Is it better to use before or after tax money to pay for 401k/tIRA rollover to Roth?

[Dash man]

DW and I plan to rollover some 401k and tIRA funds into Roth IRAs this year and for the next 4-7 years. We have after tax money we can pay the taxes with, or we can have the taxes withheld from the rollover funds. I’m not sure which is better. Any thoughts?

[bingybear]

Use after tax money. If you truly use before tax $ (TIRA) you will need to also pay the tax on the money that is paying the tax.

I thing you could have money withheld for taxes and then put those $ back in using after tax $. This would give you the benefit of having the many withheld.

It doesn't make sense to me to pay tax on the taxes.

[RunningBum]

Definitely after tax money. Work it out with a simple spreadsheet and you'll see you come out ahead that way.

[bada bing]

If you're over 59.5, paying taxes on Roth conversions with taxable savings (if available) instead of using pre-tax, deferred funds is generally the way to go. Since the limiting factor on conversion amounts is controlling annual income (and tax bracket), using taxable funds is functionally equivalent to moving the taxable savings used for paying the taxes into your Roth; i.e. you can move more into the Roth for the same tax bill. Funds moved into a Roth are available to someone over 59.5 anytime without penalty (provided they have a "seasoned" Roth over 5 years old), so there is no downside to the move.

The one potential issue is the capital gains status on the taxable funds used to pay the Roth conversion taxes. If the funds are invested with a lot of unrealized gains, you'll incur 15% CGT if your taxable income is over the top of the $78,750 zero CGT bracket (MFJ) for selling appreciated assets to pay the conversion tax. You'll have to work out how much, if any, CGT you might pay based on your specific circumstances.

For some circumstances, harvesting capital gains competes with Roth conversions for the best use of low tax bracket money.

[audreyh1]

If the numbers ever make sense for me to do a Roth conversion, I am definitely rolling as much into the Roth as I can, and paying any taxes out of other after-tax savings!

But yes - I'm also dealing with harvesting gains looking more attractive at the moment, as I make my after-tax investments more tax efficient.

[pb4uski]

Quote:

Originally Posted by Dash man DW and I plan to rollover some 401k and tIRA funds into Roth IRAs this year and for the next 4-7 years. We have after tax money we can pay the taxes with, or we can have the taxes withheld from the rollover funds. I’m not sure which is better. Any thoughts?

After-tax for sure.... you end up with more money in an account that is tax-free for life and has no RMDs... it is the functional equivalent of being able to contribute your taxes into a Roth.

Let's say you convert $100 and pay $20 in tax... with paying the tax with after-tax funds you end up with $100 in the Roth... taking the taxes out you only end up with $80 in the Roth.

[Dash man]

Thank you everyone. We are both 62, and we have plenty in CDs/savings to pay taxes at least for a few years. So we’ll go with that. While we do have some pretty high capital gains, we also have some stocks we could sell with minor impact. If we don’t start converting this year, we’ll be hit hard with the tax torpedo.