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company 401K plan doesn't allow partial ROTH conversions
Old 04-06-2015, 11:30 AM   #1
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company 401K plan doesn't allow partial ROTH conversions

I contacted our plan administrator and even though I am 55 when retired, our plan doesn't allow me to withdraw partial amounts to do small annual ROTH conversions to keep under a certain tax bracket.

Do I have any options? Does it make sense to convert it all to an IRA and then do ROTH conversions between 59 1/2 and 70 1/2?

thanks for advice from those of you much more knowledgable about these things.

michael
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Old 04-06-2015, 11:42 AM   #2
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My plan doesn't allow any in house Roth conversions. The only alternative is for me to do complete IRA rollover and do them from the IRA.
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Old 04-06-2015, 11:45 AM   #3
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Originally Posted by jabbahop View Post
Does it make sense to convert it all to an IRA and then do ROTH conversions between 59 1/2 and 70 1/2?
It makes sense to me.
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Old 04-06-2015, 11:57 AM   #4
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Do I have any options? Does it make sense to convert it all to an IRA and then do ROTH conversions between 59 1/2 and 70 1/2?
Does your plan allow you to start distributions from your 401K at age 55 since you've been separated from service? If so, you could do that for a short time (until age 59 1/2), then transfer everything to a tIRA and do your Roth Conversions (and distributions for spending) as you see fit.

The ability to "get at" your 401K money between age 55 and 59 1/2 could be important--you can't do that without a big penalty once the money is in a tIRA (aside from using the 72t rule). So, before you move all the money out of your 401K, examine the possible pitfalls, esp your ability to fund your living expenses between 55 and 59 1/2.
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Old 04-06-2015, 12:53 PM   #5
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So is the limitation of your plan that the only choice you have is a conversion for the total or is it a restriction on the number of withdrawals that you can do each year? Also, do you prefer you plan investment options over what you could get in an IRA? Does your 401k plan have a good stable value fund? Also, do you need these funds to live on... I presume not since you plan to do Roth conversions.

I don't see much upside to keeping it in your 401k plan unless you have access to a good stable value fund. Otherwise, roll it into a tIRA and start making annual Roth conversions to the top of your target tax bracket.

I think Roth conversions from ER until RMDs begin make a lot of sense if one is in the 15% tax bracket excluding Roth conversions and expects to be in the 25% tax bracket once any pensions, SS and RMDs start. In my case, since my income is below the 15% tax bracket and is principally qualified dividends and long-term capital gains which are tax free, the average federal tax rate on my Roth conversions is less than 10% compared to paying 25% if I took them later.
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Old 04-06-2015, 12:57 PM   #6
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One possible advantage to the 401k is better protection from lawsuits, depending on your state. In my state it doesn't matter.
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Old 04-06-2015, 01:13 PM   #7
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The ability to "get at" your 401K money between age 55 and 59 1/2 could be important--you can't do that without a big penalty once the money is in a tIRA (aside from using the 72t rule).
What is the big penalty for doing conversions from a traditional IRA? Setting off alarm bells for me. I know that its considered taxable but thought there was no penalty for doing the Roth conversions every year.
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Old 04-06-2015, 01:38 PM   #8
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A couple of answers.
- We fortunately don't need access to the funds before 59 1/2
- we have access to good vanguard fund options at a lower institutional cost than I could get in a Vanguard IRA
- we could be in the 15% bracket until we lose some kid and other tax deductions in a few years. Looks like will be in 25% at RMD timeframe. We probably won't be able to convert it all but would like to convert some when we can.

I guess this 401K-IRA and then ROTH-IRA a bit each year is our only option.

thanks everyone.
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Old 04-06-2015, 02:21 PM   #9
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What you say above is what I did/am doing so I'll share a bit about the process that I have used the last couple years which has worked well for me. In December of each year I rebalance, generally selling stocks in our taxable accounts to raise the liquidity that I need for the following year, so I then know my long term capital gain for the year (other then LTCG distributons). Then, after year-end dividend and capital gain distributions have been made I do a pro-forma tax return for the year based on everything I know at that juncture, calculate how much of a Roth conversions I can do to the top of the 15% tax bracket and then I do the Roth conversion.

If anything, I do a bit more Roth conversion than what I need. When I finalize my return I recharacterize any excess of over the 15% tax bracket because that small excess is effectively taxed at 30%.
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Old 04-06-2015, 02:45 PM   #10
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What is the big penalty for doing conversions from a traditional IRA? Setting off alarm bells for me. I know that its considered taxable but thought there was no penalty for doing the Roth conversions every year.
No penalties for Roth conversions. Only plain withdrawals before age 59.5 from the tIRA would be penalized, in addition to taxes. With the 401k there is a possibility of plain withdrawals from 55 to 59.5 without penalty, if allowed by your plan.
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Old 04-06-2015, 03:41 PM   #11
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Originally Posted by ArkTinkerer What is the big penalty for doing conversions from a traditional IRA? Setting off alarm bells for me. I know that its considered taxable but thought there was no penalty for doing the Roth conversions every year
No penalties for Roth conversions. Only plan withdrawals before age 59.5 from the tIRA would be penalized, in addition to taxes. With the 401k there is a possibility of plain withdrawals from 55 to 59.5 without penalty, if allowed by your plan.
Right. So, if the OP needed to have spending money from retirement accounts before age 59.5, then the 401k would be the place to get them (if allowed by the plan--apparently it ain't in his/her case). Contributions (not earnings) in Roth IRAs can be withdrawn any time without penalty, but conversions into a Roth aren't considered contributions, so there's a 5 year waiting period before they can be withdrawn without penalty. Thus, the OP could not simply convert his 401K to a Roth each year up to the applicable tax bracket limit and then withdraw that money as needed to meet living expenses.
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Old 04-06-2015, 04:36 PM   #12
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samclem, in post#8 the OP indicates that access to the funds before 59 1/2 is not an issue so a 401k rollover and periodic Roth conversions are a good solution for the OP.
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Old 04-06-2015, 06:51 PM   #13
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samclem, in post#8 the OP indicates that access to the funds before 59 1/2 is not an issue so a 401k rollover and periodic Roth conversions are a good solution for the OP.
Agreed. I was just attempting to provide a little more info for the benefit of AktTinkerer and anyone else who might find it useful.
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