capital gains rate instead of ordinary income tax rate?)
- misc interest
TOTAL: $146,200

Deductions include:
- SALT ($10k)
- mortgage Interest ($17,400)
TOTAL: $27,400
Question 2: Not sure where deductions related to two kids come in.

I also did a test Form 8606 for year 2019. Line 13 (nontaxable portion of all my distributions) comes to: $2,735.04 and Line 14 (total basis in tIRA) comes to: $9,264.96

Please see following for 2019 from my spreadsheet:

2019
AGI: $146,000
Deduction: $27,400
Taxable Income: $118,600
tIRA Conversion Amount: $80,000
Total Taxable Income: $198,600
Proportion of Basis in tIRA: $9,265
Remaining tIRA to be taxed: $70,735
Propotion of tIRA Taxed at 22%: $49,800 (tax due: $10,956)
Proportion of tIRA Taxed at 24%: $20,935 (tax due: $5,024)
Proportion of tIRA Taxed at 32% $0
Tax due for 2019 conversion: $15,980
The $15,980 is resulting from:
- $49,800 taxed at 22% (taxes due: $10,956)
- $20,935 taxed at 24% (taxes due: $5,024)
[Note the text in red is intended to show the numbers I change to see various outcomes in the spreadsheet]

Question 3: Does the $15,980 of taxes due on a $80k conversion in 2019 sound correct?

Oddly, if I modify the AGI to a much higher number ($176,000), the taxes due comes to $16,580 (not that much higher than the $15,980 due using $146k), which is making me wonder if I am incorrect in my estimate. The $16,580 is resulting from:
- $19,800 taxed at 22% (taxes due: $4,356)
- $50,935 taxed at 24% (taxes due: $12,224)

My objective is to maximize and optimize the proportion taxed at 22%, and then secondly at 24%. Once I get the spreadsheet set up correctly, I aim to apply it to years 2020 and 2021 which is when I can file as Qualifying Widow.

Thank you in advance for your insight and time, and any help you can provide!

-GeekGal

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FiveK
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Re: Roth Conversion Conundrum

Post by FiveK » Thu Sep 19, 2019 8:13 pm

GeekGal wrote:
Thu Sep 19, 2019 7:36 pm
2019
AGI: $146,000
Deduction: $27,400
Taxable Income: $118,600
tIRA Conversion Amount: $80,000
Total Taxable Income: $198,600
Might just be a question of how the spreadsheet entries are translated, but note that a tIRA conversion will also increase AGI, not just taxable income.

As you are spreadsheet-inclined, you might compare your results with what the personal finance toolbox Excel spreadsheet calculates. That one will also show you a graph of marginal rates vs. whatever income line item you choose.

retiredjg
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Re: Roth Conversion Conundrum

Post by retiredjg » Sat Sep 21, 2019 12:24 pm

I also did a test Form 8606 for year 2019. Line 13 (nontaxable portion of all my distributions) comes to: $2,735.04 and Line 14 (total basis in tIRA) comes to: $9,264.96
These are the numbers I got too assuming a total conversion of $80 (including the $12k already converted) and a year end balance in the tIRA of $271,000.

However, the balance will NOT be $271,000 at the end of the year because of two things. First, $68k of that will have been converted to Roth in a second Roth conversion. Second, the balance changes daily with the market.

The best estimate you can make now is that the $271,000 will be $203,000 at the end of the year after converting the other $68k. (Of course it will not be $203,000 exactly.)

Changing the $271k on line 6 to $203k will change your numbers on line 11 and line 14 and 15c but let's go ahead with the numbers you have now just to finish the example.


2019
AGI: $146,000 <---remember that this does not include the $12k you already converted
Deduction: $27,400
Taxable Income: $118,600
tIRA Conversion Amount: $80,000<---but $2,735 of it is not taxed (line 11)
Total Taxable Income: $198,600<---so this should be $195,865


Proportion of Basis in tIRA: $9,265 <---yes, line 14
Remaining tIRA to be taxed: $70,735<--not sure what this is

Propotion of tIRA Taxed at 22%: $49,800 (tax due: $10,956) <---yes, this is what I got
Proportion of tIRA Taxed at 24%: $20,935 (tax due: $5,024)<---I can't figure out where this number came from, I get $27,465
Oddly, if I modify the AGI to a much higher number ($176,000), the taxes due comes to $16,580 (not that much higher than the $15,980 due using $146k), which is making me wonder if I am incorrect in my estimate. The $16,580 is resulting from:
- $19,800 taxed at 22% (taxes due: $4,356)
- $50,935 taxed at 24% (taxes due: $12,224)
This might be due to your number taxed at 24% above seems about $7k too low to me.


Question 2: Not sure where deductions related to two kids come in.
Exemptions no longer exist. I think this is now a credit that is taken directly off the taxes after the taxes are computed. However, I'm not sure of that.


See if you can follow my math and if you can come up with the same thing.

