IRA to Roth conversion (backdoor Roth) Question and Advice

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youngdoc87
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Joined: Sat May 26, 2018 10:44 pm

IRA to Roth conversion (backdoor Roth) Question and Advice

Post by youngdoc87 » Sun Nov 10, 2019 6:09 pm

Some financial advice that I was hoping to get to take advantage of my low tax bracket for the next 3 years (2019-2021).

My taxable gross earnings for the year 2019 is $30,000. Currently live in California.
In the years 2020 and 2021, my projected taxable income/ gross earnings will also be $30,000 [$69,000 salary - $19,500 (403b) - $19,500 (457b)].

Currently, I have $60,000 in a traditional IRA (rolled over from previous employer 401k), as well as $13,000 of growth in a taxable brokerage account that I’ve held for a couple years, (Vanguard total stock market index fund that should qualify for long term capital gains.)

In 2022, I'll be starting with a full a physician salary and will be in likely the highest tax bracket.

Which scenario would be best?

1. Convert the $60,000 traditional IRA to roth (backdoor roth) over the next 3 years? Converting $20,000 per year will keep me just under the 22% tax bracket each year (30k gross salary + 20k conversion).

2. Should I realize my capital gains? Because my income is currently below $39,000, will be 0% long term capital gains tax.

3. Do both…convert part of my IRA to roth and realize some or all of my capital gains? Seems complicated…but possible to keep under the $39k 22% tax bracket if I do it carefully.


Also a side question…if I were to buy more Vanguard total stock market index fund now adding to my current holdings of the index fund that I’ve held for over a year, and then sell a portion in a month, would the portion sold be coming from the long term capital gains or would I have to pay short term capital gains tax?

Thank you in advance.

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FiveK
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Re: IRA to Roth conversion (backdoor Roth) Question and Advice

Post by FiveK » Sun Nov 10, 2019 6:18 pm

One quick nomenclature thing: A Backdoor Roth differs significantly from a Roth IRA conversions. The latter should be of interest to you now, while the former may be of interest to you a few years from now.
youngdoc87 wrote:
Sun Nov 10, 2019 6:09 pm
Which scenario would be best?
Usually for someone in your situation, given that the investments will be held for more than a few years, converting traditional to Roth for a 12% cost beats saving the 15% on long term capital gain harvesting. See the '0% LTCG or t->R' tab in the personal finance toolbox Excel spreadsheet for background.
Also a side question…if I were to buy more Vanguard total stock market index fund now adding to my current holdings of the index fund that I’ve held for over a year, and then sell a portion in a month, would the portion sold be coming from the long term capital gains or would I have to pay short term capital gains tax?
It depends on how you have arranged your cost basis and then, assuming you have chosen "Specific ID" (that gives you the most flexibility), which lots you designated for the sale.

HomeStretch
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Re: IRA to Roth conversion (backdoor Roth) Question and Advice

Post by HomeStretch » Sun Nov 10, 2019 6:23 pm

Your 2019 adjusted gross income will be $30k (or possibly lower if you are making pretax healthcare premium contributions). Your 2019 taxable income will be $17,800 after the $12.2k standard deduction (or possibly lower if you itemize).

Consider running your scenarios through TaxCaster or “what if” forms in tax prep software to assess the impact on taxes as there may be other things impacting your taxes to be aware of (like losing a tax credit). For example, the maximum AGI for the Savers Tax Credit is $32k and you would give up the credit at a higher AGI.

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FiveK
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Re: IRA to Roth conversion (backdoor Roth) Question and Advice

Post by FiveK » Sun Nov 10, 2019 6:41 pm

HomeStretch wrote:
Sun Nov 10, 2019 6:23 pm
Consider running your scenarios through TaxCaster or “what if” forms in tax prep software....
The "what if?" worksheets of TurboTax, TaxAct, etc. could work, but TaxCaster in particular does not handle the saver's credit so it would not be suitable here.

See US and state income tax calculator - Bogleheads.org for more discussion about tax estimation tools.

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Duckie
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Re: IRA to Roth conversion (backdoor Roth) Question and Advice

Post by Duckie » Sun Nov 10, 2019 7:09 pm

youngdoc87 wrote:Which scenario would be best?
I would choose #1. Convert the TIRA to a Roth IRA over three years. TSM is an excellent choice for a taxable account and, unless you really need the money, there is no reason to sell it. If you can afford to buy more, do so.

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