First year of FIRE question of Roth conversion

[Surewhitey]

So we're in our first official year of little to no income so we are in a low tax bracket to say the least. Would it make sense to roll over as much as possible from our 401k to a Roth IRA up to, say, the top of the 15% tax bracket?

We have 15+ years before we can get to it and I'm thinking the growth will be better as I'll have more options to invest in.

My thoughts are that the 35% (fed)+9% (state) tax we would have paid will now be taxed at 0-15% this year. Do I have the "right" idea? We have the funds to pay the tax when the time comes...I'm thinking $70-80k to roll over.

Thanks in advance.
ss

 

[MichaelB]

So we're in our first official year of little to no income so we are in a low tax bracket to say the least. Would it make sense to roll over as much as possible from our 401k to a Roth IRA up to, say, the top of the 15% tax bracket?

We have 15+ years before we can get to it and I'm thinking the growth will be better as I'll have more options to invest in.

My thoughts are that the 35% (fed)+9% (state) tax we would have paid will now be taxed at 0-15% this year. Do I have the "right" idea? We have the funds to pay the tax when the time comes...I'm thinking $70-80k to roll over.

Thanks in advance.
ss

Yes. Absolutely. You lock in the lower tax rate and also the money you move to the ROTH is no longer subject to RMD.

 

[Surewhitey]

Good point, I didn't even think of the RMD...

Would anyone recommend putting in over the 15% tax rate amount?

 

[sengsational]

Good point, I didn't even think of the RMD...

Would anyone recommend putting in over the 15% tax rate amount?

Yes on that too. Have a lookat this: http:// http://www.marottaonmoney.com/the-absolutely-last-chance-for-a-massive-roth-conversion/

This is the short 'are you a good fit article: http://www.marottaonmoney.com/roth-ira-conversion-2012-are-you-a-good-candidate/

You can also convert much more than you intend to leave in the Roth, then recharacterize. The idea is that you make a bunch of separate accounts, each in a different asset class. Thn in October 2 years out (by taking advantage of the tax filing extension) you recharacterize the loosers and keep the winners. Pretty cool if you're in a position to take advantage of it!

 

[MichaelB]

You might want to project your portfolio value up to the point you expect to begin withdrawing, to estimate what the tax rate would be based on current tax rates. Hat would help you establish a baseline. You also need to consider if you still plan on living in your current location, because of the impact of state tax. For me up to 15% is a no brainier, and more than 20% I would probably not do (my case).

 

[Surewhitey]

Good article Seng...thanks.

Looks like I'll be calling Vanguard in a few months.

Thanks for all your confirmations!
ss

 

[BigE]

Related question. If you had only Roth IRA's and a large 401 plan amount and newly retired with ability to stay in low 15% tax bracket, is it possble to only convert small amounts from the 401 account to a ROTH over a period of years to stay under the 15% tax bracket?

 

[Surewhitey]

Related question. If you had only Roth IRA's and a large 401 plan amount and newly retired with ability to stay in low 15% tax bracket, is it possble to only convert small amounts from the 401 account to a ROTH over a period of years to stay under the 15% tax bracket?

I asked that very question to a rep at Vanguard. He assured me you could, but I'll ask probably a couple more times and do some personal research to make sure.

I may even stay with Vanguard when changing it over to a personal account from the company's just to make them a little more responsible if anything goes wrong.

My account is only $75k, but DW's is a more and she would be doing just that. I'll do mine this year and work on hers in the future 3-4 years if it is that way.

Good question.

 

[Surewhitey]

I have a follow up question. DW gets $16,800 in deferred comp. Would she be able to open a traditional IRA as well? I'm thinking we could then roll that over next year...

Wasn't sure if DC is considered earned income...

 

[Alan]

I have a follow up question. DW gets $16,800 in deferred comp. Would she be able to open a traditional IRA as well? I'm thinking we could then roll that over next year...

Wasn't sure if DC is considered earned income...

I don't believe it is considered earned income as it is not taxed (and you don't pay FICA or Medicare taxes). But I may be wrong.

What is Earned Income?

What is Earned Income?

Earned income includes all the taxable income and wages you get from working.
There are two ways to get earned income:

You work for someone who pays you
or
You work in a business you own or run
​

Taxable earned income includes:

• Wages, salaries, tips, and other taxable employee pay;
• Union strike benefits;
• Long-term disability benefits received prior to minimum retirement age;
• Net earnings from self-employment if
  • you own or operate a business, or
  • you are a minister or member of a religious order ( see Special Rules page for more information);
• Gross income received as a statutory employee.

