Should you convert your IRA to a Roth?


2010 Provides a unique opportunity for IRA owners.

In 2010, you have the opportunity to convert your traditional IRA to a Roth IRA. The usual income limitations that stand in the way for converting will not apply. So, should you convert? Let’s look at why this may or may not be a good idea.

Here’s why a Roth IRA conversion may make sense for you

Consider this: a Roth IRA allows tax-free growth and tax-free income distributions at age 59½ or older and as long as you have held your Roth account for 5 years or longer. While your contributions to a Roth IRA do not allow a tax-deduction, the younger you are, the longer time frame you have for tax-free growth.

Now realize converting to a Roth IRA comes with a price tag. You will have to pay ordinary income taxes on the amount you convert. Whatever amount is converted is added to your income for the year. However, there may be a silver lining: With the market being down, most likely your account value may be the lowest it has been in years. This means by converting now you may pay lower taxes.

It is also worth noting that with all of the reckless government spending, there is a great chance that tax rates could increase in the years ahead. This is another reason why now may be as good time as ever to convert. If converting may send you into a higher tax bracket, you could consider doing a partial conversion (only converting a portion of your Traditional IRA to avoid going into the next bracket).

Even if you are older, a Roth still may make sense. Normally with an IRA, at age 70 ½ you are required to withdraw from your IRA through mandatory required distributions. However, with a Roth, there is no mandatory withdrawal rule allowing you more time to accumulate tax-free. Also, under the present tax laws, converting a traditional IRA to a Roth can lower the size of your taxable estate. This type of prudent estate planning could allow for decades of tax-free growth for those converted assets.

A few additional estate planning points: If you name your spouse as the beneficiary of your Roth IRA, your spouse can treat the inherited IRA as his or her own after you die and forego withdrawals. This allows those Roth IRA assets to keep compounding untaxed across the rest of your spouse’s lifetime.

Your spouse could then name a son or daughter as a beneficiary. This would allow your children the choice to make minimum withdrawals according to his or her life expectancy. All the while these assets continue growing completely tax-free.

Here’s why you may want to think twice about converting to a Roth

For starters, you will pay taxes now! The IRS treats a conversion from a traditional IRA to a Roth IRA as a taxable event. You will have to pay taxes on the amount you convert. Do you have enough in savings to cover these taxes? If not, you do not, I repeat do not want to pay for the taxes out of your current IRA.

You may be tempted to use your current IRA assets to pay for the tax on the conversion. Here’s why that is not a good choice. First off, if you’re under 59½, you’re facing a 10% penalty on the amount you withdraw, and secondly they amount you take out to cover the taxes will lose the chance for tax-free compounding going forward.

Why wait until 2010?

For some who are under the $100,000 adjusted gross income level, you may consider converting in 2009. Here are a few reasons this may make some sense:

  • In 2009, any withdrawals from a traditional IRA can be used to fund a Roth IRA. In years past, mandatory withdrawals from a traditional IRA typically couldn’t be deposited into a Roth IRA. But the federal government has suspended mandatory IRA withdrawals for 2009. Any IRA withdrawals made in 2009 are thereby elective withdrawals. So, if your adjusted gross income (AGI) is $100,000 or less, you have an option to fund a Roth IRA with a withdrawal from a traditional IRA – at least through the end of 2009.
  • In 2009, you can fund a Roth IRA with after-tax contributions to a 401(k), 403(b) or 457 retirement savings plan. This year, you can take those contributions and convert them to a Roth IRA tax-free, provided your AGI is $100,000 or less. More good news: there is no limit to the conversion amount.

But don’t ignore the potential tax break for those who convert in 2010

If you do a Roth conversion during 2010, you can choose to divide the taxes on the conversion between your 2011 and 2012 federal returns. This does not apply if you convert in 2009.

Before converting from a traditional IRA to a Roth, be sure to consult your tax advisor. This is a very good idea before you arrange any rollover, trustee-to-trustee transfer, or same-trustee transfer of your IRA assets. In any year, you should fully understand the potential tax impact of a Roth conversion on your finances and your estate. Also, remember that while the income limit on Roth IRA conversions will go away in 2010, the income limits on Roth IRA contributions still apply next year and for the foreseeable future.

This article was written by Jay Peroni.

Below is another article Written by Jason Topp on the subject…

To Roth or Not To Roth – That is the Question

So 2010 is upon us and there is a lot of controversy regarding whether folks should convert their Traditional IRAs to a Roth IRA. Some of you might be wondering what exactly is a Roth IRA, well, here’s the basics:

A Roth is funded with after-tax contributions; the money grows tax-deferred; and withdrawals are TAX FREE!

In other words, you use money you’ve already paid taxes on to fund the Roth, and provided you meet certain qualifications you never have to pay taxes on that money again!

What is a Roth IRA Conversion?

A Roth IRA conversion then is taking money from a Traditional IRA, pulling it out and putting it into a Roth IRA where it will grow tax free.

Sounds good right?

Well, the problem is that whenever you do this you have to pay taxes on the amount you withdraw from your Traditional IRA.

So, let’s say you are converting $5,000 from your Traditional IRA — you would have to tack on 5G’s to your income for the year and pay tax at whatever rate you are at. It’s as if you earned an additional $5,000 of income for the year.

As many of you already know, one big change for 2010 is that anyone can convert to a Roth regardless of income level. Previously, if you made over $100,000 you could not convert to a Roth.

If you convert your IRA to a Roth in 2010, you now have a choice to pay all of your taxes in 2010 or average the taxes owed on the conversion over two years (i.e. pay in 2011 and 2012). Uncle Sam is giving you a choice on when you pay your taxes.

Don’t forget though that 2010 is the last year for the current low income tax rates. The current law plans for higher tax rates in 2011 — so, if you chose to average your tax payments over the two year period in 2011 and 2012, you might get hit with higher tax rates. That Uncle Sam – he’s always got an angle doesn’t he?

Should You Roth It?

Back to the question at hand. Should you convert to a Roth IRA or not?

Usually the answer to such questions is “it depends”. This might be a great year to convert your money to a Roth and potentially pay lower taxes than you would normally if you are in a lower bracket due to retirement or a layoff and you’ve got some cash on hand to cover your taxes!

This is important because if you are under 59 1/2 and use your IRA to pay the taxes on the conversion you’ll get whacked with a 10% penatly on top of the taxes!

Also, although the markets have rebounded significantly, account balances are still off their 2007 highs. If you convert when accounts are lower, it will result in less overall tax paid plust all the earnings and growth will be tax free!

