Two years ago I converted my trad to a Roth, last year found the taxes were punative (60% marginal, thanks to AMT), and recharacterized 75% of it. A month later I converted it again.
This year I found the taxes were again punitive and recharacterized 70%. So now I have permanently converted about 50%.
Next month I will try again; but presume I will be recharactering much of it next year.
I may be changing where I have it later this year. Can I still recharacterize if I move it?
punative (60% marginal, thanks to AMT), and recharacterized 75% of it. A month later I converted it again.
now I have permanently converted about 50%.
How do you get a marginal tax rate of 70%? Seems kind of high. The top federal rate is 35%, and AMT only kicks in if your effective tax rate is less than 28%, so in other words if your effective tax rate is super high there will be no AMT.
Also the maximum state tax is probably about 10.8%. There is no payroll tax on your conversion, so I don't know how you get 70%.
Also, in 2013 the Obamacare medicare tax on income over 200k or 250k kicks in. The tax is 3.8% but I don't think it applies to 1099-R type income.
federal rate is 35%, and AMT only kicks in if your effective tax rate is less than 28%, so in other words if your effective tax rate is super high there will be no AMT.
Well, I said 60% first of all.
After that I don't know how to explain it; except that it is one of AMT's charms. I converted $168,000. If I recharacterize $42,000 I owe $40,000 in taxes (federal and NYS). If I recharacterize $21,000 I own $52,000 in taxes. So I have to pay $12,000 on the $21,000 of conversion. A 60% marginal tax rate.
I found the "sweet spot" was recharacterizing $108,000; only had a 30% marginal tax rate and only $9,000 in taxes. I don't like that, but if I hold out for lower I will never get it done.
Last year I used an accountant and he got the same type of thing; spending hours different amounts to get the various taxes. This year I figured I could do it and save "some" money.
But of course, this is all irrelevant to my question.
This is perplexing. By converting an extra 21k you pay an extra 12k in total taxes. You should compare the total normal tax, AMT tax, other taxes between the two scenarios to see what is going on.
taxes. You should compare the total normal tax, AMT tax, other taxes between the two scenarios to see what is going on.
The 57% (12/21 is not .60) included state. There are some crazy things that happen due to phaseouts, lost deductions, AMT, etc. A retiree who would otherwise be entering the 25% bracket can see a 'phantom' 46% rate (on IRA withdrawals or Roth conversion) due to this effect.
The answer, by the way, is the OP can just have the new custodian change the status and recharacterize with them. Depending on that custodian, they may change the account itself from Roth to IRA. He should check with the new Broker.
The OP opened the door to the discussion of the phantom rate, perhaps he'll share the federal-only numbers. If nothing else, it would be worth it to help others understand the effect of the AMT (and other) phaseouts/ins.
OK, it's beginning to make sense. However, it might not be just an AMT thing. Increasing the AGI increases the threshold for medical deductions, unremibursed exemptions, etc and can itself lower the itemized deductions, exemptions.
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