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GeekGal
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Re: Roth Conversion Conundrum

Post by GeekGal » Sun Sep 22, 2019 1:01 pm

Thank you so much for the responses, and especially for checking my calculations. Your assistance is really above and beyond.


1.
Propotion of tIRA Taxed at 22%: $49,800 (tax due: $10,956) <---yes, this is what I got
Proportion of tIRA Taxed at 24%: $20,935 (tax due: $5,024)<---I can't figure out where this number came from, I get $27,465 This is tIRA conversion amount ($80,000) - leftover basis ($9,265) = $70,735.

So then the $49,800 is the upper bracket of the 22% category ($168,400) - taxable income ($118,600)
And
$20,935 is the upper bracket of the 24% category ($321,450) - [remaining tIRA to be taxed ($70,735) - proportion of tIRA taxed at 22% ($49,800)]

In summary, I see your $27,465 is ($80,000 - $49,800 - $2,735).
Whereas my $20,935 is ($80,000 - $49,800 - $9,265).
I see how using the $2,735 makes sense since that is the proportion of the converted amount that should not be taxed (instead I in error included the amount that should not be taxed, but is still left in the tIRA). I have adjusted my spreadsheet.

2.
Thanks for pointing out that the year end balance will not be $271,000. I redid Form 8606, and have been entering $0 for line 7 since it indicates to NOT include conversions to a Roth IRA (but also realize you are saying modifying the numbers will change line 15c. Line 15c on my Form 8606 is $0 since lines 12 (and therefore 15a) are also $0. Should I be entering something besides $0 for line 7?

3.
Also, I figure since I have three years to convert $271-$12 = $259 (or so), I should be converting on average $86k a year, but in 2019 I should convert around $90k since I expect income in 2020 and 2021 to be slightly higher, attributed to the fact I won't have been on maternity leave as I was in 2019). Below are my revised calculations based on this, and the revisions to the spreadsheet. Your feedback would be *most* appreciated.

Form 8606
Line 1 (Nondeductible contributions to IRA) $0.00
Line 2 (total basis in tIRA) $12,000.00
Line 3 (add lines 1 and 2) $12,000.00
Line 4 (Enter contributions included on line 1 that were made from Jan 2020 through April 15, 2020) $0.00
Line 5 (subtract line 4 from line 3) $12,000.00
Line 6 (Value of tIRA as of Dec 2019) $181,000.00 (this is $271k - the $90k conversion)
Line 7 (distributions from tIRA; Do NOT include conversions to a Roth IRA) $0.00
Line 8 (Net Amount Converted to Roth in 2019) $90,000.00
Line 9 (add lines 6, 7, 8) $271,000.00
Line 10 (divide line 5 by line 9, and round to three decimal places) $0.044
Line 11 (Multiply line 8 by line 10 --> Non-taxable portion of amount converted to Roth) $3,985.24
Line 12 (multiply line 7 by line 10 to get non taxable portion of distributions that you did not convert to Roth IRA) $0.00
Line 13 (add lines 11 and 12 --> this is nontaxable portion of all distributions) $3,985.24
Line 14 (subtract line 13 from line 3 to get total basis in tIRA) $8,014.76
Line 15a (subtract line 12 from line 7) $0.00
Line 15b (enter amount on line 15a attributable to qualified disaster distribution) 0
Line 15c (subtract line 15b from line 15a to get taxable amount) $0.00
Line 16 (enter amount from line 8) $90,000.00
Line 17 (enter amount from line 11) $3,985.24
Line 18 (subtract line 17 from line 16 to get taxable amount) $86,014.76


2019
AGI $146,000
Deduction $27,400
Taxable Income $118,600
tIRA Conversion Amount $90,000
Total Taxable Income $208,600
Proportion of Basis in tIRA $3,985
Remaining tIRA to be taxed $86,015
Propotion of tIRA Taxed at 22% is $49,800 (taxes due: $10,956)
Proportion of tIRA Taxed at 24% $36,215 (taxes due: $8,692)
Proportion of tIRA Taxed at 32% $0 (taxes due: $0)
$19,648 Tax due on conversion

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FiveK
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Re: Roth Conversion Conundrum

Post by FiveK » Sun Sep 22, 2019 1:22 pm

GeekGal wrote:
Sun Sep 22, 2019 1:01 pm
Form 8606
Line 1 (Nondeductible contributions to IRA) $0.00
Line 2 (total basis in tIRA) $12,000.00
Based on the OP, I think the $12K goes on line 1 and $0 on line 2, but that was from only a quick glance. Doesn't change the bottom line.
2019
AGI $146,000
Deduction $27,400
Standard deduction is $24.4K, not $27.4K

Noticed both of the above from throwing your numbers into the toolbox spreadsheet (it has separate tabs for Form 8606 and tax calculations) mentioned previously. You may prefer your own spreadsheet (as do we), but it can be useful to compare yours to another (as do we) that has been used by many people and (presumably) has no "obvious" bugs.

