IRA to Roth Conversion Question

[clarkfan1979]

I asked something similar in the past. However, this is a little more specific and I'm closer to my final answer.

My wife has around 100K in an IRA. It was originally a 401K then converted it to an IRA after she left the employer. Without having direct access to her account, I think she has around 40K of contributions and 60K of capital gains.

For 2021, our AGI will be around 50K. This means that I have 30K of space to convert the IRA to a Roth.

From my understanding, if I did the 30K Roth conversion, the 10K of contributions would be subject to 12% federal tax and the remaining 20K of capital gains would be at 0% capital gains.

Did I make any mistakes?

[bacchi]

Are the contributions all pre-tax?

For pre-tax contributions, there are no capital gains for a tIRA conversion.

[terran]

Gains in an IRA aren't part the capital gains tax brackets. If you deducted the traditional IRA contributions when made then the whole amount of the conversion is taxable. If you didn't deduction the traditional IRA contributions when made then only the gains are taxable (at ordinary income tax rates) and the basis (amount contributed) isn't taxable. The conversion will be made in proportion to basis and gains, you can't select which you convert. See form 8606. Since this is a rollover from a 401(k) it was most likely deducted when contributed, so it's all taxable.

[clarkfan1979]

Gains in an IRA aren't part the capital gains tax brackets. If you deducted the traditional IRA contributions when made then the whole amount of the conversion is taxable. If you didn't deduction the traditional IRA contributions when made then only the gains are taxable (at ordinary income tax rates) and the basis (amount contributed) isn't taxable. The conversion will be made in proportion to basis and gains, you can't select which you convert. See form 8606. Since this is a rollover from a 401(k) it was most likely deducted when contributed, so it's all taxable.

Thank you for the info. I understand that it's all taxable. However, the first 80K of capital gains is taxed at 0%. Over the next 5 years, I'm going to be in a position where my AGI is around 50K to 60K, which means that I should have some space for capital gains at 0%.

If I tried to do an IRA to Roth conversion for 2021, is deadline December 31st 2021 or April 15th 2022?

If I missed the deadline this year, that's ok. I can just try again next year.

[clarkfan1979]

Are the contributions all pre-tax?

For pre-tax contributions, there are no capital gains for a tIRA conversion.

Yes, they are pre-tax contributions. It was originally a 401k and we did a rollover. In Vanguard it's labeled a "Rollover IRA Brokerage Account"

[EvenSteven]

Gains in an IRA aren't part the capital gains tax brackets. If you deducted the traditional IRA contributions when made then the whole amount of the conversion is taxable. If you didn't deduction the traditional IRA contributions when made then only the gains are taxable (at ordinary income tax rates) and the basis (amount contributed) isn't taxable. The conversion will be made in proportion to basis and gains, you can't select which you convert. See form 8606. Since this is a rollover from a 401(k) it was most likely deducted when contributed, so it's all taxable.

Thank you for the info. I understand that it's all taxable. However, the first 80K of capital gains is taxed at 0%. Over the next 5 years, I'm going to be in a position where my AGI is around 50K to 60K, which means that I should have some space for capital gains at 0%.

If I tried to do an IRA to Roth conversion for 2021, is deadline December 31st 2021 or April 15th 2022?

If I missed the deadline this year, that's ok. I can just try again next year.

Withdrawals from pre-tax traditional IRA are all taxable at your ordinary marginal rate, so it doesn't matter if what is inside the IRA is capital gains or not, when coming out it all gets taxed like ordinary income.

You could make 30K of traditional to Roth conversions without bumping your capital gains rate up on your other capital gains, but the 30k conversion would be taxed at your ordinary marginal rate (12% at 80k for MFJ).

Conversions are taxed in the year they are done, so If you did one now, it would be for tax year 2022.

[clarkfan1979]

Gains in an IRA aren't part the capital gains tax brackets. If you deducted the traditional IRA contributions when made then the whole amount of the conversion is taxable. If you didn't deduction the traditional IRA contributions when made then only the gains are taxable (at ordinary income tax rates) and the basis (amount contributed) isn't taxable. The conversion will be made in proportion to basis and gains, you can't select which you convert. See form 8606. Since this is a rollover from a 401(k) it was most likely deducted when contributed, so it's all taxable.

Thank you for the info. I understand that it's all taxable. However, the first 80K of capital gains is taxed at 0%. Over the next 5 years, I'm going to be in a position where my AGI is around 50K to 60K, which means that I should have some space for capital gains at 0%.

If I tried to do an IRA to Roth conversion for 2021, is deadline December 31st 2021 or April 15th 2022?

If I missed the deadline this year, that's ok. I can just try again next year.

Withdrawals from pre-tax traditional IRA are all taxable at your ordinary marginal rate, so it doesn't matter if what is inside the IRA is capital gains or not, when coming out it all gets taxed like ordinary income.

You could make 30K of traditional to Roth conversions without bumping your capital gains rate up on your other capital gains, but the 30k conversion would be taxed at your ordinary marginal rate (12% at 80k for MFJ).

Conversions are taxed in the year they are done, so If you did one now, it would be for tax year 2022.

Thank you for the answer. For some reason, I understand this one more than the others. I get it now. I'm good. Thank you to everyone. 

[zolotiyeruki]

I'm a bit late to the party, but one thing to consider is your standard or itemized deductions.  If you're MFJ, you can take a $25,100 standard deduction, add it to the $81,050 top of the 12% bracket, and get to an AGI of $106,150 while still staying in the 12% bracket.

WRT capital gains, the top of the 0% bracket is $80,800 (nearly the same as the top of the 12% bracket), which means you could convert $30k, but then harvest another $25k of capital gains without paying taxes on them.

[DaMa]

Don't forget to make estimated tax payments quarterly to avoid penalty.  I didn't realize this the first year I did a Roth conversion.  I did exactly what you mentioned, converting to the top of the 12% tax bracket for the last three years.