Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
ROTH conversions - yet again !
Old 01-17-2014, 04:15 PM   #1
Thinks s/he gets paid by the post
Live And Learn's Avatar
 
Join Date: Feb 2012
Location: Tampa Bay Area
Posts: 1,689
ROTH conversions - yet again !

I'm getting myself confused with too much reading on this and I'm losing the plot.

Vitals:
  • My income $0
  • DH income $12k
  • 1 401k - mine
  • No IRAs
  • Taxable account yields > $15k in dividends
  • Both over age 50
I want start a ROTH IRA to reduce RMDs. I'd like to max out contributions each year for at least the next 6 years (when DH starts receiving SSI), or until I reach 70 (in 19 years) if possible.

Question:
  • What is the best way to do this and what are the mechanics and tax implications ?
You don't need to answer here if you can point me to "The Dummies guide to 401k to Roth conversions". I just haven't found that magic article yet.

Thanks !!
__________________

__________________
"For the time being no discipline brings joy, but seems grievous and painful; but afterwards it yields a peaceable fruit of righteousness to those who have been trained by it." ~
Hebrews 12:11

ER'd in June 2015 at age 52. Initial WR 3%. 50/40/10 (Equity/Bond/Short Term) AA.
Live And Learn is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 01-17-2014, 04:26 PM   #2
Thinks s/he gets paid by the post
 
Join Date: Jan 2006
Posts: 2,925
Search Results

start reading................
__________________

__________________
kaneohe is offline   Reply With Quote
Old 01-17-2014, 04:33 PM   #3
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
braumeister's Avatar
 
Join Date: Feb 2010
Location: Northern Kentucky
Posts: 8,591
First, look at what your RMDs are likely to be when they start.

Retirement Plans FAQs regarding Required Minimum Distributions

If it appears that they will be high enough to push you into a higher tax bracket, then you should consider starting conversions. If not, relax.
__________________
braumeister is online now   Reply With Quote
Old 01-17-2014, 05:27 PM   #4
Thinks s/he gets paid by the post
Live And Learn's Avatar
 
Join Date: Feb 2012
Location: Tampa Bay Area
Posts: 1,689
Quote:
Originally Posted by braumeister View Post
First, look at what your RMDs are likely to be when they start.

Retirement Plans FAQs regarding Required Minimum Distributions

If it appears that they will be high enough to push you into a higher tax bracket, then you should consider starting conversions. If not, relax.
Thanks - I do believe that RMDs will push me into a higher tax bracket, hence the preplanning.
__________________
"For the time being no discipline brings joy, but seems grievous and painful; but afterwards it yields a peaceable fruit of righteousness to those who have been trained by it." ~
Hebrews 12:11

ER'd in June 2015 at age 52. Initial WR 3%. 50/40/10 (Equity/Bond/Short Term) AA.
Live And Learn is offline   Reply With Quote
Old 01-17-2014, 05:49 PM   #5
Thinks s/he gets paid by the post
obgyn65's Avatar
 
Join Date: Sep 2010
Location: midwestern city
Posts: 4,061
For what it is worth, I plan to start Roth conversions in my mid 50s. I will try to minimize taxes while planning for RMDs and postponing deferred annuities which will begin later in life. Maybe I will do a small conversion i.e. $5k the first year to better understand its mechanics and the tax impact.
Quote:
Originally Posted by Live And Learn View Post

Thanks - I do believe that RMDs will push me into a higher tax bracket, hence the preplanning.
__________________
Very conservative with investments. Not ER'd yet, 48 years old. Please do not take anything I write or imply as legal, financial or medical advice directed to you. Contact your own financial advisor, healthcare provider, or attorney for financial, medical and legal advice.
obgyn65 is offline   Reply With Quote
Old 01-18-2014, 06:52 AM   #6
Full time employment: Posting here.
 
Join Date: Jul 2011
Posts: 721
Quote:
Originally Posted by Live And Learn View Post
I want start a ROTH IRA to reduce RMDs. I'd like to max out contributions each year for at least the next 6 years (when DH starts receiving SSI), or until I reach 70 (in 19 years) if possible.

