traditional ira vs. roth ira pres
TRANSCRIPT
Conversion from a TraditionalIRA to a Roth IRA
David has a Traditional IRA, SEP IRA, and a Roth IRA totaling$310,000.
Situation:Example#1
Breakdown of Accounts: Pre- & Post-TaxContributions
SEP IRA
Consists entirely of pre-tax contributions. Totalvalue is $80,000 withpre-tax contributions of
$12,000.
Trad. IRA
Consists entirely of after-tax contributions. Totalvalue is $200,000 withafter-tax contributions of
$40,000.
Roth IRA
Obviously all aftertax contributions.
Total value is$30,000 with total
contributions of$7,000.
David only wants to convert half of the amount in his SEP andTraditional IRA’s to the Roth IRA. What amount will be added to his taxable income in 2015?
The IRA
Pro-Rata RuleApplies
Based on our numbers above, we have $40,000 total after-tax contributions tonon-Roth IRA’s. The total non-Roth IRA balance is $280,000. The total amountthat is desired to be converted is $140,000.
The amount of the conversion that will be subject to income tax is 14.29%
How to calculate it
Calculate non-taxable portion of total Non-Roth IRA’s:STEP 1
Total after-tax contributions / Total Non-Roth IRA Balance = Non-Taxable %:
$40,000 / $280,000 = 14.29%
STEP 2 Calculate the non-taxable amount by converting the result to Step 1 into dollars:
14.29% x $140,000 = $20,000
STEP 3 Calculate the amount that will be added to your taxable income:
$140,00 – $20,000 = $120,000
David will owe ordinary income tax on $120,000. He is in the 28%income tax bracket, so he will owe $33,600 in income taxes or $120,000 X .28.
Beth is over the age of 50 and is in the process of changing jobs. Heremployer has been bought our a couple times, so she has rolled overher previous 401k's into two separate IRAs. One IRA totals $115,000and the other totals $225,000. She has never had a Roth IRA, so sheis considering contributing to a nondeductible IRA for a total of$6,500 then immediately converting in 2015.
Situation: Backdoor Roth IRA ContributionExample#2
Breakdown of Accounts: Pre- & Post-TaxContributions
Old 401k
Consists entirely ofpre-tax contributions.
Total value is$340,000 with pre-tax contributions of
$150,000.
Current 401k
What is Beth's tax consequence in 2015?
When it comes toconverting, old andcurrent 401k's
do not factor intothe equation
Note
Rollover IRAs Non-ded IRA
Consists entirely ofpre-tax contributions.
Total value is$140,000 with
$80,000 pre-taxcontributions.
She plans out maxingit out until retirement
Consists entirely ofafter-tax
contributions. Totalvalue will be $6,500
of after-taxcontributions and we
will assume nogrowth.
By leaving it in the 401kit will minimizeyour tax burden.
Calculate it!
STEP 1 $6,500/ $346,000 = 1.88%
STEP 2 1.88 X $6,500 = $122
STEP 3 $6,500 – $122 = $6,378
For 2015, Beth will have a taxable income of of his $6,500Traditional IRA contribution/Roth IRA conversion, and that’sassuming no investment earnings.
$6,378
What is Beth’s taxable consequence will be in 2015:
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