Conversion Tools – Include Both Incomes?

Submitted by Mike Hunt on Thu, 2010-04-01 16:43

I have run a few tools online and was wondering – whene entering the total value of a traditional IRA being consiedered for a conversion, would I add both mine and my spouses together (as well as combine the basis of each)? Seems if we are filing jointly and also planning to convert part of each of our accounts, this would make more sense than using just my ira alone.



Submitted by Alan Spross on Thu, 2010-04-01 18:13

Most calculators only want the actual amount you plan to convert. It is better to convert the TIRA of the spouse with the highest basis percentage first so you would use the basis for that particular spouse. However, if you plan to use TIRAs of both spouses you would have to manually figure out a weighted average amount of basis separately before entering it unless the calculator is comprehensive enough to collect all this data separately from your inputs.

On the subject of basis for conversions, the final taxable amount is based on year end values, so it could change considerably if the total TIRA balance rises or drops considerably between the date of conversion and year end.

For 2010, a calculator should also address whether you plan to report the conversion in 2010 or take the 2 year deferral. Either way, the taxable % is based on year end 2010 values and the amount of actual taxable income would then be split between 2011 and 2012. Moreover, one spouse can defer and the other opt out of deferral in order to use some of the 2010 tax bracket, but a good calculator would have to address these options.



Submitted by Mike Hunt on Thu, 2010-04-01 18:18

My percentage of basis to total value = 20%
Spouse = 17%



Submitted by Mike Hunt on Thu, 2010-04-01 18:20

despite the close percentages of basis to total value, my total value is almost double hers.



Submitted by Alan Spross on Thu, 2010-04-01 18:55

The weighted average would then be 19% of basis if you plan to convert IRAs for each of you and your IRA will be 2/3 of the amount converted. If the program does not ask for separate basis inputs, you could just enter 19% and be very close to the taxable amount of the two conversions.



Submitted by Mike Hunt on Thu, 2010-04-01 19:17

Not sure I fully understand so allow me to go into a little more detail:

Our primary goal is to make sure that we (as a couple filing jointly) don’t convert too much such that we go into the next higher tax bracket – a caution I have seen mentioned many places including this site. To that end, we are using a major investment companies calculator – tha calculator only asks for the eligble account balances. At this point I can input either my TIRA, or, our combined TIRA’s – this is what I need to determine. Additionally, it asks for the total amount of after-tax contributions, so again, I can either put in just my own TIRA basis, or the combined basis of both out TIRA’s.

Which option would give me the best total picture of what our conversion amount would be? Is this a correct way to calculate?

PS – when I run the calculator using just mine, then combined, the total amount we can convert without jumping into the next higher tax bracket goes down slightly under the combined scenario.



Submitted by Alan Spross on Thu, 2010-04-01 20:27

Something is wrong with that result. Since your % basis is higher, you can convert more dollars for the same taxable income than your spouse or some combination of both.

For example, if your joint taxable income is 25,000 from the top of the current bracket, you could convert 31,250 @ 80% taxable to produce 25,000 taxable. Your spouse could only convert 30,120 @ 83% taxable to produce 25,000 of taxable income. Your basis % are close enough that there is not much difference, but YOU could convert more.

If you have already decided to just fill up your current bracket, you probably do not need a conversion calculator because those recommend amounts to convert based on subjective long term assumptions on future tax rates, asset accumulation etc. There are so many possible variables, there is no calculator that is comprehensive enought to incorporate all the possible factors, and besides you would be guessing about future events. It might not even recommend any conversion or could suggest that you convert amounts into the next higher bracket based on long term assumptions.

But if you think you just want to fill up your current bracket and let the future take care of itself, you could forget a conversion calculator and just use a tax program to put in various amounts of taxable conversions. If the amount to fill your bracket was 25,000, then all you need to do is decide how much each of you will convert. For example if you both want to contribute 12,500 then you would divide your 12,500 by 80% to get 15,625 and your spouse would divide their 12,500 by 83% to get 15,060. Then you would each convert that much.

Not seeing the calculator, I cannot tell how it plans to use this input. If you want to simplify the input, give it your total IRA balances and use 19% of that amount as the basis and it will be very close, but I doubt that the calculator will get into how much each of you should convert based on different basis %s.

Also, your post it titled “include both INCOMES”. For determining your tax bracket you would use both incomes since you are filing jointly.



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