free4now
Thinks s/he gets paid by the post
- Joined
- Dec 28, 2005
- Messages
- 1,228
I'm trying to decide whether to take advantage of the 0% capital gains tax rate or do a Rollover into a Roth IRA.
I've been thinking about converting some or all of my approx $100k Traditional IRA into a Roth IRA, to take advantage of the down market and pay less ordinary income tax on the conversion due to low share prices compared with the past few years.
Obviously I should have done this at the bottom of the market months ago, but I don't have future vision. What's been causing me to hesitate to pull the trigger on the conversion is that I would be giving up the possibility to use the 0% cap gains tax rate for income levels below about $34k that's good only for 2009 and 2010, but which will rise to 10% or so thereafter.
I'm currently FIREd, so the only taxable income I have is about $20k of dividends per year. Therefore I could theoretically sell to realize approx $34k-20k=$14k of my approx $100k unrealized LTCGs and not pay any tax on that. Assuming future CG tax rate is 10%, that would save me $1400.
On the other hand, I could convert say $14k worth of IRA to Roth IRA, which would keep that conversion in the 15% tax bracket rather than the 25% tax bracket, also saving 10% or $1400. And assuming we are close to a market bottom as seems to be conventional wisdom, this might be a good timing move as well, although I don't want to do it just for that reason because I'm not a timer by nature.
Writing all this out, I suppose I really need to do sample tax returns for the different scenarios, for several years out, to get a sense of which would be best, because there are lots of subtle effects left out of my simplified calculations above, and the possibility of filling up some or all of the $34k-$82k tax bracket.
Since I have approx $100k in IRA to convert and $100k in LTCGs to soak up, I want to use this time when I'm in low tax brackets for those purposes; it's possible I could go back to work if the economy tanks and I want to take advantage of my low tax bracket while I have it (and while Obama allows it).
I think I'm leaning towards taking the 0% CG now before that expires, given that it seems like the future holds higher CG tax. And it seems that the IRS is loosening things up around roth IRA conversions (e.g. allowing them for people with over $100k income), so it may be best to hold off on that.
Any input is welcome. What are others in low brackets doing, CG or Roth conversion?
I've been thinking about converting some or all of my approx $100k Traditional IRA into a Roth IRA, to take advantage of the down market and pay less ordinary income tax on the conversion due to low share prices compared with the past few years.
Obviously I should have done this at the bottom of the market months ago, but I don't have future vision. What's been causing me to hesitate to pull the trigger on the conversion is that I would be giving up the possibility to use the 0% cap gains tax rate for income levels below about $34k that's good only for 2009 and 2010, but which will rise to 10% or so thereafter.
I'm currently FIREd, so the only taxable income I have is about $20k of dividends per year. Therefore I could theoretically sell to realize approx $34k-20k=$14k of my approx $100k unrealized LTCGs and not pay any tax on that. Assuming future CG tax rate is 10%, that would save me $1400.
On the other hand, I could convert say $14k worth of IRA to Roth IRA, which would keep that conversion in the 15% tax bracket rather than the 25% tax bracket, also saving 10% or $1400. And assuming we are close to a market bottom as seems to be conventional wisdom, this might be a good timing move as well, although I don't want to do it just for that reason because I'm not a timer by nature.
Writing all this out, I suppose I really need to do sample tax returns for the different scenarios, for several years out, to get a sense of which would be best, because there are lots of subtle effects left out of my simplified calculations above, and the possibility of filling up some or all of the $34k-$82k tax bracket.
Since I have approx $100k in IRA to convert and $100k in LTCGs to soak up, I want to use this time when I'm in low tax brackets for those purposes; it's possible I could go back to work if the economy tanks and I want to take advantage of my low tax bracket while I have it (and while Obama allows it).
I think I'm leaning towards taking the 0% CG now before that expires, given that it seems like the future holds higher CG tax. And it seems that the IRS is loosening things up around roth IRA conversions (e.g. allowing them for people with over $100k income), so it may be best to hold off on that.
Any input is welcome. What are others in low brackets doing, CG or Roth conversion?