IRA and Taxes question

[dixonge]

It recently occurred to me that I'm about to pay more tax than I need to, which deeply hurts my sensibilities. Here's the basic scenario:

1 - DW is quickly approaching 59.5
2 - I have not yet filed 2016 taxes.
3 - 2016 is my first full year of W2 income since 2010

I am planning on maxing out my IRA contribution (and my 2016 refund) by selling existing stocks, moving them into an IRA, then basically repurchasing the same stocks inside the IRA. Most of the purchase will go toward 2016, the remainder toward 2017. At a later date (probably 2018) we will begin converting them to Roth IRA's, taking care to avoid triggering a higher tax bracket.

I will also transfer some smaller employer-plan money via rollover, either late this year or early next year.

My only concern is that I am misunderstanding or missing something here. Do you see any obvious holes in my strategy?

Thanks in advance...

 

[COcheesehead]

Do the stocks you are selling show a loss? If so, you could trigger a wash sale.
If not, then you will trigger a 2017 ST or LT gain on the sale that you will have to deal with.

 

[dixonge]

I am carrying over enough capital gains losses to wipe out the next 10 years of gains.

Don't ask...

 

[COcheesehead]

I am carrying over enough capital gains losses to wipe out the next 10 years of gains.

Don't ask...

As long as your income limits are still OK for the deduction, then go for it.

 

[dixonge]

As long as your income limits are still OK for the deduction, then go for it.

Yes, I'm sure we are fine there. The wife somehow managed to stay retired since we first quit our jobs in 2011. Her dog-walking income didn't really launch us into a new bracket exactly

Thanks for the feedback!

 

[kaneohe]

What marginal tax rate when you take the deduction and same question for when you cash out the IRA?

 

[gerntz]

Not getting why someone wants to pay income taxes on earnings/growth inside an IRA when they are removed vs. paying dividends tax rate, admittedly now, outside IRA. You expect your future income tax rate to be lower than dividends rate?

 

[LOL!]

Not getting why someone wants to pay income taxes on earnings/growth inside an IRA when they are removed vs. paying dividends tax rate, admittedly now, outside IRA. You expect your future income tax rate to be lower than dividends rate?

One reason could be that deductible traditional IRA contributions could put one in the 15% marginal income tax bracket where qualified dividends and long-term capital gains are taxed at a rate of 0% instead of the "normal" 15% LTCG tax rate.

Also one may wish to do Roth conversions in future years instead of contributing to Roth in the current year. Perhaps even the Roth conversion could be taxed at 0% if there is not much other income and the amounts are less than exemptions and deductions.

 

[COcheesehead]

Not getting why someone wants to pay income taxes on earnings/growth inside an IRA when they are removed vs. paying dividends tax rate, admittedly now, outside IRA. You expect your future income tax rate to be lower than dividends rate?

He wants to reduce his taxes today.

 

[Accidental Retiree]

It recently occurred to me that I'm about to pay more tax than I need to, which deeply hurts my sensibilities. Here's the basic scenario:



1 - DW is quickly approaching 59.5

2 - I have not yet filed 2016 taxes.

3 - 2016 is my first full year of W2 income since 2010



I am planning on maxing out my IRA contribution (and my 2016 refund) by selling existing stocks, moving them into an IRA, then basically repurchasing the same stocks inside the IRA. Most of the purchase will go toward 2016, the remainder toward 2017. At a later date (probably 2018) we will begin converting them to Roth IRA's, taking care to avoid triggering a higher tax bracket.



I will also transfer some smaller employer-plan money via rollover, either late this year or early next year.



My only concern is that I am misunderstanding or missing something here. Do you see any obvious holes in my strategy?



Thanks in advance...

Are you also going to max out a spousal IRA for your wife?

 

[dixonge]

Are you also going to max out a spousal IRA for your wife?

Actually I don't think she has enough earned income. Rats

 

[dixonge]

What marginal tax rate when you take the deduction and same question for when you cash out the IRA?

Won't be doing taxes for a couple of weeks, so not sure.

 

[Accidental Retiree]

Actually I don't think she has enough earned income. Rats

She doesn't have to have ANY income for you to fund a spousal IRA for her--unless something's changed and I'm just not aware of the change. It's been thataway for as long as I can remember.

As long as your combined household income covers the $$ deferred in the 2 traditional IRAs, you can both fully fund an IRA for 2016.

You each get to contribute $5500 and an additional $1000 each catch-up contribution if you're both over 50.

 

[Philliefan33]

Actually I don't think she has enough earned income. Rats

A spouse doesn't need earned income to make an IRA contribution as long as the other spouse has enough earned income. IOW, if you have at least $11,000 of wages on your W2 you can each make $5500 IRA contribution.

 

[dixonge]

A spouse doesn't need earned income to make an IRA contribution as long as the other spouse has enough earned income. IOW, if you have at least $11,000 of wages on your W2 you can each make $5500 IRA contribution.

Oh! Well cool. And at our age we can do catch-up contributions of $6500.

 

[dixonge]

One reason could be that deductible traditional IRA contributions could put one in the 15% marginal income tax bracket where qualified dividends and long-term capital gains are taxed at a rate of 0% instead of the "normal" 15% LTCG tax rate.

Also one may wish to do Roth conversions in future years instead of contributing to Roth in the current year. Perhaps even the Roth conversion could be taxed at 0% if there is not much other income and the amounts are less than exemptions and deductions.

We have W2 income for 2016 and 2017, then all retirement money after that, so last chance for IRA contributions. We will be firmly inside the 15% bracket regardless. Gross income this year will be $50K max. Next year, $36K pension income, so Roth conversion won't move us in or out of any bracket. All other deductions are standard. Still need to run this through the tax software, but that's my plan at this point.

 

[pb4uski]

Oh! Well cool. And at our age we can do catch-up contributions of $6500.

As long as your earned income is $13,000 or more you are all set... $6,500 in each Roth.

 

[dixonge]

One more question - are there any issues in setting up IRA's for last year and then this year, followed by converting them to Roth IRA's, and doing all those transactions within this calendar year? Are there any limits this would violate or penalties it would trigger? I don't need to do it for the 'backdoor Roth' purposes, just trying to get the 5-year waiting period rolling.

I have sufficient carryover losses to handle any tax, just wondering about other land mines.

We have just enough funds to fully max this year's deductions and come close to fully deducting for 2016. I'll put the max into this year since this year's income is higher. After that, I want to convert to Roth just to protect future withdrawals. I don't anticipate making any withdrawals for many years, however. Future investing contributions would all be unearned income, so would go into the regular brokerage account, of course.

 

[Philliefan33]

I don't see how that helps reduce your taxes. I think you will need to do the conversions starting in 2017.

If you contribute a total of $13 to tIRAs for 2016, you reduce your taxable income by $13K. If you make the same contribution for 2017 you'll get the deduction when you file a year from now.

But if you convert all of that money to a Roth in 2017 you will have to pay tax on all of it-- the $26K plus any growth.

 

[dixonge]

I don't see how that helps reduce your taxes. I think you will need to do the conversions starting in 2017.

If you contribute a total of $13 to tIRAs for 2016, you reduce your taxable income by $13K. If you make the same contribution for 2017 you'll get the deduction when you file a year from now.

But if you convert all of that money to a Roth in 2017 you will have to pay tax on all of it-- the $26K plus any growth.

Just realized my carryover losses won't apply since conversion taxes as regular income. More research in my future...