Should I Do A Roth Conversion Tutorial

[ERD50]

It's Roth, not ROTH...

+1 Annoying as well. ROTH makes it look like it is an acronym, but it isn't, it is named for the US Senator Roth who proposed the legislation allowing these tax-free account.

IRA is an acronym.

Whatever w*rks for you.

No, I don't think so.

I had been in the habit of capitalizing "Roth" (but I don't know why, maybe just because it goes with "IRA" which is capitalized, and it just looked right?), and someone on this forum (I forget who) pointed out that it is just "Roth", named after the person.

That stuck with me, and I try to remember the correct way to do it. I appreciate them correcting me, otherwise I might go through my life ignorant of this, and possibly annoying other posters who know better.

And it's not a matter of "what works", there really is a right and wrong to this.

-ERD50

 

[Koolau]

I had been in the habit of capitalizing "Roth" (but I don't know why, maybe just because it goes with "IRA" which is capitalized, and it just looked right?), and someone on this forum (I forget who) pointed out that it is just "Roth", named after the person.

That stuck with me, and I try to remember the correct way to do it. I appreciate them correcting me, otherwise I might go through my life ignorant of this, and possibly annoying other posters who know better.

And it's not a matter of "what works", there really is a right and wrong to this.

-ERD50

And it's certainly the most important topic of the day. I guess since we can't discuss politics and religion, we'll settle for spelling, grammar and capitalization (or not.) W*rks for me.



BUT (ooops, I mean but) I'll try to do better.

 

[Sunset]

Since a Roth is just a specialized form of IRA, I think it's acronym is: RIRA for everyone that likes the CAPITALS.

 

[BaylorBoy]

In those years the minimum marginal tax rate on any Roth conversion will be 18.8%.

I'm circling back around because I still can't find the answer as to why that is, despite trying to read a lot.

Basically, what happened to the 0, 10, and 12% tax brackets on my earned income (i.e. IRA money being pulled out to convert)? Or, is it specific to the conversion and if I just pull the money from tIRA to spend, I will be taxed with the normal tax brackets?

I thought it would be ok to go down this rabbit hole further since the last bit of discussion has been around capitalization, acronyms, and names.

 

[SecondCor521]

I'm circling back around because I still can't find the answer as to why that is, despite trying to read a lot.

Basically, what happened to the 0, 10, and 12% tax brackets on my earned income (i.e. IRA money being pulled out to convert)? Or, is it specific to the conversion and if I just pull the money from tIRA to spend, I will be taxed with the normal tax brackets?

I thought it would be ok to go down this rabbit hole further since the last bit of discussion has been around capitalization, acronyms, and names.

I think @SevenUp was probably calculating it as 15% capital gains tax plus 3.8% NIIT, which would apply to someone making large Roth conversions or with an otherwise pretty high income.

The 15% capital gains tax rate kicks in above $47,025 of taxable income for singles. NIIT applies to people with investment income and MAGI of $200K or more for singles, $250K or more for MFJ.

You are correct that conversions and regular distributions are generally taxed as ordinary income. But the resulting ordinary income could push up any capital gains and NII into the above mentioned ranges. Preferenced income (cap gains, NII) sit on top of ordinary income in the way taxes are calculated.

 

[SevenUp]

2. QD & LTCG - Those will vary wildly over those 5-6 years, but there could be a couple years well over $500K....

In those years the minimum marginal tax rate on any Roth conversion will be 18.8%.

I'm circling back around because I still can't find the answer as to why that is, despite trying to read a lot.

Basically, what happened to the 0, 10, and 12% tax brackets on my earned income (i.e. IRA money being pulled out to convert)? Or, is it specific to the conversion and if I just pull the money from tIRA to spend, I will be taxed with the normal tax brackets?

I thought it would be ok to go down this rabbit hole further since the last bit of discussion has been around capitalization, acronyms, and names.

Whether converted or spent, traditional IRA withdrawals past age 59.5 are taxed identically.

If you have $500K in QD+LTCG as your only income, the standard deduction is filled with that type of income, and you are in the 15% bracket for that type of income. You are also subject to the 3.8% NIIT for amounts above $200K (above $250K if MFJ).

The first dollar of the tIRA withdrawal/conversion pushes one dollar of QD+LTCG out of the ordinary income standard deduction and into the 15% QD+LTCG bracket (so there's 15%) and pushes one dollar of QD+LTCG into NIIT (there's another 3.8% for a total of 18.8%).

After the tIRA withdrawal/conversion has filled the standard deduction (aka 0% bracket), the next dollar of that ordinary income is taxed at 10%. The same 18.8% applies to the dollar of QD+LTCG pushed into the 15% and 3.8% zones so now it costs 28.8% for that dollar of ordinary income.

And so forth and so on. Does that help?

 

[Koolau]

Whether converted or spent, traditional IRA withdrawals past age 59.5 are taxed identically.

If you have $500K in QD+LTCG as your only income, the standard deduction is filled with that type of income, and you are in the 15% bracket for that type of income. You are also subject to the 3.8% NIIT for amounts above $200K (above $250K if MFJ).

The first dollar of the tIRA withdrawal/conversion pushes one dollar of QD+LTCG out of the ordinary income standard deduction and into the 15% QD+LTCG bracket (so there's 15%) and pushes one dollar of QD+LTCG into NIIT (there's another 3.8% for a total of 18.8%).

After the tIRA withdrawal/conversion has filled the standard deduction (aka 0% bracket), the next dollar of that ordinary income is taxed at 10%. The same 18.8% applies to the dollar of QD+LTCG pushed into the 15% and 3.8% zones so now it costs 28.8% for that dollar of ordinary income.

And so forth and so on. Does that help?

Good to remind ourselves of the various potential costs of converting to Roths. It all adds up and needs to be considered before conversion. YMMV