Are Roth conversions worth it for us?

[Huston55]

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Originally Posted by Huston55 That is my interpretation of the rules from reading the IRS FAQ, my former employer’s 401k FAQ, and talking to the administrator of my former employer’s 401k. I’ve not yet done our conversion but, plan to. The key seems to be that your 401k plan has a Roth component, that you’ve previously contributed to that Roth component, and that you have ‘after tax’ 401k contributions to roll over. You will owe taxes on any ‘earnings’ on the ‘after tax’ contributions. I suggest you read your 401k Summary Plan Description, any FAQs, then talk to the 401k administrator.

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Originally Posted by pb4uski ^^^ No. I'm with pjigar that even if your 401k does not have a Roth 401k component that you can roll after-tax 401k contributions to an individual Roth and the remainder of the 401k into an individual tIRA.

I guess I didn’t word that very well.

If you want to avoid the proration issue described in PB’s original post, you must do it the way I described, which allows you to transfer/rollover only the ‘after-tax’ portion + associated earnings. But, you can also rollover the ‘after-tax’ portion directly to a Roth IRA if you’re willing to live with the proration requirements.

[JoeWras]

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Originally Posted by Dash man A few years ago when I rolled my 401k into IRAs, I was able to roll the after tax portion of my traditional 401k into my Roth 401k along with my Roth IRA. You don’t need to roll it into an in-plan Roth first.

That's what everyone at w*rk is saying.

I have to say, that IRS FAQ is the most poorly written piece of work I have seen in a long time.

[Dash man]

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Originally Posted by JoeWras That's what everyone at w*rk is saying. I have to say, that IRS FAQ is the most poorly written piece of work I have seen in a long time.

I’ll try to clarify my poorly written post.
I rolled the after tax portion (less earnings) of my traditional 401k directly into my Roth IRA. This happened at the same time as I rolled my Roth 401k into my Roth IRA and my traditional pretax portion of my 401k plus all earnings into my traditional IRA. There was no need for any in-plan rollovers and no taxes were paid.

[Scuba]

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Originally Posted by pb4uski I think that Scuba has a somewhat unusual situation where there is value to Roth conversions, but the value is negligible.... as I recall they are in a high tax bracket currently and expect to be in roughly the same high tax bracket for life. Very different from a more typical early retiree that has a low marginal tax rate from ER until pensions and/or SS start and expect to be in a much higher tax bracket once pensions and/or SS starts.

Yes this is correct. 22% bracket now. So if the tax law changes and increases the brackets later, then we might benefit from Roth’s, but at the current structure there is actually a slight overall negative impact per the I-Orp model.

One other factor that may or may not be unique is that we have a substantial taxable portfolio we can draw on rather than taking IRA withdrawals.

[Scuba]

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Originally Posted by NgineER SCUBA-Since there is negligible differences between converting from tax deferred to a Roth, you should take the above into account. It is a little morbid, but we all will die some day. If there is a substantial number of years where you or your spouse files as single, then the up front cost of conversion will pay off.

This is a good point to consider and I’ll definitely ask our tax CPA about this. In CA when a spouse dies, the surviving spouse gets a stepped up basis on the inherited assets so that would certainly help too, but will ask for an illustration specific to our situation and numbers. Thanks!

[JoeWras]

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Originally Posted by Dash man I’ll try to clarify my poorly written post. I rolled the after tax portion (less earnings) of my traditional 401k directly into my Roth IRA. This happened at the same time as I rolled my Roth 401k into my Roth IRA and my traditional pretax portion of my 401k plus all earnings into my traditional IRA. There was no need for any in-plan rollovers and no taxes were paid.

Dashman, your post was fine. And I agree, everyone says you can do what you say.

I was referring to the IRS FAQ link which tries to clarify these things. It is very hard to understand .

[gauss]

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Originally Posted by Scuba This is a good point to consider and I’ll definitely ask our tax CPA about this. In CA when a spouse dies, the surviving spouse gets a stepped up basis on the inherited assets so that would certainly help too, but will ask for an illustration specific to our situation and numbers. Thanks!