Factors to Consider

  • Do you have money to cover your tax liability? Having cash on hand to cover your taxes will help soften the blow.
  • Will the money you convert push you into a higher tax bracket? If so, you probably don’t want to do it.
  • Do you have non-deductible contributions in your IRA? No taxes are due on the non-deductible portion. *There are some additional factors to consider here that go beyond the scope of this post.
  • Are you planning on applying for financial aid for yourself, your spouse or your child? Better think twice about the conversion – conversion income counts on your application.

Ultimately, whether you convert your Traditional IRA to a Roth will not determine your retirement success, there certainly are other factors to consider to help you make a great run at retirement.

Consider these factors and your overall situation to determine whether the Roth IRA conversion makes sense for you in 2010.

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What do you think? Will you be converting to a Roth this year?

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87 Comments
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  1. Darrin

    What about Rollover IRAs? I know they’re technically different than the Traditional IRA but do the same rules mentioned in your post apply to the Rollover IRAs?

  2. Very timely post. Hubby and I are considering coverting our traditional IRAs next year. I will probably run our taxes both ways to determine what the additional tax burden would be and go from there.

  3. Keep in mind that taxes only have to be paid on deductible contributions as well as investment earnings, so the entire amount of your conversion is not always taxable.

    As a result, in 2010, you can fully fund a Traditional IRA with non-deductible contributions, and immediately convert to a Roth IRA without tax consequence.

    Because of this “loophole,” the Roth IRA income limits effectively disappear as well.

  4. If I transferred a Roth IRA from one brokerage firm to a different brokerage firm, then does the “have held your Roth account for 5 years or longer” rule apply to the total combined time with both brokerage firms? Or, does the 5 years have to be with the same firm?

  5. Knows Nothing

    @Britt

    That is only true if all you have are non-deductable IRAs. If any of your IRAs (if you have multiple) have deductable money(i.e. a rollover IRA) all of your IRAs are treated as such.

  6. Here’s my take (a comment I left elsewhere on this exact issue):
    If one retired today, no pension, no other income, it would take over $2M to fill the 15% bracket. As inflation impacts the tax brackets themselves, along with the standard deduction and exemption amounts, it’s not fair to say that since one sees $3M in their account in 30 years that puts them in a higher bracket. Looking forward you’d have to adjust for inflation. If people who are now in the 15% bracket wish to save in a Roth or convert to ‘top off’ that 15% bracket, I have little objection, but those the ‘10 law applies to (earning $100K) are the very people who shouldn’t be using Roth in the first place.

    I see a lot of talk about ‘rates going up’ but very little discussion on just what it takes to reproduce the kind of income it would take to simply be at the same level. I suspect few will manage to be in the same bracket at retirement, let alone exceed it regardless of general increases in the tax structure.

  7. There are three main types of IRAs: Traditional IRA:
    The contributions you make may be tax deductible. So instead of paying taxes now, you’ll pay taxes on the money your IRA earns when you withdraw it. If you’re in a lower tax bracket at that point, you’ll pay taxes at a lower marginal income tax rate.

    Roth IRA: You pay taxes now so that you don’t have to pay tax on any of the profits earned between now and when you start withdrawing the money.

    Rollover IRA: This type of IRA is a simple solution if you’ve got a 401(k) or other retirement plan from a past job, and you want to move the money without paying penalties. This is especially helpful if you have several 401(k)s. It gives you more options for how to invest your money, and helps keep things simple by consolidating them into one account.

    Hope this helps
    Kevin

  8. Kevin – As I understand it, there is no longer a requirement for a special designated Rollover IRA. Money from a 401(k) can be transferred to either a Roth or traditional IRA, and you can transfer the money from those accounts to the next employer’s IRA so long as it goes to a like account.

  9. I am 70 1/2 (in 2010).
    I will pay no taxes so far for 2009 due to losses.
    Can I convert any Traditional IRA funds to Roth?
    Can I convert less than the entire amount of my traditional IRA?
    If so can I do it now (after the end of 2009) for the year 2009?
    How much must I with-draw from the Traditional IRA this year?
    Thanks.

  10. clydewolf

    John,

    You can convert to a Traditional IRA to a ROTH IRA. You can convert part of your TIRA to a ROTH IRA. Conversions must be completed by the end of the calendar year.

    Converting from a TIRA to a ROTH when you have after tax money in your TIRA changes things abit. The IRS looks at all of your TIRAs aa one TIRA.
    Doing a conversion when you have the after tax money in your TIRA, the taxable amount of a ROTH Conversion is the ratio of the after tax money to tax deferred money. EXAMPLE: Your tax deferred account(s) have a value of $140,000. You also have made after tax contributions to a TIRA of $30,000.
    The after tax TIRA has gains of $10,000. The ratio of your after tax money vs your tax deferred money is $30,000/$150,000. !/5 (20%) of your ROTH Conversion would be taxable regarless of which account you took your Conversion money from.

    You must take a Required Minimum Distributon from your Traditional IRA for the year in which you turn 70.5 years. For you that is 2010. Your first RMD must be taken by April 1 of 2011. After that first RMD subsequent RMDs must be taken by December 31. Waiting until 2011 to take the first RMD means you must also take your 2011 RMD by December 31, 2011, and have the appropriate taxes on 2 RMDs for 2011.

    How much is your RMD? This depends on a number of things. First you use your TIRA balance as of December 31, 2009. Then depending on your marital status, and the age of your spouse, you select a factor from the appropriate table in appendix C in IRS Pub 590, Individual Retirement Arrangements: http://www.irs.gov/pub/irs-pdf/p590.pdf

  11. clydewolf

    I’m sorry, I processed an interupt, and did not finish the previous post.

    From the appropriate table in PUB 590′s Appendix C, you find your factor to divide into the previous year end balance. This will give you your RMD.

    Example: Your TIRA balance at the end of 2009 is $100,000. You will be 70.5 years old sometime in 2010. Your spouse is the primary beneficiary of your IRA, and your spouse is not more than 10 years younger than you are. Using Table III in the appendix, for Age 70 (birthday is before July 3) we find the factor 27.4. We divide 100,000 by 27.4 and find our RMD amount is $3,649.64.

