IRA to Roth IRA Conversion, no tax?!

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Topic Author
andysnp
Posts: 40
Joined: Mon Aug 20, 2018 5:53 pm

IRA to Roth IRA Conversion, no tax?!

Post by andysnp »

Let's say I have $100,000 in an IRA and I want to convert it to Roth IRA.

Let's say I'm "early" retired at 45 so my income is 0.

The standard married deduction is $25,100.

Can I convert $25,100 from my IRA to a Roth IRA and pay 0 Tax? If I wait 5 years, I can withdraw the Roth IRA and pay no penalty and tax!

I can do this each year until all of my IRA is converted to a ROTH IRA.

Did I calculate this correctly or am I missing something?
gclancer
Posts: 751
Joined: Sat Apr 27, 2013 10:34 am

Re: IRA to Roth IRA Conversion, no tax?!

Post by gclancer »

The only thing you’re missing is state tax, if applicable. Otherwise that’s how it works, yes.
earlyout
Posts: 1473
Joined: Tue Feb 20, 2007 5:24 pm

Re: IRA to Roth IRA Conversion, no tax?!

Post by earlyout »

If you tax situation is an simple as you describe, yes, you can convert to Roth up to the amount of your standard deduction and pay no tax. Do yourself a big favor and fill out a tax return by hand to increase your understanding of the tax process.
Dottie57
Posts: 10104
Joined: Thu May 19, 2016 5:43 pm
Location: Earth Northern Hemisphere

Re: IRA to Roth IRA Conversion, no tax?!

Post by Dottie57 »

andysnp wrote: Sun Jul 18, 2021 7:11 am Let's say I have $100,000 in an IRA and I want to convert it to Roth IRA.

Let's say I'm "early" retired at 45 so my income is 0.

The standard married deduction is $25,100.

Can I convert $25,100 from my IRA to a Roth IRA and pay 0 Tax? If I wait 5 years, I can withdraw the Roth IRA and pay no penalty and tax!

I can do this each year until all of my IRA is converted to a ROTH IRA.

Did I calculate this correctly or am I missing something?
Would you be living on cash from a bank account?
Topic Author
andysnp
Posts: 40
Joined: Mon Aug 20, 2018 5:53 pm

Re: IRA to Roth IRA Conversion, no tax?!

Post by andysnp »

Dottie57 wrote: Sun Jul 18, 2021 7:28 am
andysnp wrote: Sun Jul 18, 2021 7:11 am Let's say I have $100,000 in an IRA and I want to convert it to Roth IRA.

Let's say I'm "early" retired at 45 so my income is 0.

The standard married deduction is $25,100.

Can I convert $25,100 from my IRA to a Roth IRA and pay 0 Tax? If I wait 5 years, I can withdraw the Roth IRA and pay no penalty and tax!

I can do this each year until all of my IRA is converted to a ROTH IRA.

Did I calculate this correctly or am I missing something?
Would you be living on cash from a bank account?
Let's say I have $3 million in a brokerage account. I can use the 3% rule, and withdraw around $90,000 tax free to pay for my living expenses. The Capital gains tax is 0 if your gain is $80,000 or less. Only some of the $90,000 withdrawal will be a gain.

Does this affect the IRA to Roth IRA conversion? I assume I will still pay 0 tax on the conversion, but I'm not sure.

Is this correct?

Thanks!
mkc
Posts: 697
Joined: Wed Apr 17, 2013 2:59 pm

Re: IRA to Roth IRA Conversion, no tax?!

Post by mkc »

andysnp wrote: Sun Jul 18, 2021 7:11 am Let's say I'm "early" retired at 45 so my income is 0.

The standard married deduction is $25,100.

Can I convert $25,100 from my IRA to a Roth IRA and pay 0 Tax? If I wait 5 years, I can withdraw the Roth IRA and pay no penalty and tax!

I can do this each year until all of my IRA is converted to a ROTH IRA.

Did I calculate this correctly or am I missing something?
Earned income is 0, but what about interest/dividend/cap gains and distributions?
User avatar
David Jay
Posts: 11333
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: IRA to Roth IRA Conversion, no tax?!

