General understanding of taxes with IRA conversion + Capital Gains + Deductions

IanGi — Tue, 10 Mar 2026 07:00:08 GMT

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.

Re: General understanding of taxes with IRA conversion + Capital Gains + Deductions

jeffvikings — Wed, 16 Nov 2022 19:59:52 GMT

Let's start by breaking down taxability of each item.

Interest is taxed as ordinary income.
Ordinary dividends are taxed as ordinary income but, the qualified portion of the dividends is taxed as long term capital gains.
Capital gains are taxed as either ordinary income if sold within 12 months of purchase date (short term) or as Long Term capital gains taxed at the lower rate if held greater then 12 months.

The next issue is what determines what tax bracket we are in:

First you add up all income including the capital gains and then you subtract your standard deduction or itemized deductions whichever is greater. You can go to Intuits tax bracket calculator to see where you fall using this link Tax Bracket Calculator

Based on your example you stated that you would have income of roughly (80,000+75,000)= $155,000 you would then deduct 2022 standard deduction or $25,900 or itemized if higher. Thus your taxable income would be $129,100 which if you look at tax bracket calculator you would be paying tax at a rate of 22% on ordinary income and 15% on long term capital gains. To get the best estimate of tax you can go to intuits tax caster using this link and put your actual numbers in and use different numbers for projections. Taxcaster

I hope that helps.

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General understanding of taxes with IRA conversion + Capital Gains + Deductions

Re: General understanding of taxes with IRA conversion + Capital Gains + Deductions