Yes, Roth conversions can be taxed.
When you convert an IRA to a Roth, don't you have to pay the taxes on the converted money?
I had planned to do that anytime my fed tax rate went down to 15% over the next several years , as I assume that after I sell my house in the future, the additional investment income will probably put in the equivalent of today's 25% tax bracket. Is that a good idea? MJ
Yes, you pay taxes on the gains. For example, if your conventional IRA has a contribution basis of $30K (on Form 8606) and it's now worth $100K, your conversion to a Roth would subject $70K to tax at your bracket for the resulting AGI. (Your AGI would have started at some number less than $100K and would have risen by another $70K.)
I think conversion is a good idea. Our income is down in the 10% bracket and we've been converting up to the top of the 15% bracket.
The best thing about the conversion is paying the tax at a lower bracket (our tax bracket at RMD would be up in the 25% range or higher) and paying the taxes with funds outside of the IRA. The IRA's not depleted to pay the taxes so those funds boost the IRA's compounding power in a way that's the equivalent of a large donation to a Roth.
But there are other reasons to stay with a 401(k) or a conventional IRA, and Martha has touched on those reasons. We're not in any of those situations so a Roth conversion is a better deal.
If you decide to follow the strategy of partial conversions to a ROTH each year is the amount converted put in a common ROTH
or must you create a separate ROTH each year? The reason I ask is that I am wondering how they keep track of the 5 year rule if everything is dumped in the same pot. Thanks, Charlie
Don't know. I'm converting our conventional IRAs into the same Roth IRA accounts that we started a couple years ago, which are still receiving annual contributions from spouse's W-2 income.
The reason I'm ignorant is that spouse & I are 43/44. We weren't planning to withdraw before ages 59.5, the conversion process should be finished in another 7-8 years, and everything will be over five years in the Roths before we think about withdrawing it. So we haven't had to consider that question.
My guess is that it depends on the Roth's transaction records. I wouldn't make a withdrawal unless I had documentation that the money had been on deposit for at least five years.
BTW, the best board I've ever seen for posting IRA questions is Ed Slott's
IRAHelp Forum. Several CPAs must spend hours researching the most obtuse, arcane trivia and answering our most difficult questions with the actual IRS code references.