This subject came up on the financial aid forum.
We are thinking about converting now some regular IRA to Roth. So…do we just pay taxes on our contributions? Or what?
Hoping someone can explain.
Not an expert but my understanding is that you pay income tax on whatever amount you convert. This presumes that your contributions were tax deferred.
Are you talking about a backdoor roth or just converting existing regular IRAs?
A back door Roth is for people whose AGI is too high to contribute to a Roth. You basically make a contribution to a regular IRA without taking a tax deduction then convert it to a Roth. But if you have money in other IRAs you don’t just get to say “I’m converting this $6000 I just contributed to a Roth”. You have to convert proportionately - part of your existing regular IRAs and part of the newly contributed moneys. You will owe tax on the part of the $6000 you convert that is attributed to the existing regular IRA. There is a form on your return you will have to fill out - don’t recall the number offhand. (This is a fairly simplistic explanation but gives the basics)
If you are just talking about converting existing regular IRA then you will owe money on it the same as if you were withdrawing it.
https://www.bogleheads.org/wiki/Backdoor_Roth_IRA
The Bogleheads Personal Investing forum is the best place to go with questions about Backdoor Roths.
And contributions are limited, (but not the conversion amount) to 5500 (6500 when older) so I assumed that poster wasn’t talking backdoor roth for high earners as her figure was 20K. But sure, boglehads will walk one through.
I read that bogleheads link and it was a clear as mud.
I suspect any conversions we do at this point would be fully taxable as I am not contributing any longer…just letting it all sit there until I’m ready to take a minimum draw in a couple of years.
I’m guessing my best bet is to pay the taxes on my required minimum distribution when the time comes.
I think backdoors are just for people with money to spare who have maxed out all other retirement avenues. That doesn’t seem likely for families seeking FA.
I’m not seeking financial aid at all…I’m WAY beyond that!
I’m trying to figure out if converting some of my IRA money to a Roth now makes sense. But it seems like it doesn’t.
Remember though that an amazing benefit of a Roth IRA is there are no required minimum distributions ever so account balances can grow permanently tax free, then at death can be inherited by a non spouse who takes tax-free RMDs over his/her lifetime.
If your tax bracket is lower now than in the future and you have available cash it can make great sense to convert a traditional IRA (or rollover a 401k to an IRA and then convert) to a Roth IRA.
I look forward to doing some traditional IRA to Roth conversions in order to fill up lower tax bracket space in our earlier retirement years and before SS, pensions, IRA RMDs push us up into a higher bracket
We’ve decided to do Roth conversions to avoid large RMDs at 70.5 that would definitely put us in a higher tax bracket. We work with our accountant to determine how much we can convert each year so as not to put us into a higher bracket now.
We are currently converting our IRA to Roth up to the 12% tax bracket. We are no longer working and not yet collecting SS so it makes sense. The way I looked at it, we sheltered the money at a higher bracket while we were working so even pay tax at 12%, we come out ahead. No RMD and permanently tax free going forward is added bonus.
I like the idea of being able to leave some of this to possibly my kids…
I will talk to an accountant about this.
@thumper1 IMO, it is always worth to convert if you invest in equity and you are in tax bracket higher than 15%. All earnings in IRA are taxed as ordinary income regardless of the source. If the earning was mainly from long term capital gains, and if your marginal tax rate is higher than 15%, you end up paying taxes at a higher rate.
Certainly the right way to do this is only if you pay taxes outside of the conversion, you sure don’t want to use any of that converted money to pay taxes! I’m sure you know that, but apparently not everyone does.
And you shouldn’t pay the tax with a loan according to Bogleheads.
I think @ccreader spelled it out fairly concisely. If you currently have very little other income it obviously makes sense to do an IRA conversion to use up the zero bracket, and probably the next highest (12%?) as well. A few years ago we had almost no income and did a few IRA conversions. I now have 4 IRA accounts and my wife has 3. It is a little annoying, but easily manageable.
Is there an age limit when you can no longer convert to a ROTH? Spouse plans to work until 65. Income will drop after that. Can you still convert between ages 65 & 70 when RMD’s start?
There is no age limit to ROTH conversion as far as I know. It’s more important if it makes sense tax wise for the year you plan to convert. For those more familiar with Medicare, is the premium part B based on previous year income? Is this part of the equation whether to convert or not?
Yes previous year. Our payment for part B this year was based on income in 2016. Yes, you should consider the impact of the coversion on part B payment. We had to convert and we are paying a large amount to part B this year.
Just curious…a few folks say they “had to convert”.
Why would one be required to convert?