  12. Sharon

    I am completely boggled by everything that has to do w/IRAs and I cannot find the info I’m looking for anywhere. I opened a $2000 Traditional IRA Savings in 2008 for 2007 tax year ( opened it before April 15th). Then in June of 2009 I converted the Traditional IRA with a balance of $2022.93 to a ROTH IRA. A few months later I needed money to pay medical bills so I took a $1000 distribution from my ROTH. So this year for taxes I got (2) 1099-Rs… one for $2022.93 and one for $1000.00. This is where I get totally confused. Do I pay tax AND a penalty on the conversion or just tax ? And do I just pay a penalty on the $1000 distribution that was taken out of the $2022.93 ??
    I don’t understand how much money I’m going to be losing. I haven’t made any more contributions to the ROTH since I did the conversion. So I’m assuming I’m either going to lose $300 or lose $400. I don’t understand how it works on my taxes. I’m trying to do my taxes w/Turbo Tax and it shows my total distributions as $3023. Is this taxed/penalized as a lump sum or individually ?

    The FASFA deadline is tomorrow and my daughter will lose her financial aid if I can’t get this figured out ASAP. because I can’t fill out the forms w/o the info. I had no clue it was going to be this complicated. I wish I’d just put the money under my mattress instead !

  13. clydewolf

    Sharon,

    Here is some information that may help:

    Sharon,

    It is good that you are making contributions to an IRA! Keep doing this every year you have eaned income.

    >>> I have answered your questions below, see the lines that start with >>>

    I am completely boggled by everything that has to do w/IRAs and I cannot find the info I’m looking for anywhere. I opened a $2000 Traditional IRA Savings in 2008 for 2007 tax year ( opened it before April 15th). Then in June of 2009 I converted the Traditional IRA with a balance of $2022.93 to a ROTH IRA.

    >>> You should have completed form 8606 Part II with your 2009 form
    >>> 1040, and paid income tax on the amount you Converted to your ROTH
    >>> IRA.

    A few months later I needed money to pay medical bills so I took a $1000 distribution from my ROTH.

    >>> Not the best idea, but this $1,000 distribution is now tax free. You will need to complete form 8606 Part III and pay the 10% penalty if you are younger than 59.5

    So this year for taxes I got (2) 1099-Rs… one for $2022.93 and one for $1000.00. This is where I get totally confused. Do I pay tax AND a penalty on the conversion or just tax ?

    >>> You pay just the tax on the amount you converted to your ROTH IRA.

    And do I just pay a penalty on the $1000 distribution that was taken out of the $2022.93 ??

    >>> If you are age 59.5 or older this is penalty free.
    It may be penalty free IF; this is used to pay your medical expenses that exceed 7.5% of your Adjusted Gross Income (1040 line 38).

    I don’t understand how much money I’m going to be losing. I haven’t made any more contributions to the ROTH since I did the conversion. So I’m assuming I’m either going to lose $300 or lose $400. I don’t understand how it works on my taxes. I’m trying to do my taxes w/Turbo Tax and it shows my total distributions as $3023. Is this taxed/penalized as a lump sum or individually ?

    >>> The tax should only be charged to the conversion amount. Once the
    >>> money is in th ROTH IRA, the income tax has been paid. The 10%
    >>> penalty is charged to the ROTH Distribution because the Conversion
    >>> was not aged 5 years, or meets one of the other exemptions for which
    >>> you may be qualified.

    >>> On 1040 line 15A, this should be blank, no amount goes here On 1040
    >>> line 15B, you put the conversion amount.

    >>> Look at 1040 line 58. This refers to Form 5329 where the penalty for
    >>> the ROTH Distribtuon is calculated. You will put $1,000 on line #1.
    0 on line 2.
    $1,000 on line 3.
    $100 on line 4.
    This $100 goes to your 1040 line 58.

    >>>> SUMMARIZING: Complete Form 8606 Part II for your conversion.
    ………………………………..Complete Form 8606 Part III for your ROTH Distribution.
    ………………………………..Complete Form 5329 Part I to calculate your penalty.

    ………………………………..1040 line 15b should only show your Conversion amount.

    The FASFA deadline is tomorrow and my daughter will lose her financial aid if I can’t get this figured out ASAP. because I can’t fill out the forms w/o the info. I had no clue it was going to be this complicated. I wish I’d just put the money under my mattress instead !

    >>> Yes, FAFSA is not easy.

    >>> I hope this helps you with your tax return and then FAFSA.

    >>> Clydewolf

  14. Hi,

    What is the deadline to make a Traditional IRA to Rtoh conversion? If I decide to make a conversion Feb. 1, 2010 based on my 2009 tax returns figures, can I still report it on 2009 returns? Is there an April 15, 2010 deadline on this conversion?

  15. clydewolf

    Your February 1, 2010 Conversion will be reported on your 2010 tax return.

    Roth IRA Conversions must have the funds removed from the TIRA no later than December 31 of the tax year.

    If you are doing this at your IRA custodian, the Conversion would be completed within a day or 2.

    If you are changing custodians as you do the Conversion, it may take a few more days.

    If you take the cash from your TIRA, you have 60 days complete your ROTH IRA Conversion. Or you have the same 60 days to get that cash back to some type of IRA.

  16. david rosa

    question? I have a previous 401k that is now a rollover ira….since my contributions where pretax when I was employed at that company, do I have to keep a record of all post tax dollars that I contribute to that rollover ira acct……otherwise at time of withdrawal I would be double taxed on that contribution…I do recceive a form 4598 annually showing me the contributions I made for that year…P.S. are they tax decuctible ??

  17. david – post tax IRA deposits are tracked via Form 8606 along with your tax return.

  18. clydewolf

    David,

    Your after tax contributions to your IRA are not tax deductable.

    However you may qualify for the Saver’s Tax Credit (probably not though)
    1040 line 50 (2009).

    And as Joe Taxpayer says, file that 8606 each year you make an after tax contribution. If you missed doing so in the past, it would be wise to do those missed year 8606′s now. Form 8606 is a stand alone form.

    Form 8606 – http://www.irs.gov/pub/irs-pdf/f8606.pdf
    Form 8606 Instructions – http://www.irs.gov/pub/irs-pdf/i8606.pdf

  19. I am 46 and received a lump sum ($45k) from a defined benefit plan which I am rolling over into a rollover/traditional IRA, then converting to a Roth IRA. I’m choosing to pay the tax on that in 2011 and 2012. The Roth IRA that I’m converting to has been open since 2000, but has only $100.00 in it.

    I will need to borrow some of the money, after conversion, to hopefully be put back within 60 days. If I were unable to deposit it back in time, would I still owe the 10% penalty? Are new funds deposited to a seasoned Roth considered seasoned for 5 years by tax code even if they really aren’t?

    It’s interesting to think that I could take this whole $45k from the Roth and not pay any tax on any of it until 2011 and 2012. I am not planning to do this, but wondered if I am I missing something important.

  20. Nancy Focareta

    I have a question:

    I have a traditional IRA and so does my husband. I would like to convert some of my IRA to a Roth in 2010 and pay the taxes in 2010.