cherijoh
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Re: Roth Conversion Conundrum

Post by cherijoh » Sun Sep 22, 2019 1:30 pm

GeekGal wrote:
Sat Aug 10, 2019 4:04 pm
celia wrote:
Sat Aug 10, 2019 2:25 am


Now, since your husband died so early in the year, he didn’t have much wages (unless his employer paid out unused vacation and sick time). If you can project your joint wages for this year AND it is below $193K, you both could have made Roth contributions instead.

https://www.rothira.com/roth-ira-limits

Assuming you will be eligible this year, you can ask the custodian to reclassify the $12K conversion (or two $6K conversions?) as a recharacterization instead. That will make it as if the contribution(s) had been made to Roth all along. Then the pro rata rule will not apply. Try to avoid it since once it applies to the tIRA, it will keep applying every year until all your tIRAs are emptied (and stay emptied on Dec. 31).

However, if you recharacterize, you want to make it clean and also bring over the $20 and account for any gain or loss between the January 1 contribution date and the date of conversion/recharacterization. It is up to the custodian to calculate the amount now that new money has since been added to the account.

If you can’t recharacterize due to income limits, an easier way to think about this is that the $271k Rollover could have happened before the Backdoor contributions were made. You would basically get the same tax result either way because all the same transactions happened in same year. The only slight difference is that the growth or loss would have been slightly different from the money being in the account (or not) on different dates.
Thank you. Hmmm - OK. I am under the impression that the ability to recharacterize went away with the new tax law changes?
The ability to recharacterize a conversion went away. You still have the ability to switch the designation for this year's contribution from Roth to Traditional or Traditional to Roth. Both were called recharacterizations which leads to some confusion.

cherijoh
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Re: Roth Conversion Conundrum

Post by cherijoh » Sun Sep 22, 2019 1:46 pm

GeekGal wrote:
Fri Aug 09, 2019 6:20 pm
FiveK wrote:
Fri Aug 09, 2019 2:28 pm
GeekGal, welcome to the forum and condolences to you and the rest of the family for your husband.
GeekGal wrote:
Fri Aug 09, 2019 1:52 pm
Question: Am I subject to the aggregation taxes in 2019 on the $271,000 currently held in my Traditional IRA, even though those funds were received after I did the $12,000 conversion to Roth? It will probably cost about $80-85,000 in taxes.
Unfortunately, yes - as things stand. Do a practice form 8606 for 2019 to confirm for yourself, and see comment below.
The other option I thought of is to move the $271,000 funds to my 457 account, but would prefer to leave them at Vanguard for lower costs, more investment options, and consolidated accounts. And, I am thinking I am better off with conversion to Roth IRA for the 3 reasons above.
Even if the fund fees are a little higher, if the 457 will accept the funds then the tax saving due to spreading Roth conversions over multiple years might more than compensate. Worth checking into.
And thanks for the welcome, and your condolences. I like it here, and very much appreciate the support. I am figuring out a lot in my life now, and it is not easy with two little kids and working full time. So I certainly appreciate the guidance from you all.

Yeah ... I will see if I can do a CBA on the 457 fees v. taxes on the IRA v. expected taxes at retirement on RMDs
Sometimes people get so focused on avoiding paying taxes NOW, that they lose sight of the fact that those taxes would need to be paid eventually. The larger issue IMO is will you be above the limit to make direct contributions to Roth IRA in the future?

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Re: Roth Conversion Conundrum

Post by retiredjg » Sun Sep 22, 2019 2:12 pm

GeekGal wrote:
Sun Sep 22, 2019 1:01 pm
1.
Propotion of tIRA Taxed at 22%: $49,800 (tax due: $10,956) <---yes, this is what I got
Proportion of tIRA Taxed at 24%: $20,935 (tax due: $5,024)<---I can't figure out where this number came from, I get $27,465 This is tIRA conversion amount ($80,000) - leftover basis ($9,265) = $70,735.

So then the $49,800 is the upper bracket of the 22% category ($168,400) - taxable income ($118,600)
And
$20,935 is the upper bracket of the 24% category ($321,450) - [remaining tIRA to be taxed ($70,735) - proportion of tIRA taxed at 22% ($49,800)]

In summary, I see your $27,465 is ($80,000 - $49,800 - $2,735).
Whereas my $20,935 is ($80,000 - $49,800 - $9,265).
I see how using the $2,735 makes sense since that is the proportion of the converted amount that should not be taxed (instead I in error included the amount that should not be taxed, but is still left in the tIRA). I have adjusted my spreadsheet.
I'm a little lost here. I'll think about this tomorrow.

2.
Thanks for pointing out that the year end balance will not be $271,000. I redid Form 8606, and have been entering $0 for line 7 since it indicates to NOT include conversions to a Roth IRA (but also realize you are saying modifying the numbers will change line 15c. Line 15c on my Form 8606 is $0 since lines 12 (and therefore 15a) are also $0. Should I be entering something besides $0 for line 7?
Line 7 should be $0. Line 15c should also be $0. I mis-spoke above.



