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Old 04-15-2012, 02:59 PM   #21
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.. or listen to him more carefully. He probably told you that taxes are calculated based on all your IRA money. (You can't choose just the after tax IRA money to convert or withdraw)
Yeah, as soon as I hit submit I realized it was probably a misunderstanding. Still, I'd want an adviser who can explain things clearly to me and makes sure I'm not confused, but I obviously wasn't part of this discussion.
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Old 04-15-2012, 03:34 PM   #22
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.. or listen to him more carefully. He probably told you that taxes are calculated based on all your IRA money. (You can't choose just the after tax IRA money to convert or withdraw)
+1

Yep, it's a fairly straight forward (for income taxes! ) calculation. I did a TIRA to Roth conversion in 2011. The TIRA was a mix of deductible and non-deductible contributions and earnings. It turned out all I needed was the 2011 end of year value of my TIRA and the basis (non-deductible amount) from my last 8606. I expected the worse and, for once, was surprised that it was quite simple........
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Old 04-15-2012, 04:22 PM   #23
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.. or listen to him more carefully. He probably told you that taxes are calculated based on all your IRA money. (You can't choose just the after tax IRA money to convert or withdraw)
Thanks Alan for the clarification. I'm now quite sure I misunderstood but at the time we had the discussion I thought I understood what he was saying.

So, I'm not quite sure I understand the method of tax calculation. Do I pool all the money, determine the percentage of pre-tax vs post-tax, convert a dollar amt and pay taxes based on my pre-tax/post-tax percentage?

And second question - is there an FAQ or a book that you'd recommend since I'm still not 100% on the subject?
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Old 04-15-2012, 09:54 PM   #24
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+1

Yep, it's a fairly straight forward (for income taxes! ) calculation. I did a TIRA to Roth conversion in 2011. The TIRA was a mix of deductible and non-deductible contributions and earnings. It turned out all I needed was the 2011 end of year value of my TIRA and the basis (non-deductible amount) from my last 8606. I expected the worse and, for once, was surprised that it was quite simple........
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Thanks Alan for the clarification. I'm now quite sure I misunderstood but at the time we had the discussion I thought I understood what he was saying.

So, I'm not quite sure I understand the method of tax calculation. Do I pool all the money, determine the percentage of pre-tax vs post-tax, convert a dollar amt and pay taxes based on my pre-tax/post-tax percentage?

And second question - is there an FAQ or a book that you'd recommend since I'm still not 100% on the subject?
It really is as simple as youbet explains.

Suppose the following:

Cost basis from last 8606 = $40,000

during the year you rolled over $20,000

Total of all non-Roth IRA's at end of year = $240,000 (this after you have converted $20,000).

The fraction of the conversion that is tax free is 40,000/(240,000+20,000) which is = to 0.1538

0.1538*$20,000 = $3,077 that is tax free, and your ongoing basis reported on 8606 for the next tax year is $40,000-$3,077, which = $36,923

The tax software walks you through all this.
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Old 04-16-2012, 08:05 AM   #25
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It really is as simple as youbet explains.

Suppose the following:

Cost basis from last 8606 = $40,000

during the year you rolled over $20,000

Total of all non-Roth IRA's at end of year = $240,000 (this after you have converted $20,000).

The fraction of the conversion that is tax free is 40,000/(240,000+20,000) which is = to 0.1538

0.1538*$20,000 = $3,077 that is tax free, and your ongoing basis reported on 8606 for the next tax year is $40,000-$3,077, which = $36,923

The tax software walks you through all this.
That's helpful to me thanks! And to finish my questions, I don't have to convert everything as long as we use all our IRA holdings to determine basis and therefore taxes on what we do convert. Right?

For example, say we have $500K in IRAs, 2 x $50K TIRAs and 2 x $200K Rollover IRAs. We could convert the two TIRAs, say $20K/yr for 5 years - and leave the Rollover IRAs as is (again, as long as we use all remaining for basis/taxes).
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Old 04-16-2012, 09:34 AM   #26
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That's helpful to me thanks! And to finish my questions, I don't have to convert everything as long as we use all our IRA holdings to determine basis and therefore taxes on what we do convert. Right?

For example, say we have $500K in IRAs, 2 x $50K TIRAs and 2 x $200K Rollover IRAs. We could convert the two TIRAs, say $20K/yr for 5 years - and leave the Rollover IRAs as is (again, as long as we use all remaining for basis/taxes).
I know you asked Alan, but I'll chime in if you don't mind......

Yes, you have it correct. You definitely do not have to convert all your TIRA's but, yes, the aggregate value of all your TIRAs is used in the calculation.

Your IRA administrator (Schwab for me) will send you a 1099 stating the amount you converted. TurboTax asks you for a few numbers (as illustrated by Alan) and you're done.

Edit: Just thought of a possible point of confusion....... you and your DW's transactions are handled completely separately despite you filing MFJ. If you convert from both of your TIRAs, you'll each get a 1099 and will use your own numbers to calculate the taxable portion. Then the taxable portions of both 1099 amounts will be added to your taxable income, assuming MFJ.

