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Convert existing IRA (pay tax on gains only) before my 401k converts?
Old 04-04-2018, 09:59 AM   #1
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Convert existing IRA (pay tax on gains only) before my 401k converts?

43 years old and plan to work 4-5 more years. Ideally I would have more in my taxable accounts and less in my tax deferred. I have one IRA (traditional) worth $50k. Of that, $18k is gains, $32k was contributed after tax (was married and exceeded all contribution limits -didn't know about back door roth contributions at the time.) When I quit working, my pension balance and 401k will become IRA money. After all deductions, my marginal tax rate today is combined 29% state and federal. I would pay $5,200 tax to convert the $50k IRA to a Roth (based on only taxing the $18k portion.) I'm wondering if I should do that this year to get some money transferred into my "available in 2023" bucket at 10% tax rate because once I convert my other accounts to IRAs, the $32k that I've already paid tax on will become really diluted. Moving this $50k over to my conversion ladder would go from being 64% tax free ($32k out of $50k) to 3% tax free ($32k out of $1 million.) Mathematically, the 3% non taxable portion of $1MM would provide the same result if all gets taxed eventually anyway...but I wondering if it's worth it to give me more money available in the "first five years" bucket of money that I plan to live on while building my ladder out. Is this faulty logic?
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Old 04-04-2018, 10:24 AM   #2
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I was in a similar situation but I was able to keep my 401k until the following tax year. I retired early in the year, being paid less than 3 months pay. Since my taxable income was way down for that year I converted the whole of my tIRA which had a large basis from many years of non-deductible contributions. The following year I rolled over my 401k into an IRA.
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Old 04-04-2018, 11:39 AM   #3
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I think that you might be better off to wait until you stop working assuming that you will be in a lower tax bracket in the first full year of retirement and do it then... but do it before you rollover any 401k money to a tIRA.

So you could A) drain the existing IRA which will generate $18k in pension income (plus growth from today to then)... and then B) rollover your 401k to a new and different tIRA. If you can do do A in one tax year and B in the next then it would be ideal but even if they were just separted by a few days where you have no IRA that would probably be fine.
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Old 04-04-2018, 11:53 AM   #4
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Quote:
Originally Posted by pb4uski View Post
............................

So you could A) drain the existing IRA which will generate $18k in pension income (plus growth from today to then)... and then B) rollover your 401k to a new and different tIRA. If you can do do A in one tax year and B in the next then it would be ideal but even if they were just separted by a few days where you have no IRA that would probably be fine.
If you do A) and B) in the same yr, doesn't the yr end value of the 401K/IRA ends up on line 6 of the 8606, effectively diluting the basis during the conversion and resulting in more tax? Better to do in separate years.
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Old 04-04-2018, 12:44 PM   #5
Confused about dryer sheets
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I will be looking into the timing of rolling over my 401k. If I can delay that for a year, that will be my best bet. If not, I have till Dec 31st to decide if I should make the conversion this year or wait. It'd be great to wait and then try to move over as much as I can at a lower tax bracket when I'm not actively employed and just living off savings.

As always, thanks for the responses!
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Old 04-04-2018, 02:00 PM   #6
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If you do A) and B) in the same yr, doesn't the yr end value of the 401K/IRA ends up on line 6 of the 8606, effectively diluting the basis during the conversion and resulting in more tax? Better to do in separate years.
Agree... to achieve the OP's objective it should be done in separate tax years.... but depending on his plans and other income, A could be done in December 20XX and B in January 20xx+1.
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