Last month we covered the basics of a Roth IRA conversion. (If you missed it, Read it Here). This month we'll discuss a few more mechanics of converting along with conversion strategies to maximize tax savings. Let's get to the Q&A...
1. First, can you provide clarity on the timing of the conversion and when it’s income for tax purposes?
Converting traditional IRA (Individual Retirement Account) funds to a Roth IRA can be a powerful tax savings opportunity. Here are some frequently asked questions on the topic:
1. What is the main difference between traditional IRA and Roth IRA?
Where has the year gone? With the holiday season soon in full swing you may not give year-end tax planning the attention it deserves. Too often taxes are only thought of when they need to be paid or when a tax return needs to be filed; this can be costly. There could be actions to take before year-end to minimize your tax bill or to take advantage of a unique tax situation you are in.
It’s imperative that a year-end tax projection be done to see where 2016 income stands to arrive at an estimate of taxable income. The projection is the starting point to see what the tax is on the next dollar of income or what the tax benefit is on the next dollar of deduction. Due to the alternative minimum tax (AMT) and certain phase-outs you cannot assume that your next dollar of income or deduction will be at your marginal tax rate. For example, many taxpayers in the $200,000 to $300,000 income range would fall into a marginal tax rate of 25% to 28%, but, most taxpayers in this income range actually pay tax at a 35% rate on an additional dollar of income because they are subject to the AMT and phase-out of the AMT exemption.
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