Roth Conversion Maximum Tax Free Amount

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  • #6283
    go4mint
    Participant

    I have seen this topic time and again, but cannot ferret out the answer to my simple question, so I’ll use an example, and then ask one question:

    I have a single TIRA, from which I take RMD’s annually, and also withhold enough additional for IRS taxes (no estimated tax payments made). I also take QCD’s annually.

    2020 EXAMPLE
    QCD $10k
    RMD $25k
    TAX $50k
    annual gross income $less than $150k
    well past 70-1/2 yrs

    In 2010, how much of my existing TIRA can I convert to ROTH, without incurring any penalty, or any tax due to the conversion?

    obviously, it would be advantageous to get rid of as much future tax burden as possible while investment values are low, and new tax rules are in effect.

    In 2020 can I convert

    #6284
    go4mint
    Participant

    EDIT:

    change “2010” to “2020”

    remove partial line of text last line

    #6285
    Alan S.
    Participant

    You can convert as much of your TIRA as you feel comfortable paying taxes on this year. With RMDs waived for 2020, the order in which you do any QCDs or conversions does not matter as it does in other years with RMDs. But you will have to make a decision how to pay your taxes. Your choices are either to pay quarterly estimates (first and second payments due by 7/15), or take an IRA Distribution with 99% withheld just to produce the withholding. Withholding from SS is also an option, but there are only 7 payments left and I don’t think SS is very efficient in starting and stopping such withholding.

    To be clear, your conversions and any withholding distributions will generate taxable income, but the QCD will not. Not sure what 50k TAX means, seems too high for your tax bill, but probably too low to be your AGI. Taxable income will be your total income including conversions and the taxable portion of SS benefits, then you subtract your standard or itemized deductions to arrive at your taxable income. You can probably look at your tax liability and marginal rate for 2019, and if you convert an amount in 2020 equal to what your 2019 RMD was, you may be fairly close to knowing your tax liability for 2020. Generally, you would not want to convert so much more than what your 2020 RMD would have been that your marginal rate exceeds what you expect it to be in the future when RMDs resume. The tough part is estimating what your marginal rate might be in the future if you do not convert, and taxes go up sooner rather than later due to the massive federal debt level.

    #7285
    Lewis-H
    Participant

    Converting a $100,000 traditional IRA into a Roth account in 2019 would cause about half of the extra income from the conversion to be taxed at 32%. But if you spread the $100,000 conversion 50/50 over 2019 and 2020 (which you are allowed to do), all the extra income from converting would be probably taxed at 24%.

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