Partial IRA conversion to Roth IRA Taxable Income

Submitted by Tim Hartung on Mon, 2018-11-19 19:31

In the past 4 years my husband (now age 65) and I (now age 62) have each contributed to an IRA to reduce our taxable income for those years. This year neither of us have income/jobs and only have $11,000 income from an inherited IRA RMD. We want to convert part or all of self-funded IRA’s to our Roth IRA’s for 2018. I am confused about ‘aftertax’ conversion. We used our savings to fund them BUT we did get a reduction in Fed/State income taxes paid. Do we take into consideration the reduction in the taxes paid for the years we funded the IRA when we roll it into a ROTH? OR would that entire IRA be ‘after-tax’ money so it’s not subject to additional income for 2018?

On another note – we both have self-directed company funded IRA’s so we are also looking to convert part of those to our ROTH IRAs. Since that money was paid into our IRA’s direct from the company, is it taxed as regular income on any amount transferred to our ROTH IRA’s? We have to keep our AGI under $22,000 to maintain our current medical benefits so it’s important to make these calculation correct and understand how they affect our income given the new increase in the standard Married Filing Joint deduction.

Is there someplace I can read more details about the tax aspects of a Roth conversion on your website? I’ve watched your video “is a Roth conversion right for you” but I’d like to read and understand more on this subject.



Submitted by Alan - IRA critic on Mon, 2018-11-19 23:50

  • If you received a federal tax deduction for your IRA contributions, then you would not report a non deductible contribution for that year on Form 8606.  These contributions were pre tax, and if you convert or take a distribution from these IRAs, the amount distributed is 100% taxable if you separately have not made any non deductible contributions reported on Form 8606. In that case, the entire distribution would increase your AGI dollar for dollar. 
  • Are you sure that the employer funded plans are not pension plans, 401k or other non IRA plan. Many people refer to all plans as IRAs when some may not be IRAs. However, if you were never taxed on the money in these plans, a rollover to a Roth IRA will be fully taxable and will increase your AGI. 
  • Generally, you would convert to a Roth IRA if the tax rate on your conversion will be less than what you expect your tax rate to be later in retirement, after you are both collecting SS, any pensions, and RMDs when they start at 70.5. For many people, that means that they can only convert a modest amount to avoid increasing their tax rate. You can find out what your tax rate is for the conversion, but estimating what it will be later on takes some work and is actually only an educated guess. If you lose a health insurance subsidy because you converted too much, you could treat the loss of subsidy as an added tax that effectively increases your tax rate for the conversion.
  • Generally speaking, the low income years between retirement and when other benefits such as SS or RMD income begins are good years to convert modest amounts, because your tax rates are low. If you use a tax preparer, they should be able to help you with your actual numbers.

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