Post by David Jay »

Here is my 2018 thread on Roth Conversions for low-expense retirees: viewtopic.php?f=10&t=237277
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
User avatar
RickBoglehead
Posts: 7055
Joined: Wed Feb 14, 2018 9:10 am
Location: In a house

Re: IRA to Roth IRA Conversion, no tax?!

Post by RickBoglehead »

andysnp wrote: Sun Jul 18, 2021 8:13 am Let's say I have $3 million in a brokerage account. I can use the 3% rule, and withdraw around $90,000 tax free to pay for my living expenses. The Capital gains tax is 0 if your gain is $80,000 or less. Only some of the $90,000 withdrawal will be a gain.

Does this affect the IRA to Roth IRA conversion? I assume I will still pay 0 tax on the conversion, but I'm not sure.

Is this correct?

Thanks!
If you have $3 million in a taxable brokerage account, then you're earning dividends, interest, and/or capital gains. Therefore, you do not have zero income. Therefore, you may not be paying zero tax.

Also, the 5 year rule applies to the FIRST Roth IRA you setup. Once you did that, the clock started ticking. We did our first Roth IRA many, many years ago (they started in 1997), and 80% of our retirement funds are now Roth.
Avid user of forums on variety of interests-financial, home brewing, F-150, PHEV, home repair, etc. Enjoy learning & passing on knowledge. It's PRINCIPAL, not PRINCIPLE. I ADVISE you to seek ADVICE.
Dottie57
Posts: 10104
Joined: Thu May 19, 2016 5:43 pm
Location: Earth Northern Hemisphere

Re: IRA to Roth IRA Conversion, no tax?!

Post by Dottie57 »

andysnp wrote: Sun Jul 18, 2021 8:13 am
Dottie57 wrote: Sun Jul 18, 2021 7:28 am
andysnp wrote: Sun Jul 18, 2021 7:11 am Let's say I have $100,000 in an IRA and I want to convert it to Roth IRA.

Let's say I'm "early" retired at 45 so my income is 0.

The standard married deduction is $25,100.

Can I convert $25,100 from my IRA to a Roth IRA and pay 0 Tax? If I wait 5 years, I can withdraw the Roth IRA and pay no penalty and tax!

I can do this each year until all of my IRA is converted to a ROTH IRA.

Did I calculate this correctly or am I missing something?
Would you be living on cash from a bank account?
Let's say I have $3 million in a brokerage account. I can use the 3% rule, and withdraw around $90,000 tax free to pay for my living expenses. The Capital gains tax is 0 if your gain is $80,000 or less. Only some of the $90,000 withdrawal will be a gain.

Does this affect the IRA to Roth IRA conversion? I assume I will still pay 0 tax on the conversion, but I'm not sure.

Is this correct?

Thanks!
Capital gains tax impacts income tax. Really, use tax software to see how it impacts your Roth conversion.
User avatar
Free to Choose
Posts: 46
Joined: Sat Feb 09, 2019 1:40 pm
Contact:

Re: IRA to Roth IRA Conversion, no tax?!

Post by Free to Choose »

Dottie57 wrote: Sun Jul 18, 2021 9:08 am
andysnp wrote: Sun Jul 18, 2021 8:13 am
Dottie57 wrote: Sun Jul 18, 2021 7:28 am
andysnp wrote: Sun Jul 18, 2021 7:11 am Let's say I have $100,000 in an IRA and I want to convert it to Roth IRA.

Let's say I'm "early" retired at 45 so my income is 0.

The standard married deduction is $25,100.

Can I convert $25,100 from my IRA to a Roth IRA and pay 0 Tax? If I wait 5 years, I can withdraw the Roth IRA and pay no penalty and tax!

I can do this each year until all of my IRA is converted to a ROTH IRA.

Did I calculate this correctly or am I missing something?
Would you be living on cash from a bank account?
Let's say I have $3 million in a brokerage account. I can use the 3% rule, and withdraw around $90,000 tax free to pay for my living expenses. The Capital gains tax is 0 if your gain is $80,000 or less. Only some of the $90,000 withdrawal will be a gain.