Question:
  • What is the best way to do this and what are the mechanics and tax implications ?
Not sure how good I'll be in summing it up here, but I'll take a shot. You need to first run a projection (or have your accountant do it) to determine your likely marginal tax bracket after RMDs begin. Then you should determine how much of your 401k you can shift to Roth without getting into that same bracket. For example, if you know you'll likely be in the 25% bracket after RMDs, then you would only convert to Roths the amount that would push you up into the 15% bracket. Essentially, you want to pay a little taxes now to avoid a lot of taxes later so you have to find that happy place. One important issue though is you'd have to roll your 401k into a rollover IRA to start doing conversions... that may not work well for you if you're taking "over 55" distributions from your 401k to live on right now. If you decide the rollover works for you, here are the mechanics:
1)Open a Rollover IRA- pick a low cost provider like Vanguard, TD Ameritrade or Fidelity
2)Ask employer for a distribution form and request a tax-free rollover distribution to your new Rollover IRA
3)Once the funds arrive in cash, invest the proceeds per your investment plan
4)Convert the amount of your Rollover that puts your taxable income where you want (based on tax projection)
5)Don't withhold for taxes on the conversion so the entire converted amount remains invested. Pay the taxes at the end of the year when you file your 2014 return with funds from your taxable account or other savings.

I don't know if I over-simplified it or under-simplified it but I hope that helped!
__________________
panacea is offline   Reply With Quote
Old 01-18-2014, 11:12 AM   #7
Thinks s/he gets paid by the post
Live And Learn's Avatar
 
Join Date: Feb 2012
Location: Tampa Bay Area
Posts: 1,689
Quote:
Originally Posted by panacea View Post
If you decide the rollover works for you, here are the mechanics:
1)Open a Rollover IRA- pick a low cost provider like Vanguard, TD Ameritrade or Fidelity
2)Ask employer for a distribution form and request a tax-free rollover distribution to your new Rollover IRA
3)Once the funds arrive in cash, invest the proceeds per your investment plan
4)Convert the amount of your Rollover that puts your taxable income where you want (based on tax projection)
5)Don't withhold for taxes on the conversion so the entire converted amount remains invested. Pay the taxes at the end of the year when you file your 2014 return with funds from your taxable account or other savings.

I don't know if I over-simplified it or under-simplified it but I hope that helped!
Thanks ! this is where I get confused:

  • Do I need to rollover the entire 401k at one time or can I roll over 13k per year and then convert to ROTH from there ?
  • Do I need to have earned (salary) income to fund the ROTH ? In other words, can I do a conversion even if earned income is zero ?
  • I read somewhere that you can't have any tIRAs to do a conversion - something about prorated taxes .... totally confused by this !
The point about not paying the taxes immediately is a good one !
__________________
"For the time being no discipline brings joy, but seems grievous and painful; but afterwards it yields a peaceable fruit of righteousness to those who have been trained by it." ~
Hebrews 12:11

ER'd in June 2015 at age 52. Initial WR 3%. 50/40/10 (Equity/Bond/Short Term) AA.
Live And Learn is offline   Reply With Quote
Old 01-18-2014, 11:22 AM   #8
Moderator
Alan's Avatar
 
Join Date: Jul 2005
Location: Eee Bah Gum
Posts: 21,086
Quote:
Originally Posted by Live And Learn View Post
Thanks ! this is where I get confused:

  • Do I need to rollover the entire 401k at one time or can I roll over 13k per year and then convert to ROTH from there ?
  • Do I need to have earned (salary) income to fund the ROTH ? In other words, can I do a conversion even if earned income is zero ?
  • I read somewhere that you can't have any tIRAs to do a conversion - something about prorated taxes .... totally confused by this !
The point about not paying the taxes immediately is a good one !
Why do you want to do a phased rollover since there is zero taxes whichever way you go? If it is because you really like the choices and costs in your 401k then that is fine, but you'll need to talk to your 401k provider to see if they allow partial rollovers.

You don't need earned income to do ROTH conversions, you just can't make more contributions.

Both my wife and I had tIRA's when we moved our 401ks to Rollover IRA's. There were zero tax implications.
__________________
Retired in Jan, 2010 at 55, moved to England in May 2016
Now it's adventure before dementia
Alan is offline   Reply With Quote
Old 01-18-2014, 11:28 AM   #9
Thinks s/he gets paid by the post
Live And Learn's Avatar
 
Join Date: Feb 2012
Location: Tampa Bay Area
Posts: 1,689
Quote:
Originally Posted by Alan View Post
Why do you want to do a phased rollover since there is zero taxes whichever way you go? If it is because you really like the choices and costs in your 401k then that is fine, but you'll need to talk to your 401k provider to see if they allow partial rollovers.

You don't need earned income to do ROTH conversions, you just can't make more contributions.