I am probably stating the obvious here, but stepped-up basis only applies to after-tax accounts, not IRAs/401ks etc.

-gauss

[Scuba]

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Originally Posted by gauss I am probably stating the obvious here, but stepped-up basis only applies to after-tax accounts, not IRAs/401ks etc. -gauss

Yes, understood. Since we have a significant portion of our assets in a taxable portfolio, it makes a difference for us.

[indiajust]

Keep in mind that you can't touch the account for 5 years after the last rollover. I got laid off in the GFC and used mortgage deductions to counter the income created by the rollovers. I spent 6 years doing serial rollovers, now I have 2 more years to wait, but I'm only 54. If you rolled piecemeal for 5 years and then had to wait 5 years to access the money... you might be dead or otherwise need the funds.


It just seems a bit late in the game, and it sounds as though you have a fair amount of complexity to deal with.

[pb4uski]

If you are over 59 1/2 and the Roth has been established for more than 5 years you can withdraw as much as you want anytime that you want.

[Scuba]

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Originally Posted by indiajust Keep in mind that you can't touch the account for 5 years after the last rollover. I got laid off in the GFC and used mortgage deductions to counter the income created by the rollovers. I spent 6 years doing serial rollovers, now I have 2 more years to wait, but I'm only 54. If you rolled piecemeal for 5 years and then had to wait 5 years to access the money... you might be dead or otherwise need the funds. It just seems a bit late in the game, and it sounds as though you have a fair amount of complexity to deal with.

I agree, it would have been nice to do this earlier, but even through 2018 we are still in the 22% bracket. Even higher when we were working. Did not make sense to start earlier, and may not even make sense now.

[indiajust]

Well, from emotional and planning standpoint, you sound prepared and knowledgeable. You are willing and able. You have enough on the taxable side to cover any issues that might arise. You can afford to do nothing, but are willing to put in a bit of effort to avoid future tax risk. The costs are in complexity and tax paperwork. Put the plan on a piece of paper. Since the money is more/less break even... how do you like to spend your time? Perhaps this is more of a nuanced personal decision than a financial one. Regardless of outcome, you are FI and ER secure. A good place to be.

[gauss]

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Originally Posted by pb4uski If you are over 59 1/2 and the Roth has been established for more than 5 years you can withdraw as much as you want anytime that you want.

+1

Actually the requirement is ANY Roth that was established in your name at least 5 years ago -- and over age 59 1/2 of course.

[RunningBum]

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Originally Posted by indiajust Keep in mind that you can't touch the account for 5 years after the last rollover. I got laid off in the GFC and used mortgage deductions to counter the income created by the rollovers. I spent 6 years doing serial rollovers, now I have 2 more years to wait, but I'm only 54. If you rolled piecemeal for 5 years and then had to wait 5 years to access the money... you might be dead or otherwise need the funds.

I don't think that's right at all. According to Kitces, and he references the tax code, each conversion has it's own 5 year period. https://www.kitces.com/blog/understa...d-conversions/ I've read the same elsewhere.

Also, you can always touch it, it just may cost you an early withdrawal penalty.

[Scuba]

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Originally Posted by indiajust Well, from emotional and planning standpoint, you sound prepared and knowledgeable. You are willing and able. You have enough on the taxable side to cover any issues that might arise. You can afford to do nothing, but are willing to put in a bit of effort to avoid future tax risk. The costs are in complexity and tax paperwork. Put the plan on a piece of paper. Since the money is more/less break even... how do you like to spend your time? Perhaps this is more of a nuanced personal decision than a financial one. Regardless of outcome, you are FI and ER secure. A good place to be.

Yes, we do feel fortunate, albeit there are many uncertainties in the future. I don’t like spending my time crunching numbers and doing paperwork; however I’m willing to if there is significant benefit. We are going to talk it over once more with our CPA, and raise the question about whether there is a bigger benefit in our case if one of us passes away young and the survivor remains single for a long period of time. Assuming the answer to that doesn’t encourage us to move forward with Roth conversions, we’ll probably skip it.