Author Topic: Roth Conversion Ladder and the Taxable Brokerage Account  (Read 896 times)

ColoradoSaving

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Roth Conversion Ladder and the Taxable Brokerage Account
« on: June 19, 2019, 07:14:25 PM »
Hello everyone, quick question, I want to make sure I understand this.

So say it comes time to do a Roth conversion Ladder and I have 5 years of expenses in a taxable account.

Do the capital gains count towards my yearly income?

So, say the top of the 12% (formerly 15%) tax bracket is 40,000 for the year.

Can I sell shares up to $40,000 per year in my taxable account to live on while creating the conversion ladder without having to pay tax on the gains and at the same time convert $40,000 from the Traditional IRA to the Roth and still remain in the 12% tax bracket?

Or will the capital gains count towards income and mean I would have to do the math to figure out how much I can move from the Traditional IRA to the Roth to remain in the 12% bracket?

Also, if my taxable account draws Dividends, will I need to deduct those from my ladder conversion as well?

Thank you!

MDM

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Re: Roth Conversion Ladder and the Taxable Brokerage Account
« Reply #1 on: June 19, 2019, 07:34:40 PM »
Hello everyone, quick question, I want to make sure I understand this.

So say it comes time to do a Roth conversion Ladder and I have 5 years of expenses in a taxable account.

Do the capital gains count towards my yearly income?
Yes.

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So, say the top of the 12% (formerly 15%) tax bracket is 40,000 for the year.

Can I sell shares up to $40,000 per year in my taxable account to live on while creating the conversion ladder without having to pay tax on the gains and at the same time convert $40,000 from the Traditional IRA to the Roth and still remain in the 12% tax bracket?
Maybe.  Depends on the amount of gain when you sell the shares.  Note that tax brackets are on taxable income (after taking the standard or itemized deduction) not gross income.

Quote
Or will the capital gains count towards income and mean I would have to do the math to figure out how much I can move from the Traditional IRA to the Roth to remain in the 12% bracket?

Also, if my taxable account draws Dividends, will I need to deduct those from my ladder conversion as well?
Yes, they all count.  If you have tax software that you used for 2018, you could create a dummy return and do "what if...?"s to your hearts content.  Or the case study spreadsheet might be useful in that regard.

dandarc

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Re: Roth Conversion Ladder and the Taxable Brokerage Account
« Reply #2 on: June 19, 2019, 07:40:55 PM »
Taxable account dividends are taxable income - can't really control those, but you should have a pretty good idea of what those have been / were. When you're in the draw-down phase, probably best to not re-invest dividends in your taxable account as you'll pay taxes regardless. Take the cash and use it to pay current expenses.

Capital gains are also taxable income - you can often control these at least at the beginning by minimizing the amount you have to sell and being picky about which lots you sell. You pay tax on the gains, not the entire amount - so choose to sell the shares with the highest basis to minimize the capital gains.

Any money you convert from traditional to Roth is taxable income.

I think your question is rooted in the long-term capital gains and qualified dividends being taxed at 0% up to a certain level. No free lunch there - you add up your other income first, and then add in the capital gains and qualified dividends to determine whether you pay 0%, 15%, or 20% on the qualified dividends and long-term gains.

Don't forget about the standard deduction - that reduces your taxable income and adds more 0% space. Might be more like $47,000 of 0% space in your example.

ETA: MDM beat me to the punch. Posting anyway.

ColoradoSaving

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Re: Roth Conversion Ladder and the Taxable Brokerage Account
« Reply #3 on: June 19, 2019, 10:29:31 PM »
Thank you both much!