Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
rIRA conversion and taxes
Old 11-10-2012, 04:42 PM   #1
Full time employment: Posting here.
Badger's Avatar
 
Join Date: Nov 2008
Posts: 829
rIRA conversion and taxes

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!
__________________

__________________
Badger is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 11-10-2012, 05:14 PM   #2
Recycles dryer sheets
 
Join Date: Mar 2012
Posts: 125
I'm planning something similar and believe you are correct.
__________________

__________________
dmdunca44 is offline   Reply With Quote
Old 11-10-2012, 05:24 PM   #3
Thinks s/he gets paid by the post
growing_older's Avatar
 
Join Date: Jun 2007
Posts: 2,608
That is also my understanding. And what I plan to do as well.
__________________
growing_older is offline   Reply With Quote
Old 11-10-2012, 05:47 PM   #4
Full time employment: Posting here.
ronocnikral's Avatar
 
Join Date: Apr 2010
Posts: 852
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....
__________________
ronocnikral is offline   Reply With Quote
Old 11-10-2012, 06:33 PM   #5
Thinks s/he gets paid by the post
 
Join Date: Jul 2005
Posts: 3,862
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.
__________________
Animorph is offline   Reply With Quote
Old 11-10-2012, 07:38 PM   #6
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
RunningBum's Avatar
 
Join Date: Jun 2007
Posts: 5,193
"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.
__________________
RunningBum is offline   Reply With Quote
Old 11-10-2012, 11:08 PM   #7
Dryer sheet wannabe
 
Join Date: Apr 2012
Posts: 11
Quote:
Originally Posted by RunningBum View Post
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?
__________________
dennygt is offline   Reply With Quote
Old 11-10-2012, 11:20 PM   #8
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
haha's Avatar
 
Join Date: Apr 2003
Location: Hooverville
Posts: 22,386
Quote:
Originally Posted by dennygt View Post
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
__________________
"As a general rule, the more dangerous or inappropriate a conversation, the more interesting it is."-Scott Adams
haha is offline   Reply With Quote
Old 11-10-2012, 11:49 PM   #9
Dryer sheet wannabe
 
Join Date: Apr 2012
Posts: 11
Quote:
Originally Posted by haha View Post
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?
__________________
dennygt is offline   Reply With Quote
Old 11-11-2012, 12:10 AM   #10
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
RunningBum's Avatar
 
Join Date: Jun 2007
Posts: 5,193
Quote:
Originally Posted by dennygt View Post
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.
__________________
RunningBum is offline   Reply With Quote
Old 11-11-2012, 07:36 AM   #11
Thinks s/he gets paid by the post
 
Join Date: Jan 2006
Posts: 2,933
Quote:
Originally Posted by dennygt View Post
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.
__________________
kaneohe is offline   Reply With Quote
Old 11-11-2012, 08:54 AM   #12
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
RunningBum's Avatar
 
Join Date: Jun 2007
Posts: 5,193

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.
__________________
RunningBum is offline   Reply With Quote
Old 11-11-2012, 09:19 AM   #13
Full time employment: Posting here.
Badger's Avatar
 
Join Date: Nov 2008
Posts: 829
Quote:
Originally Posted by RunningBum View Post
"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!
__________________
Badger is offline   Reply With Quote
Old 11-11-2012, 11:57 AM   #14
Thinks s/he gets paid by the post
 
Join Date: Jan 2006
Posts: 2,933
Quote:
Originally Posted by RunningBum View Post

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.
__________________
kaneohe is offline   Reply With Quote
Old 11-11-2012, 01:28 PM   #15
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
haha's Avatar
 
Join Date: Apr 2003
Location: Hooverville
Posts: 22,386
Good chart! This can be a slippery concept.

Ha
__________________
"As a general rule, the more dangerous or inappropriate a conversation, the more interesting it is."-Scott Adams
haha is offline   Reply With Quote
Old 11-11-2012, 04:13 PM   #16
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
RunningBum's Avatar
 
Join Date: Jun 2007
Posts: 5,193
Quote:
Originally Posted by kaneohe View Post
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.
__________________
RunningBum is offline   Reply With Quote
Old 11-11-2012, 06:19 PM   #17
Thinks s/he gets paid by the post
 
Join Date: Jan 2006
Posts: 2,933


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

__________________
kaneohe is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


 

 
All times are GMT -6. The time now is 04:31 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.