3. Also, I figure since I have three years to convert $271-$12 = $259 (or so)...
My understanding is you have three years to convert $271k since that is what is in the tIRA now. The $12k is no longer there. Am I wrong?





Line 1 (Nondeductible contributions to IRA) $0.00 This is the line you show how much was contributed to tIRA in 2019. Should be either $12k (if it is one IRA) or $6k if there are two IRAs). I'm a little unclear on whether there were one or two. We may need to split this.


Line 2 (total basis in tIRA) $12,000.00 <---this is what is carried over from line 14 of the previous year's Form 8606. Presumably $0.


Line 3 (add lines 1 and 2) $12,000.00

Line 4 (Enter contributions included on line 1 that were made from Jan 2020 through April 15, 2020) $0.00

Line 5 (subtract line 4 from line 3) $12,000.00

Line 6 (Value of tIRA as of Dec 2019) $181,000.00 (this is $271k - the $90k conversion Correction.... Yes, if you convert another $90k later on this year then Line 6 will be $181,000 (since we are pretending that the value is constant).

Line 7 (distributions from tIRA; Do NOT include conversions to a Roth IRA) $0.00[/b]<--this is correct

Line 8 (Net Amount Converted to Roth in 2019) $90,000.0<---this should be $102k since there are two conversions ($12k and $90k). I can't really go any further until we get the amount currently in the tIRA agreed on.
Last edited by retiredjg on Sun Sep 22, 2019 3:03 pm, edited 1 time in total.

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Re: Roth Conversion Conundrum

Post by retiredjg » Sun Sep 22, 2019 2:15 pm

FiveK wrote:
Sun Sep 22, 2019 1:22 pm
Deduction $27,400 Standard deduction is $24.4K, not $27.4K
She is not using the standard deduction.

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Re: Roth Conversion Conundrum

Post by FiveK » Sun Sep 22, 2019 2:16 pm

retiredjg wrote:
Sun Sep 22, 2019 2:12 pm
Line 6 (Value of tIRA as of Dec 2019) $181,000.00 (this is $271k - the $90k conversion)<---This is incorrect I think. You are failing to account for the $12k that has already been converted.
Any amount converted from the tIRA to a Roth IRA will no longer be in the tIRA.

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Re: Roth Conversion Conundrum

Post by retiredjg » Sun Sep 22, 2019 2:18 pm

cherijoh wrote:
Sun Sep 22, 2019 1:30 pm
The ability to recharacterize a conversion went away. You still have the ability to switch the designation for this year's contribution from Roth to Traditional or Traditional to Roth. Both were called recharacterizations which leads to some confusion.
What you are saying is true, but it does not affect this poster. A conversion has already occurred so it is no longer possible to recharacterize from traditional to Roth and vice versa. It's a done deal.

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Re: Roth Conversion Conundrum

Post by retiredjg » Sun Sep 22, 2019 2:20 pm

FiveK wrote:
Sun Sep 22, 2019 2:16 pm
retiredjg wrote:
Sun Sep 22, 2019 2:12 pm
Line 6 (Value of tIRA as of Dec 2019) $181,000.00 (this is $271k - the $90k conversion)<---This is incorrect I think. You are failing to account for the $12k that has already been converted.
Any amount converted from the tIRA to a Roth IRA will no longer be in the tIRA.
Is this message for me? If yes, I'm missing the point.

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Re: Roth Conversion Conundrum

Post by FiveK » Sun Sep 22, 2019 2:47 pm

retiredjg wrote:
Sun Sep 22, 2019 2:20 pm
FiveK wrote:
Sun Sep 22, 2019 2:16 pm
retiredjg wrote:
Sun Sep 22, 2019 2:12 pm
Line 6 (Value of tIRA as of Dec 2019) $181,000.00 (this is $271k - the $90k conversion)<---This is incorrect I think. You are failing to account for the $12k that has already been converted.
Any amount converted from the tIRA to a Roth IRA will no longer be in the tIRA.
Is this message for me? If yes, I'm missing the point.
Line 6 is the value of all your traditional, SEP, and SIMPLE IRAs as of December 31.

Any amount converted from the tIRA to a Roth IRA will no longer be in the tIRA.

In other words, there is no need (for the purpose of line 6) to account for the $12k that has already been converted.

Does that make sense?

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Re: Roth Conversion Conundrum

Post by cherijoh » Sun Sep 22, 2019 2:48 pm

GeekGal wrote:
Sun Aug 25, 2019 11:26 am
Woo! :happy
I thought I had made a colossal and irreversible mistake in doing the $12k conversion since I then assumed the $271k tIRA. From what I had read, it seemed like having a year end balance in the tIRA was a bad thing, and thus I was thinking I needed to empty it before end of 2019 to avoid some sort of penalty (either tax or otherwise).

