IRA to IRA conversion
Hello,
I have an IRA account with $90K and was recently told converting it to Roth IRA would be beneficial since I am not receiving a salary. I am trying to figure out if it is so and also, if I should convert the whole amount. Some background about me: I am 42, not married, and have a 9-year-old son, My tax return for 2013 will be around $20K (from investments) and I live in California.
Thank you very much for your advice!
Permalink Submitted by Alan - IRA critic on Mon, 2013-08-26 16:28
It is not possible to determine if you should convert some of the 90k. You would have to estimate your marginal federal and state tax rates in retirement and then only convert amounts for which your current rates fall under those rates. You also need to have the cash available to pay the taxes with other than IRA money. Do you file as Head of Household? Do you expect your income to generally be higher in future years before retirement? Do you have a Roth IRA now? Note that if you convert, you cannot take distributions from the converted amount for 5 years without paying a 10% penalty. With more specifics, I could give you an approximate amount to convert, but unless you expect to generate much more annual income before retirement, it would be only a small portion of the 90k at most.
Permalink Submitted by María GH on Mon, 2013-08-26 21:42
Thanks for responding. To your questions:1) Yes, I’m head of household. My income could either stay like this (if I continue in this “semi-retired” state) or be much higher if I take an engineering position in the future. Unfortunately, I’m not sure yet. But I am sure this year it will be this low and probably next year or two will continue like that, but perhaps after that I would get a job and be much higher.2) I don’t have a Roth IRA, why does that matter?3) I know about not taking distributions. I thought it was for 3 year, I see you say 5. At any rate, I do have money to pay the taxes (cash that is not invested).Thanks!
Permalink Submitted by Alan - IRA critic on Tue, 2013-08-27 04:49
For HOH filing status, about the first 17k is covered by your exemptions and std deduction. Then the next 13k is taxed at 10%, so with the 20k you already have, you could convert about 10k at 10%. Then the next 35k is at 15%. Due to the uncertainty about your future earnings, the conservative play would be to limit your conversion to about 10k, but if it looks like you will go back into engineering at much higher pay, then you might increase the conversion to the top of the 15% bracket (35k more) or perhaps somewhere between 0 and 35 more. Certainly not more than 45 total. If you are not sure, you can convert the 45k, and you will have until as late as 10/15/2014 to reverse all or part of your conversion by recharacterizing it back to the traditional IRA. That provides you with a longer analysis and look back period to retroactively reverse the conversion if things change. In any event, the lower your retirement income will be the less you would convert since the conversion might cost you more than you will save by converting more and reducing your RMDs in retirement. There are other factors to consider as well, such as chances for a large inheritance, etc.