Traditional 401K Roth Conversions - How to determine the Benefits?

[Dash man]

Some people will never see the 12% bracket unless they itemize with large charitable contributions.

 

[TheWizard]

Good catch, although I understand there are certain circumstances where you can appeal the IRMAA determination, eg. "if you have had a life-changing event such as a loss of income or divorce, then you can refile or you can file for a redetermination". If you stop Roth conversions at 64 does that qualify as a "loss of income"??

No, they're not earned income.
I did go back to work part-time in 2016 and that extra income bumped me into a higher IRMAA tier for 2018.
But no earned income in 2017, so I filed SSA-44 (I retired again) and they rescinded my increase in IRMAA for 2018.

I'll always be paying mid-level IRMAA under current law and I've come to be okay with that...

 

[SecondCor521]

No, they're not earned income.
I did go back to work part-time in 2016 and that extra income bumped me into a higher IRMAA tier for 2018.
But no earned income in 2017, so I filed SSA-44 (I retired again) and they rescinded my increase in IRMAA for 2018.

I'll always be paying mid-level IRMAA under current law and I've come to be okay with that...

Even though it's not earned income, Roth conversions are included in AGI. So I think that it impacts both IRMAA surcharges and the taxation of SS benefits.

The only way I can figure to answer the question would be for someone to submit the appeal form and see what SS says.

 

[Dash man]

The IRS specifically excludes Roth conversions as a reason to appeal IRMAA charges.

 

[DawgMan]

The IRS specifically excludes Roth conversions as a reason to appeal IRMAA charges.

Well, that's a kick in the nutzz! I was hoping one of the new 87K IRS agents would hear me out! I suppose knocking out as much of the conversions before 63 is now the strategy.

 

[Dash man]

Well, that's a kick in the nutzz! I was hoping one of the new 87K IRS agents would hear me out! I suppose knocking out as much of the conversions before 63 is now the strategy.

We’ll, maybe you’ll get one of the new hires that is not properly trained!

 

[RunningBum]

Some people will never see the 12% bracket unless they itemize with large charitable contributions.

That's irrelevant. It doesn't matter what the actual bracket numbers are, it's about converting at the same or lower tax bracket than you expect to be in later, also taking into consideration things like ACA subsidy, IRMAA, FAFSA, etc. Just like deferring income in the first place is really about doing it while your tax bracket is higher or the same as you expect when you retire.

 

[G-Man]

My company offers a Roth 401k and allows in-plan Roth Conversions. Is there any benefits to doing partial in-plan Roth Conversions from my traditional 401k to the Roth 401K or should I do partial rollovers of my traditional 401K to a Traditional IRA and then to the Roth IRA?

 

[SecondCor521]

My company offers a Roth 401k and allows in-plan Roth Conversions. Is there any benefits to doing partial in-plan Roth Conversions from my traditional 401k to the Roth 401K or should I do partial rollovers of my traditional 401K to a Traditional IRA and then to the Roth IRA?

I doubt your company allows partial rollovers from 401(k) to traditional IRA while you still work there.

Once you leave employment, you could just roll everything from my 401(k) to my traditional IRA then do partial Roth conversions from there. That's what I did and I think it's fairly easy and common.

Tax-wise, I don't think there's any difference between the two things you suggest in terms of the amount of tax owed. Roth conversions can be withdrawn tax- and penalty-free after 5 tax years (this is the rule behind the Roth conversion ladder); I'm not sure if the same is true for in plan conversions in a 401(k). If access to the converted dollars at a particular age in the near future were important to you, that might be something to investigate.

 

[NgineER]

I doubt your company allows partial rollovers from 401(k) to traditional IRA while you still work there.

Once you leave employment, you could just roll everything from my 401(k) to my traditional IRA then do partial Roth conversions from there. That's what I did and I think it's fairly easy and common.

Tax-wise, I don't think there's any difference between the two things you suggest in terms of the amount of tax owed. Roth conversions can be withdrawn tax- and penalty-free after 5 tax years (this is the rule behind the Roth conversion ladder); I'm not sure if the same is true for in plan conversions in a 401(k). If access to the converted dollars at a particular age in the near future were important to you, that might be something to investigate.

This is from Gauss in another thread... It looks like it eliminates the five year rule for the Roth IRA. I tried it by doing a rollover from my 401k to a Roth 401k, but I haven't been able to roll it over to a Roth IRA since I'm still working, so I don't know if it works for me. If this works for you it would be advantageous to keep your assets in the 401k.

One way to do this is available if you have a Roth 401k available at work that you can take distributions from or rollovers to a Roth IRA.

I can "convert" lets say $100,000 from my traditional 401k to my Roth 401k and pay the income taxes.

If I then roll over the a portion of the Roth 401k to a Roth IRA, then the employer will calculate a "basis in the contract" in box 5 on the 1099-R that shows the distribution/rollover from the Roth 401k to the Roth IRA. This box 5 amount will be available soon, tax and penalty fre, once the funds arrive in the Roth IRA -- regardless of your age.

The magic happens when this money lands in the Roth IRA. The box 5 amount is not considered a conversion, but rather gets booked to the Roth IRA "contribution basis" ie line 22 8606. See the instructions for IRS form 8606 for a reference -- and read the full instructions. They describe how to calculate line 22 in several different places. Maybe just search for "investment in the contract".

