Taxes on a Roth conversion

Submitted by Anthony Romano on Tue, 2021-04-13 02:04

I know the rule of thumb is not to do a backdoor Roth unless you have the cash to pay the taxes. However, what I consider cash is in a brokerage account with company stock I have acquired over the years. I am 70 years old and retired. I can convert and sell 150K in total and stay in the 28% tax bracket. My quandary is if I convert 100K from a 401K do I want to deduct the taxes from the conversion and just deposit 72,000 with the hope of a return or sell 50K of company stock pay the 15% capital gains and then pay the 28K in taxes for the Roth conversion – leaving $14,500 from the 50K. On one hand I think it will take a long time to make up the 28K if I deduct from the 401K distribution. On the other if I pay from the sale of stock that money is gone for good. I want the Roth to avoid taxes and I don’t think I will need the money at 72. I started a back door Roth in 2019.

Should I do the Roth conversion?

How should I pay the taxes?



Submitted by Anthony Romano on Wed, 2021-04-14 12:04

I may need to clarify my question. Regardless of what it is called, if I take a distribution from my 401K and put in a my Roth  I will pay ordinary income tax at 24% (not 28% as previously stated). When I sell company stock I pay capital gains tax at 15%. I do not have a savings account to actually pay either. So the question is – should I continue to build my Roth and pay the taxes now. If so, should I pay with the distribution from the 401k or the sale of company stock. As you may have surmised, I am a proponent of the Ed Slott philosophy.

Submitted by Alan - IRA critic on Wed, 2021-04-14 14:29

Are the company share gains NUA of former employer shares or just ordinary cap gains?   What is your expected marginal rate in the future if you do not convert and factor in RMDs? If you convert 100k, have you factored in IRMAA surcharges or increased IRMAA surcharges? What is your filing status, joint or single?

Submitted by Anthony Romano on Thu, 2021-04-15 00:09

So I do have multiple streams of income; retirement, dividends, SS, rental property. All my income combined will be under $321,450 (after the conversion and sale of stock – $150,000 in total). So my interpretation is that the income tax bracket will be 24% and the capital gains tax will be 15% because the income is not over $488,850. 85% of my SS will be taxed. So in my mind the marginal tax rate is not an issue. Maybe I am over simplifying it but it seems cut and dried. I did not factor in IRMAA but I think that increase is only for one year. There is no NUA. Filing status married jointly. 

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