can we use deductions to negate taxes on a Roth conversion?
If we convert an IRA to a Roth in a year where we have enough deductions to negate most of the taxes on the conversion, is that permissable or does the IRA require we pay taxes on the total value of the conversion no matter what deductions we might have that year? Seems to me it would be best to convert in a year where you know you will have a lot of deductions, if that is permissable?
Permalink Submitted by Alan Spross on Wed, 2010-03-17 04:32
Yes, that is just smart planning. It is a way to produce instant income to fully use any deductions or net operating losses available. Some taxpayer might make a larger conversion knowing that they can recharacterize the exact amount needed when all the totals are known to end up with no current tax but fully use the deductions, use just the 10% bracket etc.
The net value of a conversion is mostly determined by the difference in taxes paid for the conversion and what would have been paid in retirement without the conversion due to RMDs or other distributions. So if you can convert for nothing, it is a slam dunk decision.