Roth Conversion Calculations

[Felix Mulier]

We're planning to convert our tIRAs to Roth starting this year. I read several great threads and learned a lot, as always, in this Forum.

My question is quite specific. I'm trying to answer "What is the maximum amount we can convert and stay within the 15% tax bracket?" We have about $20K of "headroom" this year.

It got interestingly complicated very quickly when taking into account nondeductible contributions. Fortunately, we have all the basis numbers from way-back-when, there have been no recent contributions, nor have we taken any distributions, but it still took a bit of finagling.

I read IRS PUB 590 and completed Worksheet 1-5 therein. http://www.irs.gov/pub/irs-pdf/p590.pdf and also worked out Form 8606 http://www.irs.gov/pub/irs-pdf/f8606.pdf

With a goal of maximizing the conversions, I "backed into" the amount we could safely convert using excel and recreating the calculations in those 2 documents. I've uploaded my spreadsheet here (maybe others will find it useful). By "tweaking" the contents of the cell for "net amount converted from Traditional to Roth" (highlighted in green), I was able to calculate how much to convert and get as close as possible to the target amount ($20K).

Did I get this right? Comments/questions/hole-poking greatly appreciated before I pull the trigger. Thanks in advance.

 

[Z3Dreamer]

Php file extension does not work for this old man. Xls does. What am I doing wrong?


This subject interests me because I will begin doing the Roth Conversions this year. Easier for me as I have all 100% taxable IRAs. Have decided to simplify my return so I can pull the trigger and convert some nice round number. I am not itemizing for 2014 as I am bunching.


In future years I will be juggling itemized deductions, Obamacare MAGI, and Roth conversions. I wish/hope/pray that RMDs will be an issue but I don't see it.

 

[kaneohe]

Maybe I'm trying to avoid looking at a spreadsheet but I can't view it on a borrowed Chromebook even tho it appears to download and I click the dropdown menu to view it. It sounds like you know what you're doing so just a few misc. words.............do you have any unpredictable sources of income like Dec. distributions of dividends/CGs that could make your 5 decimal calculation obsolete in a second and push those QDIV/LTCGs into the 30% bracket? Just remember that you can recharacterize all/part of your conversions to drop down below the 15% upper limit.

Also I'm sure you know but sometimes some folks get AGI/taxable income mixed up end up using the tax rate tables on AGI . Might be good to run your numbers thru tax software or a tax calculator like Taxcaster or the HR Block one.

 

[jebmke]

Maybe I'm trying to avoid looking at a spreadsheet but I can't view it on a borrowed Chromebook even tho it appears to download and I click the dropdown menu to view it. It sounds like you know what you're doing so just a few misc. words.............do you have any unpredictable sources of income like Dec. distributions of dividends/CGs that could make your 5 decimal calculation obsolete in a second and push those QDIV/LTCGs into the 30% bracket? Just remember that you can recharacterize all/part of your conversions to drop down below the 15% upper limit.

Also I'm sure you know but sometimes some folks get AGI/taxable income mixed up end up using the tax rate tables on AGI . Might be good to run your numbers thru tax software or a tax calculator like Taxcaster or the HR Block one.

That 30% marginal rate, which isn't even a bracket is why it is key to use tax software to do conversion calcs - not just use the brackets. Unless you do it by hand with forms which is tedious.

 

[pb4uski]

I don't have this issue as my IRA is totally pre-tax/deductible contributions, but if I did I would simply do a pro forma tax return with the conversion and then do what ifs to see how much I could increase the conversion amount to bring my taxable income to the top of the 15% tax bracket.

 

[Options]

I've seen several suggestions to use software such as Turbotax to simplify these calculations. Why is an excel spreadsheet necessary? Am I missing something?

 

[kaneohe]

I've seen several suggestions to use software such as Turbotax to simplify these calculations. Why is an excel spreadsheet necessary? Am I missing something?

The spreadsheet probably isn't needed if the software has F8606.

 

[Alan]

It is very easy to check this using tax software, just look at form 8606 as mentioned above after you input the figures.

I did look at your spreadsheet and noticed that you have the value of your IRA's as of 9/30/14. You need to know the value of your IRA's on 12/31/13

e.g. if the value of all your IRA's on 12/31/13 was $100,000 and the value of your non-deductibles (your basis) was $10,000 then that is 10% of the total. So, in 2014 when you make a conversion or withdrawal then 90% of that withdrawal will be taxable, so if you convert $10,000 in 2014, $1,000 will be tax free and the basis carried forward to 2015 is $9,000.

I think I may have that correct but could be wrong and someone else can correct me. (and I'm certain they will)

 

[kaneohe]

I did look at your spreadsheet and noticed that you have the value of your IRA's as of 9/30/14. You need to know the value of your IRA's on 12/31/13

Alan, I think OP has it right (or at least "righter"). Here is the 2013 Form 8606. http://www.irs.gov/pub/irs-pdf/f8606.pdf
You will notice that it has the valuation for year end date for that yr which implies that the form for 2014 will have the valuation for the year end date for 2014. It is always safer just to go step by step with the correct yr form(IRS does a nice job, I think) instead of thinking which is kind of dangerous

Actually it does kind of make sense. You always know the basis but the valuations change. If at year end 2013, the basis is 10K and the valuation is 100K, it is true that the basis is 10% of the valuation as of that date. Now suppose the valuations double in 2014. Now the basis is only 5% of the value.
Of course if you do a conversion during 2014, you are missing that chunk at year end so you have to add back the amount of the conversion and any other distributions to get the total valuation, although they could be measured at different times for different pieces so it doesn't completely make sense.
You end up dividing the basis (known) by the sum of year end valuation and conversions/distributions (which approximate the total value) to get the % of basis. Clear as mud probably but best to just follow each line instructions
(or trust the software).