It sounds like I will pay the taxes based on the conversion amount and the corresponding tax rates, as one would expect, but no more. That is a great relief, thank you. :beer
Form 8606 is on my to-do list - I just keep running out of time, but will certainly do it to estimate taxes due, and to strategize how much to convert each year.

I agree that a phased conversion is the best approach for me, but the examples really help to make this clear (thanks again).
Am also thinking I could stretch the conversion of the $271k tIRA out to 2025 (sunset of current tax rates) to fill up the lower tax brackets and ease the tax burden each year. Although in looking at the tax brackets for HoH, there isn't much room left at the 24% rate, and there is also the opportunity cost of forgoing tax free growth in the Roth for the years 2022-2025.

I understand I will pay ordinary income tax on pre-tax contributions in the tIRA that are converted to Roth. Am I on the hook for paying a penalty for converting any of the earnings in the tIRA to Roth?
Within your traditional IRA account, earnings are treated the same way as pre-tax contributions from the perspective of the conversion - they haven't been taxed yet. Therefore no penalties. There are of course taxes.

But you may want to read up on tax-efficient fund placement in the Wiki. I would have all my bond funds in the traditional account and make my Roth 100% stocks if possible. This is because the expected return of stocks is higher than bonds - you want to set it up so the expected retun on your Roth is higher than Traditional. This way your Roth will grow to be a higher percentage of your total assets organically (i.e., even without conversions).

As someone else up-thread mentioned, you also want to watch for market corrections as a good opportunity to do Roth conversions. I retired in 2018 and planned to do a moderate amount of conversions, but I did a lot more than planned (up to top of 22% bracket) when the market dipped last December. This year I haven't done any conversions so far. I'll take another look at it near the end of the year when I know more about my interest, dividends for the year.

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Re: Roth Conversion Conundrum

Post by retiredjg » Sun Sep 22, 2019 2:56 pm

FiveK wrote:
Sun Sep 22, 2019 2:47 pm
retiredjg wrote:
Sun Sep 22, 2019 2:20 pm
FiveK wrote:
Sun Sep 22, 2019 2:16 pm
retiredjg wrote:
Sun Sep 22, 2019 2:12 pm
Line 6 (Value of tIRA as of Dec 2019) $181,000.00 (this is $271k - the $90k conversion)<---This is incorrect I think. You are failing to account for the $12k that has already been converted.
Any amount converted from the tIRA to a Roth IRA will no longer be in the tIRA.
Is this message for me? If yes, I'm missing the point.
Line 6 is the value of all your traditional, SEP, and SIMPLE IRAs as of December 31.

Any amount converted from the tIRA to a Roth IRA will no longer be in the tIRA.

In other words, there is no need (for the purpose of line 6) to account for the $12k that has already been converted.

Does that make sense?
I get it now.

Very poor wording/thinking on my part. I was not thinking about whether the $181k was correct or not. It is correct if there is another conversion of $90k.

I was focused on the fact $90k is not the total conversion for the year so $90k can't be used as the conversion amount later on in the form.

Thanks for catching that. I'll go back and change it.

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Re: Roth Conversion Conundrum

Post by cherijoh » Sun Sep 22, 2019 3:05 pm

RetiredAL wrote:
Sun Aug 25, 2019 4:23 pm
retiredjg wrote:
Sun Aug 25, 2019 2:44 pm
RetiredAL wrote:
Sun Aug 25, 2019 2:07 pm
Do remember the taxes on those conversions are normally due at conversion time and must be paid in that quarter.
Do they have to be paid in that quarter or could she just increase her withholding at work to cover the conversion?

If you are using conversion $ to pay the taxes, just have the taxes withheld as part of the conversion.

Do not do this under age 59.5. That would be an early withdrawal and subject to a 10% penalty.
Good warning about using conversion $ when under 59.5. Since I'm long passed that age, it slipped my mind.

I'm not a tax pro, but my understanding is that is correct. However, there are not many month's left to crank up the withholdings.

Yes, I understand there are 101 ways (figuratively) to make the taxes whole, but having read of the many woe-be-me stories here at BH's on many different subjects, is it really worth taking the risk that you'll get everything right to not get ding'd, on a process you may never have done before.
Assuming that the OP hasn't already done any extra conversions beyond the Backdoor Roth, she has until the end of the year to figure it out. 4th quarter estimated taxes aren't due until January 15th. I would expect there is enough time to beef up withholding to cover the taxes on the $11k+ of conversions she has already done if she isn't set up to meet a safe harbor using withholding.

