The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: Awitte58 on November 11, 2015, 10:19:44 AM
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So when making conversions from 401k to tIRA there is no tax there correct? It is essentially transferring money from one tax-advantage account to another.
And then when it comes to converting money from the tIRA to the Roth to build your ladder that is when the amount converted is considered taxable income for that calendar year?
So say for a person filing single. They have $30,000 in taxable income after all deductions. This has them in the 15% bracket.
If that individual converts $1 through $6900 from a tIRA to Roth IRA that portion will be taxed normally at 15% rate?
I am trying to understand how people say 'convert the allowable amount that won't affect your taxes.'
Also, you don't have to make continual conversions right? This isn't the 72t dist so if I wanted to I could make a $10,000 conversion this year if I plan to make a big purchase in 5 years.
Sorry for the scatter-brained post. I am just trying to understand things more clearly.
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401k to tIRA: not a taxable event. tIRA to Roth IRA: taxed as income. So if in the 15% bracket with $30k, you can convert $6900 with a 15% tax (federal, don't forget state taxes too, if applicable). You can convert as much or as little as you want in any given year.
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So when making conversions from 401k to tIRA there is no tax there correct? It is essentially transferring money from one tax-advantage account to another.
And then when it comes to converting money from the tIRA to the Roth to build your ladder that is when the amount converted is considered taxable income for that calendar year?
Yes, this is correct. Traditional to traditional is a non-taxable event. Traditional to Roth is taxable in the year of conversion.
So say for a person filing single. They have $30,000 in taxable income after all deductions. This has them in the 15% bracket.
If that individual converts $1 through $6900 from a tIRA to Roth IRA that portion will be taxed normally at 15% rate?
I am trying to understand how people say 'convert the allowable amount that won't affect your taxes.'
Your scenario sounds right. Remember that there's essentially a 0% bracket in the amount of your standard (or itemized) deduction and exemptions for your family size. If your income otherwise is less than this amount, you can often do Roth conversions up to this amount without affecting your taxes. These may still affect things like ACA subsidies or tax credits, which is important to keep in mind.
Also, you don't have to make continual conversions right? This isn't the 72t dist so if I wanted to I could make a $10,000 conversion this year if I plan to make a big purchase in 5 years.
Correct! You can convert as much or as little as you want each year. It's totally up to you.