Both my wife and I had tIRA's when we moved our 401ks to Rollover IRA's. There were zero tax implications.
This helps ! I thought that I couldn't convert part of a tIRA - that there was some sort of prorated tax thingy if you did that. Now I know ! When I said I need the "dummies guide to ROTH conversions" I wasn't kidding
__________________
"For the time being no discipline brings joy, but seems grievous and painful; but afterwards it yields a peaceable fruit of righteousness to those who have been trained by it." ~
Hebrews 12:11

ER'd in June 2015 at age 52. Initial WR 3%. 50/40/10 (Equity/Bond/Short Term) AA.
Live And Learn is offline   Reply With Quote
Old 01-18-2014, 11:29 AM   #10
Thinks s/he gets paid by the post
Live And Learn's Avatar
 
Join Date: Feb 2012
Location: Tampa Bay Area
Posts: 1,689
Oh - the other question - is there a dollar limit on the amount I can convert annually ?
__________________
"For the time being no discipline brings joy, but seems grievous and painful; but afterwards it yields a peaceable fruit of righteousness to those who have been trained by it." ~
Hebrews 12:11

ER'd in June 2015 at age 52. Initial WR 3%. 50/40/10 (Equity/Bond/Short Term) AA.
Live And Learn is offline   Reply With Quote
Old 01-18-2014, 11:36 AM   #11
Recycles dryer sheets
Sirka's Avatar
 
Join Date: Mar 2011
Location: Southern CA
Posts: 200
[/QUOTE this is where I get confused:

1. Do I need to rollover the entire 401k at one time or can I roll over 13k per year and then convert to ROTH from there ?

2. The point about not paying the taxes immediately is a good one ![/QUOTE]

1. I would contact the 401k administrator about this. Usually you must take the whole 401k amount and roll it into IRA.

2. About the taxes, I think you will need to start estimating & making quarterly tax payments to avoid penalty. Don't wait till the end of year and be shocked like I was. California, in my case, was not nice in pointing it out to me. Penalty - first to get my attention.
__________________
Hard to say what it was, when it isn't.
FIRED in 2005 @ 55
Sirka is offline   Reply With Quote
Old 01-18-2014, 11:43 AM   #12
Recycles dryer sheets
Sirka's Avatar
 
Join Date: Mar 2011
Location: Southern CA
Posts: 200
Quote:
Originally Posted by Live And Learn View Post
Oh - the other question - is there a dollar limit on the amount I can convert annually ?
I only convert amount up to our 15% tax bracket (about $25K each year).
__________________
Hard to say what it was, when it isn't.
FIRED in 2005 @ 55
Sirka is offline   Reply With Quote
Old 01-18-2014, 12:09 PM   #13
Moderator
Alan's Avatar
 
Join Date: Jul 2005
Location: Eee Bah Gum
Posts: 21,086
Quote:
Originally Posted by Live And Learn View Post
Oh - the other question - is there a dollar limit on the amount I can convert annually ?
There is no dollar limit, just limit the amount you convert each year to minimize your taxes, as sirka points out above.
__________________
Retired in Jan, 2010 at 55, moved to England in May 2016
Now it's adventure before dementia
Alan is offline   Reply With Quote
Old 01-18-2014, 12:34 PM   #14
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Chuckanut's Avatar
 
Join Date: Aug 2011
Location: West of the Mississippi
Posts: 6,323
Quote:
Originally Posted by Alan View Post
There is no dollar limit, just limit the amount you convert each year to minimize your taxes, as sirka points out above.
The more your convert, the more taxes Uncle Sam collects. Why would he limit that?
__________________
The worst decisions are usually made in times of anger and impatience.
Chuckanut is offline   Reply With Quote
Old 01-18-2014, 03:25 PM   #15
Full time employment: Posting here.
 
Join Date: Jul 2011
Posts: 721
Quote:
Originally Posted by Live And Learn View Post
This helps ! I thought that I couldn't convert part of a tIRA - that there was some sort of prorated tax thingy if you did that. Now I know ! When I said I need the "dummies guide to ROTH conversions" I wasn't kidding
Any amount you convert to Roth is fully taxable at your marginal tax rate. I think you are confusing the conversion of pre-tax dollars (your 401k) with converting a nondeductible Traditional IRA, which isn't taxable if you convert immediately before any earnings are accumulated... as long as you have no other IRAs. Irrelevant in this case since you'll owe tax on the entire converted amount.
__________________
panacea is offline   Reply With Quote
Old 01-18-2014, 04:17 PM   #16
Recycles dryer sheets
 