 

[Surewhitey]

Vanguard said she would be getting a check from her employer on the deferred comp. I'm pretty sure she will be paying fed taxes and has already paid FICA and Medicare as it was only deferred from fed taxes.

Hopefully we can take advantage of this as we're really counting on the future tax savings.

 

[Alan]

Vanguard said she would be getting a check from her employer on the deferred comp. I'm pretty sure she will be paying fed taxes and has already paid FICA and Medicare as it was only deferred from fed taxes.

Hopefully we can take advantage of this as we're really counting on the future tax savings.

Sounds like you are well set. You can also do a spousal IRA contribution now that she has earned income.

 

[Surewhitey]

Sounds like you are well set. You can also do a spousal IRA contribution now that she has earned income.

Cool! I hope so...

 

[heirloom]

I don't believe it is considered earned income as it is not taxed (and you don't pay FICA or Medicare taxes).

It's like Alan said, if your employer takes taxes out, then it is considered earned income and you can invest it into and IRA. If they don't take taxes out, you can't do it unless one of you are working and make enough money to put into an IRA.

I am getting a monthly severance and was shocked when I saw they took taxes out. I called HR and they are considering it earned income. I didn't want it that way and never thought of it being that way. But, thats the way it is and I'm contributing to my Roth with it.

 

[heirloom]

I type too slowww. Didn't know you and Alan were still writing when I answered.

 

[Zantastic]

So we're in our first official year of little to no income so we are in a low tax bracket to say the least. Would it make sense to roll over as much as possible from our 401k to a Roth IRA up to, say, the top of the 15% tax bracket?

We have 15+ years before we can get to it and I'm thinking the growth will be better as I'll have more options to invest in.

My thoughts are that the 35% (fed)+9% (state) tax we would have paid will now be taxed at 0-15% this year. Do I have the "right" idea? We have the funds to pay the tax when the time comes...I'm thinking $70-80k to roll over.

Thanks in advance.
ss

I'm planning to do the same thing as you, but only up to the 10% bracket at most. I like it when I'm in good company.

 

[Nords]

So we're in our first official year of little to no income so we are in a low tax bracket to say the least. Would it make sense to roll over as much as possible from our 401k to a Roth IRA up to, say, the top of the 15% tax bracket?
We have 15+ years before we can get to it and I'm thinking the growth will be better as I'll have more options to invest in.
My thoughts are that the 35% (fed)+9% (state) tax we would have paid will now be taxed at 0-15% this year. Do I have the "right" idea? We have the funds to pay the tax when the time comes...I'm thinking $70-80k to roll over.

Related question. If you had only Roth IRA's and a large 401 plan amount and newly retired with ability to stay in low 15% tax bracket, is it possble to only convert small amounts from the 401 account to a ROTH over a period of years to stay under the 15% tax bracket?

We've spent most of the last 10 years converting a little IRA every year up to the top of the 15% bracket, and paying the taxes with funds from our taxable account (outside of the IRAs).

We have a few years to go.

Even if the tax law does not change, in a decade when spouse's pension starts we'll immediately bounce up into the 25% federal income tax bracket. So it makes sense to convert now, as well as avoiding RMDs later.

 

[kaneohe]

Related question. If you had only Roth IRA's and a large 401 plan amount and newly retired with ability to stay in low 15% tax bracket, is it possble to only convert small amounts from the 401 account to a ROTH over a period of years to stay under the 15% tax bracket?

You might want to check w/ your 401K provider. The 401K plans I am familiar with are not very flexible w/ distributions.....generally all or nothing.
You could roll everything to an IRA and then do the partial conversions but
you might lose the generally better creditor protection of the 401K (depends on state protections for IRA).

 

[Surewhitey]

You might want to check w/ your 401K provider. The 401K plans I am familiar with are not very flexible w/ distributions.....generally all or nothing.
You could roll everything to an IRA and then do the partial conversions but
you might lose the generally better creditor protection of the 401K (depends on state protections for IRA).

Yeah, I thought that (and will until proved wrong). I "heard" you could do this from a Vanguard agent, but he may be talking about keeping it "with" Vanguard to do this. They probably will not be as helpful if they think they'll be losing your biz anyway.

Re creditor protection, something to consider for sure. I know you can't get on food stamps if you have IRA's vs 401k's...mmm doughnuts...

 

[Surewhitey]

Nice pension! DW will only get us out of the poverty line...