pb4uski
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
The main benefit of a Roth conversion is that all the money in the Roth is yours, but in a tIRA 15%-25% is claimed by the IRS so only 75%-85% is yours.
Which means that if you pay the tax on the conversion from the amount converted, there is no net benefit -- assuming the same tax rate. But if you pay the tax from outside funds, the net effect is that you effectively add money to the Roth.
But if your tax rate later will be more than your tax rate now, it is good to convert now. For example, if you convert now at Joint rate but you think that a withdrawal in the future might be at Individual rate, like if your spouse dies before then. Or if the eventual RMD's will push you into a higher bracket.....
Agree with all you said other than the 15%-25% part. While those are tax brackets, the reality is that depending on one's facts and circumstances the amount of tax paid on a Roth conversion can be much lower.
For example take a retired married couple with $500k in taxable accounts and $1.0m in tax-deferred accounts and $500k in tax-free accounts. Let's say that the $500k in taxable accounts generate $20k in QDI/LTCG. If they Roth convert to the top of the 15% tax bracket they convert $76k and pay $7,400 in tax... 9.7%.
And for each $1 of itemized deductions in excess of the standard deduction they can Roth convert tax free.
2016 | ||||
TI at top of 15% tax bracket | 75,300 | |||
Standard deduction | 12,600 | |||
2 exemptions | 4,050 | 8,100 | ||
96,000 | ||||
Qualified dividends and LTCG | (20,000) | |||
Roth conversion | 76,000 | |||
Deductions and exemptions | 0% | 20,700 | - | |
$0-$18,550 | 10% | 18,550 | 1,855 | |
$18,551-$75,300 | 15% | 36,750 | 5,513 | |
76,000 | 7,368 | |||
Effective tax on conversion | 9.7% | |||
Qualified income | 0% | 20,000 | - | |
Total tax | 7,368 | |||
Total effective tax rate | 7.7% | |||
Total income | 96,000 | |||
Deductions | (12,600) | |||
Exemptions | (8,100) | |||
Taxable income | 75,300 | |||