    I would like to convert some of my husband’s IRA to a Roth IRA in 2010 and pay the taxes over 2011 and 2012.

    May I do this??
    Thanks.

  21. clyde wolf

    Sharon,

    Borrowing money from our IRA using the 60 day transfer period for IRAs is not the smartest thing to do. I do understand you expect to pay this back within 60 days. You have 60 days from receipt of the money to get it back into your ROTH IRA. This would result in not tax and no penalty.

    Because money comes out of a ROTH IRA in an Ordered Sequence, you may not have any tax or penalty. That Ordered Sequence is:
    - First to come from a ROTH IRA is our Annual Contributions. We can take these from our ROTH IRA at any time for any reason without tax or penalty.
    - Second to come from a ROTH IRA is our Converted Amounts. We can take these at any time without tax, we paid the tax at the time of Conversion. 5 years after the Conversion the penalty is waived too. Each Conversion has it’s own 5 year clock. Taking the Converted money from the ROTH IRA in the first 5 years after the Conversion will result in a 10% penalty on the amount of Converted money removed from the ROTH IRA.
    - Third to come out of a ROTH IRA is gains. If the ROTH IRA owner is age 59.5 years old or older, AND the ROTH IRA is at least 5 years old, there is no tax or penalty on this money. Taxes would apply on the gains when the ROTH IRA is not 5 years old. There would be no penalty because the ROTH IRA owner is age 59.5 or older.
    For being younger than 59.5, taxes and penalty would apply.

    Depending on how much and which type of money you take out of your ROTH IRA, the penalty and taxes may apply to the distribution you are considering from your ROTH IRA.

    You would not want to take, the $45,000 from your ROTH IRA. This would Cancel your 2010 Conversion, and would make the $45,000 taxable in 2010.

  22. David Winn

    I turned 71 this year (2010) and am required to take the minimum distribution from my rollover IRA. Can I take the distribution and have it converted into a Roth IRA?

  23. clyde wolf

    David Winn,

    It is good that you have been planning ahead and saving for your retirement using a Traditional IRA (TIRA).

    Unfortunately what you are proposing can not be done. In the year we reach age 70.5 or more, the first money distributed from our TIRA is our Required Minimum Distribution (RMD). This money can not be converted to a ROTH IRA. The RMD must be removed from our TIRA by December 31.

    Failure to take the RMD from our TIRA will result in an excessive accumulation penalty of 50% of what we should have taken.

    In 2008 and again in 2009 (even though no RMD was required in 2009) we could have made a tax free Charitable Distribution of up to $100,000 from our TIRA directly to a qualified charitable organization. This would have counted as our RMD (or for a few fortunate folks, part of their RMD). But the tax free Charitable Distribution ended with 2009 and Congress has not taken this feature up in any of it’s legislation so far this year.

    You can use your RMD to pay tax on an additional amount that you Convert to a ROTH IRA. If you choose to do this, it may be best to Convert an amount that will almost fill your current tax bracket. The Conversion will lower your 2010 year end balance in your TIRA and help to reduce (or keep down) next year’s RMD. A Conversion to a ROTH IRA must be completed by December 31.

    Completing a 2010 Conversion to a Roth IRA you can pay the taxes on your 2010 tax return or pay the tax over 2 years, 2011 and 2012.

  24. See http://fairmark.com/reference/index.htm
    Converting all of it would have you pay 25%, you are right. The 15% bracket this year ends for you at $34,000. My best advice for your situation is a partial conversion (to Roth), just enough so in 2010 your taxable is exactly $34,000. This would mean converting about $4000 per year.
    As you noted, no estate tax, but when your heirs take the money, they will pay tax as they withdraw from the traditional IRA. The withdrawals from the Roth are not taxed at all.
    For the heirs to be allowed to take this money over their own lifetime, they must be listed as beneficiaries on the IRA account. I hope this makes sense, if not, please ask a follow on question.

  25. Richard – Yes, you can convert partial, and if you find when you are doing your taxes that you went over the next bracket, ‘recharacterize’ just the amount you wish. You can go through a bit of effort so you hit it dead on.

    For the kiddies – withdrawals are not earned income, so they are subject to the rules surrounding the kiddie tax. First $950, tax free, next $950, 10%, above that is subject to their parents’ rate. But, all is not lost. If they are properly listed as beneficiaries they can take withdrawals over their lifetime, and for the amount we’re discussing, $950/yr will be above what’s required. It’s only if they withdraw all at once there may be an issue.

    On a side note – too few really understand the complexity of the Roth decision. That may result in many making a bad choice. For most, a partial conversion is all they should even consider.

  26. I have incurred some losses in stocks from my savings accounts. I have a Traditional IRA Account of the same amount as the loss.
    Will it help if I convert the Traditional IRA to Roth IRA? Will I save all the taxes on it since my Loss in Stocks is the same as the Traditional IRA Amount?
    Please help.
    Thanks
    Raj

  27. clyde wolf

    Raj,

    I will assume, you sold your stocks creating the loss.
    You report your stock sale (gain or loss) on Schedule D. Following the line descriptions on Schedule D, you offset your Capital Gains with the amount of loss.

    Then you can subtract up to $3,000 of your remaining losses against your income (1040 line 13). When your losses exceed that $3,000 you can carry the remaining to future years and repeat the process, first to reduce gains and then subtract up to $3,000 from other income.

    Follow the line items on Schedule D.

    Your Capital Losses may be used to reduce your total income, including your Conversion amount, up to $3,000.

  28. I have a question with respect to reporting the tax burden. If I understand this correctly, if I convert my TIRA into a Roth IRA in 2010, I have the option of reporting 50% of the ordinary income as a result of the conversion in 2011 and 50% in 2012.
    Does this mean that I can pay 50% of the conversion taxes when I file my 2011 taxes in the first part of 2012 and pay the other 50% of the conversion taxes when when I file my 2012 taxes in the first part of 2013?

  29. I am 73. I must make a mandatory withdrawal from my TIRA of about $10,000 this year. Can I do that by converting the $10,000 to a Roth IRA. I have other funds from which I can pay the tax.

  30. Elliot – the RMD for 2010 is based on the 12/31/2009 balance. That number is fixed, you must take it as an RMD. You can convert other funds in the TIRA before year end so those funds are not in the account this coming 12/31.
    In other words, you can lower the RMD for 2011 if you wish.
    I’d suggest you look at your taxable income for 2010 and convert enough to fill the bracket you are in now. e.g. you are single and will have a taxable income of $25,000. The 15% bracket ends at $34,000. You convert $9000, and pay just 15%. You do this each year, and may never pay 25% due to rising RMDs.

