How to Calculate Tax Due on a Roth IRA Conversion

by Mark Kennan

The Internal Revenue Service requires you to report your conversions from a traditional IRA to a Roth IRA on your income taxes. The taxes due depend on your marginal income tax rate. When figuring how you plan to pay for the income taxes coming from the conversion, consider using savings or other income to pay for the taxes rather than taking the money out of the conversion, especially if you are under 59 1/2 years old. If so, any money taken out, even to pay taxes, counts as an early distribution and is subject to a 10 percent early withdrawal penalty.

Calculate the taxable portion of your Roth IRA conversion. If converting from a traditional IRA without any nondeductible contributions - those which you made without deducting them on your income taxes - the entire amount is taxable. If your traditional IRA contains nondeductible contributions, the portion of the conversion originating from nondeductible contributions is nontaxable. For example, if your traditional IRA account consists of 18 percent nondeductible contributions, 18 percent of your conversion from that account would be tax-free.

Estimate your marginal income tax rate based on your total taxable income and filing status. Each year in IRS Publication 15, the IRS prints the income tax tables for each filing status. For example, if in 2010 you filed as married filing jointly and had $80,000 in taxable income, you fall in the 25 percent income tax bracket.

Multiply the taxable portion of your Roth IRA conversion by your marginal income tax rate to calculate the income taxes due on your Roth IRA conversion. In this example, if $17,500 of your conversion is taxable, multiply $17,500 by 0.25 to find you would owe $4,375 in taxes.

Warning

  • Depending on where in your income tax bracket you fall, your Roth IRA conversion may push you into a higher income tax bracket, resulting in the portion of your conversion that falls in the higher bracket being taxed at the higher rate. For example, if your taxable income put you $5,000 below the next tax bracket and you converted $7,000, $5,000 would be taxed at the lower tax rate and the remaining $2,000 would be taxed at the higher tax rate.

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