As I think it is well known, distributions from Roth IRAs before age 59 1/2 first come from the contribution basis and are tax and penalty free.

This strategy has been a huge windfall for me in freeing up cash-flow between retiring at age 47 and age 59 1/2.

The beauty of this method is there are no five year fixed waiting periods between doing the "conversion" portion and paying the taxes -- and the ability to withdrawal tax/penalty free from the Roth IRA.

To fully flush this out, you should read the instructions for form 1099-R box 5 to establish how the employer determines the "investment in the contract" of the Roth 401k. I suspect that it is pro-rata between Roth 401k contributions and growth. It is possible that there may be a rule that the Roth 401k has to be established for 5 years before this would work. I would need to research this because I was past the 5 year point for first contributing to the Roth 401k, so any possible/potential limitation did not effect me.

-gauss

 

[SecondCor521]

This is from Gauss in another thread... It looks like it eliminates the five year rule for the Roth IRA. I tried it by doing a rollover from my 401k to a Roth 401k, but I haven't been able to roll it over to a Roth IRA since I'm still working, so I don't know if it works for me. If this works for you it would be advantageous to keep your assets in the 401k.

Yes, I read that post.

It's irrelevant to me personally because I retired in 2016 and already have a fully funded Roth conversion ladder at this point.

I do see how it could be advantageous as a way to eliminate the 5 year conversion waiting period. Since the IRS and Congress are usually pretty savvy about people taking advantage of rules, I would be concerned that there is something missing in @gauss' analysis. If I were considering using this approach, I would investigate it thoroughly beforehand (as @gauss suggests doing).

 

[G-Man]

This is from Gauss in another thread... It looks like it eliminates the five year rule for the Roth IRA. I tried it by doing a rollover from my 401k to a Roth 401k, but I haven't been able to roll it over to a Roth IRA since I'm still working, so I don't know if it works for me. If this works for you it would be advantageous to keep your assets in the 401k.

Can you provide a link to Gauss post.

 

[RunningBum]

Can you provide a link to Gauss post.

Just click on the little triangle arrow next to their name where their post is quoted.

 

[NgineER]

Yes, I read that post.

It's irrelevant to me personally because I retired in 2016 and already have a fully funded Roth conversion ladder at this point.

I do see how it could be advantageous as a way to eliminate the 5 year conversion waiting period. Since the IRS and Congress are usually pretty savvy about people taking advantage of rules, I would be concerned that there is something missing in @gauss' analysis. If I were considering using this approach, I would investigate it thoroughly beforehand (as @gauss suggests doing).

I too will have a fully funded Roth conversion ladder when I retire, so I'm not counting on it, but it would be helpful if it was there.

 

[teej1985]

The IRS specifically excludes Roth conversions as a reason to appeal IRMAA charges.

I didn't think the IRS was involved with collecting IRMAA or processing IRMAA appeals.

 

[Dash man]

I didn't think the IRS was involved with collecting IRMAA or processing IRMAA appeals.

You’re correct. It’s the Social Security folks that deal with it.

 

[pb4uski]

Just click on the little triangle arrow next to their name where their post is quoted.

I never knew that... cool.

 

[G-Man]

Do you agree with the Roth Conversion approach outlined in this article?

https://www.theretirementmanifesto.com/why-i-just-did-a-before-tax-rollover-into-a-roth/

 

[SevenUp]

Do you agree with the Roth Conversion approach outlined in this article?

https://www.theretirementmanifesto.com/why-i-just-did-a-before-tax-rollover-into-a-roth/

As it says there, a Roth conversion "will be taxed at your current marginal tax rate, which may be lower than the tax rate you’ll incur if you wait until the RMD law forces you to take heavier withdrawals in the future."

Up to you to determine the validity of "may be lower" for your situation.

 

[pb4uski]

Do you agree with the Roth Conversion approach outlined in this article?

https://www.theretirementmanifesto.com/why-i-just-did-a-before-tax-rollover-into-a-roth/

Just skimmed it, but generally, yes... I would agree. It is advocating what many of us here advocate, do low tax cost Roth conversions from ER until pensions and SS and RMDs start to avoid higher tax cost RMDs later.

It has a lot more "punch" if you are in the 10% or 12% tax bracket in ER and expect to be in the 22% bracket later. If you are currently in the 22% bracket now and will be in the 24% bracket later then the benefits are less compelling.

Another reason for doing low-tax cost Roth conversions now for couples is because if one of you dies early the surviving spouse is often thrown into and even higher tax bracket. And then there is the possible sunset of the 2017 Act tax bracket cuts.

 

[ArkTinkerer]

Been doing retirement things and so was off the forum for a while. Was considering this very issue and so came back to check this forum which has been an awesome source of info! More specific to this discussion--

One item not considered so far about the benefits of doing the conversions is staying in a tax bracket low enough to avoid taxes on dividends and interest. By keeping capital gain generating assets in a Roth IRA one can reap additional tax savings. Alas, the caveat to this bit me last year! I didn't realize my state taxes interest and dividends as normal income. My state taxes were higher than my federal! As someone else here mentioned there are a lot of variables to consider when trying to optimize this.