  31. clyde wolf

    Lee,

    Yes you have the right. Half of your 2010 Conversion will be reported on your 2011 tax return, early in 2012, and the other half will be reported on your 2012 tax return early in 2013. This is the default option.

    To do that, you will need to complete Form 8606 for 2010, 2011 and 2012.

    You have another option, that is to report the Conversion on your 2010 tax return early in 2011. Doing this option, you need to file Form 8606 just for 2010, and check a box I believe is on line 22.

    And if you file a joint tax return, and both taxpayers on that return do a ROTH Conversion in 2010, one tax payer can select to pay the taxes in 2010 and the other tax payer can use the 2 year default option. Because both taxpayers have done a conversion, both taxpayers must complete their Form(s) 8606.

  32. I will have no earned income for 2010 so I believe this would be a good opportunity to convert Traditional to Roth. How can I figure out how much I can convert before paying any taxes at all, keeping in mind standard deductions, child tax credits, etc? Thanks

  33. Kev –
    Sorry about no income, but great strategy.
    Yes, if you are single, you still have the one exemption ($3650) and STD deduction ($5700). Double that if married.
    I’d suggest you consider even hitting the 10% bracket, the first $8375 sing or $16,750 joint, if your income is normally 15% or higher. That 10% is a small price to pay today.
    Last – there is a Mulligan. Convert now to be sure you fill that 10% bracket. When you are calculating in April, reverse (“recharacterize”) enough to be exactly where you want.
    I help a retiree, and we do this so her last taxed dollar is taxed at 15%, but even one more buck is 25% money. This helps her avoid the RMDs pushing higher each year. A bit of tinkering, but it’s a good long term strategy.

  34. Iif I convert my TIRA into a Roth IRA in 2010, I have the option of reporting 50% of the ordinary income as a result of the conversion in 2011 and 50% in 2012.
    This mean that I can pay 50% of the conversion taxes when I file my 2011 taxes in the first part of 2012 and pay the other 50% of the conversion taxes when when I file my 2012 taxes in the first part of 2013.
    This means half of my 2010 Conversion will be reported on your 2011 tax return, early in 2012, and the other half will be reported on your 2012 tax return early in 2013. This is the default option.
    But don’t I need to worry about paying enough estimated taxes during both 2011 and 2012 to cover the taxes due for those years to avoid large penalties for underpayments? I can’t really wait until April 2012 and 2013 to suddenly come up with the taxes on my return can I?
    .

  35. clyde wolf

    Matt,

    Good Point.

    You may need to adjust your withholding, or make estimated payments.

    Before the penalty applies: There are 3 safe harbors before we need to make estimated payments. The penalty would be assessed on the amount over the safe harbor that provides the lowest overage.
    Here are the safe harbors:
    1) Will you owe $1,000 or more after subtracting withholding and refundable credits from your tax bill?

    if yes, then:
    2) Will your withholding plus refundable credits be at least 90% of your 2011 tax bill?

    If NO, then:
    3) Will your withholding plus refundable credits be at least 100% of your 2009 tax bill?

    If yes, you do not need to make an estimated payment.

    Qualify for any one of the safe harbors above and there is no penalty.

  36. Matt –
    Correct – when you convert and create a taxable event, you owe the tax on the same timeline as if it were earned. If you convert now, for 2010 but were to pay it on the ’10 return, an estimated tax payment by 1/15 would help you avoid a penalty.

  37. I am considering converting trad. IRAs to Roth IRAs. I am 45 y.o. and have high annual income. As a consequence, I have only been able to contribute to an IRA for myself and one for my wife with after tax money. We now each have about 23k invested, nearly all of which is contributions. I cannot see any reason I would not want to convert all of them to Roth IRAs If I understand this correctly, I will pay taxes only on my trivial gains in the conversion. On the longterm horizon, it’s hard for me to imagine the personal income tax rates will not go up. Furthermore, I like the fact that there are no required distributions. I understand the Roth may have advantages in an inheritance situation, too. Can someone tell me if I’m missing something here?

    If I convert, can I make contributions in future years into the Roth?

    Thanks.
    Dave

  38. clyde wolf

    Dave,

    The only thing I can see for you not to Convert would be your high tax rate. But as you say you have very small gains. That would be good if this After Tax IRA is your only Traditional IRA.

    If you have other Traditional IRAs, you must take All of them into consideration for determining the taxable amount on your Conversion. Example: You have an IRA funded with with all Before Tax Contributions. That IRA is now valued at $25,000. Your Traditional IRA funded with After Tax Contributions is worth $23,000 of which $3,000 is gain. You have $28,000 of Tax Deferred money. Converting you would need figure the ratio of your tax deferred money vs your total amount of $48,000. If you are converting $23,000 you would be taxed on 58.3% of your Conversion.

    The IRS looks at all of your TIRAs as one TIRA. Each distribution is composed of Pre-Tax and Post-Tax money based on the ratio of the two types of money in all of your TIRAs.

    Your beneficiaries would need to take tax free Required Minimum Distributions from your ROTH IRA.

    If you are going to convert and take advantage of the 2010 spreading your tax over tax years 2011 and 2012, you best get moving. The Conversion must be complete before January 1, 2011.

  39. Bob Zeilinski

    My question is similar to Dave’s above. My wife has a 401K and a IRA CD. I would like to convert the IRA CD to a Roth. We are also in a high tax bracket but the CD is after tax $ with samll gains. Will the IRS count the 401K plan in Total or this that separate from IRA’s? Also the 01-01-11 date to convert. Is that only to take advantage of the tax split in 2011 & 2012? Can I still convert to Roth if we pay the full tax in 2011? In other words do I have until 4-15-11 to convert if we pay all taxes?

    Thanks.

  40. clydewolf

    Bob Zeilinski,

    That is a great idea!

    You can convert that after tax TIRA to a ROTH IRA.
    Taxes would be due only on the gains in the TIRA,
    You have already paid the tax on the original contributon, also referred to as your Basis.
    Only IRA tax deferred money will count for the conversion. But all of your tax deferred IRA money needs to be considered. The 401k does not count into this Conversion.

    Converting now this will be taxed in your 2011 tax year, not tax year 2010.

    Be sure to complete Form 8606 Part II when you file your taxes next year.
    Also be sure to complete a New Beneficiary Form for the ROTH IRA.

  41. Gentlemen….If I have no “EARNED INCOME”, may I transfer funds from a TIRA to a RIRA?

  42. Two part question:
    Part one – the latter portion of my contributions were aleady taxed in the respective contribution year. If I convert, do I get taxed again for those contributions?

