Deorbit Plan

Worked example: a retired couple’s federal return with a Roth conversion and capital gains

Every deduction, bracket slice and capital-gains band, computed by the simulator’s tax function

By the Deorbit Plan editorial team, a Berrydyne program · Last reviewed · Topic: Taxes in retirement

The household

A married couple, both 66, file a joint 2026 return in Alabama. They have stopped working and have not started Social Security. This year they convert $80,000 from a traditional IRA to a Roth IRA, earn $2,000 of bank interest and $10,000 of qualified dividends, and sell shares held for years at a $50,000 long-term gain. The question is the one many early retirees ask: how much federal tax does a large conversion cost when gains are also on the return?

These inputs are one of the hand-computed cases in the simulator’s test suite. The page runs them through the same tax function the simulator uses each time it is built, and the test suite checks the results against the hand calculation, so the figures here and the simulator’s cannot drift apart.

The return, line by line

Ordinary income (the conversion and the interest) is taxed through the brackets first. Dividends and gains are then stacked on top of it and taxed by where they land in the capital-gains bands[1]. Both spouses are 65 or older, so each adds the additional standard deduction and, while it lasts, the senior deduction[2].

Federal tax, 2026, married filing jointly
LineRule appliedAmount
Roth conversion$80,000
Interest$2,000
Qualified dividends$10,000
Long-term capital gains$50,000
Adjusted gross income (AGI)$142,000
Less standard deduction (married filing jointly)Standard deduction, 2026−$32,200
Less additional deduction for 2 people 65 or olderAdditional standard deduction, $1,650 each−$3,300
Less senior deduction (2 people 65 or older)Senior deduction and its phase-out−$12,000
Taxable ordinary income$34,500
Taxable qualified dividends and gains$60,000
10% on $24,800 of ordinary income2026 brackets (married filing jointly)$2,480
12% on $9,700 of ordinary income2026 brackets (married filing jointly)$1,164
Tax on ordinary income$3,644
0% on $60,000 of dividends and gainsCapital-gains bands, stacked on top of ordinary income$0
Tax on dividends and gains$0
Federal income tax$3,644

Alabama taxes the same income separately. Under the simulator’s Alabama rules the couple owes $5,925 of state income tax[4]; the Alabama page shows how that figure is built.

What to notice

  • The deductions total $47,500, so only $34,500 of the $82,000 of ordinary income is taxed, and it never leaves the 12% bracket.
  • All $60,000 of dividends and gains sits inside the 0% band, which runs to $98,900 of taxable income for a joint return. The couple still has $4,400 of room before any gain would be taxed at 15%.
  • AGI is $142,000, far below the $250,000 line where the net investment income tax starts[3], so there is none.
  • Federal tax is $3,644 on $142,000 of income, 2.57% overall.

What would change this

  • Converting $10,000 more adds $2,105 of federal tax. The extra ordinary income also pushes the same amount of gains up the stack, so part of the cost is gains moving out of the 0% band, not just the bracket rate on the conversion.
  • Selling $20,000 more in gains uses up the remaining 0% room; $17,040 of the gains would then be taxed at 15%, for federal tax of $6,373.
  • If both were 64, neither age-based deduction would apply and the same return would owe $7,115, $3,471 more.

See it over a full plan

Load the demo plan with bracket-filling Roth conversions and see each year’s conversion, gains and tax. Open it in the simulator →

If you already have a saved plan, the link only takes you to the right panel; your plan is not changed.

These examples show how the rules work. They are not financial, tax or investment advice. Real returns have details these examples leave out, so check the IRS instructions or ask a tax professional before you act. See the disclaimer.

Sources

Every threshold, rate and amount above is a figure the simulator uses. The sources page lists each one with its official source and the date we checked it, and the rule links in the tables go to the matching entry there.