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Re: Roth Conversion Conundrum

Post by cherijoh » Sun Sep 22, 2019 3:13 pm

FiveK wrote:
Sun Sep 22, 2019 1:22 pm
GeekGal wrote:
Sun Sep 22, 2019 1:01 pm
Form 8606
Line 1 (Nondeductible contributions to IRA) $0.00
Line 2 (total basis in tIRA) $12,000.00
Based on the OP, I think the $12K goes on line 1 and $0 on line 2, but that was from only a quick glance. Doesn't change the bottom line.
2019
AGI $146,000
Deduction $27,400
Standard deduction is $24.4K, not $27.4K <--- She isn't using std deduction; upthread she explained the itemized deductions

Noticed both of the above from throwing your numbers into the toolbox spreadsheet (it has separate tabs for Form 8606 and tax calculations) mentioned previously. You may prefer your own spreadsheet (as do we), but it can be useful to compare yours to another (as do we) that has been used by many people and (presumably) has no "obvious" bugs.

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Re: Roth Conversion Conundrum

Post by cherijoh » Sun Sep 22, 2019 3:17 pm

retiredjg wrote:
Sun Sep 22, 2019 2:18 pm
cherijoh wrote:
Sun Sep 22, 2019 1:30 pm
The ability to recharacterize a conversion went away. You still have the ability to switch the designation for this year's contribution from Roth to Traditional or Traditional to Roth. Both were called recharacterizations which leads to some confusion.
What you are saying is true, but it does not affect this poster. A conversion has already occurred so it is no longer possible to recharacterize from traditional to Roth and vice versa. It's a done deal.
Yes, I posted before seeing Alan S. post. I didn't reread the entire thread and didn't remember that she'd already down the conversion. Celia was posting about recharacterizing contributions.

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Re: Roth Conversion Conundrum

Post by FiveK » Sun Sep 22, 2019 3:53 pm

retiredjg wrote:
Sun Sep 22, 2019 2:15 pm
FiveK wrote:
Sun Sep 22, 2019 1:22 pm
Deduction $27,400 Standard deduction is $24.4K, not $27.4K
She is not using the standard deduction.
cherijoh wrote:
Sun Sep 22, 2019 3:13 pm
FiveK wrote:
Sun Sep 22, 2019 1:22 pm
2019
AGI $146,000
Deduction $27,400
Standard deduction is $24.4K, not $27.4K <--- She isn't using std deduction; upthread she explained the itemized deductions
OK, I get it. ;)

It's still a good idea, when developing one's own spreadsheet, to compare it with something reasonably expected to be correct. :)

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Re: Roth Conversion Conundrum

Post by GeekGal » Sun Sep 22, 2019 5:15 pm

retiredjg wrote:
Sun Sep 22, 2019 2:12 pm

3. Also, I figure since I have three years to convert $271-$12 = $259 (or so)...
My understanding is you have three years to convert $271k since that is what is in the tIRA now. The $12k is no longer there. Am I wrong?
You are correct. The $12k is no longer in the tIRA. So yes, I have three years to convert $271k.


retiredjg wrote:
Sun Sep 22, 2019 2:12 pm

Line 1 (Nondeductible contributions to IRA) $0.00 This is the line you show how much was contributed to tIRA in 2019. Should be either $12k (if it is one IRA) or $6k if there are two IRAs). I'm a little unclear on whether there were one or two. We may need to split this.
There were two tIRAs, each for $6k; one for me and one for my husband. He passed away before converting to Roth IRA. After his passing, I assumed his tIRA and then converted it to a Roth IRA.

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Re: Roth Conversion Conundrum

Post by GeekGal » Sun Sep 22, 2019 5:18 pm

FiveK wrote:
Sun Sep 22, 2019 3:53 pm

OK, I get it. ;)

It's still a good idea, when developing one's own spreadsheet, to compare it with something reasonably expected to be correct. :)
Yes, thank you for providing the link to the other spreadsheet. I downloaded it and was very impressed. I think I got overwhelmed at the detail, but agree I should give a spin through, with particular focus on the tab related to Form 8606.

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Re: Roth Conversion Conundrum

Post by GeekGal » Sun Sep 22, 2019 5:26 pm

GeekGal wrote:
Sun Sep 22, 2019 5:26 pm
cherijoh wrote:
Sun Sep 22, 2019 3:05 pm

Assuming that the OP hasn't already done any extra conversions beyond the Backdoor Roth, she has until the end of the year to figure it out. 4th quarter estimated taxes aren't due until January 15th. I would expect there is enough time to beef up withholding to cover the taxes on the $11k+ of conversions she has already done if she isn't set up to meet a safe harbor using withholding.
I did increase my withholding on my paycheck substantially, but given there are only 7 pay periods left in the year, I may have to pay estimated taxes separately as well since taxes owed for the ~$90k tIRA conversion this year are around $20,000.
I have a credit card that pays 3% rewards in the first year up to $20,000. I have about $10,000 left to "spend" before the 3% rewards is reduced to 1.5%. I may pay some of the $20,000 taxes for the tIRA conversion with this 3% rewards credit card (knowing the credit card fee is 2.25% or so) - I will still net gain a small amount. I plan to pay off credit card balance (and the taxes for the tIRA conversion in full using funds from a taxable brokerage account)
I have never paid quarterly taxes before, so I will need to figure out exactly how to do that.


