This might be a dumb question, but can I convert a portion of my rollover IRA (401k) into a traditional IRA? The reason I ask is that my DW and I owe about $4200 in 2022 taxes to the feds. To reduce our federal tax burden, Turbotax is ‘recommending’ we each invest $7000 into a traditional IRA before April 14, 2023 (total $14,000). This would reduce our tax liability to about $900. However, this money would need to be a distribution from my rollover 401K IRA, and my wife’s inherited IRA, which we would take prior to April 18, 2023. It appears we would get the tax credit for 2022, but would be taxed on the distribution in 2023? Is this correct?
We are both retired (65 and 58 yro, respectively), no pensions, and I have deferred SS, so far…plan to start SS at 67-68 or so.
Thank you in advance for any advice.
Dumb Tax Question?
Dumb Tax Question?
Regards, |
Doug
Re: Dumb Tax Question?
Yes, this works, as long as you had enough earned income in 2022 to make the contribution. If you make an IRA contribution for 2022 in 2023, you still deduct it on your 2022 taxes. And if you get the money for doing this in 2023, any tax due will be paid on your 2023 taxes.
You get a slight benefit from this beyond the delay of the tax for one year. If you withdraw from the inherited IRA and contribute to your personal IRA, you delay the required minimum distributions.
But what is your tax bracket? If you are in the 12% bracket, you may be better off making the contribution to a Roth IRA. That will not reduce your taxes this year, but will reduce them more in the future, since the Roth IRA is tax-free and need not be withdrawn during your lifetime. (Similarly, you may want to convert some of your traditional IRA to a Roth IRA at 12%.) If you are in the 22% tax bracket for 2022 and the 12% bracket for 2023, that is an additional benefit for contributing to the traditional IRA for 2022 using taxable money from 2023.
You get a slight benefit from this beyond the delay of the tax for one year. If you withdraw from the inherited IRA and contribute to your personal IRA, you delay the required minimum distributions.
But what is your tax bracket? If you are in the 12% bracket, you may be better off making the contribution to a Roth IRA. That will not reduce your taxes this year, but will reduce them more in the future, since the Roth IRA is tax-free and need not be withdrawn during your lifetime. (Similarly, you may want to convert some of your traditional IRA to a Roth IRA at 12%.) If you are in the 22% tax bracket for 2022 and the 12% bracket for 2023, that is an additional benefit for contributing to the traditional IRA for 2022 using taxable money from 2023.
David Grabiner
Re: Dumb Tax Question?
Why not just pay the tax?