traditional ira vs. roth ira pres

1
Conversion from a Traditional IRA 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-Tax Contributions SEP IRA Consists entirely of pre- tax contributions. Total value is $80,000 with pre-tax contributions of $12,000. Trad. IRA Consists entirely of after- tax contributions. Total value is $200,000 with after-tax contributions of $40,000. Roth IRA Obviously all after tax contributions. Total value is $30,000 with total contributions of $7,000. David only wants to convert half of the amount in his SEP and Traditional IRA’s to the Roth IRA. What amount will be added to his taxable income in 2015? The IRA Pro-Rata Rule Applies Based on our numbers above, we have $40,000 total after-tax contributions to non-Roth IRA’s. The total non-Roth IRA balance is $280,000. The total amount that 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. Her employer has been bought our a couple times, so she has rolled over her previous 401k's into two separate IRAs. One IRA totals $115,000 and the other totals $225,000. She has never had a Roth IRA, so she is considering contributing to a nondeductible IRA for a total of $6,500 then immediately converting in 2015. Situation: Backdoor Roth IRA Contribution Example #2 Breakdown of Accounts: Pre- & Post-Tax Contributions Old 401k Consists entirely of pre-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 to converting, old and current 401k's do not factor into the equation Note Rollover IRAs Non-ded IRA Consists entirely of pre-tax contributions. Total value is $140,000 with $80,000 pre-tax contributions. She plans out maxing it out until retirement Consists entirely of after-tax contributions. Total value will be $6,500 of after-tax contributions and we will assume no growth. By leaving it in the 401k it will minimize your 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 $6,500 Traditional IRA contribution/Roth IRA conversion, and that’s assuming no investment earnings. $6,378 What is Beth’s taxable consequence will be in 2015: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Highmark Wealth Management LLC), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Highmark Wealth Management LLC. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Highmark Wealth Management LLC is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. If you are a Highmark Wealth Management LLC client, please remember to contact Highmark Wealth Management LLC, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of the Highmark Wealth Management LLC’s current written disclosure statement discussing our advisory services and fees is available upon request.

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Page 1: Traditional IRA vs. Roth IRA pres

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:

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by HighmarkWealth Management LLC), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of,or as a substitute for, personalized investment advice from Highmark Wealth Management LLC. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with theprofessional advisor of his/her choosing. Highmark Wealth Management LLC is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. If you are a Highmark Wealth Management LLCclient, please remember to contact Highmark Wealth Management LLC, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of theHighmark Wealth Management LLC’s current written disclosure statement discussing our advisory services and fees is available upon request.