Edited to indicate taxes due (including credit card balance to be paid using taxable brokerage account funds.
Last edited by GeekGal on Sun Sep 22, 2019 6:04 pm, edited 1 time in total.

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Re: Roth Conversion Conundrum

Post by FiveK » Sun Sep 22, 2019 5:37 pm

GeekGal wrote:
Sun Sep 22, 2019 5:18 pm
FiveK wrote:
Sun Sep 22, 2019 3:53 pm

OK, I get it. ;)

It's still a good idea, when developing one's own spreadsheet, to compare it with something reasonably expected to be correct. :)
Yes, thank you for providing the link to the other spreadsheet. I downloaded it and was very impressed. I think I got overwhelmed at the detail, but agree I should give a spin through, with particular focus on the tab related to Form 8606.
That tab and the Calculations seem the primary ones for your situation - other than the Instructions tab, if you are inclined to read instructions before attempting assembly. ;)

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Re: Roth Conversion Conundrum

Post by retiredjg » Mon Sep 23, 2019 8:25 am

Before we go further down this rabbit hole, I'd like to take a step back and look at a few things.

There were two tIRAs, each for $6k; one for me and one for my husband. He passed away before converting to Roth IRA. After his passing, I assumed his tIRA and then converted it to a Roth IRA.
1. We've been putting the whole $12k onto one Form 8606, but that may be incorrect. Ordinarily (if he had not passed away) there would be a Form 8606 for each of you. Each would have $6k on line 1 and line 3 and 5.

You assumed his IRA, but I don't know how to show that you also assumed his basis. I thought it might happen on line 2 of your Form 8606 but I cannot find any guidance on that in the form instructions.

Until we have some knowledge on how to document basis that is assumed, it is probably a waste of time to fiddle with the 8606 Forms any more because we don't know whether to use 1 form or 2.

Did you mention a tax person earlier?


2. If you are going through all this at the present time to get a handle on how much to withhold for taxes, the forms are not needed to get a reasonable guess on your taxes.

It appears that you intend to convert an additional $90k in 2019. That will be a total of $102k converted to Roth in 2019, most (about $98k) of which will be taxed. It appears some of that will be taxed at 22% and some at 24%. Assuming you are not in some kind of phase out, I'm guessing if you withhold something in the neighborhood of $23k, you should be OK. You could withhold more if that makes you more comfortable.

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Re: Roth Conversion Conundrum

Post by GeekGal » Mon Sep 23, 2019 9:12 am

retiredjg wrote:
Mon Sep 23, 2019 8:25 am
Before we go further down this rabbit hole, I'd like to take a step back and look at a few things.

There were two tIRAs, each for $6k; one for me and one for my husband. He passed away before converting to Roth IRA. After his passing, I assumed his tIRA and then converted it to a Roth IRA.
1. We've been putting the whole $12k onto one Form 8606, but that may be incorrect. Ordinarily (if he had not passed away) there would be a Form 8606 for each of you. Each would have $6k on line 1 and line 3 and 5.

You assumed his IRA, but I don't know how to show that you also assumed his basis. I thought it might happen on line 2 of your Form 8606 but I cannot find any guidance on that in the form instructions.

Until we have some knowledge on how to document basis that is assumed, it is probably a waste of time to fiddle with the 8606 Forms any more because we don't know whether to use 1 form or 2.

Did you mention a tax person earlier?
I was thinking Alan S. had said something about this earlier in reply to my inquiry, excerpted below (my query is in black color text).

- I converted both his and my Traditional IRA to a Roth IRA in February 2019 for a total conversion of $12,000 (so he no longer has a Traditional IRA. I left $20 in mine, unaware of the aggregation rules).

If it turns out that one or both of your TIRA Contributions are non deductible, you will file a Form 8606 for each spouse reporting whose contribution is non deductible for 2019. Since you couldn't have converted HIS TIRA until you assumed ownership of it, his 6000 of basis is transferred to YOU and the combined 12000 conversion will be reported only on YOUR Form 8606. You will therefore show 12000 of basis on your Form 8606, but as others have noted, the later rollover of his employer plan will result in pro rating of the entire year end 2019 balance and most of the 12000 conversion being taxable, but no more than that. Most of your 12000 basis will be left over and then carried over to later years.


My husband did our taxes via Turbo Tax (it was always straight-forward for our situation, and he was very good at them). I did them for 2018 in April via Turbo Tax.
I therefore do not have a tax person.

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Re: Roth Conversion Conundrum

Post by GeekGal » Mon Sep 23, 2019 9:20 am

2. If you are going through all this at the present time to get a handle on how much to withhold for taxes, the forms are not needed to get a reasonable guess on your taxes.

It appears that you intend to convert an additional $90k in 2019. That will be a total of $102k converted to Roth in 2019, most (about $98k) of which will be taxed. It appears some of that will be taxed at 22% and some at 24%. Assuming you are not in some kind of phase out, I'm guessing if you withhold something in the neighborhood of $23k, you should be OK. You could withhold more if that makes you more comfortable.

