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This was a low income year for several personal and professional reasons and so I'm looking at taking the opportunity and converting an IRAs to a Roth IRA.

I have an IRA that was rolled over from a 401K a few years back. If I had contributed and deducted $36K into that 401K originally and now I want to convert that IRA into a Roth IRA, that $36K would be counted towards my income for this year and I would have to pay taxes on it. Any gains would not be taxable.

Am I understanding that correctly?

Thanks.
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This was a low income year for several personal and professional reasons and so I'm looking at taking the opportunity and converting an IRAs to a Roth IRA.

I have an IRA that was rolled over from a 401K a few years back. If I had contributed and deducted $36K into that 401K originally and now I want to convert that IRA into a Roth IRA, that $36K would be counted towards my income for this year and I would have to pay taxes on it. Any gains would not be taxable.

Am I understanding that correctly?


No.

The gains have never been taxed, nor have the original contributions ever been taxed. Therefore, the entire IRA is pre-tax, and any amount that is converted is taxable.

You do not have to convert the entire IRA at once - you are allowed to convert just part of the IRA. So if you only want to pay taxes on $36k, just convert $36k. Or choose whatever amount you want to convert, up to and including the entire balance.

In order to avoid paying underpayment penalties because of the additional taxes on the conversion, you should be sure to meet a safe harbor through withholding and/or quarterly estimated payments.

AJ
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If the $36K was contributed to your 401K as a pretax contribution, none of it has been taxed.

Hence, every dollar converted to a Roth IRA will be counted as taxable income. Gains are fully taxed when converted to the Roth. Gains in your 401K are not taxed when converted to an IRA, but they are when the IRA is converted to a Roth.
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Hence, every dollar converted to a Roth IRA will be counted as taxable income. Gains are fully taxed when converted to the Roth. Gains in your 401K are not taxed when converted to an IRA, but they are when the IRA is converted to a Roth.

There are no gains or losses in traditional tax-deferred 401(k) and IRA accounts. They are just pools of value. You can transfer value between tax-deferred accounts without creating a tax event. A transfer to a taxable or tax-exempt account treated as a withdrawal from the tax-deferred account and is a taxable event. The value withdrawn is taxed as ordinary income.
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What you want to convert will be considered earned income. No big deal, it is just a number that gets taxed, but . . . if you are SSI/Medicare age and/or RMD age, your Plan B will jump several times each bracket your gross goes up. Your federal taxes will creep up too.
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if you are SSI/Medicare age and/or RMD age, your Plan B will jump several times each bracket your gross goes up. Your federal taxes will creep up too.

Sorry, not exactly correct. Medicare premiums have their own scales for when the premiums increase, which are not tied to tax brackets. The Medicare premiums start to increase at $85k for singles, $170k for couples. That happens to be close to where the current break between the 12% and 22% bracket is, but that's just a coincidence, since the current Medicare premium increase thresholds have been in place since 2011, while the tax brackets were reset with the TCJA, and are indexed for inflation yearly.

For those who are on ACA insurance, rather than Medicare, the subsidy limits are probably an even larger concern, since you lose your entire subsidy if you go $1 over 400% of the FPL for your family size.

All this goes to point out that there are lots of moving parts that need to be considered when doing Roth conversions.

AJ
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I have an IRA that was rolled over from a 401K a few years back. If I had contributed and deducted $36K into that 401K originally and now I want to convert that IRA into a Roth IRA, that $36K would be counted towards my income for this year and I would have to pay taxes on it. Any gains would not be taxable.

Do you have any after tax contributions to any IRA including the rollover from the 401K? If not, then as others have stated, the amount converted is fully taxable.

Medicare premiums are based on your income from two years ago. 2019 premiums were based on 2017. 2019 income will determine 2021 Medicare premiums.

The following link has the income ranges and premiums along with a general explanation.

https://www.investmentnews.com/article/20181120/FREE/1811299...
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What you want to convert will be considered earned income.

No, it is taxable income but not earned income.
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Me

if you are SSI/Medicare age and/or RMD age, your Plan B will jump several times each bracket your gross goes up. Your federal taxes will creep up too.


AJ

Sorry, not exactly correct. Medicare premiums have their own scales for when the premiums increase, which are not tied to tax brackets.


The federal taxes run on different brackets. I should have embellished the word "creep".
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Thanks for all the replies and advice.

if you are SSI/Medicare age and/or RMD age, your Plan B will jump several times each bracket your gross goes up. Your federal taxes will creep up too.
Thankfully that doesn't apply to me so one less thing to worry about.

For those who are on ACA insurance, rather than Medicare, the subsidy limits are probably an even larger concern, since you lose your entire subsidy if you go $1 over 400% of the FPL for your family size.
Thanks for the reminder.

Best,

DatVader
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