Converting part of a traditional IRA to Roth IRA

[scotttiger]

I have both traditional and Roth IRA's. I believe with itemized deductions, I will be under the the threshold for federal tax brackets where the rate jumps from 12% to 22%.

I would like to take advantage of the difference between my taxable income and that threshold, and try to convert an equal amount from my traditional to Roth IRA. Basically, I want to pay only 12% on that retirement money now instead of worrying about what the future taxes will be for my deferred (traditional) IRA.

What are the steps to do this to avoid an early withdrawal penalty? Do we have to open a roll-over IRA? (Is it even possible to take a portion and move into a rollover and then into a Roth)?

Please advise if and how to do this. I want to do this before the end of 2019.

Thanks.

[dmertz · Accepted solution]

Roth conversions themselves are not subject to penalty, only income tax.  One could induce a tax underpayment penalty by doing a Roth conversion and not having paid an insufficient amount of tax withholding from all sources plus estimated tax payments, but I'll assume that you will make an estimated tax payment to avoid that.

Not sure why you would be are asking about opening a rollover IRA.  Are you mistakenly referring to a 401(k) or similar qualified retirement plan as an IRA?  If the account is a 401(k) or similar account, not a traditional IRA, a taxable rollover directly to a Roth IRA is permissible under the law.  Are you considering doing the conversion with a distribution from a traditional IRA at one custodian and depositing it as a Roth conversion contribution at a different custodian?  Some IRA custodians only permit in-house Roth conversions.  Simplest is an in-house Roth conversion (traditional account and Roth IRA at the same custodian).

With regard to figuring the amount using TurboTax, enter incremental amounts of Roth conversion, say, $1,000 at a time, and compare that to the resulting change in federal and state tax liability.  If the additional income is being taxed at a marginal federal tax rate of 12% you'll see your federal income tax liability increase by $120 for each $1,000 increase in income.  Keep in mind that taxable Roth conversions will increase your AGI which can have side effects on other things that depend on AGI, for example, the taxability of Social Security income.

[scotttiger]

Thank you for such a timely and comprehensive answer.

So, to sum up: One can withdraw partial amounts from a traditional IRA and deposit those funds into a Roth IRA without causing an early withdrawal penalty. Of course, one pays tax on that contribution to the Roth IRA. No intermediate rollover IRA is needed; as well, since both accounts at at the same custodian, this should make it easier.

I've already maxed out Social Security tax for this year, so the effect on AGI is not an issue. 

Nice advice on incrementally testing amounts to see how tax liability changes.

[fanfare]

you are doing a Roth conversion and you need to have the trustee do that.

you can't do it "manually" yourself as you suggest above.
if you don't have a Roth account, you'll have to establish one.

Act promptly, time is running out.

[dmertz]

I'm not sure what fanfare means by "manually."  It's certainly permissible under the tax code to take a distribution from a traditional IRA paid to yourself and within 60-days roll it over to a Roth IRA as a Roth conversion contribution.  However, some Roth IRA custodians have their own rules by which they will not accommodate doing this.