Converting to a Roth
I was looking at my portfolio. I’m thinking that I would have about a $40,000 loss for next year. I am single ( no kids) with about 225,000 in traditional IRA that I could convert to a Roth IRA. I started a small business which only gives me about 3,500 a year in deductions for the year. Because my income was so low last year,my effective rate in taxes was about 8.72%. I expect it to be low this year for 2009. I’m wondering if I could just convert all of the 225,000 to a Roth?
Permalink Submitted by Alan Spross on Tue, 2009-04-07 22:40
It is seldom a good idea to convert large amounts at one time unless you have substantial assets and are already in a top tax bracket. While converting in a low income year can be a good idea, you need to do an analysis to determine the amount you can convert that does not result in a tax bill higher than your expected rate in retirement. For example, you may opt to convert enough to use up your 15% tax bracket in order to keep the tax bill on conversions from getting too high.
Permalink Submitted by Joe Williams on Tue, 2009-04-07 23:34
Alan,
I was trying to cover my $40,000 in loss so I can write off the full amount from selling my annuity (which is not an IRA). Doesn’t that make sense?
Permalink Submitted by Alan Spross on Tue, 2009-04-07 23:37
Yes, it makes sense to convert enough to bring your taxable income from negative up to -0-, and probably to use up your 10% bracket as well. But you mentioned converting the entire 225,000, which is far more than covering your deductions.
Permalink Submitted by Joe Williams on Wed, 2009-04-08 02:40
I guess I don’t totally understand how much I can convert. Maybe, about 75,000?
Permalink Submitted by Alan Spross on Wed, 2009-04-08 03:06
You need to complete an estimate of your 2009 taxable income to determine which bracket you will fall in. You can then figure how much you could convert to bring you up to the top of your current bracket or the next higher bracket if you want to pay those rates. The good thing about conversions is that they can be fully or partially recharacterized next year after you get your final tax figures. This means that after the fact you can erase any amount of your conversion that is too much or exposes you to higher tax rates. So don’t be afraid of converting too much as long as you know you can recharaterize all or part.
Permalink Submitted by Joe Williams on Wed, 2009-04-08 22:57
Thank You Alan.