Converting vs. Conversion for a Roth

Howard Kaikow

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Dec 24, 2009, 9:06:33 AM12/24/09

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Each of the past few years, my sister has put $6000 into an IRA. I do
this acting as Power of Attorney for my sister.

After she figures out her taxes, she then recharacterize the appropriate
amount to a Roth. She just hates filling out the 8606 form.

In 2010, I was thinking that instead of undergoing the contribution to
the IRA, followed by a recharacterization, which should be rather small
in 2010, as her income grows, it might be better to use that $6000 to
pay tax on a conversion.

I believe that her marginal tax rate is 28%, so the $6000 would cover
taxes on a conversion of $21428.57.

Sound right?

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Howard Kaikow

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Dec 25, 2009, 6:34:49 PM12/25/09

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I think what I am really after is the following:

r1 = effective marginal rate on Federal taxes
r2 = effective marginal rate on State taxes
T= Target tax bite due to Roth conversion
C= = Amount that can be converted to Roth for T tax bite

C=T/(r1+r2)

ASSuME that Roth conversion does not change tax bracket, does this sound

Phil Marti

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Dec 26, 2009, 6:26:43 AM12/26/09

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On Dec 25, 6:34�pm, Howard Kaikow wrote:

> I think what I am really after is the following:

It is if what you're looking for is the answer to "I have $X available
to pay taxes on a conversion. How much can I convert?"

> r1 = effective marginal rate on Federal taxes
> r2 = effective marginal rate on State taxes
> T= Target tax bite due to Roth conversion
> C= = Amount that can be converted to Roth for T tax bite
>
> C=T/(r1+r2)
>
> ASSuME that Roth conversion does not change tax bracket, does this sound
> right?

Yes, assuming you don't itemize deductions. That would slightly
lessen the Federal tax bite because of the deduction for state income
tax. Unless you're in AMT land, in which case you don't deduct state
taxes.

It's called simplification. Ask any member of Congress.

Phil Marti
Clarksburg, MD

Howard Kaikow

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Dec 27, 2009, 3:38:51 PM12/27/09

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Getting a precise estimate is indeed affected by the cross-effects of
deducting state taxes, but that overly complicates the formula, which is
just a good first guess.

Another issue is how much T grows in a money market, or, say, balanced
mutual fund, before the tax has to actually be paid, not to mention
taxes on gains in the balanced fund.

Howard Kaikow

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Dec 28, 2009, 11:18:55 AM12/28/09

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On 12/27/2009 15:38, Howard Kaikow wrote:
> Getting a precise estimate is indeed affected by the cross-effects of
> deducting state taxes, but that overly complicates the formula, which is
> just a good first guess.

Silly me, I did modify the formula to take into effect of state tax on
federal tax.