 

[Alan]

Alan, I think OP has it right (or at least "righter"). Here is the 2013 Form 8606. http://www.irs.gov/pub/irs-pdf/f8606.pdf
You will notice that it has the valuation for year end date for that yr which implies that the form for 2014 will have the valuation for the year end date for 2014. It is always safer just to go step by step with the correct yr form(IRS does a nice job, I think) instead of thinking which is kind of dangerous

Actually it does kind of make sense. You always know the basis but the valuations change. If at year end 2013, the basis is 10K and the valuation is 100K, it is true that the basis is 10% of the valuation as of that date. Now suppose the valuations double in 2014. Now the basis is only 5% of the value.
Of course if you do a conversion during 2014, you are missing that chunk at year end so you have to add back the amount of the conversion and any other distributions to get the total valuation, although they could be measured at different times for different pieces so it doesn't completely make sense.
You end up dividing the basis (known) by the sum of year end valuation and conversions/distributions (which approximate the total value) to get the % of basis. Clear as mud probably but best to just follow each line instructions
(or trust the software).

yes, you are correct. However, the OP has not completed line 6 of the form 8606 correctly. He has the following in his attached 8606 spreadsheet

"Value of all traditional IRAs (as of 9/30/2014)"

I also agree with your statement "trust the software"

 

[kaneohe]

yes, you are correct. However, the OP has not completed line 6 of the form 8606 correctly. He has the following in his attached 8606 spreadsheet

"Value of all traditional IRAs (as of 9/30/2014)"

I also agree with your statement "trust the software"

Since yr end is not here yet, I suspect those were his most recent values or perhaps those he had when he was working on the spreadsheet. That's what I meant by "righter" or more recent than yr end 2013.

 

[Felix Mulier]

Thanks to everyone who responded.

I've seen several suggestions to use software such as Turbotax to simplify these calculations. Why is an excel spreadsheet necessary? Am I missing something?

I used the spreadsheet because I had to get "closer" to these calculations to really try to understand them. I will follow the suggestions to do a pro forma return in TurboTax. It still feels like a black box sometimes, hence the spreadsheet.

I used the most current numbers I have for the valuation (i.e. 9/30/14). When I file, I'll be using the year-end numbers (from 2014 - the same year as the tax year). Am not anticipating any "rude" year-end CG surprises, but am prepared to handle if it happens.

Will follow-up post when I work this out in TT. I'm goin' in!

 

[Felix Mulier]

clarifying question - Form 8606

I used the most current numbers I have for the valuation (i.e. 9/30/14). When I file, I'll be using the year-end numbers (from 2014 - the same year as the tax year).

OK, so now I have a clarifying question about Form 8606, Line 6. Last year's form (2013) says

Enter the value of all your traditional, SEP, and SIMPLE IRAs as of December 31, 2013, plus any outstanding rollovers (see instructions).

Change that date to December 31, 2014. It occurs to me, since I'm doing the conversion before year-end, that the value will be after the conversion - right?

Am not anticipating any "rude" year-end CG surprises

Figures - we got a CG distribution the other day. This is one instance when my procrastination actually worked in my favor!

 

[Alan]

OK, so now I have a clarifying question about Form 8606, Line 6. Last year's form (2013) says Change that date to December 31, 2014. It occurs to me, since I'm doing the conversion before year-end, that the value will be after the conversion - right?

Correct

 

[Animorph]

I Roth convert way more than I expect to need, all through the year, in multiple Roth accounts, one set of fund shares per account. Plus a large chunk of cash at the end of the year. In March 2015 I'll do my taxes, figure out exactly how much I want to convert, and recharacterize the new Roth accounts that don't fit within that limit (and have the lowest gains to that point). You can partially recharacterize a conversion as well, so you can get really close to exactly the number you want.


And after all that precision, unless you are avoiding a tax credit or ACA cliff, it really won't make any difference to the big picture if you miss a tax bracket top by +/-$1000.

 

[Felix Mulier]

OK - so I just finished a TurboTax marathon and thought I'd add a few learnings for the next guy!

I did a "pro forma" return for 2014. I tried answering their questions, but got really frustrated and started over today with a brand new return (didn't carry over any information - in retrospect maybe I could have). I printed out blank forms from the IRS, plugged in my numbers in pencil and then figured out how to "brute force" them into TT!.

I narrowed it down to the following forms that you need to tweak/update to play with the numbers for "How much can I convert and not have to pay any taxes?"

1. 1099-R(s) - make sure your enter amounts in line 1 and 2a. Tweaking: play with this number to see how your tax refund changes. Select "Taxable amount not determined" in 2b, enter 2 or 7 in the box on Line 7, check the box called "IRA/SEP/SIMPLE", finally, at the bottom of this form, fill in lines B4 and check the box on B5 (or else Part II of form 8606 doesn't get filled in).
2. IRA Information Worksheet - Part IV (Traditional Year-end Value Detail) is particularly important. Tweaking: You have to remember to change this amount when you're playing around with the 1099-R lines 1 and 2a. The more you convert in Step 1, the lower this number is.
3. IRA Information Worksheet - Part V (Roth Contribution and Conversion Balances). Lines 23-32 deal with balances before the conversion. Lines 51-60 deal with balances after. Tweaking: once again, you need to go in and change these amounts after you change the amounts on the 1099-Rs.

You just keep playing with the conversion amount and balances until you find the sweet spot!

Hope this helps. Thanks for everyone's input.