Does this affect the IRA to Roth IRA conversion? I assume I will still pay 0 tax on the conversion, but I'm not sure.

Is this correct?

Thanks!
Capital gains tax impacts income tax. Really, use tax software to see how it impacts your Roth conversion.

I agree with the previous responses.

In addition, Income stacking effects ordinary Income, including conversions, first by the Standard Deduction. Look at these articles from kitces.com:

https://www.kitces.com/blog/long-term-c ... in-0-rate/

https://www.kitces.com/blog/understandi ... -in-basis/

There are also a lot of Boglehead.org threads on it that explain the framework.

viewtopic.php?t=87471

viewtopic.php?t=212723
02nz
Posts: 6926
Joined: Wed Feb 21, 2018 3:17 pm

Re: IRA to Roth IRA Conversion, no tax?!

Post by 02nz »

andysnp wrote: Sun Jul 18, 2021 8:13 am Let's say I have $3 million in a brokerage account. I can use the 3% rule, and withdraw around $90,000 tax free to pay for my living expenses. The Capital gains tax is 0 if your gain is $80,000 or less. Only some of the $90,000 withdrawal will be a gain.

Does this affect the IRA to Roth IRA conversion? I assume I will still pay 0 tax on the conversion, but I'm not sure.

Is this correct?

Thanks!
Actually, accounting for the standard deduction, and assuming no other income, a MFJ couple can have almost $106,000 in LTCG in 2021 and pay no federal tax. If you add IRA distributions / Roth conversions into the picture, those dollars will start filling in from the bottom (with the standard deduction), pushing some LTCG dollars into the 15% bracket. This site helps visualize: https://engaging-data.com/tax-brackets/ ... &cg=105900 (you need to change the year manually to 2021).
pshonore
Posts: 7287
Joined: Sun Jun 28, 2009 2:21 pm

Re: IRA to Roth IRA Conversion, no tax?!

Post by pshonore »

andysnp wrote: Sun Jul 18, 2021 7:11 am Let's say I have $100,000 in an IRA and I want to con'vert it to Roth IRA.

Let's say I'm "early" retired at 45 so my income is 0.

The standard married deduction is $25,100.

Can I convert $25,100 from my IRA to a Roth IRA and pay 0 Tax? If I wait 5 years, I can withdraw the Roth IRA and pay no penalty and tax!
I believe if you withdraw "converted monies" before you reach 59 1/2, there may be tax and penalties. (No tax on withdrawal of original contributions though).
retire2022
Posts: 1998
Joined: Tue Oct 02, 2018 6:10 pm
Location: NYC

Re: IRA to Roth IRA Conversion, no tax?!

Post by retire2022 »

andysnp wrote: Sun Jul 18, 2021 7:11 am Let's say I have $100,000 in an IRA and I want to convert it to Roth IRA.

Let's say I'm "early" retired at 45 so my income is 0.

The standard married deduction is $25,100.

Can I convert $25,100 from my IRA to a Roth IRA and pay 0 Tax? If I wait 5 years, I can withdraw the Roth IRA and pay no penalty and tax!

I can do this each year until all of my IRA is converted to a ROTH IRA.

Did I calculate this correctly or am I missing something?
here is Glen Reeves free tax preparation (1040 in Excel) software 2021 and prior years without your state form.

https://sites.google.com/view/incometax ... e/download
MrJedi
Posts: 788
Joined: Wed May 06, 2020 11:42 am

Re: IRA to Roth IRA Conversion, no tax?!

Post by MrJedi »

Yes. This strategy (or even going up to 10/12% tax rate which is relatively low still) is what people fail to see when they talk about wanting retire early and thus don't want to contribute to 401k. To me retiring early gives you many years with very low income to perform these Roth conversions at zero or very low tax. Then you can withdraw those conversions tax/penalty free after 5 years (Roth conversion ladder strategy).
sycamore
Posts: 2484
Joined: Tue May 08, 2018 12:06 pm

Re: IRA to Roth IRA Conversion, no tax?!

Post by sycamore »

pshonore wrote: Mon Jul 19, 2021 8:37 am
andysnp wrote: Sun Jul 18, 2021 7:11 am Let's say I have $100,000 in an IRA and I want to con'vert it to Roth IRA.

