Ins and outs of IRAs into Roth accounts
Q: I turn 70½ in 2019. In the past few years, I have converted some of my traditional IRAs into Roth accounts. This will reduce my 2019 required minimum distribution. I want to continue to do conversions, partly because I expect tax rates to go up in the future. But I don’t know if I am still allowed to do conversions now that I am 70½. Can you answer that?
You are still allowed to do conversions because
there is no age limit. You also do not need to have earned income for traditional-to-Roth IRA conversions, so it is possible to continue conversions throughout your retirement.
What you cannot do is convert a required minimum distribution. RMDs are required because the policy objective behind retirement plans is to encourage saving during the working years, with withdrawals during retirement.
If it were possible to move funds from one type of tax-sheltered retirement account into another, the policy would be thwarted. So RMDs are not only subject to tax, but they must held outside a retirement account.
As you start to draw down your traditional IRA balances, through a combination of RMDs and perhaps conversions, your RMDs may actually decrease in future years.
Q: I am both thrilled that the stock market is doing so well and panicked that it will not continue to do so. For this reason, I want to sell some of my stock mutual funds in 2019 and move the funds into a more stable investment. My 2018 taxable income was about $55,000, and I am married. I am trying to figure out how much capital gains tax I will pay. The websites I looked at are confusing. One suggests that I can actually pay zero capital gains tax because of my income, another talks about the 20% maximum rate. I’m pretty sure that 20% is not the right rate for me because even my other income is not taxed that high, but if there is some limit on how much can be not taxed at all, I would like to know that.
Something called net capital gains is taxed at special (favored) rates. For the asset that you are looking to sell, it would be a long-term capital gain that would fall within this net capital gain definition.
No matter what your regular tax rate is, there is a special, and lower, rate that applies to long-term capital gains. The overall maximum rate is 20%, but that applies only to those people who would otherwise pay 37% on their regular sources of income.
Your income places you in a 12% marginal tax bracket. Capital gains in this bracket are taxed at a zero rate. Both the 12% and the zero tax rates apply up to taxable income of $78,950 for 2019. This means that you could safely have $20,000 of longterm capital gains added to your current estimated income and taxed at zero.
If you go above that the tax will depend on what your final 2019 taxable income is. Again, up to $78,950 there is a zero capital gains rate. Above that, the capital gains rate for you will become 15%. Other income above $78,950 is taxed at 22%.
The rates and income ranges shown above apply only to those who are married filing jointly. Also, short-term capital gains do not get the favored tax rate. A longterm gain is one with a holding period of more than one year at the time of sale.
Q: I was reimbursed by my employer for a 2019 move, and it was reported as special pay and they withheld all taxes. I thought moving expense reimbursements were not taxed.
They were not. The past tense “were” is important. Beginning with the 2018 tax year, no deduction is allowed to an individual for job-related moving expenses. This means that employer reimbursements are now taxable.
Through the end of 2017, individuals could deduct qualified moving expenses. This allowed employer reimbursements to be nontaxable to the employee. A 2017 move reimbursed in 2018 is also nontaxable.
Your employer’s reporting for the reimbursement is correct. If the move was made after 2017, then all reimbursements are taxable and subject to regular wage withholding.