Roth IRA conversion -- does it affect your ability to contribute the Roth IRA max?

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mister_sparkle
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Roth IRA conversion -- does it affect your ability to contribute the Roth IRA max?

Post by mister_sparkle » Sun Oct 11, 2015 9:19 pm

Contemplating converting part of my IRA to Roth in 2015 as we'll be safely within the 15% tax bracket. Couldn't find the answer to this simple question: can I still contribute $5500 to my Roth IRA in the same year?

TIA.

DSInvestor
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Re: Roth IRA conversion -- does it affect your ability to contribute the Roth IRA max?

Post by DSInvestor » Sun Oct 11, 2015 9:23 pm

Roth conversions do not affect your ability to contribute to Roth IRA assuming you still have cash available after paying the tax on the conversion. Roth conversion does not consume Roth IRA contribution space. The taxable amount of your Roth conversion income is included in your Federal AGI but it is excluded from the MAGI for Roth IRA purposes. If you were eligible for Roth IRA contributions before the conversion, a large conversion will not make you ineligible for Roth IRA contributions.
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mister_sparkle
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Re: Roth IRA conversion -- does it affect your ability to contribute the Roth IRA max?

Post by mister_sparkle » Sun Oct 11, 2015 9:29 pm

That's what I hoped. Thanks very much.

I used Tax Caster to get an estimate of how much of a refund we'd be getting, and it's enough to cover the tax vig from converting the $12-$15K or so of IRA funds that we are going to convert.

Alan S.
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Re: Roth IRA conversion -- does it affect your ability to contribute the Roth IRA max?

Post by Alan S. » Sun Oct 11, 2015 9:39 pm

That is correct.
A Roth conversion will not affect your ability to make a regular Roth contribution -
but it WILL be counted in modified AGI or purposes of deducting a TIRA contribution.

That means that the modified AGI gap between deducting a TIRA contribution as opposed to the higher modified AGI amount to make a Roth contribution will be increased by the taxable amount of a Roth conversion. This makes it more likely that regular IRA contribution would be a Roth contribution because you are more likely not to be able to deduct a TIRA contribution. This effect also extends to a spouse's IRA contribution.

Alan S.
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Re: Roth IRA conversion -- does it affect your ability to contribute the Roth IRA max?

Post by Alan S. » Sun Oct 11, 2015 9:48 pm

mister_sparkle wrote:That's what I hoped. Thanks very much.

I used Tax Caster to get an estimate of how much of a refund we'd be getting, and it's enough to cover the tax vig from converting the $12-$15K or so of IRA funds that we are going to convert.
The amount of your tax refund should not be a factor in determining if you are going to convert. That is tantamount to basing your conversion on the amount of withholding you have made as opposed to whether the marginal rate you will pay for the conversion will be higher or lower than your estimated rate in retirement.

That said, if your current rate is 15%, that is low enough to increase the chance that your rate on the conversion will be lower or at least no higher than your rate in retirement.

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Re: Roth IRA conversion -- does it affect your ability to contribute the Roth IRA max?

Post by Artsdoctor » Mon Oct 12, 2015 8:35 pm

"That said, if your current rate is 15%, that is low enough to increase the chance that your rate on the conversion will be lower or at least no higher than your rate in retirement."

Agreed. But how high do you consider "too high" to convert? I'm struck by how variable my marginal tax rate can be from year to year; sometimes I "go out the other side" of the AMT and am firmly in the 35%+ rate, and sometimes I'm right in the AMT 28% spot for a little while (only to start increasing gradually again). Relatively speaking, 28% seems like a bargain to me, but I'm not sure what to expect in retirement since I won't have earned income. I'd like to think it'd be less but there's something very attractive about Roths . . .

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