Let's say I'm "early" retired at 45 so my income is 0.

The standard married deduction is $25,100.

Can I convert $25,100 from my IRA to a Roth IRA and pay 0 Tax? If I wait 5 years, I can withdraw the Roth IRA and pay no penalty and tax!
I believe if you withdraw "converted monies" before you reach 59 1/2, there may be tax and penalties. (No tax on withdrawal of original contributions though).
I think that's incorrect.

Mike Piper (author and Boglehead member) just posted an article about Roth IRA Withdrawal Rules.
Distributions of Converted Amounts

Distributions of converted amounts are not subject to ordinary income tax.

Distributions of converted amounts are subject to a 10% penalty, unless (at least) one of the following is true:

The distribution is occurring at least 5 years from January 1 of the year in which the conversion occurred,
The distribution is of a converted amount that was not taxable in the year of the conversion,
The distribution is for a “qualifying reason” (listed below), or
One of the “other exceptions” to the 10% penalty (also listed below) applies.
See the rest of the article for the “qualifying reason” and “other exceptions” lists.
pshonore
Posts: 7287
Joined: Sun Jun 28, 2009 2:21 pm

Re: IRA to Roth IRA Conversion, no tax?!

Post by pshonore »

sycamore wrote: Mon Jul 19, 2021 9:09 am
pshonore wrote: Mon Jul 19, 2021 8:37 am
andysnp wrote: Sun Jul 18, 2021 7:11 am Let's say I have $100,000 in an IRA and I want to con'vert it to Roth IRA.

Let's say I'm "early" retired at 45 so my income is 0.

The standard married deduction is $25,100.

Can I convert $25,100 from my IRA to a Roth IRA and pay 0 Tax? If I wait 5 years, I can withdraw the Roth IRA and pay no penalty and tax!
I believe if you withdraw "converted monies" before you reach 59 1/2, there may be tax and penalties. (No tax on withdrawal of original contributions though).
I think that's incorrect.

Mike Piper (author and Boglehead member) just posted an article about Roth IRA Withdrawal Rules.
Distributions of Converted Amounts

Distributions of converted amounts are not subject to ordinary income tax.

Distributions of converted amounts are subject to a 10% penalty, unless (at least) one of the following is true:

The distribution is occurring at least 5 years from January 1 of the year in which the conversion occurred,
The distribution is of a converted amount that was not taxable in the year of the conversion,
The distribution is for a “qualifying reason” (listed below), or
One of the “other exceptions” to the 10% penalty (also listed below) applies.
See the rest of the article for the “qualifying reason” and “other exceptions” lists.
Thanks for the correction. Thats a complicated topic.
tj
Posts: 4666
Joined: Thu Dec 24, 2009 12:10 am

Re: IRA to Roth IRA Conversion, no tax?!

Post by tj »

RickBoglehead wrote: Sun Jul 18, 2021 8:25 am
andysnp wrote: Sun Jul 18, 2021 8:13 am Let's say I have $3 million in a brokerage account. I can use the 3% rule, and withdraw around $90,000 tax free to pay for my living expenses. The Capital gains tax is 0 if your gain is $80,000 or less. Only some of the $90,000 withdrawal will be a gain.

Does this affect the IRA to Roth IRA conversion? I assume I will still pay 0 tax on the conversion, but I'm not sure.

Is this correct?

Thanks!
If you have $3 million in a taxable brokerage account, then you're earning dividends, interest, and/or capital gains. Therefore, you do not have zero income. Therefore, you may not be paying zero tax.

Also, the 5 year rule applies to the FIRST Roth IRA you setup. Once you did that, the clock started ticking. We did our first Roth IRA many, many years ago (they started in 1997), and 80% of our retirement funds are now Roth.
No, the 5 year rule applies to each conversion. Mike wrote a good post on this today.

https://obliviousinvestor.com/roth-ira- ... wal-rules/
Affable at 50
Posts: 119
Joined: Fri Dec 27, 2019 2:34 am

Re: IRA to Roth IRA Conversion, no tax?!

