Roth Conversion?

Question

If I decide to convert my traditional IRA to a roth IRA what taxes will I owe on the conversion. Would I just be taxed on the earnings or would the entire amount be subject to income tax? Conversion amount would be about $25,000 and I am under 59 1/2. I am currently at the 25% tax bracket.

Answer 1

The entire amount would be taxable at conversion time, unless you have made non-deductible contributions to your traditional IRA. Most traditional IRA contributions are pre-tax, so they haven't been taxed yet. So the tax at your current rate would be $6250, or more if the extra $25K bumped you into a higher bracket, then you'd pay 28% on the amount that went into the higher bracket.

You'd have to come up with that tax amount from some other source than what you took from the traditional IRA if you don't want to pay a 10% penalty on some of the withdrawal in addition to the taxes, since any part of the money that is not rolled over to the Roth would be considered a premature withdrawal.

Answer 2

If you correctly roll a traditional IRA to a Roth IRA, you will include the the amount as taxable income at the applicable rates. Add $25,000 to your current taxable income and look up the tax at the new level of income.

Answer 3

taxed on the entire amount. If you kept the ira as a traditional ira you would taxed on the entire amount as you withdrew it over time. This is the same thing, only you're being taxed all at once, since you're taking it all at once.