    Part two – for my earlier contributions that have not been taxed, the value of those shares are currently worth less than what I paid for them. Understand having to pay taxes on the amount contributed. However, at some point in time (upon sell) shouldn’t I also be able to record a realized capital loss – assuming the valuation upon sale is still lower than the cost?

    Thanks.

  43. Jeff -
    (1) No, a conversion is taxed prorated to the amount deposited pre-tax.
    e.g. You’ve tracked via form 8606 $5000 worth of non-deducted deposits. Total account value is $10000. When you convert, only 50% is taxed and 8606 adjusted to reflect this.
    (2) You don’t get to break up the deposits. i.e. you have one Traditional IRA comprised of pre and maybe post-tax money. The number of accounts it sits in doesn’t matter. The rules for taking a loss require a sale of the entire IRA, which rarely ever makes sense.

  44. Robert – income is required only for new deposits, a conversion is now allowed regardless of income, no minimum or maximum.

  45. I think a lot of people don’t realize the benefits of the Roth IRA in terms of tax free growth. I’ve seen several of my friends invest in retirement funds without using the Roth IRA vehicle simply because they didn’t know it exists.

  46. I openned a Traditional IRA account in Dec 2008 hoping that I will be able to take deduction in my taxes when I file in April09. However, due to income limitations and the fact that I did not contribute to an employer sponsored saving plans when available, I became ineligible to take the deduction. I now want to convert this to ROTH IRA. Do I end up paying taxes again on funds I transfer to RothIRA? Any other tax implications that I need to be aware of?

  47. Su – If you have no other IRA money, this conversion is only taxable on the amount of growth, e.g. your $3000 deposit is now $3200, the tax is just on the $200 to convert.
    If you do have other IRA money that’s pretax, you have to figure the ratio of posttax to total balance to figure your taxable amount.

  48. How should deferring until next year half the tax due on a conversion from TIRA to Roth affect AGI?

  49. I just figured it out, sorry for my confusion. Now I need to understand how AGI affects FAFSA?

  50. Received my 2010 1099-R. It shows gross distributions (converted from traditional to a Roth in 2010) of $5974. Line 2a is blank. 1st block of 2b is blank but there is an X in 2nd block of 2b. Line 3 is blank and line 4 shows zero. Line 7 shows G. My records indicate that I contributed a total of $1840 (after tax dollars) in 1989 and 1990 with no other contributions since. My question is do I have to pay taxes on the full amount (line 1) or can I deduct $1840. If I can how do a go about revising my 1099-R or can I?
    Thanks

  51. K_Yeeters – The RMD must be withdrawn first. Don’t take the broker’s word, look it up yourself. Look at the December IRA account balance(s), and then find a table showing the divisor, just google IRA RMD table.
    After the RMD is taken for 2010, you are free to convert any of the remaining balance. This reduces the 12/31/11 balance, and therefore the 2011 RMD.

  52. James Barry

    I had no earned income in 2010 and converted some traditional IRA’s to Roth IRA’s. The tax program I use says that is excess Roth IRA contribution and is subject to a 6% penalty. Is that correct?

  53. clydewolf

    James Barry,

    No, that is not right. There is no limit on the amount you can convert.
    Conversions do not count as a contribution.

    I would guess you have not completed Form 8606, Part II.

    Depending on how you want to pay your taxes on the Conversion, either in 2010 or half in 2011 and half in 2012, you may need to check some boxes in this seciion of the form.

    Paying half of the tax in 2011 and half in 2012 is the default mode.

    Paying the tax on your 2010 return, you need to check a box on line 19,
    and check a box on line 24, even though looking at the form it appears this is not necessary. The Instruction book for the form indicates it is necessary.

    You should also add a note to your return stating This is a ROTH Conversion.

  54. Kristeen Gaffney

    I have a technical question regarding my rollover. I recently rolled over a traditional 401K plan to a Roth IRA. The effective date of the withdrawal of the funds from the 401K was 12/29/2010. The date that the Roth IRA account was opened (check deposited) was 1/3/2011. My question is what is the effective date of the rollover – the date the funds were withdrawn or the date the Roth IRA account was opened? Was my transaction effective in 2010 allowing me to defer the taxes across 2010 and 2011? I haven’t found any discussion at this level of detail in the IRS information. I appreciate any guidance or advice that you can provide.

  55. My husband and I each has been contributing post-tax money to traditional IRA since 2008. And we have no other IRA acconts. In late 2010, we converted to Roth IRA (there was no growth due to loss). When we file our tax, Turbotax tells us that our AGI is too high to convert the $5000 of 2010 contribution to roth IRA in 2010. As a result, we have to pay penalty each year for the $5000 in the roth IRA. It suggests us to convert the $5000 back to traditional IRA to avoid that penalty/tax. Does this make sense at all? How should I handle this?

  56. Cathy – the deposit seems to not be entered correctly. First enter the deposit, and verify that it flows to the 8606, which should reflect the total deposits over your IRA investing lifetime. Then you enter the conversion as one number, since there’s no growth, as you stated, no tax should be due.

  57. John W

    I think I am having a similar problem as Cathy. For the past ~5 years, my wife and I have been making non-deductible contributions to Traditional IRAs. In 2010, we each moved a portion of the total to a Roth IRA. We have no other IRAs. My understanding is that we should not owe any tax, but Turbotax tells us we made “excess contributions” to the IRA, and is taxing us on the distribution! Any help is appreciated.

  58. John,
    It’s tough to help someone without looking over their shoulder, but I can give you some pointers. By doing it on TurboTax, you can tinker till you find the source of the error.
    First, before you enter any IRA conversion figures (that is, remove the conversion for the moment) look at your 8606. Does it show the 5 years’ accumulated non-deducted deposits?
    Then, enter (via the 1099 for the converted amount) the correct figures, showing the withdrawal and conversion. This flows back to the 8606 showing that it’s a conversion, and removing it from the running amount of IRA you have pretax.
    Let me know if that helps.

  59. Diane M

    Thanks for all of your excellent advice & explanations! Reading your article and the responses to questions has answered mine. This is the best site I’ve found for clarifying all the tax rules on TIRAs to Roth.

    THANKS!!!

  60. Great article! I converted to a Roth last year, using an IRA that was a 401k rollover. Personally, I am hard-pressed to think of a reason why a person wouldn’t do this….the tax advantages are just too great.

  61. Alex – one would “not” convert because the saving rate is so low that most people will retire in the 10 or 15% bracket, even if working at 25%.
    So the model of taking pretax money saving the 25% tax and withdrawing at 15% when retired, works for the majority. This is the simplest answer to “why not.”