Post by Affable at 50 »

pshonore wrote: Mon Jul 19, 2021 9:34 am
sycamore wrote: Mon Jul 19, 2021 9:09 am
pshonore wrote: Mon Jul 19, 2021 8:37 am
andysnp wrote: Sun Jul 18, 2021 7:11 am Let's say I have $100,000 in an IRA and I want to con'vert it to Roth IRA.

Let's say I'm "early" retired at 45 so my income is 0.

The standard married deduction is $25,100.

Can I convert $25,100 from my IRA to a Roth IRA and pay 0 Tax? If I wait 5 years, I can withdraw the Roth IRA and pay no penalty and tax!
I believe if you withdraw "converted monies" before you reach 59 1/2, there may be tax and penalties. (No tax on withdrawal of original contributions though).
I think that's incorrect.

Mike Piper (author and Boglehead member) just posted an article about Roth IRA Withdrawal Rules.
Distributions of Converted Amounts

Distributions of converted amounts are not subject to ordinary income tax.

Distributions of converted amounts are subject to a 10% penalty, unless (at least) one of the following is true:

The distribution is occurring at least 5 years from January 1 of the year in which the conversion occurred,
The distribution is of a converted amount that was not taxable in the year of the conversion,
The distribution is for a “qualifying reason” (listed below), or
One of the “other exceptions” to the 10% penalty (also listed below) applies.
See the rest of the article for the “qualifying reason” and “other exceptions” lists.
Thanks for the correction. Thats a complicated topic.
The articles say that you are not subject to tax on the converted amounts after a five year wait (as described above). The converted amount does not include earnings following the conversion.
tj
Posts: 4666
Joined: Thu Dec 24, 2009 12:10 am

Re: IRA to Roth IRA Conversion, no tax?!

Post by tj »

Affable at 50 wrote: Mon Jul 19, 2021 10:07 am
pshonore wrote: Mon Jul 19, 2021 9:34 am
sycamore wrote: Mon Jul 19, 2021 9:09 am
pshonore wrote: Mon Jul 19, 2021 8:37 am
andysnp wrote: Sun Jul 18, 2021 7:11 am Let's say I have $100,000 in an IRA and I want to con'vert it to Roth IRA.

Let's say I'm "early" retired at 45 so my income is 0.

The standard married deduction is $25,100.

Can I convert $25,100 from my IRA to a Roth IRA and pay 0 Tax? If I wait 5 years, I can withdraw the Roth IRA and pay no penalty and tax!
I believe if you withdraw "converted monies" before you reach 59 1/2, there may be tax and penalties. (No tax on withdrawal of original contributions though).
I think that's incorrect.

Mike Piper (author and Boglehead member) just posted an article about Roth IRA Withdrawal Rules.
Distributions of Converted Amounts

Distributions of converted amounts are not subject to ordinary income tax.

Distributions of converted amounts are subject to a 10% penalty, unless (at least) one of the following is true:

The distribution is occurring at least 5 years from January 1 of the year in which the conversion occurred,
The distribution is of a converted amount that was not taxable in the year of the conversion,
The distribution is for a “qualifying reason” (listed below), or
One of the “other exceptions” to the 10% penalty (also listed below) applies.
See the rest of the article for the “qualifying reason” and “other exceptions” lists.
Thanks for the correction. Thats a complicated topic.
The articles say that you are not subject to tax on the converted amounts after a five year wait (as described above). The converted amount does not include earnings following the conversion.
For the earnings to be tax free, you basically need to be over 59.5 and have had five years since you first contributed to any Roth IRA. The article would note any exceptions.
retiredjg
Posts: 44825
Joined: Thu Jan 10, 2008 12:56 pm

Re: IRA to Roth IRA Conversion, no tax?!

Post by retiredjg »

sycamore wrote: Mon Jul 19, 2021 9:09 am Mike Piper (author and Boglehead member) just posted an article about Roth IRA Withdrawal Rules.
Mike is one of the best at explaining complicated subjects in a very simple manner. :D
trizzle
Posts: 9
Joined: Wed May 23, 2018 2:43 pm

Re: IRA to Roth IRA Conversion, no tax?!

