I'm trying to evaluate the effect of converting a distribution from my Traditional IRA to my existing Roth IRA using the 2019 Desktop version of TurboTax.
- TurboTax Desktop Premier for 2019 taxes.
- 1099-R entered, Line 7 code is "7-Normal Distribution"
- The IRA/SEP/SIMPLE box is checked.
Am I doing this correctly?
- On screen "About This Retirement Account", "Was this withdrawal an RMD for 2019?" Check the bullet "No, None of this withdrawal was an RMD".
- On the screen "What did you do with the money" - Check the bullet "I converted all of this money to a Roth IRA Account"
Form 8606T now shows in the Forms view and seems to be correct.
Is this the correct way to do this?
With the suspension of RMD's for 2020 I felt I needed to at least take a look at converting.
TurboTax is a great What If tool. After doing comparisons of converting several amounts to my Roth I've found the combined fed and state tax hit is significant (over 30% of the converted amount). At my age it's not going to work.
Modeling whether or not a Roth conversion makes sense is quite complex. If you have Social Security income, there can be a range of income where the marginal tax rate is substantially higher than it is at higher incomes, so you might want to test with even higher conversion amounts. You'll want to compare the marginal tax rate on the entire proposed Roth conversion to what your marginal tax rate is expected to be for the last dollars of your RMD since RMDs will be required in future years. If you pay for Medicare Part A or D, you'll also need to take into account IRMAA for the Medicare cost when figuring your marginal tax rate. Also be aware that amounts converted to Roth lower your RMDs for future years and the money grows tax free in the Roth IRA rather than tax deferred (subject to the requirements for qualified distributions), so you could still end up paying less in total taxes over your lifetime than without the Roth conversion despite the higher marginal tax rate now. This assumes that you have the funds to pay the taxes without needing to make a distribution from a retirement account.
Thanks for your reply and added notes...
From one of your earlier posts...
To determine the marginal tax rate for a particular type of income you must add or subtract that type of income, see the resulting change in tax liability, then divide the change in tax liability by the change you made in income.
I tested three conversion amounts up to $200k.
Using your method, the combined fed and state tax on each came up as 34.2%, 31.9% & 31.5%.
I recognize the underlying benefits of converting as well as the pitfalls of added Medicare premiums, the Net Investment income tax of 3.8% plus the higher marginal rate.
Thanks for your input.