  62. I guess I should have rephrased my answer….I can’t think of a good reason. I agree with you that the savings rate is terribly low. Of course, I would think that in the long run you will pay less tax with the ROTH, no matter what tax bracket you are in….although I have never seen the math to prove/disprove this.

  63. Steven Newland

    I converted $13,000 from a traditional roth ira to a roth ira in 2010. I wanted to pay the taxes on this amount in 2011 and 2012. My tax preparer told me that i am not eligible to do this and will have to pay the taxes this year. Is this right.

  64. Steven – ?? Did he give you any reason? No it’s not right. In fact, the default for tax software is to assume the taxpayer wants it split. One must specifically say don’t split it to take it all in 2010.
    It’s time to take your business elsewhere. If you’re not comfortable doing it yourself (with tax software) you at least need to find someone familiar with current the tax code.

  65. Patty Jo

    I have a traditional IRA account valued at $16,000. The original amount I invested over the initial three years was $6,000 and the account has earned $10,000 in interest. There was no tax deduction taken in the years that I made the IRA contributions and I did not fill out any special forms when I filed my income tax return in those years. (At that time Roth IRAs did not exist or I would have just set up the IRAs as Roth.)
    To simplify my life I would like to remove the $6000 original nondeductable basis from my traditional IRA and roll it over to my ROTH IRA. (The taxable interest will remain in the traditional IRA.) This will help me to separate taxable income from nontaxable income when I finally make withdrawals and keep my accounting systems much easier to track. I will be 59.5 on May 15th, 2011, so I plan to do this after May 15th.
    Since I already paid tax on the $6000 will I have to pay tax on it again?
    Will there be any penalties on the early withdrawal & roll over?
    How will I report this on my year 2011 income tax return?
    Any other tips that you would like to offer?
    Thanks for your help. Patty

  66. Patty Jo – you were supposed to track the non-deducted IRA money via form 8606, which gets submitted with your return. You may want to amend your 2010 return so you are on record as having the $6k lifetime non-deducted deposits.
    That said, when you convert to Roth or withdraw, you can not choose to withdraw the $6k first. The money is prorated. 10/16 is 5/8 or 62.5%, so any dollar converted or withdrawn is going to have 62.5% taxed (at your marginal rate of course). As the return grows, the taxed amount as a percentage will only rise.
    But as you’re turning 59.5 why not wait till you’re retired and convert or withdraw when you are in a lower tax bracket?

  67. If I funded the TIRA with cash prior tax deadline and convert the cash to Roth, that would be tax-free right since the cash is after-tax. Is this a loophole in the IRS code?

  68. Doris

    I’m so glad I found this site as I am not sure what to do about my IRA’s and my bank can’t advise me. I just rolled over a $206,000 Traditional IRA from a credit union to a bank. I am 76 years old and don’t need to withdraw anymore than the RMD each year as I have access to other savings accounts. I have already withdrawn the RMD for 2010 as it was required due to the rollover. I deposited it into a money market account at the same bank. I would like to transfer funds out of this Traditional IRA into a new Roth IRA this year and every year thereafter in the amount that doesn’t push me into the next tax rate. I would keep this Roth IRA in the same bank as my Traditional IRA. Is my plan OK to do? I’m asking because I keep getting the impression above that these Roth accounts opened and funded by transfers from a Traditional IRA had to have been initially created in the 1009/2010 years. Was that just a temporary 2-year opportunity or is it still OK to do?

    Also, I don’t understand how you can “re-characterize” an amount the following year after you withdrew it from a Traditional IRA and had it transferred into the Roth IRA. Is that a legal transaction? And will banks be happy to do that for you? Are you saying, if you make a mistake and transfer too much that puts you into the next tax bracket one year, the bank can reverse a small amount of the previous transaction the next year with no problem at all from the IRS? If true, this little option is pure gold!

    Thank you in advance for your answer.

  69. Doris. You nailed it. (That is, you understand it perfectly.
    I have an 83 year old I work with and this is exactly what we do each year.
    Take the RMD, do an estimate of her net taxable income, convert to Roth to push that number to $34K (for 2010) or whatever the top of 15% is that year. If we overshoot, recharacterize in April.
    The obvious benefit is twofold – she avoids having the RMD push her into a higher bracket, and she keeps more money in the retirement account to grow.
    Her girls, who both earn good incomes, will avoid their own taxes on the Roth money, as mom paid 15% instead of her girls paying 25 or 28%.
    By the way, recharacterizing is but a form to fill out, your bank should be able to give this to you. If the front line guys can’t, ask for a manager.

  70. Within the last year, I combined several of mom’s retirement accounts into one rollover Ira. Her former employers 401k with a value of $150k, an old TIRA of about $6k and a pension from her old employer that had an asset value of $48k. Mom is 63 and still married so I will take advantage of partially converting this rollover IRA into a Roth IRA year after year up to the 15% bracket max. I get that. My one issue is the pension assets that I rolled over. Do I somehow treat or track that differently from the standpoint of taxable contributions. Is there a tax form I should fill out? A little confused?

    • John – if you rolled the pension into the IRA, it’s all one number. The only thing to be concerned with is if any deposits were post-tax. If not, no extra work, just keep doing that conversion. Your plan, to convert just enough to ‘top off’ that 15% bracket is ideal. After she passes 70-1/2 and has RMDs, your planning will help keep her from paying 25%.

  71. Hi, My family income is less than 100K. I contributed 5000 to T-IRA last year and this year I stopped after contributing 1250. I stopped becasue my insurance agent told me that for my age (37 Yrs) Roth IRA is a better option than T-IRA. The reasons given were same as those given in your article. Now I want to transfer those 6300 (6250 + 50 earnings) into Roth IRA. I know I will be paying taxes on all of that. Ans also I can deduct 1250 from this years taxes becasue I contributed 1250 for this year. Can I invest my ramining limit for this year of (5000 – 1250) = 3750 into Roth IRA account. Also is it a wise idea now for me to transfer those to Roth IRA. Another thing to consider is that I live in State of IL. last year my state tax for 3% and this year it is 5 %. So I will eb paying that extra 2 % this year even though my state incomce was form last year. My federal tax rate is 15 %. What are the other things I need to consider before making a decision to transfer.

  72. Ikram – The Traditional vs Roth has little to do with age, and nearly everything to do with current income, future income, and current assets. Less than $100k? How much less? But more important what is the line on your taxes that shows “taxable income”? Which is the same as my asking you what tax bracket you are in. If you are in the 15% bracket, I have little issue with the Roth, so long as you have some money (maybe 401(k)?) that’s pretax. In the 25% bracket, pretax is the better account for most.