Post by trizzle »

02nz wrote: Sun Jul 18, 2021 10:31 am
andysnp wrote: Sun Jul 18, 2021 8:13 am Let's say I have $3 million in a brokerage account. I can use the 3% rule, and withdraw around $90,000 tax free to pay for my living expenses. The Capital gains tax is 0 if your gain is $80,000 or less. Only some of the $90,000 withdrawal will be a gain.

Does this affect the IRA to Roth IRA conversion? I assume I will still pay 0 tax on the conversion, but I'm not sure.

Is this correct?

Thanks!
Actually, accounting for the standard deduction, and assuming no other income, a MFJ couple can have almost $106,000 in LTCG in 2021 and pay no federal tax. If you add IRA distributions / Roth conversions into the picture, those dollars will start filling in from the bottom (with the standard deduction), pushing some LTCG dollars into the 15% bracket. This site helps visualize: https://engaging-data.com/tax-brackets/ ... &cg=105900 (you need to change the year manually to 2021).
This is a fascinating tool. Thank you for the link!
02nz
Posts: 6926
Joined: Wed Feb 21, 2018 3:17 pm

Re: IRA to Roth IRA Conversion, no tax?!

Post by 02nz »

Affable at 50 wrote: Mon Jul 19, 2021 10:07 am The articles say that you are not subject to tax on the converted amounts after a five year wait (as described above). The converted amount does not include earnings following the conversion.
Note that it's 5 calendar years, could be closer to 4 years in practice: e.g., if you convert in Dec 2021, that amount is available penalty-free on Jan 1, 2026.
tj
Posts: 4666
Joined: Thu Dec 24, 2009 12:10 am

Re: IRA to Roth IRA Conversion, no tax?!

Post by tj »

02nz wrote: Mon Jul 19, 2021 10:37 am
Affable at 50 wrote: Mon Jul 19, 2021 10:07 am The articles say that you are not subject to tax on the converted amounts after a five year wait (as described above). The converted amount does not include earnings following the conversion.
Note that it's 5 calendar years, could be closer to 4 years in practice: e.g., if you convert in Dec 2021, that amount is available penalty-free on Jan 1, 2026.
The best thing to do is probably keep a spreadsheet of all your contributions and conversions. Unless you plan on converting in the 5 years before you start withdrawing, the dates aren't so relevant as long as you don't withdraw mroe than the contributions and conversions.
Topic Author
andysnp
Posts: 40
Joined: Mon Aug 20, 2018 5:53 pm

Re: IRA to Roth IRA Conversion, no tax?!

Post by andysnp »

trizzle wrote: Mon Jul 19, 2021 10:30 am
02nz wrote: Sun Jul 18, 2021 10:31 am
andysnp wrote: Sun Jul 18, 2021 8:13 am Let's say I have $3 million in a brokerage account. I can use the 3% rule, and withdraw around $90,000 tax free to pay for my living expenses. The Capital gains tax is 0 if your gain is $80,000 or less. Only some of the $90,000 withdrawal will be a gain.

Does this affect the IRA to Roth IRA conversion? I assume I will still pay 0 tax on the conversion, but I'm not sure.

Is this correct?

Thanks!
Actually, accounting for the standard deduction, and assuming no other income, a MFJ couple can have almost $106,000 in LTCG in 2021 and pay no federal tax. If you add IRA distributions / Roth conversions into the picture, those dollars will start filling in from the bottom (with the standard deduction), pushing some LTCG dollars into the 15% bracket. This site helps visualize: https://engaging-data.com/tax-brackets/ ... &cg=105900 (you need to change the year manually to 2021).
This is a fascinating tool. Thank you for the link!
So just to clarify. Let's assume I live in a State with 0 income tax.

First I convert $24,800 of my IRA to ROTH IRA and I'll pay 0 Taxes because that's the current Standard Married Deduction.
Then I sell my stock and will still pay 0 tax if my long term capital gains is $80,800 or less. ($80,800 is the maximum bracket for 0 tax on LTCG).
For example, I could sell $161,600 in stocks and pay 0 tax if 50% of that sale is long term capital gains and 50% comes from principal.
Qualified dividends are also taxed at 0 if it's under the $80,800 bracket.
So if my combined long term capital gains and qualified dividends are $80,800 or less, I will pay 0 Tax.
My Bonds are Muni, so I pay 0 tax on their interest.
If I wait 5 years, I can sell $24,800 of that ROTH IRA even though I will only be 50, and pay 0 Tax and no early penalty.
I can do this each each year, eventually converting all of my IRA to ROTH IRA and pay 0 Tax.

