Calculating the Roth conversion amounts

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
tenkuky
Posts: 352
Joined: Sun Dec 14, 2014 4:28 pm

Calculating the Roth conversion amounts

Post by tenkuky » Thu Jun 14, 2018 9:02 am

I will convert a small amount of my IRA to Roth in January, because of the following:
1. There are non-deductible amounts in there, and the wiki says to convert those sooner rather than later.
2. My tax bracket will remain the same (slight income reduction expected this year) to allow for this.
3. It will reduce my deferred amounts (current Trad:Roth= 90:10) and thus RMDs in the future.

My concern is how to go about calculating the taxable amount since :oops: I comingled in the past, non-ded contributions + rollover from employer. Is the math done by Schwab or do I dig up my 5498s for the last 20 years?
I called Schwab today and it looks like the conversion can be done online (and in kind), I just don't want to make a mistake.

Thanks!

retiredjg
Posts: 32710
Joined: Thu Jan 10, 2008 12:56 pm

Re: Calculating the Roth conversion amounts

Post by retiredjg » Thu Jun 14, 2018 9:07 am

The math is done by you or your tax software if you can figure out how to enter the data.

To start, you need to dig up your Form(s) 8606 (or just the last one) for the year(s) you made the noon-deductible contribution(s). Did you fill out that form?

The 5498 form will not tell you anything. The company that holds your IRA does not know what you have deducted or not deducted.

tenkuky
Posts: 352
Joined: Sun Dec 14, 2014 4:28 pm

Re: Calculating the Roth conversion amounts

Post by tenkuky » Thu Jun 14, 2018 9:24 am

Yes, I did have to send the IRS a composite (with apologies) to update 8606 since I had inadvertently left out several years.
I learned that from this board, and also stopped contributing to the nondeductible IRA in last 2 years.
I will dig up the last 6806 and plug into software.
Thanks for the guidance!

retiredjg
Posts: 32710
Joined: Thu Jan 10, 2008 12:56 pm

Re: Calculating the Roth conversion amounts

Post by retiredjg » Thu Jun 14, 2018 9:29 am

You should also pretend you do a Roth conversion and work through the form in pencil. That will teach you how it works.


Do you have a 401k or similar plan that would accept a rollover from the IRA? If yes, you can "isolate" your basis (the non-deductible contributions) from the other money and just convert the non-deductible part.

tenkuky
Posts: 352
Joined: Sun Dec 14, 2014 4:28 pm

Re: Calculating the Roth conversion amounts

Post by tenkuky » Thu Jun 14, 2018 9:31 am

Wow!
I'll check and see if the 401K will do that.
To be clear: I isolate the non-deductible, keep it in the IRA, and rollover previously rolled over amounts to the 401K or 403b if it will allow it?
Then, I just convert the amount left in the IRA?
Sounds like a good way to undo my years of stupid decisions!

retiredjg
Posts: 32710
Joined: Thu Jan 10, 2008 12:56 pm

Re: Calculating the Roth conversion amounts

Post by retiredjg » Thu Jun 14, 2018 10:00 am

Yes, that would be the procedure.

You could even combine this with the Roth conversion you plan to do. For example, let's say you wanted to do a Roth conversion of $5000. Let's say you have $4,000 of non-deductible contributions in the mixed IRA. You could roll everything BUT $9k into the 401k and convert the $9k to Roth. You'd pay tax on the $5k and not on the $4k.

This would all be captured on the Form 8606. Read it and see how it works.

Your 401k may not accept the rollover if the IRA is not named "rollover". Or they may not accept a rollover from an IRA that has mixed contributions (no need to volunteer this info, but tell them if they ask).

If they won't accept the rollover, all is not lost. You just have to pro-rate each withdrawal or conversion from your IRA (which means the total of all your IRAs that are not Roth IRA). It's a pain the first time. After that, it is very simple.

tenkuky
Posts: 352
Joined: Sun Dec 14, 2014 4:28 pm

Re: Calculating the Roth conversion amounts

Post by tenkuky » Thu Jun 14, 2018 10:11 am

Another question on this:
while calculating the non-deductible contributions, say it's $5500 in 2010, is that all that is exempt from taxable event?
What about the growth of it, now it's $6000?
How does one calculate that and make it all exempt since the basis was nondeductible anyway?
I apologize if I'm not understanding this. :(

I got off the phone with Fido and they will accept any pretax monies as rollover into the 403b.
So it's upto me to do the math and decide what I want sent.

