Converting a traditional IRA to a Roth

[summer2007]

My Dad is 67 and still working and he has a small traditional IRA of around 30k that he would like to convert to a Roth IRA.

I already found out for him that you can't convert a 401k until you retire.

What I wanted to know is if he can convert his traditional IRA to a Roth while he is still working and if he can convert the whole 30k of it this year?

I think he can do this but I wanted to make sure...I figured someone would know this instantly on here!

Thanks

Jim

 

[ziggy29]

My Dad is 67 and still working and he has a small traditional IRA of around 30k that he would like to convert to a Roth IRA.

I already found out for him that you can't convert a 401k until you retire.

Have you confirmed with the plan documents? At age 67, a fair number of plans would allow at least partial rollovers into an IRA. There is no law preventing in-service rollovers from a 401K to an IRA. Most plans prohibit it in the general case but some have a few exceptions for older employees.

And yes, he can do Roth conversions while still working as long as he's under the income limits ($100,000 in 2009, but see below). So if his income is $70K or less for 2009, he could convert the whole $30K. If he's between $70K and $100K, he could as much as he could fit until it kicked his MAGI up to $100K. Over $100K he'd not be able to convert in 2009. BUT in 2010 (unless the law changes) there will be no income limit to a Roth conversion.

Frankly, I'd wait for two reasons: first of all, in 2010 there is no income limit at all and the tax can be paid over two years (2011 and 2012); secondly, if he'll be in a lower tax bracket when he retires, that's when I'd perform the conversion.

 

[Animorph]

It might be nice to convert while the IRA balance is low due to the current market, but taxes should determine the timing of your conversion. Just to say it explicitly, you will pay full income taxes for each dollar converted. It just adds to your income. I'm waiting for DW to retire before converting, so our income will be low and taxes on the conversion much lower than they would be now. Of course, you may be thinking of taxes rising in the future, so it's still a guessing game.

Some people on this board sound like they have planned on converting yearly up to the top of the 0% tax bracket each year, I believe. That has to be better than converting while working.

 

[meridiver]

And yes, he can do Roth conversions while still working as long as he's under the income limits ($100,000 in 2009, but see below). So if his income is $70K or less for 2009, he could convert the whole $30K. If he's between $70K and $100K, he could as much as he could fit until it kicked his MAGI up to $100K. Over $100K he'd not be able to convert in 2009. BUT in 2010 (unless the law changes) there will be no income limit to a Roth conversion.

I don't think this is correct. Until 2010, I think the rule has always been that as long as you are under the 100K income limit pre-conversion, you can convert any amount you want. The IRA amount that you do convert is excluded from the MAGI calculation, so if you had income of 90K, you could still convert the full 30K, even though that would push you over 100K for the year. If I'm wrong, then I'm in trouble because I converted a significant amount last year and my AGI was definitely above 100K by the time I was done.

I do agree, though, that it might be more advantageous to wait until 2010 to convert so that you can spread the tax out over two years.

 

[clifp]

My Dad is 67 and still working and he has a small traditional IRA of around 30k that he would like to convert to a Roth IRA.

I already found out for him that you can't convert a 401k until you retire.

What I wanted to know is if he can convert his traditional IRA to a Roth while he is still working and if he can convert the whole 30k of it this year?

I think he can do this but I wanted to make sure...I figured someone would know this instantly on here!

Thanks

Jim

Ziggy has it right. I'd also echo his point. There is no reason for a working person to due a Roth conversion. (Contribution yes Conversion no) I'd either wait until next year, when you can spread the conversion over two year or better wait until his is retired to do the conversion.

 

[Tadpole]

I think the answer to this is obvious but, since I don't like the obvious answer, I will ask any way. If a person converts money from deferred to Roth in 2010, are the taxes they pay in 2011 and 2012 based on their 2010 earnings or their 2011 and 2012 earnings?

 

[rjsciurus]

You might want to spend an hour or two looking at tax brackets (after deductions and credits, remember) and running his specific numbers before making decisions about converting before/after retirement. American retirement circumstances and tax law are so unique to individuals that there's really no other way to make a good decision.

It also might give you some insight into whether the conversion is useful at all. It's not a clear-cut choice for a 67-year-old, and probably a more complex decision than the Roth conversion limits/tax bracket issue.

 

[heyyou]

When Scott Burns writes about the "torpedo tax" resulting from RMDs on top of SS and/or pension, it is on RMDs from $400K+ IRAs. The larger RMDs forces most of your SS to become taxable. You pay tax on the RMD plus tax on your SS that was too little to be taxable before big RMD. There is some means testing for whose SS is taxable.

For the OP, my question is why does your Dad want to convert anything at his age? I agree with ziggy and clifp, do not convert while working. The conversion would drive his taxable annual income into a higher tax bracket than when he is retired, so there is not an advantage to paying the tax early.

Use some assumptions about return rates to project what his RMD's might be. Add that to his retirement income to see a comparison with his currently employed income. The whole point of conversions is to save taxes by paying less but early instead of paying more at a later date. Your Dad's intent on paying now may not be wise.

At age 59, I'm not highly interested in RMDs. I just read Scott Burns.

 

[summer2007]

Thanks everyone

My Dad when he retires will be concentrating on his 401k and he can't convert any of that while he is still working.

He could get some but probably not all of his taxable IRA into the 15% bracket and be done with taxes forever on the money and have no RMD to worry about at 70-1/2. So that is the reasons for thinking about converting to a Roth. And yes everyone's situation is different.

But listen to this!

He gets in touch with his bank where he has his taxable IRA and they tell him he can only convert 6k a year and he will have to close his taxable IRA account and have a 365 day penalty on his CD's in the account!

I think this is totally wrong and the lady that told him this probably (hopefully) has no clue what she is talking about!

Jim

 

[LOL!]

I would like to re-iterate what ziggy29 wrote about. Check if Dad's 401(k) plan allows in-service withdrawals/rollovers for employees older than 59 1/2.

Our company plan has a curious statistic: Folks over age 59 1/2 but still working have very few assets in the plan. I would've thought that the older workers would have accumulated the largest balances. Well, they are smart and move their money to lower-cost IRAs as soon as they are able to do so.

 

[summer2007]

Thanks LOL!

My Dad's 401k is with Vanguard and whoever he talked to there said he couldn't convert anything while he was still working.

But the person he talked to might have been wrong so maybe I should tell him to look into it again.

Jim

 

[LOL!]

Vanguard is a low-cost provider, so going to a rollover IRA would likely be of no benefit to him with respect to costs.

And you have to be careful when talking to reps with your vocabulary. I'm not sure if the word "convert" was used, but you cannot "convert" the 401(k) money, but you may be able to do a "rollover" to an IRA.

 

[Animorph]

Is he holding CD's in the bank IRA account? Such as a 5-year ladder of $6k per year? You may indeed need to let them expire and not roll-over before you have money available within the IRA to convert (without a one year interest penalty). Doesn't seem worth it to incur a CD interest penalty just to convert to a Roth a little early. Converting $6k a year is not too bad.

It might be possible to convert by just transferring the CD's into a Roth without selling them, assuming they are somewhat transportable (into a Vanguard Roth account say), or the bank offers a Roth option. For example, I was able to transfer fund shares from my 401k directly to a traditional IRA (both with Fidelity) without selling them, a "transfer in kind". You have to do this with the help of the new Roth account company. You can't do it yourself, but it's a common thing.