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Roth IRA conversions before 401k rollover
Old 08-30-2013, 06:39 PM   #1
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Roth IRA conversions before 401k rollover

My current tIRA and Roth IRA balances are fairly modest, mid 5-figures combined.

My 401k is about 10 times as much.

I just did a Vanguard Financial Plan and the planner suggested that I may want to convert my tIRA to Roth IRA before I FIRE and roll over my 401k into my tIRA.

Because once I do that, the tax basis changes and any conversions would incur a lot of taxes.

Currently my tIRA has modest gains.

However, I see in a lot of threads here that people are doing it after FIRE, so that they can engineer their income, to stay below to get ACA subsidies or other reasons (minimize taxes in general?).

My AGI is being padded almost by 2/3 over my salary due to cap gains distributions and dividends from my taxable accounts (which are like 85% of my retirement assets).

Still make sense to do it?

Single, no children so I think the subsidy limit for ACA would be like $46k or something like that. I plan to have a larger annual budget, though spending in 2012 was actually about $49k, without paying for health insurance.
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Old 08-30-2013, 07:06 PM   #2
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Do a partial or full Roth conversion if your tax bracket is equal or lower to what it would be in retirement, especially when you have mandatory distributions. It may not make sense to do this while you have a salary. The only other reason I know of to convert now is if you want to get the ACA subsidy, so you'd want to take as much income as you can this year before you have to watch the ACA cap.

[Edit: removed wrong info about mixing pre and post tax deductions, assuming growing_older covered it correctly.]
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Old 08-30-2013, 07:37 PM   #3
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Your in a situation somewhat like we are. The fundamental issue, we were in a high tax bracket when we were still working, but then we dropped to a ridiculously low bracket when I retired. When we reach 70 or thereabouts, Soc Sec and RMD's will force us into a higher bracket again and taxes on Soc Sec as well. So it could be smart to at least use up the full benefit of ZERO taxes on qualified dividends/LTCG in the middle period - you can either fill what's left after withdrawals for expenses with Roth conversion or withdrawals from tax deferred after age 59 to reduce RMD later and/or other LTCGs from sales/rebalancing. Lots of moving parts tax wise, not to mention who knows how tax code may change in the next many years.

I am looking for definitive answers, if I find something I will share it, but so far it looks like I'm going to have to grind it out on Excel myself.
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Old 08-30-2013, 07:41 PM   #4
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If you have post-tax money in your IRA now, you can convert that to Roth paying only tax on the gains. However, no matter how many IRAs you have the pre-tax and post-tax ratio is used to determine how much of the conversion is taxable. If you have only a little pre-tax money in your current IRA, your adviser may be suggesting you do a conversion before you roll all that 401k (pre-tax) money into an IRA and significantly raise the pre-tax / post=tax ratio for all future conversions. Keeping the money in separate IRA accounts doesn't help, the ratio is figured across all IRAs; but keeping the money in the 401k does matter because the ratio is only based on IRA balances.
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Old 08-30-2013, 08:22 PM   #5
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Quote:
Originally Posted by growing_older View Post
If you have post-tax money in your IRA now, you can convert that to Roth paying only tax on the gains. However, no matter how many IRAs you have the pre-tax and post-tax ratio is used to determine how much of the conversion is taxable. If you have only a little pre-tax money in your current IRA, your adviser may be suggesting you do a conversion before you roll all that 401k (pre-tax) money into an IRA and significantly raise the pre-tax / post=tax ratio for all future conversions. Keeping the money in separate IRA accounts doesn't help, the ratio is figured across all IRAs; but keeping the money in the 401k does matter because the ratio is only based on IRA balances.
+1

That's the only reason I can think of that would make it necessary to wait on the 401k to tIRA rollover. If the tIRA is all pre-tax then I'm stumped.

And hopefully there's no need to rollover the 401k exactly when you retire, though I guess your employer may require or promote that. You should be able to leave the 401k in place and roll it over whenever you want after you retire.
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Old 08-30-2013, 08:59 PM   #6
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Quote:
Originally Posted by growing_older View Post
If you have post-tax money in your IRA now, you can convert that to Roth paying only tax on the gains. However, no matter how many IRAs you have the pre-tax and post-tax ratio is used to determine how much of the conversion is taxable. If you have only a little pre-tax money in your current IRA, your adviser may be suggesting you do a conversion before you roll all that 401k (pre-tax) money into an IRA and significantly raise the pre-tax / post=tax ratio for all future conversions. Keeping the money in separate IRA accounts doesn't help, the ratio is figured across all IRAs; but keeping the money in the 401k does matter because the ratio is only based on IRA balances.
This more or less sounds like what he was saying. Both my tIRA and ROTH are all with post-tax, non-deductible money so the gains wouldn't be that great.

But my 401k is all pre-tax contributions plus gain.

So once I rolled over, my taxable base would be way higher.

I've converted some funds from tIRA to ROTH once or twice. But then I could only contribute to tIRA in following years because of the income eligibility limits for ROTH contributions.

Unless I'm reading the ACA premiums and total out of pocket maximums wrong, I think I'm okay without the subsidy so trying to get the subsidy wouldn't be a motivation for converting.
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Old 08-30-2013, 10:02 PM   #7
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Having post-tax money in a tIRA is one of the main reasons to convert to Roth. Typically the tax on such conversion is small since you'll only pay it on the gain, not on the contribs too. Then, once in Roth, all the subsequent growth is tax free.
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Old 08-31-2013, 03:15 AM   #8
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There is no reason you can't roll over your 401K into an separate IRA, and then convert a portion of your rolled over IRA into a Roth before SS, and/or pension kick in.

As general rule your lowest tax bracket will probably be in your 50s. Assuming that you have enough cash in your taxable account and it sounds like you due making a modest ROTH conversion most years in your 50 gives you a lot of flexibility in future years.
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Old 08-31-2013, 09:22 AM   #9
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I don't know your plans for FIRE and retire so this may not be relevant........and you will want to confirm independently........but I believe it is not only the order.....convert TIRA before rollover of 401K but also the timing that is important. If you do in the correct order but do both in the same year, I think you may still end up w/ the basis problem because the formula looks at your TIRA at year end (which would then include the 401K). It may be better to do the 2 events in separate yrs to eliminate that problem.
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Old 08-31-2013, 11:25 AM   #10
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Currently my tIRA is about 20k, my ROTH is about 35k.

I could contribute another 6k for this year and convert all of it?

But yeah, I will have to find out if I can defer the rollover even if I FIRE this year.
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Old 08-31-2013, 01:11 PM   #11
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Essentially a long-delayed backdoor Roth contribution then. You can google "backdoor Roth" and find most of the advice we've been giving here. Yes, add this year's 6.5k (if you're old enough) and convert the whole thing, though you can do it in as many chunks as you'd like. And make sure you can hold off the rollover until next year before Roth converting.
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Old 12-03-2013, 01:01 PM   #12
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Making a note for myself:


Backdoor Roth: A Complete How-To
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