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Author: jaroman Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 19021  
Subject: Roth Conversion Date: 3/1/2002 5:48 PM
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Pixy, if you are here: how do I calculate the tax I would owe if I converted a traditional to Roth IRA. THe traditional is a combo of deductible and non.
Also, is this tax payable next year when I file? Can I use capital loss carry foward for this tax too?
Do you agree that the only reason to convert would be if I thought my tax rate would be the same or higher upon withdrawals?
Thank you and thanks to anyone else who may reply.
jaroman
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Author: pmarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7811 of 19021
Subject: Re: Roth Conversion Date: 3/1/2002 8:13 PM
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Pixy, if you are here: how do I calculate the tax I would owe if I converted a traditional to Roth IRA. THe traditional is a combo of deductible and non.

If you're converting your entire traditional IRA to Roth, simply take it's current value and subtract the total of your nondeductible contributions. The net is your taxable income from the conversion. Multiply that by your marginal rate, and you have a good approximation of the tax effect. (Don't forget the state, if yours taxes this kind of transaction.)

Also, is this tax payable next year when I file? Can I use capital loss carry foward for this tax too?

The additional income may create or increase an estimated tax requirement. You can read about estimated taxes in the Tax Strategies board's FAQ and in IRS Publication 505. But basically, the conversion income goes on your return for the year in which you convert.

Just like any other distribution from a traditional IRA, the conversion income is ordinary income reported on line 15 of the 1040. You cannot directly apply a capital loss carryover to it. (If your Schedule D shows a net capital loss, you can use $3,000 of it on line 13 of the 1040, but that's it.)

Phil


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Author: iamdb Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7812 of 19021
Subject: Re: Roth Conversion Date: 3/1/2002 11:19 PM
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For those retired folks who receive social security and are keeping your AGI low by minimizing the draw from your portfolio, you need to also calculate the effect on the taxibility of your social security. You can be in for a surprise when the added income from the Roth conversion makes more of your social security income taxable.

db

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Author: jaroman Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7813 of 19021
Subject: Re: Roth Conversion Date: 3/2/2002 7:10 AM
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Phil and db,
Thank you for the help!
jaroman

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7814 of 19021
Subject: Re: Roth Conversion Date: 3/2/2002 7:49 AM
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Jaroman asks:

Pixy, if you are here: how do I calculate the tax I would owe if I converted a traditional to Roth IRA. THe traditional is a combo of deductible and non.
Also, is this tax payable next year when I file? Can I use capital loss carry foward for this tax too?
Do you agree that the only reason to convert would be if I thought my tax rate would be the same or higher upon withdrawals?


Yeah, I'm still here lurking away. And I think Phil Marti provided you an excellent response. DB also pointed out the added burden someone drawing Social Security payments could face. Both replies cover the bases you need to be aware of regarding the tax consequences of conversions.

In general, I would agree that as long as your income tax rate stays the same or will increase in retirement, then a conversion makes sense. It also depends on how long the money stays in the Roth before it's withdrawn to cover living expenses and how one pays the income tax bill at the time of the conversion. If ALL the money in the traditional IRA gets to the Roth and if that money stays there for five years or longer, then a conversion makes sense.

It also makes sense for those who wish to avoid mandatory withdrawals from a traditional IRA at age 70 1/2 so as to preserve tax-deferred growth for heirs/beneficiaries. In the latter case, a Roth is a great estate planning tool for those who do NOT need the IRA money to live on. In fact, paying the income taxes on the traditional IRA before death could have the effect of reducing a potential estate tax as well as eliminating that income tax bill to the heirs. Thus, while in life one's income tax bill could go up as a result of the conversion, at death the overall tax bill (estate AND income) goes down to the family.

Regards..Pixy

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Author: pmarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7815 of 19021
Subject: Re: Roth Conversion Date: 3/2/2002 8:45 AM
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It also depends on how long the money stays in the Roth before it's withdrawn to cover living expenses and how one pays the income tax bill at the time of the conversion.

Gee, Dave, if you have my investment acumen you can convert for free. I even had some untaxed basis left over after I converted.

Phil

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Author: pmarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7816 of 19021
Subject: Re: Roth Conversion Date: 3/2/2002 8:46 AM
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I even had some untaxed basis left over after I converted.

Make that previously taxed, and get me some coffee.

Phil

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7817 of 19021
Subject: Re: Roth Conversion Date: 3/2/2002 9:24 AM
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Phil said:

Gee, Dave, if you have my investment acumen you can convert for free.

LOL. I've been there myself, so you have sympathies. But at least your future gain will be untaxed, too. :-)

Best..Dave

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Author: jaroman Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7818 of 19021
Subject: Re: Roth Conversion Date: 3/2/2002 2:13 PM
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Well, you two are making me feel slightly better. I won't explain why I am eligible to convert now anyhow...
I shall report when I do the above mentioned calculations.
jaroman
PS My area of expertise, besides gardening and child rearing is as a certified fitness trainer. Please let me know if I can ever help you.


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