RickMachE
Well-Known Member
- Joined
- Jul 1, 2021
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- 204
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- Location
- SE MI
- Vehicles
- 2022 Mach-E Premium 4X, 2022 Lightning Lariat
You're confusing several things.Provided you have owned the ROTH account for 5 years. You still pay taxes on the IRA to ROTH conversion if you IRA was funded with pre-tax dollars. There is also a 10% pre 59.5 years of age penalty to withdraw. Seems like a lot to go thru to make a couple thousand dollars. Not saying it cannot work, but depends on many of your personal factors. For most, it may not be as attractive as on the surface.
Anyone can convert a traditional IRA to a Roth IRA. That conversion, the full amount, is taxable as income. That allows you to raise your income, generate tax, and thereby help use up a tax credit.
The owning for 5 years relates to withdrawals, not conversions.
The penalty for withdrawing isn't applicable, because you're not withdrawing.
For some, their tax bracket may make converting not make as much sense. But those people are likely to already have sufficient tax liability to use a $7,500 credit.
For those with lower income levels, and thereby a lower tax liability, let's suppose they can only use $2,500 of the $7,500 credit. Therefore, $5,000 is going to be totally wasted. Instead of wasting it, if I'm in the 15% tax bracket, I can convert $33,333.33 from a traditional IRA to a Roth IRA, and, at a 15% rate, generate tax owed of $5,000, and fully use the tax credit.
We were buying a Mach-E regardless (and may buy a Lightning). Our normal tax status would have us with a lower than $7,500 tax liability (or in the Lightning's case, possibly $12,500). Therefore, we need to generate taxable income, either via a capital gain or a conversion to Roth, to use up the credits.
The huge benefit is that since it's "free" income, i.e. we are using a tax credit that would otherwise be tossed away, we now have more Roth funds for retirement, or are able to free up more taxable money by getting rid of some large pending gains that would only get larger.
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