Roth Conversion — Calculating Estimated Taxes

Submitted by mark wald on Wed, 2018-07-04 04:29

I’m estimating my income/deductions in order to determine how much of my Traditional IRA I can convert to a Roth IRA while staying within my current federal income bracket. I want to confirm my understanding that Long Term Capital Gains (LTCG) and Qualified Dividends (QD) are taxed at lower rates and will NOT push my ordinary income into a higher tax bracket (although it will increase my AGI). In other words, can I exclude my estimated LTCG and QD from my estimated taxable income (for determining my tax bracket/rate) and not worry that the LTCG/QD amounts will put me in a higher tax bracket? If yes, with everything else being equal, I then can convert more Traditional IRA money to my Roth, while staying in my current marginal tax bracket. Thanks.



Submitted by David Mertz on Wed, 2018-07-04 12:15

  • The additional tax liability resulting from the Roth conversion cannot be determined in isolation from your LTCG and QD.  While the LTCG and QD does not affect the tax rate applied to the Roth conversion income, taxed as ordinary income, the tax rate applied to the LTCG and QD *can* be affected by the increase in ordinary income.  However, if all of your LTCG and QD is already being taxed at 15% and additional ordinary income from the Roth conversion will not push any of the LTCG or QD income to be taxed at 20%, you can might be able ignore the LTCG and QD income when calculating the maximum amount of the Roth conversion that allows you to remain at your current marginal tax rate
  • When determining the amount to convert, you want to consider marginal tax rate, which is not necessarily your tax bracket rate.  In addition to LTCG and QD, factors that may come into play and affect your marginal tax rate on ordinary income are Social Security income, tax deductions and tax credits that may be affected by AGI, so you’ll want to do a relatively complete estimate of the change in your tax liability for a given Roth contribution.

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