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Posted by Gary on August 29, 2008, 8:45 am
I tried to answer this message twice, but without success. So I'm
going to try this third attempt by entering a fresh post, altering the
subject slightly.
I didn't give enough details. Here they are now, based upon my last
tax return.
Some notes:
I file as single.
I reside in NY State.
I'm age 75, retired.
My IRA was worth about $750,000 at the end of 2007. This may have
dropped to about $700K by now.
Federal Income tax 2007:
Earned income 0
Interest 615 On bank accounts
Dividends 15,229 On taxable investments
Capital gains 17,693 On taxable investments
IRA distributions 31,211 MRDs
Pension 35,543 Constant, not indexed
Social security 13,841 Total SS = 16.283
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AGI 114,132
Deductions 11,182
Exclusions 3,400
Taxable income 99,550
Tax 18,529
NY Income tax 2007:
Federal AGI 114,132
-Social Security -13,841
-Pension exclusion -20,000
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NY AGI 80,291
Deduction 7,724
Taxable Income 72,567
Tax 4,574
One more note, regarding Tad's comment (cannot buy into a Roth if your
income exceeds $100,000).
The $100,000 figure we all know and love is MODIFIED Adjusted Gross
Income (MAGI). ONLY FOR THE PURPOSE OF CALCULATING IRA TO ROTH
CONVERSIONS, MAGI does not include MRDs or any conversion income. So
for 2007, my MAGI is $114,132 - 31,211 = $82,921. I'd expect it to be
about the same in 2008.
======================================= MODERATOR'S COMMENT:
The reason your post did not go through is because we returned it to you with
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Posted by Dave Dodson on August 29, 2008, 11:05 am
> I file as single.
> I reside in NY State.
> I'm age 75, retired.
> AGI $114,132
You are in the 28% tax bracket, which for 2008 ended at $164,550. I
don't think it makes much sense to do a Roth converstion so large that
it pushes you into the 33% bracket, so I suggest you convert enough to
top off the 28% bracket, about $50,000.
If you make charitable contributions, I suggest you consider setting
up and funding a Fidelity Gift Fund account. E.g., if you make $5,000
of contributions per year, you could instead make a contibution of,
say, $25,000 to a Gift Fund account, which would fund your
contributions for five years. This additional itemized deduction would
enable you to add a like amount to your Roth conversion. You could
donate appreciated securities for an additional tax break. Here is an
article to read about using Gift Fund this way:
http://assetbuilder.com/blogs/scott_burns/archive/2007/11/30/fidelity-charitable-gift-fund-embraces-index-investing.aspx
Dave
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Posted by Tad Borek on August 29, 2008, 2:13 pm
Gary wrote:
> The $100,000 figure we all know and love is MODIFIED Adjusted Gross
> Income (MAGI). ONLY FOR THE PURPOSE OF CALCULATING IRA TO ROTH
> CONVERSIONS, MAGI does not include MRDs or any conversion income.
That's correct, from your post it wasn't clear you'd meet that.
I'd suggest talking with a local CPA to get an exact figure, but my
software's one-minute guess is about $329k in additional tax if you'd
converted a $750k IRA on top of the income you posted. That's a 41%
average tax rate - 9% higher than the marginal rate you pay now.
If correct, that strikes me as a lot of "certain" tax to pay in exchange
for a "possible" tax benefit. Your current tax on RMDs is a good bit
lower than 41%, and the Medicare means-test surcharge isn't all that big
(and you might get hit with the first-tier surcharge anyway?). So you'd
need a big increase in tax rates for this to net you a benefit. And it
might go the other way...for example if the IRA-to-charity provision is
extended (it expired in 2007), and you do some charitable giving in this
manner, that could be enough to keep you in an acceptable bracket.
Also, you might be able to shift your investments so you end up with
little or no taxable interest, dividends, or capital gains. The capital
gains in particular might be manageable, by doing some specific-ID
selling of loss positions (this is a good year to harvest unrealized
gains). Strip out these income items and you have mid-$60k's taxable
income. Even if not a possibility now, this stuff could be an option in
the future, if tax rates do rise -- shift your taxable income downward
in response to that. So there may be other ways to reduce the impact of
higher tax brackets, other than the Roth route.
And of course it's said often on MIFP - the point isn't minimizing tax,
it's maximizing your after-tax income. So it might be just fine to stick
with these taxable income sources and pay the tax.
-Tad
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Posted by Tad Borek on August 29, 2008, 3:14 pm
Tad Borek wrote:
> The capital
> gains in particular might be manageable, by doing some specific-ID
> selling of loss positions (this is a good year to harvest unrealized
> gains).
I meant "unrealized losses" there...
-Tad
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to keep the conversations on-topic for financial planning. Other posting
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