Order of accounts for Roth Conversions?

[Splash]

DH and I retired in 2017 with no Roth IRAs and 75% of our nest egg in tax deferred assets. We plan significant Roth conversions starting in 2018. I’m wondering if there is a benefit to converting accounts in any particular order (biggest first, pro-rata based on balance, etc.). I would be interested in your thoughts.

Our Information:
1. Breakdown of our deferred assets:

• 25% DH IRA
• 60% my 401k
• 15% my pension (haven’t decided yet if we will roll lump sum into IRA or take as pension)​

2. I am 56 and DH is 57

3. In 2017 we did the following to gain a better understanding of the conversion process, get the Roth 5 year clocks going, and stay within our desired tax bracket.

• Converted $1000 of DH IRA to Roth IRA
• Converted $500 of my 401k to Roth 401k
• Contributed $500 to a new Roth IRA in my name​

4. We plan to keep funds in my former employer 401k. It has excellent low fee investment choices including a Stable Value Fund, the ability to convert funds to Roth 401k, and reasonable distribution options. Although we don’t plan to withdraw any funds prior to 59.5, it gives us peace of mind knowing that we can without penalty.

 

[SecondCor521]

Given what you've written, I don't see any benefits to any particular ordering except possibly in terms of estate planning (see #2 below). Some things you could consider:

1. You'll both have RMDs at about the same time. Consider conversions that get you to the RMD targets you want to be at. If one of you were quite a bit older than the other, then you could consider the age difference (and thus the RMD differences) when deciding which to convert.

2. Since you have the larger amount of tax-deferred assets, consider what would happen to you financially and tax-wise if your DH predeceases you. Likewise for the reverse situation where you predecease DH. Remember that when one of you passes away, the other will probably be paying taxes at the higher "Single" rates.

3. Investment choices, fees, and account minimums might be minor considerations. For example, if your new $500 Roth IRA were at Vanguard, they might be charging you a $20 per year custodial fee that you might be able to avoid with additional funds.

4. Someone on here (pb4uski I think?) converted all of his wife's account first so there was one less account to deal with. So you might convert all of your DH's IRA first just to get rid of it.

 

[mamadogmamacat]

Do you have any after tax contributions in any of your trad IRA or 401k accounts?

Even if you don't need to withdraw those for expenses, you could transfer that amount to the ROTH accounts without any tax consequences.

 

[gauss]

Do you have any after tax contributions in any of your trad IRA or 401k accounts?

Even if you don't need to withdraw those for expenses, you could transfer that amount to the ROTH accounts without any tax consequences.

Be careful here. Unless I am missing something, in general, IRS form 8606 would say otherwise -- at least for the IRAs. It would pro-rated.

For pre-1987 401k after-tax contributions only, I believe that you are correct.

Post 1986 401k contributions, on the other hand, would also be drawn out on a pro-rata basis.


-gauss

 

[mamadogmamacat]

IRS ruling in 2015 allowed this in a 401k roll over at least. I know because I did it. all post tax to ROTH rest to traditional not a problem

 

[Sunset]

Be careful here. Unless I am missing something, in general, IRS form 8606 would say otherwise -- at least for the IRAs. It would pro-rated.

For pre-1987 401k after-tax contributions only, I believe that you are correct.

Post 1986 401k contributions, on the other hand, would also be drawn out on a pro-rata basis.
-gauss

+1


It's very annoying, one cannot simply transfer at one time, all the post tax IRA contributions to a roth.

Instead one has to take a declining ratio every year as a non-taxable portion of the withdrawal.

Thankfully, H&R block software (and probably others) track this yearly when I import the previous year, so it's easier

 

[Sunset]

OP

In your situation , I would first start with DH IRA , as the 401K has some extra benefits like protection from lawsuits.

 

[mamadogmamacat]

Yes, it appears for trad IRA's one still has to pro rate. However, not for a complete 401k rollover as I stated above. SO if you have significant after tax contributions in a 401k only, one can put all of those dollars in a ROTH upon the rollover of the entire IRA

Interesting that the pro rating only need occur for those accounts in each of the spouses names. So if you have any after tax dollars, its worth a look to see if one spouse has significantly more than the other. pro rating may have benefits in that case:
https://www.fidelity.com/viewpoints/retirement/roth-IRA-common-questions

 

[gauss]

IRS ruling in 2015 allowed this in a 401k roll over at least. I know because I did it. all post tax to ROTH rest to traditional not a problem

Agreed.

True, but you do need to remove the taxable funds from the 401k too (for post 86 contributions). Of course you could roll the taxable funds into a traditional IRA as you mentioned.

For pre-87 contributions you could just take the after-tax portion and not pro-rate.

-gauss

 

[Splash]

OP Here.

SecondCor52, Thanks for the input. I definitely need to do some noodling on what the impact will be when one of us passes. Hadn't thought of that.

mamadogmamacat and gauss, There is only $3000 after tax in 401k. When I did the Roth conversion in 2017, I was able to designate how much after tax and pre-tax funds I wanted to convert. It's possible I contributed the after tax funds pre-1987. I will move the after tax funds in 2018. Thanks for the great discussion.

Sunset, Thanks for the heads up that 401K's have some protection from lawsuits that IRAs do not. I will need to educate myself.

 

[N02L84ER]

A couple of thoughts. Some states tax deferred distributions per person after the distribution exceeds a specified amount. If your state does this, you should not focus on completely converting one person's tax deferred accounts. Secondly, I am focusing on converting the potentially highest earning investments first, stocks before bonds and other fixed income products in order to get the most growth to be tax free. YMMV.