Author Topic: Unique Situation - ROTH IRA Conversion question for 2018 Tax Year  (Read 531 times)

HoneyChaseZippy

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Hi. I have a question on whether or not I have this tax scenario correct

Assuming one has high reserves and high income but chose to take a down year and make a 1/3 of normal income for personal reasons.  Also, I am near debt free so amassing more income is not important at the moment. 

Here's my example on what I'm trying to execute for this year which is using tax defer acct to lower my income as much as possible.

W2 30k (Sales job)
Max 401k 18.5k
FSA Dependent Care 2.5k
HSA 2.5k

My net Taxable income would be $6500 which doesn't even take full advantage of the new tax changes.

New Tax changes is that I have a 12k Standard Deduction for myself (MFS) with 2 Dependents so I'll get 2k CTC per child (4k credit assuming I have tax dues)

I have a TiRA/Rollover account with a sizable amount invested from a couple of Rollovers from past 401k.  Doing a ROTH Conversion now up to my 12% Tax Bracket which is 38.7k would make sense or to convert enough to take full advantage of the 4k CTC or any other credit made available for low income earner, correct?

This is assuming in the future I will be back to high income earning and will be taxed at a higher rate for sure.  This is more or less making the best out of my situation.

Thank you for taking the time to read this post.
« Last Edit: May 24, 2018, 02:20:35 PM by HoneyChaseZippy »
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TheWifeHalf

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Re: Unique Situation - ROTH IRA Conversion question for 2018 Tax Year
« Reply #1 on: May 24, 2018, 08:55:01 PM »
We lived that situation a few years ago (well, not exact) TheHusbandHalf's union was on strike for 4 months so we took advantage of the lower income and converted some of his tIRA.
We are also going to convert after THH stops working, but does not collect Railroad Retirement (instead of SS) for 5-6 years.

secondcor521

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Re: Unique Situation - ROTH IRA Conversion question for 2018 Tax Year
« Reply #2 on: May 24, 2018, 09:11:13 PM »
OP is correct.

A couple of comments:

1.  $1400 of the $2000 CTC is refundable, meaning you can get it back even if you don't owe the tax.

2.  The CTC applies to kids who are under 17 throughout 2018.  OP is probably OK.

3.  There are other juicy tax credits for someone with that sort of low income:  retirement savings contribution credit, earned income tax credit, ACA subsidies, and cost-sharing reductions for ACA Silver level plans.

4.  MFS is quite often not the best filing status, but OP probably knows that.  MFJ, even if the couple is heading for a divorce, might be better if the parties can cooperate.
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SeattleCPA

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Re: Unique Situation - ROTH IRA Conversion question for 2018 Tax Year
« Reply #3 on: May 25, 2018, 11:48:34 AM »
Sort of related when someone is self-employed.

The new Sec. 199A deduction for sole proprietors, partners in partnerships, S corporations and real estate investors creates potentially a giant space for Roth conversions.

FYI, I am really not a hardcore Roth fan... however if someone gets a $20K or $40K or, gulp, $60K Sec. 199A deduction, one thing to contemplate is using that deduction to move $20K or $40K or $60K into a Roth. Over the next few years, someone might have potential to move hundreds of thousands of dollars into a Roth this way.

If someone is interested, more info here: Sec. 199A changes retirement planning for some folks.
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HoneyChaseZippy

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Re: Unique Situation - ROTH IRA Conversion question for 2018 Tax Year
« Reply #4 on: May 25, 2018, 11:55:54 AM »
Thank you for the responses and info.  I will look into those credits and the 199A Deduction.  I really appreciate the response. 
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HoneyChaseZippy

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Re: Unique Situation - ROTH IRA Conversion question for 2018 Tax Year
« Reply #5 on: May 25, 2018, 01:14:43 PM »
I just read more about the EITC for a family with 2 qualified dependents.... Man, that is a juicy figure to get a credit of $5716 if your income is below 56,802 but that's for MFJ... I've been filing MFS due to my wife's student loan debt forgiveness. It's up in 5 yr so I'm stuck with this filing for now.
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swampwiz

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Re: Unique Situation - ROTH IRA Conversion question for 2018 Tax Year
« Reply #6 on: May 30, 2018, 12:41:44 PM »
Hi. I have a question on whether or not I have this tax scenario correct

Assuming one has high reserves and high income but chose to take a down year and make a 1/3 of normal income for personal reasons.  Also, I am near debt free so amassing more income is not important at the moment. 

Here's my example on what I'm trying to execute for this year which is using tax defer acct to lower my income as much as possible.

W2 30k (Sales job)
Max 401k 18.5k
FSA Dependent Care 2.5k
HSA 2.5k

My net Taxable income would be $6500 which doesn't even take full advantage of the new tax changes.

New Tax changes is that I have a 12k Standard Deduction for myself (MFS) with 2 Dependents so I'll get 2k CTC per child (4k credit assuming I have tax dues)

I have a TiRA/Rollover account with a sizable amount invested from a couple of Rollovers from past 401k.  Doing a ROTH Conversion now up to my 12% Tax Bracket which is 38.7k would make sense or to convert enough to take full advantage of the 4k CTC or any other credit made available for low income earner, correct?

This is assuming in the future I will be back to high income earning and will be taxed at a higher rate for sure.  This is more or less making the best out of my situation.

Thank you for taking the time to read this post.

AIUI, there is a proportion limit to how much can be put into a 401K, like 15%, so with only $30K in earned income, that could only reduce it by $4500.

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Re: Unique Situation - ROTH IRA Conversion question for 2018 Tax Year
« Reply #7 on: May 30, 2018, 03:39:08 PM »
AIUI, there is a proportion limit to how much can be put into a 401K, like 15%, so with only $30K in earned income, that could only reduce it by $4500.
Some employers, usually for no good reason, put a "percent of income" limit on 401k contributions.  But the IRS does not: the only IRS-enforced limit is $18.5K/yr (or $24.5K if 50 or older), assuming one makes at least that much.

HoneyChaseZippy

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Re: Unique Situation - ROTH IRA Conversion question for 2018 Tax Year
« Reply #8 on: May 30, 2018, 04:55:52 PM »
To piggyback on this situation, what could I do if I decide to leave my job now and have only contributed 6k to the 401k?  I would have left 12.5k on the table to be taxed.  Any suggestions on what one can do? Traditional IRA for the other 5.5k and that's it?
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Laura Ingalls

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Re: Unique Situation - ROTH IRA Conversion question for 2018 Tax Year
« Reply #9 on: June 01, 2018, 06:36:20 PM »
I just read more about the EITC for a family with 2 qualified dependents.... Man, that is a juicy figure to get a credit of $5716 if your income is below 56,802 but that's for MFJ... I've been filing MFS due to my wife's student loan debt forgiveness. It's up in 5 yr so I'm stuck with this filing for now.

Pretty sure Roth conversions count as unearned so you could only convert $3500 providing that was your only unearned income (no capital gains, interest, dividends).