Join Date: Jun 2011
Posts: 182
Good topic for me since I have no TIRAs and when I retire will have a significanct 401k that I would like to do some partial conversions. I have never been able to get an answer on the question: Are partial 401k to roth IRA conversions allowed? And I guess like Alan mentioned, it depends on the specifics of the 401k plan. We have a somewhat Draconian plan using a local bank that my small business is joined at the hip with, so I'm not too optimistic they will be helpful if I choose this path. This has already been stated but I also think going into retirement with some Roth monies will allow more flexibility when dealing with the taxes (I mean the growing army of nasty socialist ants who didn't save and now want others to pay).
__________________
This is no social crisis, just another tricky day for you...
BigE is offline   Reply With Quote
Old 01-18-2014, 04:33 PM   #17
Thinks s/he gets paid by the post
 
Join Date: Jan 2006
Posts: 2,925
Quote:
Originally Posted by BigE View Post
Good topic for me since I have no TIRAs and when I retire will have a significanct 401k that I would like to do some partial conversions. I have never been able to get an answer on the question: Are partial 401k to roth IRA conversions allowed? And I guess like Alan mentioned, it depends on the specifics of the 401k plan. ).
As you mentioned, you need to ask your 401K administrator about this. It is common that you either take all or take nothing but this should not be a hindrance since you can move all to TIRA and then partial conversions from there.
__________________
kaneohe is offline   Reply With Quote
Old 01-18-2014, 04:55 PM   #18
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
NW-Bound's Avatar
 
Join Date: Jul 2008
Posts: 19,401
How much to do Roth conversion depends on how much tax you are willing to pay, and generally one wants to stay within the lower bracket, namely 15% tax, as others have noted.

In terms of 401k to tIRA prior to Roth conversion, I do not know how easy or cumbersome it is to do partial rollover 401k/tIRA every year or if that is possible with all 401k's. We have multiple 401k's, and one of mine has been completely rolled over to a tIRA at Schwab. I also have a Roth IRA at Schwab. As a married couple filing a joint tax return, it does not matter which of our tIRA to do conversion from, so I will continue to roll over this tIRA account until it's depleted, then move on to another 401k or tIRA.

Regarding the mechanics, conversion between my tIRA to the Roth IRA at Schwab is as easy as the following. Log on to my account, select "Roth IRA Conversion", then designate which individual stock or MF and how many shares of it I want to transfer from the tIRA account to the Roth account. Hit "confirm" or something like that, then it's done.

I then go to the account summaries and verify that the designated shares of stocks or MFs now appear in the Roth, and deducted off the tIRA. The transfer is instantaneous. In late January, Schwab will send me a statement to document that Roth conversion for tax filing purposes.
__________________
"Old age is the most unexpected of all things that can happen to a man" -- Leon Trotsky
NW-Bound is offline   Reply With Quote
Old 01-18-2014, 05:32 PM   #19
Thinks s/he gets paid by the post
Live And Learn's Avatar
 
Join Date: Feb 2012
Location: Tampa Bay Area
Posts: 1,689
I knew this forum would give me the help I needed !


So I think this is my plan:
Contribute 90% of DH's income into a ROTH IRA. Take distributions from my taxable account to support my WR. Hopefully this means I will have a "gap" to filling the 15% tax bracket. The thing I need to figure out if it is is better for me to top off the 15% tax bracket with ROTH IRA conversions (vs "tax gain harvesting"). That is something I can tackle -- it was the whole conversion / limits thing that was getting in my way of figuring this out !


Onward and upward !


Thanks folks
__________________
"For the time being no discipline brings joy, but seems grievous and painful; but afterwards it yields a peaceable fruit of righteousness to those who have been trained by it." ~
Hebrews 12:11

ER'd in June 2015 at age 52. Initial WR 3%. 50/40/10 (Equity/Bond/Short Term) AA.
Live And Learn is offline   Reply With Quote
Old 01-20-2014, 09:48 PM   #20
Recycles dryer sheets
Cat-tirement's Avatar
 
Join Date: Mar 2013
Posts: 188
IIRC, some years back my 401k contributions were prematurely limited based on % of income rather than a fixed $ amount. Something about "highly compensated employees". (I had some bonuses and extra hours, which still didn't seem that high compared to the management.) So it's possible that you might not be allowed 90%. Maybe others here know more details about how that works.
__________________

__________________
How can you tell when a cat is retired?
Cat-tirement is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


 

 
All times are GMT -6. The time now is 07:13 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.