My wife and I are retired and our sole income comes from dividends and capital gains. We are not yet collecting social security and we’ve not yet started to take funds from our IRA accounts, of which we each have both a traditional IRA as well as a Roth. I am questioning whether we should convert some of the traditional IRA funds to Roth. Are these conversions taxed as Earned Income? And if so, is the following correct?
- Earned income is taxed using the relevant tax table (totally unrelated to the income from dividends capital gains)
- and then the income from dividends and capital gains are taxed using their relevant tax tables (again totally unrelated to the above earned income)
Where are deductions applied?
In a scenario where we convert $80k of Traditional IRA to Roth, have $75k of income from Dividends & Cap Gains, and have $50k of deductions, is the following correct? The $80k is reduced by the $50k deduction to $30k and taxed at $2,055 plus 12% of the amount over $20,550. And there would be no tax on the Capital Gains since it is below $83,350.