Yes, maybe good plan for now re withholdings. My objective was tax withholding and to plan out the proportion of the tIRA to convert each year to minimize taxes.

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Re: Roth Conversion Conundrum

Post by retiredjg » Mon Sep 23, 2019 10:02 am

I was thinking Alan S. had said something about this earlier in reply to my inquiry, excerpted below (my query is in black color text).
I'm glad you remembered that. I had forgotten he said that.


Alan said.....If it turns out that one or both of your TIRA Contributions are non deductible, you will file a Form 8606 for each spouse reporting whose contribution is non deductible for 2019. Since you couldn't have converted HIS TIRA until you assumed ownership of it, his 6000 of basis is transferred to YOU and the combined 12000 conversion will be reported only on YOUR Form 8606. You will therefore show 12000 of basis on your Form 8606....
The question still remains in my mind where do you show the $12k basis? Since he didn't mention anywhere in particular, I guess the only place it could go is on line 1. Edited to add...I'm still wondering if His $6k should be entered on line 2.

Since contributing $12k is not allowed for 1 person in a year, you probably need to include a comment or explanation. You'll have to watch carefully on Turbo for a place to add (type in) a comment related to that form.

And keep good notes because you will likely get an inquiry about 2 years later. I think this is because computers kick out the things that are out of place and may send the inquiry before a human actually looks at the return for an explanation.
Last edited by retiredjg on Mon Sep 23, 2019 10:45 am, edited 1 time in total.

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Re: Roth Conversion Conundrum

Post by retiredjg » Mon Sep 23, 2019 10:10 am

GeekGal wrote:
Mon Sep 23, 2019 9:20 am
Yes, maybe good plan for now re withholdings. My objective was tax withholding and to plan out the proportion of the tIRA to convert each year to minimize taxes.
I don't think this is going to matter if you want to convert it all in 2019, 2020, and 2021. Here's why.

Each of those 3 years you only have a certain amount of "space" in the 22% bracket for your conversion to be put in. The rest spills over into the 24% bracket. The space in the 22% bracket is not going to get any bigger no matter what you do (unless you restrict your income in some way).

Does that make sense?

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Re: Roth Conversion Conundrum

Post by retiredjg » Mon Sep 23, 2019 10:40 am

Here is how I "see" your income. Think of your income as a stack. It reads from the bottom up. Maybe Fivek can check my work since I do this by hand and might have had a brain fart.


3) $97,675 is the taxable part of your $102k conversion. The first $49,800 is taxed at 22%. The remaining $47,875 is taxed at 24%.

2) the next $118,600 is in the 10%, 12%, and 22% bracket (I won't break it down)

1) $27,400 is not taxed because it is your itemized deduction


I get taxes of $22,446 for the conversion.


All of this assumes that you are not in some kind of phase-out so it should be checked using tax software.

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Re: Roth Conversion Conundrum

Post by GeekGal » Fri Oct 18, 2019 5:03 pm

Thank you all for your help, and particularly retiredjg for going through the trouble of double-checking the calculations. I get $21,978 in my spreadsheet for federal taxes due (and estimated between $4,000-$6,000) for state taxes. I also tried the spreadsheet recommended by FiveK, and got a slightly different value for the leftover basis, but all in all, I will plan for about $23,000 in federal taxes, and about $5,000 in state taxes for 2019.

Also, thank you for pointing out that there isn't an "optimal" amount to convert each year - not sure why I was thinking there was, but perhaps it is because optimization is a integral function of my brain works.

I was considering the overall tax burden will be about $70,000 (federal) and about $15,000 (state), for an overall tax total of $85,000 over the course of the next three years. The opportunity cost of this $85,000 assuming a modest annual average rate of return of 5%, no additional money, for the next 31 years (until I am 70 years old) is $385,804. I suppose the funds in the Roth will grow, and I won't be taxed on the tIRA funds once they are converted, but gosh that is a lot of opportunity cost.

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Re: Roth Conversion Conundrum

Post by retiredjg » Fri Oct 18, 2019 6:06 pm

It might help to look at this a different way.

You may think of that money as yours, but you do not own all of your tax-deferred money. Uncle Sam owns part of it. You can pay him now or later. Either way, there is no "opportunity cost" because that $85k is not yours to begin with.

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FiveK
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Re: Roth Conversion Conundrum

Post by FiveK » Sun Oct 20, 2019 12:45 pm

GeekGal wrote:
Fri Oct 18, 2019 5:03 pm
I also tried the spreadsheet recommended by FiveK, and got a slightly different value for the leftover basis....
Good to see that things are making sense to you.

It's possible you have a situation not envisioned by the developer of that spreadsheet. Its 8606 calculations seem to have been correct for a variety of posted situations here. If there is - or even if you think there is - an error in it, you might post the circumstances in the Case Study Spreadsheet updates thread.

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