Did I miss something?
User avatar
JoMoney
Posts: 11737
Joined: Tue Jul 23, 2013 5:31 am

Re: IRA to Roth IRA Conversion, no tax?!

Post by JoMoney »

andysnp wrote: Wed Jul 21, 2021 8:05 am
trizzle wrote: Mon Jul 19, 2021 10:30 am
02nz wrote: Sun Jul 18, 2021 10:31 am
andysnp wrote: Sun Jul 18, 2021 8:13 am Let's say I have $3 million in a brokerage account. I can use the 3% rule, and withdraw around $90,000 tax free to pay for my living expenses. The Capital gains tax is 0 if your gain is $80,000 or less. Only some of the $90,000 withdrawal will be a gain.

Does this affect the IRA to Roth IRA conversion? I assume I will still pay 0 tax on the conversion, but I'm not sure.

Is this correct?

Thanks!
Actually, accounting for the standard deduction, and assuming no other income, a MFJ couple can have almost $106,000 in LTCG in 2021 and pay no federal tax. If you add IRA distributions / Roth conversions into the picture, those dollars will start filling in from the bottom (with the standard deduction), pushing some LTCG dollars into the 15% bracket. This site helps visualize: https://engaging-data.com/tax-brackets/ ... &cg=105900 (you need to change the year manually to 2021).
This is a fascinating tool. Thank you for the link!
So just to clarify. Let's assume I live in a State with 0 income tax.

First I convert $24,800 of my IRA to ROTH IRA and I'll pay 0 Taxes because that's the current Standard Married Deduction.
Then I sell my stock and will still pay 0 tax if my long term capital gains is $80,800 or less. ($80,800 is the maximum bracket for 0 tax on LTCG).
For example, I could sell $161,600 in stocks and pay 0 tax if 50% of that sale is long term capital gains and 50% comes from principal.
Qualified dividends are also taxed at 0 if it's under the $80,800 bracket.
So if my combined long term capital gains and qualified dividends are $80,800 or less, I will pay 0 Tax.
My Bonds are Muni, so I pay 0 tax on their interest.
If I wait 5 years, I can sell $24,800 of that ROTH IRA even though I will only be 50, and pay 0 Tax and no early penalty.
I can do this each each year, eventually converting all of my IRA to ROTH IRA and pay 0 Tax.

Did I miss something?
If you're in a low tax bracket, as in the example, you're not likely getting an advantage from using muni bonds, you'd probably have a higher return even if it meant paying taxes in one of the low brackets... especially in a state with 0 income tax.

If you have a large taxable IRA that's likely to push you into a higher tax bracket in the future, or you expect to get a job or have a pension or other income, it could be beneficial to pay some taxes up into the 10%-12% brackets and convert it earlier. Paying 0 tax isn't necessarily optimal if paying 10% now keeps you from paying 22% in the future.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
cas
Posts: 1382
Joined: Wed Apr 26, 2017 8:41 am

Re: IRA to Roth IRA Conversion, no tax?!

Post by cas »

andysnp wrote: Wed Jul 21, 2021 8:05 am Did I miss something?
I don't think anybody has brought up the issue of health insurance yet.

Where is this 45 year old MFJ early retiree going to be getting health insurance for the family?

If it is via the ACA, then the premium tax credits are tied to income, which can cause your marginal tax rate to be higher than your nominal tax bracket. So, even in your "0%" tax scenario proposed above, your would still have to look at how various levels of income would affect your ACA health insurance premiums.
User avatar
LadyGeek
Site Admin
Posts: 74062
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: IRA to Roth IRA Conversion, no tax?!

Post by LadyGeek »

I removed an interchange focused on a member's signature line. The discussion was derailed.

