How much tax will you owe on a Roth IRA conversion? Don’t believe everything you see on IRS tax tables. The reality may be more complicated. Reasons include:
* Phaseouts. Many tax benefits for lower- and middle-income taxpayers are gradually reduced as income grows. Converting a traditional IRA to a Roth IRA will result in more taxable income, which might cost you child tax credits, say, or medical deductions.
* "Cliff" cutoffs. Some tax benefits disappear or drop sharply with certain income points. For example, married couples get a $4,000 deduction for college tuition payments with up to $130,000 in income and a $2,000 deduction with up to $160,000 in income. If a Roth IRA conversion puts your income over $130,000, you lose $2,000 of this deduction; go over $160,000 and you get no deduction.
Therefore, before converting a traditional IRA to a Roth IRA, go over your last tax return to see which tax benefits might shrink if a Roth IRA conversion swells your income.
