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Roth IRA Conversion
Old 11-13-2012, 05:55 PM   #1
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Roth IRA Conversion

I plan to ER next year once I max out my 401K + match. Basically I'll be putting 100% of my income (minus SS/Medicare/Health Insurance) into my 401K and will max. out early Feb.

So I'll technically have no earned income from work in 2013 as it will all go into the tax deferred 401K..

I then plan on converting the maximum amount possible from my traditional IRA into a Roth IRA while staying within the 15% tax bracket.

The question I have and can't find an answer to is: Since the conversion of traditional IRA funds into Roth IRA funds is considered earned income, does this taxable "earned income" count as income that can then be the basis for my 2013 Roth IRA contribution?
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Old 11-13-2012, 06:28 PM   #2
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Originally Posted by Spokane2303 View Post
I plan to ER next year once I max out my 401K + match. Basically I'll be putting 100% of my income (minus SS/Medicare/Health Insurance) into my 401K and will max. out early Feb.

So I'll technically have no earned income from work in 2013 as it will all go into the tax deferred 401K..

I then plan on converting the maximum amount possible from my traditional IRA into a Roth IRA while staying within the 15% tax bracket.

The question I have and can't find an answer to is: Since the conversion of traditional IRA funds into Roth IRA funds is considered earned income, does this taxable "earned income" count as income that can then be the basis for my 2013 Roth IRA contribution?
No, IIRC a tIRA to Roth conversion is income, but not earned income. If you want to play that angle, you would need to stay on until your earnings are equal to your 401k contribution + your Roth contribution so your W-2 income would be equal to the Roth contribution.

So for example, if your 401k contribution is $23k and you want to contribute $6,500 to a Roth, you would need to stay on until you earn $29.5k. Be aware that you would need to also check to see how you medical insurance, HSA (if any) affect this total. Your HR department or CPA should be able to help you through the details.

YMMV
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Old 11-13-2012, 06:46 PM   #3
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I agree with pb4uski even though the tIRA dollars look like earned income, swim like earned income, and quack like earned income.
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Old 11-13-2012, 06:48 PM   #4
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Thanks!

I thought that might be the case..
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Old 11-14-2012, 09:55 AM   #5
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couldn't you just work another 2 weeks and have enough "income" to make a straight Roth contribution?
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Old 11-14-2012, 11:40 AM   #6
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couldn't you just work another 2 weeks and have enough "income" to make a straight Roth contribution?
Good idea - wish I'd thought of that.

Actually it might only be an additional week to 10 days.
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Old 11-14-2012, 07:05 PM   #7
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Yes, I'll most likely delay and work a couple extra weeks.

Though I'm starting to feel that I'm falling into the "one more year" category of reasons to delay my ER.

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Old 11-14-2012, 09:11 PM   #8
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Nooooooo

Don't go there!

The objective is to just work long enough in 2013 so that your earnings and unpaid vacation pay are enough to fully fund your 2013 401k contribution, Roth contribution, HSA, etc. So that on the day you leave your W-2 earnings are $6,500 (so you can make a $6,500 Roth contribution). That's all.

It is a slippery slope.
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Old 11-15-2012, 10:49 AM   #9
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Too bad you don't have a Roth 401k available.
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Old 11-15-2012, 11:36 AM   #10
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Originally Posted by pb4uski View Post
Good idea - wish I'd thought of that.

Actually it might only be an additional week to 10 days.
oops, yes, you should have thought about that....

In other news, I fail to see how a couple weeks falls into the "one more year." I know things add up quickly...And on the other side of the coin, if those 2 weeks are truly important to you, does the Roth contribution really matter?
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Old 11-15-2012, 12:32 PM   #11
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Take the extra 2 weeks (or 10 days - whichever comes first, heh, heh) and go around saying your good-bye's. Or clean out your desk - slowly. W*rk? What's that?? Are they going to fire you (since you are FI/REing yourself already?)

On a personal note: I could have wished to w*rk at a j*b (c*reer?) that paid $6,500 in 2 weeks. No such luck (nor good management) on my part. Good for you!!

On another personal note: Relayed in these pages previously, FWIW your Roth conversion "income" counts as "income" toward getting a mortgage if you think you might be in a position to need one in the near future. Just one of those "stranger-than-fiction" kind of facts. YMMV
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