Please stay on-topic, which is helping the OP.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
User avatar
LadyGeek
Site Admin
Posts: 74062
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: IRA to Roth IRA Conversion, no tax?!

Post by LadyGeek »

This thread is now in the Personal Finance (Not Investing) forum (Roth conversion).

The wiki has some background info. See: Roth IRA conversion
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
retiredjg
Posts: 44825
Joined: Thu Jan 10, 2008 12:56 pm

Re: IRA to Roth IRA Conversion, no tax?!

Post by retiredjg »

So just to clarify. Let's assume I live in a State with 0 income tax.

First I convert $24,800 of my IRA to ROTH IRA and I'll pay 0 Taxes because that's the current Standard Married Deduction.
That is last year's standard deduction for MFJ. This year, it is $25,100 for your age.

Then I sell my stock and will still pay 0 tax if my long term capital gains is $80,800 or less.
Only if your total income, after all deductions, is $80,800 or less.

So if my combined long term capital gains and qualified dividends are $80,800 or less, I will pay 0 Tax.
Yes.

If I wait 5 years, I can sell $24,800 $25,100 of that ROTH IRA even though I will only be 50, and pay 0 Tax and no early penalty.
Yes.

I can do this each each year, eventually converting all of my IRA to ROTH IRA and pay 0 Tax.
Pretty much. Remember that it is all of your taxable income, including things like SS (does not yet apply) and interest on savings accounts that must be under $80,800 this year to pay no federal tax.

It is not necessary to convert your entire IRA to Roth. But it would be good to convert enough that the IRA does not become a problem.
retiredjg
Posts: 44825
Joined: Thu Jan 10, 2008 12:56 pm

Re: IRA to Roth IRA Conversion, no tax?!

Post by retiredjg »

JoMoney brings up a good point. Paying no federal tax should not be your goal if you have a large tax-deferred account. That will come back to bite you in the end (pun intended). You should convert enough to fill both the 10% and 12% brackets at least. Maybe more if your tax-deferred accounts are very large.
tj
Posts: 4666
Joined: Thu Dec 24, 2009 12:10 am

Re: IRA to Roth IRA Conversion, no tax?!

Post by tj »

retiredjg wrote: Thu Jul 22, 2021 3:04 pm JoMoney brings up a good point. Paying no federal tax should not be your goal if you have a large tax-deferred account. That will come back to bite you in the end (pun intended). You should convert enough to fill both the 10% and 12% brackets at least. Maybe more if your tax-deferred accounts are very large.
So... that means i should not be contributing to traditional in the 12% bracket? :annoyed
retiredjg
Posts: 44825
Joined: Thu Jan 10, 2008 12:56 pm

Re: IRA to Roth IRA Conversion, no tax?!

Post by retiredjg »

tj wrote: Sat Jul 24, 2021 10:24 am
retiredjg wrote: Thu Jul 22, 2021 3:04 pm JoMoney brings up a good point. Paying no federal tax should not be your goal if you have a large tax-deferred account. That will come back to bite you in the end (pun intended). You should convert enough to fill both the 10% and 12% brackets at least. Maybe more if your tax-deferred accounts are very large.
So... that means i should not be contributing to traditional in the 12% bracket? :annoyed
Not necessarily. That is a completely different question.

What it means is that you should make decisions based on how much money is left in your pocket after taxes. The amount of tax dollars paid is not the number to use for making decisions.

For example, suppose you pay 25% tax on $10,000 and what you have left ($7,500) doubles in size. You have $15k in your pocket.

Compare that to investing your $10k which doubles in value...and then you pay only 15% tax ($3k) on it...leaving you with $17,000 in your pocket.

In the first case, you pay $2,500 in taxes and end up with $15k. In the second case, you pay $3,000 in taxes but you end up with $17k. Which would you rather have?

It is the tax rate (15% rather than 25%) that determines which is the better choice, not the dollar amount you pay in taxes. So don't focus on how much you pay in taxes.


However, your question indicates that you might still be in accumulation mode rather than a person trying to figure out withdrawals.

In many (most) cases, Roth would be a better choice in the 12% bracket than traditional. Using traditional in the 12% bracket can be helpful when it comes to getting tax credits though.
Post Reply