User avatar
FiveK
Posts: 4858
Joined: Sun Mar 16, 2014 2:43 pm

Re: Calculating the Roth conversion amounts

Post by FiveK » Thu Jun 14, 2018 10:15 am

tenkuky wrote:
Thu Jun 14, 2018 9:31 am
To be clear: I isolate the non-deductible, keep it in the IRA, and rollover previously rolled over amounts to the 401K or 403b if it will allow it?
This may have been implied, but to be sure:
a) You roll over previously rolled over amounts and all earnings to the 401k.
b) The only amount you should convert from tIRA to Roth is the amount of non-deductible contributions.

The net result of a and b should be $0 in the tIRA as of 12/31/2018, a non-taxable move of the non-deductible contributions from the tIRA to the Roth, and an increase in the 401k by the amount of deductible tIRA contributions and the earnings from all tIRA contributions.

User avatar
FiveK
Posts: 4858
Joined: Sun Mar 16, 2014 2:43 pm

Re: Calculating the Roth conversion amounts

Post by FiveK » Thu Jun 14, 2018 10:20 am

tenkuky wrote:
Thu Jun 14, 2018 10:11 am
Another question on this:
while calculating the non-deductible contributions, say it's $5500 in 2010, is that all that is exempt from taxable event?
What about the growth of it, now it's $6000?
How does one calculate that and make it all exempt since the basis was nondeductible anyway?
I apologize if I'm not understanding this. :(

I got off the phone with Fido and they will accept any pretax monies as rollover into the 403b.
So it's upto me to do the math and decide what I want sent.
You would roll over [(total balance in the tIRA) minus (amount of non-deductible contributions)].

The 'Form8606' tab in the personal finance toolbox spreadsheet may be a useful double check to what commercial tax software and/or hand calculations provide.

Housedoc
Posts: 25
Joined: Thu May 24, 2018 4:25 pm

Re: Calculating the Roth conversion amounts

Post by Housedoc » Thu Jun 14, 2018 3:49 pm

I will play around with the tool. My initial thoughts on looking at my numbers is probably not worth it.
My IRA all tax deferred is 1.3 Mil, Wife's is 750 thousand. We are 60 and 59 in age. Drawing a pension but not planning on taking SS till 70.
I previously estimated around 35 thousand a year conversion to avoid bumping into next tax bracket. 10 years is only 350K conversion.
I would pay taxes each year out of my money market or cd accounts that have already been taxed. Any opinions before I use spreadsheets? Thanks in advance.

retiredjg
Posts: 32710
Joined: Thu Jan 10, 2008 12:56 pm

Re: Calculating the Roth conversion amounts

Post by retiredjg » Thu Jun 14, 2018 4:49 pm

tenkuky wrote:
Thu Jun 14, 2018 10:11 am
Another question on this:
while calculating the non-deductible contributions, say it's $5500 in 2010, is that all that is exempt from taxable event?
What about the growth of it, now it's $6000?
The growth will eventually be taxed. There are two ways you can do this.
  • Roll everything else to the 403b and convert $6k paying tax on $500 now.

    Or roll everything except $5,500 to the 403b, and you pay tax on the other $500 as you take the money out of 401k/IRA later in life.
Either is acceptable.

How does one calculate that and make it all exempt since the basis was nondeductible anyway?
I apologize if I'm not understanding this. :(
It is not all "exempt". Only the $5,500 will not be taxed a second time. You will pay tax at some point on the earnings (unless you die first).

I got off the phone with Fido and they will accept any pretax monies as rollover into the 403b.
So it's up to me to do the math and decide what I want sent.
This is good.

retiredjg
Posts: 32710
Joined: Thu Jan 10, 2008 12:56 pm

Re: Calculating the Roth conversion amounts

Post by retiredjg » Thu Jun 14, 2018 4:52 pm

Housedoc wrote:
Thu Jun 14, 2018 3:49 pm
I will play around with the tool. My initial thoughts on looking at my numbers is probably not worth it.
My IRA all tax deferred is 1.3 Mil, Wife's is 750 thousand. We are 60 and 59 in age. Drawing a pension but not planning on taking SS till 70.
I previously estimated around 35 thousand a year conversion to avoid bumping into next tax bracket. 10 years is only 350K conversion.
I would pay taxes each year out of my money market or cd accounts that have already been taxed. Any opinions before I use spreadsheets? Thanks in advance.
It is possible you need to convert into the next tax bracket at least until you are 63 years old (when IRMAA comes into play). To get a specific recommendation (after you play with the tool....you should probably start your own thread and give more information about your situation.

Post Reply