Roth Conversion Value for tax purposes
The tax owed on an RMD in a traditional IRA is based on the previous 12/31 value. Does this apply to the conversion to a Roth; is the tax based on the previous 12/31 or the value on the actual date of transfer? Lorraine
Permalink Submitted by Clyde Wolf on Thu, 2009-10-29 15:45
That is a roundabout way of saying you pay income tax on your RMD.
As for a ROTH Conversion, the tax is determined on the amount of the Conversion.
If you were converting your entire TIRA today, the tax would be based on today’s account
balance.
Typically folks would top off their tax bracket with an amount for a ROTH Conversion. If that amount is $12,500, then that Conversion amount would be added to their ordinary income for tax purposes.
Permalink Submitted by Alan Spross on Thu, 2009-10-29 20:09
However, if you have basis in your traditional IRA, the amount of income included will be based on the value of the distribution used for the conversion times the pro rate factor using the adjusted 12/31 value in the year of the conversion distribution.
Similarly, the gross amount of an RMD is based on the FMV of the prior year 12/31 value, but the amount included in income where there is basis in the TIRA reflects the relative 12/31 values in the year of the distribution. In summary, the gross amount is based on prior year value and the net taxable amount on the current year pro rate factor.