What are the tax consequences of converting from IRA to Roth IRA?

Question

I will have a relatively low Federal taxable income this year. If I convert, say $100,000 from my traditional IRA to my Roth IRA, will that "income" push me into the same bracket as if it were real income? Does my total income including the converted amount have to stay below the threshold for allowing a Roth conversion? Will this trigger AMT?

Answer 1

If you convert all at once you will be hit with a large tax bill bases on the total income including the amount converted. However, if you convert only so much that you will not be subject to a higher income tax bracket you will avoid the high tax rates. Then next year convert some more.

For example assuming you are married and filing jointly and will adjusted gross income of $40,000 then you could convert $20,000 to your Roth IRA without being bumped into a higher tax bracket. Then next year, assuming the same gross, you could convert another $20,000.

Answer 2

nicely, the above 2 solutions are partly the finest option. once you recharacterize a everyday IRA to a Roth, the percentage is 25%, in case you've held it decrease than 5 years, 10% thereafter. that is taxed to you because the money contained in the classic IRA are tax-deferred, even as the money in a Roth IRA are after-tax money. Your banker will be able to grant you good figures on all of it. because that is lower than $1000, it received't have a wide effect on your undemanding tax concern except you probably did not have a lot federal withholding withheld out of your pay checks... besides the undeniable fact that, because you're doing this in '07, the effect received't hit until eventually the '07 go back is filed, next three hundred and sixty 5 days. you may concern the "distribution" (it really is what they'll call it) to backup withholding, and then try to be purely high-quality, tax-sensible. in case you do not favor to attempt this, you may document a clean W-4 with your corporation employer and characteristic a touch extra withholding taken out of your pay checks. Even $5 a pop will do plenty for you, over the approach the three hundred and sixty 5 days.

Answer 3

Wow, love the copy and paste action from Country Boy-- I would like to have seen what the next chapter would say.. The first two individuals who answered are correct. Also note that a Traditional IRA rollover into a Roth IRA must remain in the Roth IRA for five years or else 10% penalty applies to the rollover amount that is withdrawn.

Answer 4

IRA Conversions are taxed as Regular Income so it will push you in to a higher bracket and it could trigger AMT based on your other deductions.

Answer 5

Amounts you withdraw before you reach age 59 1/2 may be subject to a 10% additional tax. You also may owe an excise tax if you do not begin to withdraw minimum distribution amounts by April 1st of the year after you reach age 70 1/2. These additional taxes are figured and reported on Form 5329. Refer to Form 5329 Instructions for exceptions to the additional taxes. For information on conversions from a traditional IRA to a Roth IRA, refer to Publication 590.

Excerpt from Pub 590:

Converting From Any Traditional IRA Into a Roth IRA -

You can convert amounts from a traditional IRA into a Roth IRA if, for the tax year you make the withdrawal from the traditional IRA, both of the following requirements are met.

Your modified AGI for Roth IRA purposes (explained in chapter 2) is not more than $100,000.

You are not a married individual filing a separate return.


Note.
If you did not live with your spouse at any time during the year and you file a separate return, your filing status, for this purpose, is single.

Allowable conversions. You can withdraw all or part of the assets from a traditional IRA and reinvest them (within 60 days) in a Roth IRA. The amount that you withdraw and timely contribute (convert) to the Roth IRA is called a conversion contribution. If properly (and timely) rolled over, the 10% additional tax on early distributions will not apply.

You must roll over into the Roth IRA the same property you received from the traditional IRA. You can roll over part of the withdrawal into a Roth IRA and keep the rest of it. The amount you keep will generally be taxable (except for the part that is a return of nondeductible contributions) and may be subject to the 10% additional tax on early distributions. See When Can You Withdraw or Use Assets, later for more information on distributions from traditional IRAs and Early Distributions, later, for more information on the tax on early distributions.

Periodic distributions. If you have started taking substantially equal periodic payments from a traditional IRA, you can convert the amounts in the traditional IRA to a Roth IRA and then continue the periodic payments. The 10% additional tax on early distributions will not apply even if the distributions are not qualified distributions (as long as they are part of a series of substantially equal periodic payments).

Required distributions. You cannot convert amounts that must be distributed from your traditional IRA for a particular year (including the calendar year in which you reach age 70½) under the required distribution rules (discussed in this chapter).

Inherited IRAs. If you inherited a traditional IRA from someone other than your spouse, you cannot convert it to a Roth IRA.

Income. You must include in your gross income distributions from a traditional IRA that you would have had to include in income if you had not converted them into a Roth IRA. You do not include in gross income any part of a distribution from a traditional IRA that is a return of your basis, as discussed under Are Distributions Taxable, later in this chapter.