I was playing with H&R Block Taxcut and I saw your point regarding the 30% tax rate (more like 33%). Worse, when I tried increasing my coversion from 20K to 25K, the tax increased from 6094 to 8295 - a 44% tax rate. THis is when AMT kicked in. Hard to comprehend paying 44% now to avoid paying 25% later. I just might limit my conversion to 20K.
Taxes on IRA Withdrawals and Conversions
- Thread starter KingB
- Start date
I was playing with H&R Block Taxcut and I saw your point regarding the 30% tax rate (more like 33%). Worse, when I tried increasing my coversion from 20K to 25K, the tax increased from 6094 to 8295 - a 44% tax rate. THis is when AMT kicked in. Hard to comprehend paying 44% now to avoid paying 25% later. I just might limit my conversion to 20K.
The taxcut software that I have been using is not the final release. As such, the AMT exemption that it is using is the original amount - $45000. This amount is changed yearly by our lowmakers. Last year, the exemption was $74450.
I want to keep it safe - I will stick to 20K conversion in case the exemption does not get changed.
Original Wally
Recycles dryer sheets
To summarize -
1) If you roll from your 401 to a REGULAR IRA - **AND** you do it "institution to institution" there is no current tax liability. DO NOT HAVE the check from the 401 made to YOU.
a) Subsequent withdrawals from the IRA are taxable as ordinary income, and if you are +59 1/2 there is no early withdrawal penalty. There MAY or MAY NOT be withholding on the withdrawal depending on the IRA custodian, and the choices offered to you at withdrawal time. REMEMBER State taxes too if your State taxes retirement incomes. The exact amount of the tax due CANNOT be known at the time of withdrawal. It depends on your total tax situation - pension, interest, dividends, rental income, part time j*b. SO, if you have (say) 20% withheld, that may be MORE or LESS than the actual amount due. As always, that difference, either way, flushes out on April 15th with either a refund or a balance due. "Quarterly Estimated payments" can keep you from BOTH a large balance due ##AND## related underpayment penalties. Consult a tax professional for additional information. (n.b. - PM me off list and I would be willing to give more personal advice)
2) For funds rolled to a ROTH IRA, that amount rolled is treated as a current year distribution and taxed as ordinary income. BUT then the funds in the ROTH, **INCLUDING FUTURE EARNINGS** are distributed to you tax free. (The longer you plan to leave THAT portion IN the Roth the more benefit - you are paying income tax UP FRONT on the account in exchange for not having to pay taxes on potential future earnings)
NOTE: I believe there is ONE additional difference between 401(k) and IRA accounts that gets overlooked - I **believe** that in the event of death there are different rules for how fast the beneficiaries HAVE to take the funds. And I beleive that it is more beneficial to the beneficiaries to have the inheritance in the form of a 401(k) than an IRA. Not 100% certain - I recall having that discussion with our 401/457 rep when I rolled my 401 out of the company plan to Vanguard.
Lastly, I do NOT know what the risk is that C*ngress could change the ROTH rules and institute a tax ANYWAY. Just a disclosure of another (minor) risk.
1) If you roll from your 401 to a REGULAR IRA - **AND** you do it "institution to institution" there is no current tax liability. DO NOT HAVE the check from the 401 made to YOU.
a) Subsequent withdrawals from the IRA are taxable as ordinary income, and if you are +59 1/2 there is no early withdrawal penalty. There MAY or MAY NOT be withholding on the withdrawal depending on the IRA custodian, and the choices offered to you at withdrawal time. REMEMBER State taxes too if your State taxes retirement incomes. The exact amount of the tax due CANNOT be known at the time of withdrawal. It depends on your total tax situation - pension, interest, dividends, rental income, part time j*b. SO, if you have (say) 20% withheld, that may be MORE or LESS than the actual amount due. As always, that difference, either way, flushes out on April 15th with either a refund or a balance due. "Quarterly Estimated payments" can keep you from BOTH a large balance due ##AND## related underpayment penalties. Consult a tax professional for additional information. (n.b. - PM me off list and I would be willing to give more personal advice)
2) For funds rolled to a ROTH IRA, that amount rolled is treated as a current year distribution and taxed as ordinary income. BUT then the funds in the ROTH, **INCLUDING FUTURE EARNINGS** are distributed to you tax free. (The longer you plan to leave THAT portion IN the Roth the more benefit - you are paying income tax UP FRONT on the account in exchange for not having to pay taxes on potential future earnings)
NOTE: I believe there is ONE additional difference between 401(k) and IRA accounts that gets overlooked - I **believe** that in the event of death there are different rules for how fast the beneficiaries HAVE to take the funds. And I beleive that it is more beneficial to the beneficiaries to have the inheritance in the form of a 401(k) than an IRA. Not 100% certain - I recall having that discussion with our 401/457 rep when I rolled my 401 out of the company plan to Vanguard.
Lastly, I do NOT know what the risk is that C*ngress could change the ROTH rules and institute a tax ANYWAY. Just a disclosure of another (minor) risk.
Typo, or subtle political ploy?
nun
Thinks s/he gets paid by the post
- Joined
- Feb 17, 2006
- Messages
- 4,872
When you ask your IRA administrator for a payout you will fill out a form to choose your withholding tax. You can also do this on a W-4P. The usual rate of withholding on IRA income is 10% although you can choose no withholding if you are resident in the USA. If you live outside the US it's 10% mandatory withholding for US citizens and 30% of non-resident aliens unless a lower rate is specified in a tax treaty.
