rIRA conversion and taxes

[Badger]

I am planning to convert some tIRA funds to rIRA funds before the end of the year while I am in the 15% bracket. I just need to check what happens if I go over maximum allowed amount.

I have not run any "what ifs" with tax software but if I understand correctly I will be taxed 15% up to the maximum allowed then any additional money over that would be taxed at the next higher rate (25%). Is this correct?

I was thinking to take advantage of the lower taxes now since in a few years I will be in the 25% bracket due to manditory tIRA withdrawl at 70.5 yrs. If I do exceed the 15% limit now then the additional converted money that is taxed at 25% would really break even for my future taxes.

Does this sound right?

Cheers!

 

[dmdunca44]

I'm planning something similar and believe you are correct.

 

[growing_older]

That is also my understanding. And what I plan to do as well.

 

[ronocnikral]

another important point is you can convert now, and you have until you tax filing deadline to recharacterize back to tIRA if you go over, your assets decrease in value and/or it's a full moon on April 15th. This includes if you file for an extension.

We need a Roth IRA/tIRA "sticky"/FAQ....

 

[Animorph]

Yeah, there's no big tax jump if you go a little over into the 25% bracket. However, do watch out for special capital gains and qualified dividend tax breaks (0%) within the 15% bracket. You may not be able to fill it completely with IRA income while still retaining those breaks. And others may need to consider the health insurance subsidy as well.

 

[RunningBum]

"Maximum allowed amount" on a conversion? Is there such a thing? There is a max on contributions, but you can convert as much as you want. Or am I reading the original post wrong?

To optimize it, as Animorph hints, you probably want to keep the conversion PLUS divs and LTCGs (less deductions, exemptions, etc) under the 15% line. For every dollar you go over, a dollar of divs or LTCG is taxed at 15%, and your converted dollar is taxed at 15%, for an effective 30% fed tax.

 

[dennygt]

To optimize it, as Animorph hints, you probably want to keep the conversion PLUS divs and LTCGs (less deductions, exemptions, etc) under the 15% line. For every dollar you go over, a dollar of divs or LTCG is taxed at 15%, and your converted dollar is taxed at 15%, for an effective 30% fed tax.

But the divs and LTCGs do not count as part of your taxable income, as long as you stay in the 15% tax bracket, right?

 

[haha]

But the divs and LTCGs do not count as part of your taxable income, as long as you stay in the 15% tax bracket, right?

Wrong. It is complicated, and it will be better that you understand it before you act.

Ha

 

[dennygt]

Wrong. It is complicated, and it will be better that you understand it before you act.

Ha

I only had $1,200 in div and LTCGs. If I stay that far from the next tax rate (15 to 25 %), should I be okay?

 

[RunningBum]

I only had $1,200 in div and LTCGs. If I stay that far from the next tax rate (15 to 25 %), should I be okay?

Yes.

For anyone who doubts this phantom 30% (15%+15%) bracket, try it out with a tax program. Or just look at the Qualified Dividends and Capital Gains Worksheet and try it with different numbers below and above this limit.

 

[kaneohe]

But the divs and LTCGs do not count as part of your taxable income, as long as you stay in the 15% tax bracket, right?

Perhaps a better way of thinking about it...............
LTCG/QDIV do count as part of taxable income but as long as you stay in the 15% bracket (including them), they are taxed at 0%..........which implies that if you exceed the 15% bracket (including them), some part of them (QDIV/LTCG) will be taxed .

For a pictorial way of thinking about this, see the stacked bar chart by tfb here....
http://www.bogleheads.org/forum/viewtopic.php?p=1247382
The title is Qualified Divs but the same idea pertains to LTCG.

It's probably a good idea to verify your thoughts by running your info through a tax calculator like Taxcaster (google for it) or tax software.

 

[RunningBum]

This is the diagram created by tfb at Bogleheads, in the thread referenced above. Ordinary income includes conversions from traditional IRA to a Roth IRA.

 

[Badger]

"Maximum allowed amount" on a conversion? Is there such a thing? There is a max on contributions, but you can convert as much as you want. Or am I reading the original post wrong?

Sorry for the confusion. I meant the most I could convert to a rIRA and still remain in the 15% tax bracket considering my taxable income.

I used the free taxcaster to get a general idea and it looks like I can convert about 20k before exceeding the top of the 15% tax bracket. At least this gets me started and I have next year with no income from a job to increase the amount I can convert assuming I don't start taking SS.

Thanks,
Cheers!

 

[kaneohe]

This is the diagram created by tfb at Bogleheads, in the thread referenced above. Ordinary income includes conversions from traditional IRA to a Roth IRA.

Thanks for posting that chart. btw.......how did you do that? I tried copy and paste but I only got the text.

 

[haha]

Good chart! This can be a slippery concept.

Ha

 

[RunningBum]

Thanks for posting that chart. btw.......how did you do that? I tried copy and paste but I only got the text.

On the page I got it from I right clicked and selected "View Image" to get just the image on it's own page, with a URL.

In my post I clicked on the Insert Image icon, which kind of looks like a yellow postcard, in between the icon with a letter behind an envelop and the quote balloon. It asked for the URL, which I had from above.

 

[kaneohe]

Thanks! Good trainer.........old dogs and tricks.........