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Roth conversion in early retirement

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  • Roth conversion in early retirement

    I am bit confused by the pro-rata rule for Roth conversions, so I am requesting a clarification.

    If Roth conversions can't be done if you have any funds in a traditional IRA on Dec 31st of a given year, then how do people avoid this problem when doing partial Roth conversions of their traditional IRA in low income years (ie. during sabbatical, early retirement etc)?

  • #2




    I am bit confused by the pro-rata rule for Roth conversions, so I am requesting a clarification.

    If Roth conversions can’t be done if you have any funds in a traditional IRA on Dec 31st of a given year, then how do people avoid this problem when doing partial Roth conversions of their traditional IRA in low income years (ie. during sabbatical, early retirement etc)?
    Click to expand...


    They can always be done, it's just a point of paying taxes on the conversion...which you expect to do if it was never taxed (or it was deducted) in the first place, like your usual traditional IRA.  It's done in lower income years because it's then taxed at a lower bracket.

    The thing with the back-door IRA and the pro-rata rule is that you end up paying taxes on money that was already taxed, since the contribution was non-deductible.

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    • #3




      I am bit confused by the pro-rata rule for Roth conversions, so I am requesting a clarification.

      If Roth conversions can’t be done if you have any funds in a traditional IRA on Dec 31st of a given year, then how do people avoid this problem when doing partial Roth conversions of their traditional IRA in low income years (ie. during sabbatical, early retirement etc)?
      Click to expand...


       

      These conversions are fully taxed because they are from pre-tax (not taxed) TIRAs. That is why they are timed to convert in low-income years. Anybody can convert to a Roth IRA. As @DMFA said, the issue is to avoid paying taxes on money that you've not deducted in the first place. That is not the concern with a conversion of pre-tax IRA funds.
      Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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      • #4
        You guys are awesome. Thank you!

        Just for example, let's say that I have rolled over my 403(b) into an IRA. I plan to convert 10K out of 100K in a given year to a Roth IRA. My understanding is that the only taxes owed in that year would be on 10K (and not the entire 100K). Am I correct?

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        • #5
          Correct. The conversion is reported as income, but only the amount that is converted. Not the entire tax deferred IRA.

          The Mad Fientist explains it well with pretty infographics.

          If the conversion is your sole source of taxable income, it can be done tax free, a little bit at a time. It helps to have a wife, kids, and little dividend income. Tax-wise, at least.

           

           

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          • #6




            Just for example, let’s say that I have rolled over my 403(b) into an IRA. I plan to convert 10K out of 100K in a given year to a Roth IRA. My understanding is that the only taxes owed in that year would be on 10K (and not the entire 100K). Am I correct?
            Click to expand...


            Correct. This is where tax planning comes in. And tactical use of bear markets and corrections.
            Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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            • #7
              Thank you for those links. Both articles were very informative and easy to understand.

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