Question From A Reader â€“ Refinance A Home To Pay Taxes For A Roth IRA Conversion?

By Hank on 09/03/2010 – 3:48 am PDT -- Opinion

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This article written by Hank Coleman. Hank is the publisher of Own The Dollar, a personal finance blog dedicated to helping everyone learn to master their own dollars. He also writes about money topics for members of the military and their families at Military Money Might.

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Muneer

If you refinance your home and get a lower mortgage rate while you save money on your mortgage payments, and with the saved money you pay your roth conversion taxes, that’s a good idea. But here’s an important point

Let’s clarify this. While you would do a conversion from a traditional IRA or other plan in to a Roth IRA in 2010, the capital gains or income to be claimed on your taxes will not be done until 2011 and 2012, thus saving you from facing a huge tax bill in 2010. The IRS is aware of this and they have allowed you to claim 50% of your capital gains income in 2011, and the remaining 50% in 2012, thus splitting the bill across 2 years.

Note: You would pay taxes in 2011 and 2012 according to the tax bracket you’re in. For instance, if you made a lot more money in 2012 than 2011, you would pay more of the conversion taxes in 2012 rather than 2011. However, your total conversion tax will be prorated across the 2 years.