How to Calculate a Roth Conversion on Your Taxes

by Mark Kennan

Roth IRA conversions require you to pay income taxes on the pretax amount of the conversion. In return, your qualified distributions come out tax-free. Knowing the amount of income taxes you will owe due to your Roth IRA conversion allows you to budget for the expense ahead of time. Though you could take out some of the conversion to pay the tax, you will lower the value of your Roth IRA and, unless you are 59 1/2, have to pay an extra 10 percent penalty because the IRS treats it as having taken an early distribution.

1. Estimate your total taxable income for the year, including the amount of your Roth IRA conversion. Include all of your taxable income for the year but take out any deductions or exemptions you plan to claim on your taxes.

2. Look up your income tax bracket using the tax rate schedules on IRS Publication 17. Locate the tax rate schedule for your filing status and then find the range that include your taxable income. For example, for the 2010 tax year, if you filed as married filing separately and had a taxable income of $65,000, you fall in the 25 percent tax bracket.

3. Divide your percentage tax rate by 100 to convert it to a decimal. In this example, divide 25 percent by 100 to get 0.25.

4. Multiply your tax rate as a decimal by the amount of your Roth IRA conversion to figure your taxes resulting from the conversion. Finishing the example, if your taxable income included $18,440 from a Roth IRA conversion, multiply $18,440 by 0.25 to find your Roth IRA conversion added $4,610 to your tax bill.

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