Rollover Traditional IRA to Roth - How much Tax will I pay if Adjusted Gross Income is almost 0?

Question

Hi,

I am a U.S. citizen living in Argentina as a permanent resident, with my wife (dual U.S./Argentinean citizen) and my son (dual as well). Almost all of my income qualifies for the Foreign earned income exclusion. I have about $20,000 in a traditional IRA that I contributed to prior to the move. My question: If I convert this to a Roth IRA, how can I calculate how much penalty I'll have to pay? I suspect that if I convert less than the standard deduction amount on my tax return, that I won't have to pay anything, but perhaps I'm missing something. I googled for a little while, but couldn't find how to calculate this. Maybe i should have just gone directly to IRS website and read the tax code.

Thanks,

Jason

Answer 1

I'm not particularly sure how much you'll have to pay, but here's something that might help.
http://personal.fidelity.com/accounts/services/content/convertinga.shtml.cvsr

Answer 2

When you convert a traditional IRA to a Roth IRA the transaction IS taxable as ordinary income. That's because the funds going in to the traditional IRA were untaxed while funds into a Roth are tax paid. There is no penalty.

In your situation you may wish to carefully consider this. As you have used the Foreign Earned Income Exclusion, your tax rate STARTS at the rate that you would have been taxed at had you not taken the exclusion. With your income, you're right on the line between the 15% and 25% brackets. Even if you're in 15% territory, the tax on the rollover will almost certainly put a significant portion of that money in 25% territory. As such, the tax could be as high as $5,000. If you are a long way from retirement that may not matter but if you are contemplating retirement in the next few years it may not be worth it.

Also bear in mind the $100,000 MAGI limit for coverting from a traditional IRA to a Roth. In your case, the income excluded from tax using the FEIE must be added back to arrive at your MAGI. If that exceeds $100k, you are barred from the rollover. If you are currently barred, current law will remove that ceiling effective in 2010 so you will be able to do the rollover then.

Answer 3

The foreign earned income exclusion does not create a loophole to avoid taxes on the IRA to Roth IRA rollover. In figuring your taxes, disregard the amount of excluded income in determining if the rollover is allowed, and how much tax you will pay.

If without the exclusion, your income is $100,000 or more, then you cannot do the rollover. The taxes you will pay will be at the rate without the exclusion.

So this may not be the year to do the IRA to Roth rollover for you.

See page 16 of IRS Pub 590 IRA:

http://www.irs.gov/pub/irs-pdf/p590.pdf

Answer 4

i'm guessing you have no longer have been given the money to pay the 2010 50% that became deferred to your 2011 return. I usually would say pay it while it fairly is due, no reason to defer it yet it fairly is my opinion and not congress'. you have no longer have been given 2010, 2011 and 2012 on your table. Or i'm not sure what you recommend by that. you're submitting 2011 return in 2012, and paying 0.5 of the 2010 tax on the IRA conversion plus your widespread 2011 tax. Technically you are able to amend the 2010 return and do this, yet you additionally can in basic terms document your 2011 return pay in 50% with it. Then make purely a widespread tax value to US Treasury after the return is processed for the different 50% marking it to your 2012 tax return. which will accomplish the comparable component and be plenty much less hardship. the quantity is on web site 2 of form 8606 on your 2010 return on lines 20a and 20b. desire it fairly is clever.

Answer 5

You should be able to convert any amount from trad IRA to Roth IRA if during the year
*Your modified AGI (explained later under Roth IRAs) is not more than $100,000, and
*You are not a married individual filing a separate return.

To be tax free, you must do the rollover within 60 days.