Author Topic: Help with Traditional to Roth Conversions  (Read 905 times)

tennisray

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Help with Traditional to Roth Conversions
« on: January 16, 2020, 07:23:28 AM »
My wife (44 yo) and I (45yo) are still working full-time.  We are planning for her to RE in the next few years.  I'd like to plan converting her traditional 401(k) to Roth while I continue to work.  I work in a school system, so I have access to a 457 and 403(b), which I max out.  Here are the #'s:
Salary= 90k My wife has RMD from a beneficiary IRA of about $6000/year.  Dividends/interest=$10000/year;
Deductions: $39k for 457/403b; $4800 health/dental/fsa ins; $5400 pension contribution=$48000 AGI. 

Help with plan:
1. Convert wife 401k to IRA at Vanguard
2. With my #'s, how much should/can I convert yearly to stay in the 12% tax bracket?

Edited to add that we have enough savings that I will keep the same deductions when wife RE's and pull any $ we need from savings.
« Last Edit: January 16, 2020, 07:45:22 AM by tennisray »

zolotiyeruki

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Re: Help with Traditional to Roth Conversions
« Reply #1 on: January 16, 2020, 08:00:27 AM »
It seems to me that you'd want to wait until after she RE's, and you have lower income, before you start the conversion, in order to reduce your tax burden.  Or are you working to set up a Roth ladder of some sort?

DadJokes

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Re: Help with Traditional to Roth Conversions
« Reply #2 on: January 16, 2020, 08:02:38 AM »
Is the IRA that she gets $6k from annually Roth or traditional?

Assuming that it is traditional, I'm only coming up with $46,800 that is subject to ordinary income taxes (dividends are taxed separately).

Income: $90,000
RMDs: 6,000
Less:
457/403b: (39,000)
Insurance: (4,800)
Pension: (5,400)
Total: $46,800

2020 Std deduction: $24,800
Subject to ordinary tax: $22,000

So, you could convert up to $58,250 and still keep everything within the 12% bracket. Obviously, it'll change each year as tax brackets and the standard deduction shift with inflation, but that's a good ballpark (and not being exact won't hurt that much).

@Cpa Cat @seattlecyclone are the tax people (IIRC), so they might be able to give better answers than me.

tennisray

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Re: Help with Traditional to Roth Conversions
« Reply #3 on: January 16, 2020, 08:16:44 AM »
It seems to me that you'd want to wait until after she RE's, and you have lower income, before you start the conversion, in order to reduce your tax burden.  Or are you working to set up a Roth ladder of some sort?

Yes, you are correct.  We wouldn't start the conversion until she stopped working.

tennisray

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Re: Help with Traditional to Roth Conversions
« Reply #4 on: January 16, 2020, 08:19:38 AM »
Is the IRA that she gets $6k from annually Roth or traditional?

Assuming that it is traditional, I'm only coming up with $46,800 that is subject to ordinary income taxes (dividends are taxed separately).

Income: $90,000
RMDs: 6,000
Less:
457/403b: (39,000)
Insurance: (4,800)
Pension: (5,400)
Total: $46,800

2020 Std deduction: $24,800
Subject to ordinary tax: $22,000

So, you could convert up to $58,250 and still keep everything within the 12% bracket. Obviously, it'll change each year as tax brackets and the standard deduction shift with inflation, but that's a good ballpark (and not being exact won't hurt that much).

@Cpa Cat @seattlecyclone are the tax people (IIRC), so they might be able to give better answers than me.

Yes, the beneficiary RMD is traditional and counts as income.

Great write-up! Thanks!  I have read-up on these conversions, but I'm always confused on AGI/MAGI.  This helps and is good news that we can subtract the standard deduction...can convert a lot more per year than I thought.  I started having my wife invest in her Roth 401k this year, but it makes more sense to do traditional and then convert when we are in the 12% bracket.

DadJokes

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Re: Help with Traditional to Roth Conversions
« Reply #5 on: January 16, 2020, 10:07:34 AM »
Is the IRA that she gets $6k from annually Roth or traditional?

Assuming that it is traditional, I'm only coming up with $46,800 that is subject to ordinary income taxes (dividends are taxed separately).

Income: $90,000
RMDs: 6,000
Less:
457/403b: (39,000)
Insurance: (4,800)
Pension: (5,400)
Total: $46,800

2020 Std deduction: $24,800
Subject to ordinary tax: $22,000

So, you could convert up to $58,250 and still keep everything within the 12% bracket. Obviously, it'll change each year as tax brackets and the standard deduction shift with inflation, but that's a good ballpark (and not being exact won't hurt that much).

@Cpa Cat @seattlecyclone are the tax people (IIRC), so they might be able to give better answers than me.

Yes, the beneficiary RMD is traditional and counts as income.

Great write-up! Thanks!  I have read-up on these conversions, but I'm always confused on AGI/MAGI.  This helps and is good news that we can subtract the standard deduction...can convert a lot more per year than I thought.  I started having my wife invest in her Roth 401k this year, but it makes more sense to do traditional and then convert when we are in the 12% bracket.

And if I understand capital gains tax rates correctly, they are 0% up to the top of the 12% bracket, but that's your AGI+capital gains. In other words, if you are getting $10k in dividends annually, you may want to cap conversions at $48,250 in this case.

MDM

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Re: Help with Traditional to Roth Conversions
« Reply #6 on: January 16, 2020, 06:19:56 PM »
Yes, you are correct.  We wouldn't start the conversion until she stopped working.
The case study spreadsheet downloaded into Excel can show you a marginal tax rate chart for whatever range of Roth conversions you wish to consider.  Requires a little, but not much, Excel knowledge.

Classical_Liberal

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Re: Help with Traditional to Roth Conversions
« Reply #7 on: August 04, 2020, 10:48:16 PM »
Seeing if I can get a response without starting a new thread.

Topic is also Help with Roth conversions. 

If a married couple is/has been filing separately, and one partner is making most of the income.  Can the non income earner still complete roth conversions (roth in their name) based on that partners tax situation.   I know Roth contributions are severely limited in the filing separately category, but I can't seem to find info if this applies to conversions as well.

Thanks in advance for any answers.


terran

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Re: Help with Traditional to Roth Conversions
« Reply #8 on: August 04, 2020, 11:05:22 PM »
Seeing if I can get a response without starting a new thread.

Topic is also Help with Roth conversions. 

If a married couple is/has been filing separately, and one partner is making most of the income.  Can the non income earner still complete roth conversions (roth in their name) based on that partners tax situation.   I know Roth contributions are severely limited in the filing separately category, but I can't seem to find info if this applies to conversions as well.

Thanks in advance for any answers.

If you continue to file separately, then no, the income from the conversion will go on the taxes of the person who makes the conversion.

MDM

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Re: Help with Traditional to Roth Conversions
« Reply #9 on: August 04, 2020, 11:14:27 PM »
If a married couple is/has been filing separately, and one partner is making most of the income.  Can the non income earner still complete roth conversions (roth in their name) based on that partners tax situation.   I know Roth contributions are severely limited in the filing separately category, but I can't seem to find info if this applies to conversions as well.
Yes, a traditional to Roth conversion may be done in any amount.  That amount will be taxable as ordinary income to whoever does the conversion.

See also "Married, filing separately" IRA to Roth Conversion.

Classical_Liberal

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Re: Help with Traditional to Roth Conversions
« Reply #10 on: August 05, 2020, 11:38:35 AM »
@MDM @terran
Much thanks!
« Last Edit: August 05, 2020, 11:40:35 AM by Classical_Liberal »