I'd like to do a 401K>Roth IRA conversion this yea...
Sign Up

Why sign in to the Community?

  • Submit a question
  • Check your notifications
or and start working on your taxes
Announcements
TurboTax has you covered during Covid. Get the latest second stimulus info here.
cancel
Showing results for 
Search instead for 
Did you mean: 
New Member

I'd like to do a 401K>Roth IRA conversion this year. How do I figure out how much I can convert without pushing me into next tax bracket?

My Financial Advisor has suggested that I do this before the end of the year.
8 Replies
Level 14

I'd like to do a 401K>Roth IRA conversion this year. How do I figure out how much I can convert without pushing me into next tax bracket?

The amount from your 401-k is taxed at your ordinary income tax rate. So add that income to your other taxable income and compare that result with your income tax bracket. 

Level 15

I'd like to do a 401K>Roth IRA conversion this year. How do I figure out how much I can convert without pushing me into next tax bracket?

Here's one easy-access reference to both 2020 and 2021 tax brackets (though 2021 could change)

 

https://www.bankrate.com/finance/taxes/tax-brackets.aspx

_____________________________________

Remember, that only the $$ that slop into the next tax bracket get taxed at the next higher rate...so if you miss-estimate some, it might not hit you too hard.

 

Other income estimates to consider.....Fidelity and Vanguard (and likely other Mutual fund brokers) distribute capital gains, mostly  in December every year.  I know both Fidelity and Vanguard now have their "estimates" of what they plan to distribute for their funds.   For mine, they are approximately double what they distributed last year, but it will vary widely depending on what funds you own.  So if you have significant holdings in Mutual funds, be sure to research and take those estimated distributions into account.

Level 15

I'd like to do a 401K>Roth IRA conversion this year. How do I figure out how much I can convert without pushing me into next tax bracket?

and when you estimate your income, be sure to reduce it by your standard deduction... DO NOT estimate anything that is subject to long term capital gains or Long term capital  distributions. because that uses a different tax bracket table. 

 

@SteamTrain - maybe I am not tracking with you, but I would not include LT distributed capital gains - that doesn't follow the ordinary tax bracket.   but ST distributed capital gains would be added into ordinary income and be subject to the ordinary tax bracket schedule. 

Level 15

I'd like to do a 401K>Roth IRA conversion this year. How do I figure out how much I can convert without pushing me into next tax bracket?

@NCperson 

 

(Later....based on details presented below, NCperson appears to be correct...so probably best to only include the ST gains in guestimating your tax bracket for this purpose)

Level 15

I'd like to do a 401K>Roth IRA conversion this year. How do I figure out how much I can convert without pushing me into next tax bracket?

yes, the LT gains and LT distributions add to AGI, but they are not part of the calculation for ORDINARY tax bracket....  ST gains and ST distributions are part of the ORDINARY tax bracket calculation. 

 

look at the schedule on page D-16 and if you want to go through the gory detail,  as you state Line 1 is taxable income, but lines 2-43 decipher what is taxed at a capital gains rate, leaving line 44 as the part that is taxed as ordinary income; line 44 is taxed using the ORDINARY tax tables.  

 

LT distributions and LT capital gains will have no impact on Line 44 as that are netted out during lines 2-43, so there is really no need to worry about these numbers in estimating where an IRA distribution trips you into the next tax bracket.

 

Trust me, I do this calculation multiple time during the year for exactly the same reason the questioner is asking.  

 

https://www.irs.gov/pub/irs-pdf/i1040sd.pdf

 

 

Level 15

I'd like to do a 401K>Roth IRA conversion this year. How do I figure out how much I can convert without pushing me into next tax bracket?

You're correct, I yield to a more experienced person who is aware of some subtleties I hadn't considered (yet).   

 

I really didn't want to get into that form/worksheet, but eventually I worked thru it enough that I think I can see what's going on with the worksheet and what it does with LT gains.  Normal folks really can't be expected to go thru that mess.

_______________

A real solution for this person (and many, many others) would be to ALWAYS use the Desktop software each and every year.  Then they can simply use the prior year's tax forms, and the What-IF worksheet to adjust the $$ amounts in the various income categories, to model the next year.  Can't do everything, but it would be reasonably close.   (And the Online software is really almost totally useless for such pre-season modelling ) .

 

Though that really doesn't give them their actual tax brackets, it will show a tax calculation with balance due, or refund, that they can either accept, or decide it too much to tolerate.

Level 15

I'd like to do a 401K>Roth IRA conversion this year. How do I figure out how much I can convert without pushing me into next tax bracket?

agreed that folks can't be asked to go through the mess of the schedule I mentioned above, but it's really simple:

 

Take all income, exclude any LT gains, LT distributions, and qualified dividends (forgot to mention this one) and then subtract the standard deduction.  THAT is ordinary income.  I look that number up on the tax bracket schedule to determine where my bracket ends.

 

best, 

 

 

 

 

Level 15

I'd like to do a 401K>Roth IRA conversion this year. How do I figure out how much I can convert without pushing me into next tax bracket?

If your conversion pushes you from, say, 22% to 24%, then only the amount over the 22% bracket is taxed at 2% more.

If this bothers you, stay under the 22% income bracket.

Dynamic Ads
v
Privacy Settings