BTW, an advantage to not rolling over a 401k to a rollover IRA is that 401k's are not included in the calculation. That's why I'm delaying the rollover of my 401k until I complete the TIRA to Roth conversions that I want to do.
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Old 04-16-2012, 09:58 AM   #27
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I know you asked Alan, but I'll chime in if you don't mind......

Yes, you have it correct. You definitely do not have to convert all your TIRA's but, yes, the aggregate value of all your TIRAs is used in the calculation.

Your IRA administrator (Schwab for me) will send you a 1099 stating the amount you converted. TurboTax asks you for a few numbers (as illustrated by Alan) and you're done.

Edit: Just thought of a possible point of confusion....... you and your DW's transactions are handled completely separately despite you filing MFJ. If you convert from both of your TIRAs, you'll each get a 1099 and will use your own numbers to calculate the taxable portion. Then the taxable portions of both 1099 amounts will be added to your taxable income, assuming MFJ.

BTW, an advantage to not rolling over a 401k to a rollover IRA is that 401k's are not included in the calculation. That's why I'm delaying the rollover of my 401k until I complete the TIRA to Roth conversions that I want to do.
Was directed at anyone, thanks for your reply! I think I've got it now.

I didn't think of delaying the 401k rollover . But it appears a Roth conversion may not be in our best interest anyway (based on the VG tool), still evaluating...
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Old 04-16-2012, 09:15 PM   #28
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This is what our tax guy told us when I wanted to do a conversion in 2011.
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Thanks Alan for the clarification. I'm now quite sure I misunderstood but at the time we had the discussion I thought I understood what he was saying.
I think we're beginning to home in on one of the sources of fear, uncertainty, & doubt...

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Was directed at anyone, thanks for your reply! I think I've got it now.
I didn't think of delaying the 401k rollover . But it appears a Roth conversion may not be in our best interest anyway (based on the VG tool), still evaluating...
When I was asking IRA conversion questions on Ed Slott's forum, I was eventually told by the CPAs to stop asking so many philosophical "What if?" questions and just sit down to crunch through Form 8606. They're right. When you grab the numbers off the documents and follow the directions, you come up with the correct answers. Better yet, you can back-calculate to make sure your conversion keeps you from crossing over the line into the 25% income-tax bracket.
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Old 04-16-2012, 10:21 PM   #29
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better yet, you can back-calculate to make sure your conversion keeps you from crossing over the line into the 25% income-tax bracket.
Nords, very basic question, but why should one convert to fill up 15% bracket and not the 25%?

Reason I'm asking is the ORP report says for me to convert $92,000 in our first year of retirement which, when combined with my small pension, will be well into the 25% bracket.
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Old 04-16-2012, 11:04 PM   #30
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If you also have an existing 401K/403B, or can start one, you can likely roll the existing IRA's into that and thus avoid the aggregation rule. Those accounts are not considered for purposes of calculating taxes on a Roth conversion. You can then do a an immediate rollover to your Roth of a new $6K contribution each year to a new IRA.

Of course, this assumes you still have some earned income. You can later roll the 401K funds back to a regular IRA account when all earned income goes away, if you choose.

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Old 04-17-2012, 12:30 PM   #31
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Nords, very basic question, but why should one convert to fill up 15% bracket and not the 25%?

Reason I'm asking is the ORP report says for me to convert $92,000 in our first year of retirement which, when combined with my small pension, will be well into the 25% bracket.
Lisa,
Drop James Welch (ORP inventor) a note over at his web site. You'll get his response. I'm sure he's thought through the tax implications.

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Old 04-17-2012, 01:44 PM   #32
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Lisa,
Drop James Welch (ORP inventor) a note over at his web site. You'll get his response. I'm sure he's thought through the tax implications.

-- Rita
Thanks for the suggestion Rita, I'll do that.
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Old 04-17-2012, 08:14 PM   #33
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Nords, very basic question, but why should one convert to fill up 15% bracket and not the 25%?
It's not necessarily the tax bracket you're in but rather the one you'll be in.

In the case of spouse & myself, when her pension starts then our income tax will be in the 25% bracket. If we had to take RMDs then we might be even higher (I'm afraid to check).

Right now our income is low enough to leave us in the 15% tax bracket with room to spare. So nearly every year for the last decade we've converted a little bit of our IRAs to Roths... realizing just enough taxable income on the conversion to fill in the rest of the 15% tax bracket.

If you know you're going to end up in the 28% bracket (or even higher) then it makes financial sense to convert up into the 25% bracket. But if you have several years to do the conversion, then you could save even more by not going above the 15% bracket.
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Old 04-17-2012, 08:28 PM   #34
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It's not necessarily the tax bracket you're in but rather the one you'll be in.
Thanks Nords, I understand now. All the references I've read on ER.org have been to filling up the 15% bracket but I hadn't read about one going over that.

If we didn't convert to Roth, our RMDs on top of SS +pension, would likely put us in the 28% bracket, so now I'm understanding why ORP recommended the conversions that it did.

Ya know, I REALLY like this learning a little bit at a time. It has a much better chance of sticking than when I try to read about a subject cover to cover.

Thanks so much to everyone for being a willing teacher!
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