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Traditional IRA Deduction AND Roth Conversions?
Old 10-03-2018, 09:53 AM   #1
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Traditional IRA Deduction AND Roth Conversions?

I currently contribute 6480 per year to my IRA and take that deduction on our tax return. If I start converting small amounts (maybe 10K/yr) to a Roth, can I still claim the traditional IRA contribution deduction we've paid this year on my tax return? Future contributions would probably go to the Roth side.

Also, how is the Roth conversion taxed? Is that something you pay at the time of conversion, or is there a special place on the tax return to do that?
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Old 10-03-2018, 10:02 AM   #2
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Roth conversions are ordinary income and therefore taxed at your marginal ordinary income tax rate. 12% or 22% or 24% for most taxpayers.

Not sure that your plan makes sense. You'll get a $6,480 tax deduction for your tIRA contribution and $10,000 of ordinary income for the Roth conversion... so net incremental ordinary income of $3,520. Also, your tIRA will decline by $3,520 and your Roth will increase by $10k.

Why not do a Roth contributions for $6.500 and declare victory? Or do that and a $3,500 Roth conversion if you must and are in the same or lower tax bracket that you will be in retirement.

The main power of IRAs are tax rate arbitrage... contribute to tIRAs if/when your current marginal tax rate is lower than the marginal tax rate you expect in retirement.
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Old 10-03-2018, 10:18 AM   #3
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Roth conversions are reported on pt II of F8606 which carries over to line 15b
of the 1040. Tax is paid when you file tax return.
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Old 10-03-2018, 10:18 AM   #4
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It doesn’t make sense or it is a wash. I agree with pb4ski to just contribut to Roth IRA, wait until you retire to Roth conversion.
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Old 10-03-2018, 10:32 AM   #5
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Originally Posted by pb4uski View Post
Roth conversions are ordinary income and therefore taxed at your marginal ordinary income tax rate. 12% or 22% or 24% for most taxpayers.

Not sure that your plan makes sense. You'll get a $6,480 tax deduction for your tIRA contribution and $10,000 of ordinary income for the Roth conversion... so net incremental ordinary income of $3,520. Also, your tIRA will decline by $3,520 and your Roth will increase by $10k.

Why not do a Roth contributions for $6.500 and declare victory? Or do that and a $3,500 Roth conversion if you must and are in the same or lower tax bracket that you will be in retirement.

The main power of IRAs are tax rate arbitrage... contribute to tIRAs if/when your current marginal tax rate is lower than the marginal tax rate you expect in retirement.
I guess I was just wondering if I would lose the traditional IRA deduction AND add 10K to income for the Roth conversion. Essentially bumping our taxable income up 16K.

We will most likely be in the same tax bracket after retiring that we are in now (12%). Of course, tax rates will probably increase in the future. With a Roth we would pay today's tax rate. With the traditional we would pay the future tax rate, and get taxed on the earnings we've gained over the years too.

Would it be smarter to just leave the traditional IRA alone and take the deduction for this year? Then start contributing to a Roth instead of the traditional going forward? Delay any conversion till after retirement, if at all?

Or just leave things alone and stop fussing with it?
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Old 10-03-2018, 10:36 AM   #6
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It doesn’t make sense or it is a wash. I agree with pb4ski to just contribut to Roth IRA, wait until you retire to Roth conversion.
You answered my question before I could ask it. I misread pb4's Roth "contribution", I thought it said conversion. My bad. Makes more sense now.

Are there advantages to making Roth conversions after retirement instead of while still working?
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Old 10-03-2018, 10:37 AM   #7
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Roth conversions are reported on pt II of F8606 which carries over to line 15b of the 1040. Tax is paid when you file tax return.
Thanks. That was one detail I wasn't sure how it was handled.
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Old 10-03-2018, 10:43 AM   #8
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Originally Posted by mountainsoft View Post
You answered my question before I could ask it. I misread pb4's Roth "contribution", I thought it said conversion. My bad. Makes more sense now.

Are there advantages to making Roth conversions after retirement instead of while still working?
I think so. In my case we are in lower tax rate in retirement, but we choose to convert a lot more than the minimum up to 12%. If your income is $40k now, you can replace that amount by do Roth conversion when you retire. Maybe you will get a pension, but usually it’s a lot less than work income.
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Old 10-03-2018, 10:44 AM   #9
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You might consider making a $6,500 Roth contribution and then doing Roth conversions to the top of the 12% tax bracket since you expect to pay 12% or more either now or later.

The benefit... albeit arguably minor... is that any future income in the Roth would be tax-free and perhaps less than 85% of your SS benefit will be taxed because your RMDs will be lower.

However, IF you plan to move from WA to some tax-free state once you retire then you probably wouldn't want to do Roth conversions now... IOW, when considering the tax arbitrage you need to consider both federal and state marginal tax rates.
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Old 10-03-2018, 11:31 AM   #10
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You might consider making a $6,500 Roth contribution and then doing Roth conversions to the top of the 12% tax bracket since you expect to pay 12% or more either now or later.
I'm leaning towards starting a Roth and directing our contributions to that instead of the traditional. I won't worry about the conversions until we retire, if we decide to do it all.

Washington does not have a state sales tax and we have no plans to move.
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Old 10-03-2018, 12:32 PM   #11
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It is income tax that is the issue, not sales tax... but I see that WA does not have income tax either.... NH of the left coast.
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Old 10-03-2018, 12:50 PM   #12
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It is income tax that is the issue, not sales tax... but I see that WA does not have income tax either.... NH of the left coast.
Sorry, brain fart. I meant income tax.
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