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A Simple Roth Conversion Question
Old 02-15-2010, 02:44 PM   #1
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A Simple Roth Conversion Question

I am estimating that next year, when I file my federal tax form, my taxable income, after standard deductions and personal exemptions have been taken into account, will be NEGATIVE $13,000. Given that for 2009 a taxable income of $10,000 has zero tax due and assuming this will be the same for 2010, is it correct that I can convert $23,000 from a rollover IRA to a Roth IRA without paying any taxes?
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Old 02-15-2010, 03:09 PM   #2
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I would use the tax prep software I used for 2009 as if it were 2010 and do a pretend Roth IRA rollover of $23,000 to see how much tax might be owed.
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Old 02-16-2010, 12:54 AM   #3
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. Given that for 2009 a taxable income of $10,000 has zero tax due and assuming this will be the same for 2010, is it correct that I can convert $23,000 from a rollover IRA to a Roth IRA without paying any taxes?
Second the motion to use tax software/calculator. I'm not sure where you're getting your given above. From the table here, it looks to me like any taxable income is taxed
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Old 02-16-2010, 08:54 AM   #4
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I think you may be double-counting the standard deduction, but without a detailed breakdown I can't be sure.

A married/joint household gets a standard deduction of $11,400 and two personal exemptions totaling $7,300. That means a MFJ household could effectively pay zero federal income tax on normally taxable income up to $18,700. A couple that had (say) $5,000 in interest income as their only income source would have room to do a Roth conversion up to $13,700 without tax liability. Which, in this case, would be a no-brainer.

Plus, from the IRS point of view, there is no such thing as a "negative income," since the usual instructions dictate that if a calculation results in a number less than zero, you enter zero. So your "goal" in that case would be to find more ways to "use" the effective zero tax bracket to make the numbers less negative since the result is the same in the end (zero).
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Old 02-16-2010, 11:09 AM   #5
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agree that there should be a detailed breakdown. There appear to be dual uses of the word "taxable" income in this threadand that is confusing the issue.There is the man-on-the-street "taxable" meaning potentially subject to tax and the more formal "taxable" that means AGI less deductions and exemptions. OP appears to be using the formal def in OP since there is reference to exemptions and deductions but OP may revert to man-on-the-street def in later posts. Not sure tho.
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Old 02-17-2010, 09:31 AM   #6
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OK, a little more detail (numbers updated from original post)...

I am retired and live solely off of my investments. I have no pension or any other type of income. In 2009, my interest and dividends totaled about $9,300. I have some carryover losses from previous years so that gives me $3,000 off of that, making my Adjusted Gross Income (1040 Line 38) $6,300. Subtracting the Standard Deduction of $11,400 and Personal Exemptions of $7,300 yields -$12,400.

I plugged these numbers into Turbo Tax and (as expected) it showed zero tax due. I then "faked" some income and I had to go all the way up to about $19,300 before there was any tax due. As it turns out, this is because of how my taxes were calculated on the Schedule D Tax Worksheet.

So, does all of this mean that I could convert $19,300 of my Rollover IRA into my Roth IRA without paying ant federal tax on it?
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Old 02-17-2010, 11:04 AM   #7
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OK, a little more detail (numbers updated from original post)...

I am retired and live solely off of my investments. I have no pension or any other type of income. In 2009, my interest and dividends totaled about $9,300. I have some carryover losses from previous years so that gives me $3,000 off of that, making my Adjusted Gross Income (1040 Line 38) $6,300. Subtracting the Standard Deduction of $11,400 and Personal Exemptions of $7,300 yields -$12,400.

I plugged these numbers into Turbo Tax and (as expected) it showed zero tax due. I then "faked" some income and I had to go all the way up to about $19,300 before there was any tax due. As it turns out, this is because of how my taxes were calculated on the Schedule D Tax Worksheet.

So, does all of this mean that I could convert $19,300 of my Rollover IRA into my Roth IRA without paying ant federal tax on it?
It would appear so.
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Old 02-17-2010, 12:15 PM   #8
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I plugged these numbers into Turbo Tax and (as expected) it showed zero tax due. I then "faked" some income and I had to go all the way up to about $19,300 before there was any tax due. As it turns out, this is because of how my taxes were calculated on the Schedule D Tax Worksheet.
So, does all of this mean that I could convert $19,300 of my Rollover IRA into my Roth IRA without paying ant federal tax on it?
Is America a great country or what?!?

You don't even have to "fake" the income in TurboTax. Start with your original (actual) tax data and then tell TurboTax that you want to do a Roth IRA conversion. Give it a 1099-R or plug through a paper copy of form 8606. Depending on the basis in your conventional IRA you might be able to go higher than $19,300.

Many of us ERs convert a little every year to the top of our tax bracket (in my case 15%). The more losses/deductions, the more converted.
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Old 02-17-2010, 05:37 PM   #9
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Thanks y'all.
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Old 02-17-2010, 07:33 PM   #10
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Did you have 6900 in qualified dividends? (19300 - 12400). That would account for 0 taxes. Will you have the same in qual divs next yr? If so, that
seems like it would work. After 2010, the 0% rate goes away so there will be some tax on those qual divs.
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Old 02-18-2010, 08:45 AM   #11
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Yep, it was the qualified dividends that allowed me to get to that number. Thanks for all of the help.
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