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How to estimate tax on trad IRA to Roth conversion


I am considering converting my trad ira to a roth ira and I am trying to estimate how that will impact my taxes. Below is what I think I know and what I am trying to do to estimate the tax impact.
I believe that I will be paying tax on the full balance of my trad account (of course I will confirm this before proceeding) so I used that balance and added that to my taxable income for my 2009 tax return (using turbo tax) and noted the change in my tax refund as calculated by turbo tax. My ASSumption is that I can use this as a rough guide in estimating the tax impact of this conversion.
Of course I realize that this is not exact, in 2010 I will have some variations in my income and taxes, but will this provide at least a rough estimate in how converting my traditional ira to a roth ira will impact my 2010 taxes?
If there is a better (but still easy) way to estimate the tax impact of this conversion please let me know.
Regards,
Sam
Reply to
Sam

I believe you can pay zero tax for 2010 (only), then pay on half the conversion in 2011 and another half in 2012. Now it is probably true tax rates after 2010 will rise, but on the other hand you can employ that tax money for investment and possibly grow for that extra year+.
Why sweat the detailed estimate anyway? I guess if you had underpaid your last year estimated tax, then you must ensure overpayment. But if delaying payment, then you can ensure paying full estimates (w/o roth) this year, then you get a free pass to underpay the next year when the roth becomes due (so you will know better how much to prepay for 2012).
Reply to
dumbstruck

Well, if the OP (Sam) somehow is at top of the 15% bracket, in 2010, $34,000 single, $68,000 joint see
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for charts, then this exercise will help him discover why I appear so anti-Roth in many of my comments/answers.
Not knowing anything else about Sam, yes, his method is good. The split will insure that regardless of other income he'll have to pay tax at whatever rate he lands.
His whole situation rests on where he falls in his bracket, how much he plans to convert, and whether he has the inclination to recharacterize if he went over (only allowed for those claiming the income in 2010, i.e. you can't claim it in 11/12, and then recharacterize beyond Oct 11)
On a side note - years ago I had an "oh my God" cap gain, from company stock that was taken over. Much of it was ordinary income. Long story short, for that year, I was 2 brackets higher than usual. The 11/12 split can be a Pandora's Box for some (or is it Trojan Horse?)
Sam - A conversion may be right for you, or anyone. An in depth analysis is more than appropriate, 'Not' doing it is foolhardy.
Joe
Reply to
JoeTaxpayer

charts, then this
Oh no, I somehow missed the absurd fact they jump the tables from 15 to 25%! Why on earth when the other jumps are modest, and it's not even that hard to come up with a continous curve fitting equation? This is creating an entire industry, effort better put into advocating fixing the pitfall.
Anyway, I guess one strategy for a 2011/12 roth payment is to innoculate yourself against needless cap gain payments in those years that were earned in 2010. That is cash in your 2010 cap gains in this year (and try to exceed any 2009 cap loss carryover). I wish I had realized that before the flash crash.
One strategy is hedging, so that one of a pair is expected to go up when the other goes down. Cash in the winner this December and the loser in January for example. If desperate at the end of the year, maybe consider something like a long straddle or a pair of inverse etfs. Yuk!
Reply to
dumbstruck

In my case, the cap gain wasn't a choice, it was from a takeover. One day I had a stock (as any investor might) along with restricted shares that were not even vested, and then announced and done within months. All turned to cash. My example just offers Sam one scenario of many where the splitting of the income over two years can hurt him.
Now, to your point perhaps, instead of spitting the income in '11 and '12, why not convert into just two Roth accounts in '10 separating into classes that are least correlated? By October of '11, the hindsight is 20/20 and if both accounts are way up, leave them, if one is down or flat, recharacterize.
Keep in mind, most people will retire in the 15% bracket or lower. For those who are looking to convert their IRA, the decision tree isn't short, and a bit of obsessing may pay off in a decent tax savings.
Joe
Reply to
JoeTaxpayer

dumbstruck writes:
Note that when you spread the tax impact over 2011 and 2012, you are not spreading the 2010 taxes across those years. You are adding half of the conversion income to each of those future years to be taxed at whatever your marginal tax rate is in each of those two years.
Note, too, that taxes for folks in certain brackets are likelier to be higher in 2011 and beyond. Unless Congress does something about it, the EGTRRA 2001 and JGTRRA 2003 tax cuts almost all expire at the end of 2010.
Obama's proposed budget includes extension of some of the cuts - to those in the lower brackets, but not to folks in the higher brackets.
Of course, you don't have to make a decision regarding this until you file your 2010 taxes early next year, and between now and then, we may get a better idea of what's actually going to happen with our taxes. But it does seem likely that no matter what happens, it'll include at least some parts of the 2001 tax cuts expiring.
--
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Reply to
BreadWithSpam

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