    I suggest you re-read the entire set of comments on this post, and I’d also ask why you are taking advice from insurance salesmen? His expertise is in insurance. Do you call your doctor when the air conditioner blows hot air?

  73. Last year I had the chance to save more than $100k on the principle of a commercial property and used $125k from an IRA (traditional 1/2 from mine + 1/2 from wife) to pay-off the loan and incur the savings. Now, 11.5 months later I want to re-fund my Traditional IRA and am being told I cannot deposit more than $5k/person per year until age 50. I had figured that the 10% penalty would sting, but would be worth it for the savings…but if I get hit with the taxes too and cannot get those IRA’s back up to previous levels, then I have really messed myself up more than I had thought. Any advice? Quite troubled.

  74. I have a traditional IRA worth 40,000 and a rollover IRA worth 100,000. Both have a mixture of before and after tax funds. I understand how to compute the taxable amount. My question has to do with where the funds can come from for a partial conversion to a roth IRA. For example, if I want to convert 25,000 to a roth IRA, can I take the entire 25,000 from either one of the IRA’s or do I need to take the same percentage from each (e.g. 25,000/140,000 = 17.85% from each)?

  75. John -
    The need for “rollover” as a separate designation has gone away.
    For all practical purposes, you have one IRA, it happens to be in multiple accounts, and has some post-tax component.
    You take the total, do the math, and transfer from where you wish. To be clear, you convert whatever funds you want, but do the math taking all accounts into consideration.

  76. I have 2 TIRA’s, one in amt. of $34,000 & another $110,000.
    I am a 79 y.o. widow ,own home, drawing approx. $8000. RMD .
    My total yr. income including the RMD is approx. $25000.
    I am in need of more money to help with expenses ( insurance, taxes, utilities, personal, auto, etc. ) & want to know the best way to withdraw some of my IRA CD money .
    The RMD puts me over the top to be eligible for any medicare savings program or low imcome housing of which I am interested in as I find owning responsibilities have been much too stressful for me to manage.
    Would appreciate any suggestions, solutions.

    • Hello Terry,
      My RMD from my traditional IRA ( Bank CD ) is approximate. $8000. for this yr., 2011.
      I want to withdraw an additional $7,000.( to stay under $34,000. ) from this account in order to prevent my going into a future higher tax bracket eventually as I am 78 y.o. & want to stay under the $34,000. limit that will bring me into the higher tax bracket.
      I’m hoping to draw down this account for above reason.
      My total taxable income ,with including Social security is approx. $18,000.& I am in the 15% tax bracket.
      If I withdraw an additional $7,000.will my bank penalize me ?
      (Also, is $7,000. in addition to the $8000.= $15000. RMD ) )a right amount ?) close to $34,000.?
      I do understand that only the $8000. will be a RMD but I do pay taxes on the additional $7,000.
      I’m Subtracting $18,000.(my total. inc. ) from $34,000.(tax bracket change ) & want to be sure that I don’t go over the higher tax amount.
      In addition, I own my home & need additional money for repairs & updating.
      Thank you.”

  77. I contributed 5,000 in 2010 to a traditional IRA while I meant to contribute it to a roth IRA. when I realized this error, I moved the money to my traditional IRA account in 2011. I didn’t deduct this 5,000 in my 2010 tax return. now the 5,000 is shown as a distribution in 2011 and in theory I need to include it as my “income” in 2011. How do I report this and show IRS that I shouldn’t include it in 2011 taxable income? Thanks!

  78. I’m a 78 y.o. female widow , my gross income ( Soc.Sec, pension, all taxable ) is $19000. & with my RMD ( $8,000) totals approx. $26,000.
    How much more can I take from my RMD to stay within the 15% tax bracket ?
    I need money to update plumbing, furniture, etc. & have no other savings to take from.
    The $26000. is pretty much used up for taxes, insurance , utilities, food, etc.
    Appreciate your reply with explanation.

  79. Hello Joe Taxpayer,
    My RMD from my traditional IRA ( Bank CD ) is approximate. $8000. for this yr., 2011.
    I want to withdraw an additional $7,000.( to stay under $34,000. ) from this account in order to prevent my going into a future higher tax bracket eventually as I am 78 y.o. & want to stay under the $34,000. limit that will bring me into the higher tax bracket.
    I’m hoping to draw down this account for above reason.
    My total taxable income ,with including Social security is approx. $18,000.& I am in the 15% tax bracket.
    If I withdraw an additional $7,000.will my bank penalize me ?
    (Also, is $7,000. in addition to the $8000.= $15000. RMD ) )a right amount ?) close to $34,000.?
    I do understand that only the $8000. will be a RMD but I do pay taxes on the additional $7,000.
    I’m Subtracting $18,000.(my total. inc. ) from $34,000.(tax bracket change ) & want to be sure that I don’t go over the higher tax amount.
    In addition, I own my home & need additional money for repairs & updating.
    Thank you.”

  80. It seems you have it right. In 2012 the bracket line is $35,350 for single.
    Yes the extra money should be taxed at the 15%, no, the bank shouldn’t care, as long as it’s not in some kind of CD with early withdrawal penalty.

    In general, to accomplish what you wish, I recommend converting that 7 or 8 thousand to a Roth. This way, when you do your taxes in April ’13, you can recharacterize the exact amount you are over $35,350.

    By the way, there is a convoluted equation, when half your SS benefit plus your taxable income exceeds $25,000 social security starts to be taxed. This creates a Phantom Tax Rate (for lack of a better expression) higher than your marginal rate. I highly recommend using a copy of TurboTax for 2011, and understand your marginal rate. Do your taxes, then go back, and increase your IRA RMD by exactly $1000. If your tax jumps more than 15%, this may be why.

    The Roth conversion and recharacterizing can help avoid a negative surprise next year at tax time. I hope this helped.

  81. Dongping

    Hi Joe Taxpayer,
    My wife and I are 65 now and plan to quit our jobs and retire sometine next year. We have good amount of TIRA/401K in our accounts (approximate 650K). We want to lower our RMD when we reach 70 1/2. So we plan to defer our social security benefit by 2 years to avoid Phantom Tax Rate. During these first two years of retirement, we will convert approximate 120K of our TIRA/401K to ROTH IRA each year to cut our TIRA to 400K level (We are willing to pay 25% tax bracket for this conversion anyway). We have over 300K in cash saving to cover the convertion tax and daily spendings.
    I would like to know if there is any constrain or limitation for our plan?
    Thanks for your advice.

    Dongping

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