401k Roth Conversions

[Delawaredave5]

Conversion newbie. Know I need to talk w tax person. Understand BBB on fence. Have done board search.

Logged on line to my 401k, found "Roth conversion" button, clicked it - and saw 3 categories:

After Tax Partially Taxable $xxx
Company Match Taxable $xxx
Before Tax Taxable $xxx

Didn't go further. Can you convert some/all of "just one category above" ? I'm still working, so income likely highest will ever be.

For "Partially Taxable" - any idea what this means - how much would be taxable ? Thanks

 

[djsander]

After tax partially taxable will be your after tax contributions and the gains. The gains will be taxable. My after tax 401k showed the part that I had contributed and the gains. This was Fido and I called them and discussed the movement. I moved the after tax contribution to a Roth IRA and the gains into a rollover IRA. Somebody else will have to answer for certain, but the after tax money with gains will have to go at the same time although you can split them. There may also be plan issues about how and when you can move the money.

 

[Delawaredave5]

Thanks. We're working and in 32% federal bracket now. Retiring in next couple years, would drop to 24% bracket, doubt lower.

The AT accounts are 65% taxable. So if there's $100k, $65k taxable and I'd owe $20k federal.

If I wait a couple years and convert later, the tax would drop to $15.6K

Are there any big reasons to do 401k Roth conversions now ? Sorry I'm not getting it.

 

[RetireBy90]

Thanks. We're working and in 32% federal bracket now. Retiring in next couple years, would drop to 24% bracket, doubt lower.

The AT accounts are 65% taxable. So if there's $100k, $65k taxable and I'd owe $20k federal.

If I wait a couple years and convert later, the tax would drop to $15.6K

Are there any big reasons to do 401k Roth conversions now ? Sorry I'm not getting it.

In general, most of what I’ve seen here is you would convert to a Roth if expect your tax to be higher when you plan to take draws or when Required minimum distributions kick in, which is at 72 today.
Many use the years right after retirement and before drawing SS or from tax deferred funds (IRA or 401K) to convert.
There are many things to consider when deciding if, when and how much. Funds converted become part of AGI and MAGI which can determine how much of SS is taxable; tax on cap gains; how much you pay for ACA coverage or Medicare; along with tax rate for surviving spouse if married when first partner passes.
To answer your last question, with only what you have said so far, I’d suggest conversions when you retire and rate goes to 24%.

 

[Delawaredave5]

Thanks ! Other risk I'm trying to consider is "middle brackets" might go up in future. Seems like future is higher tax rates for wealthier people.

So I'm at 32%, retire in 3 years, income goes down, but rate goes up and I'm still in mid-30's percentages federal brackets.

https://taxfoundation.org/historical-income-tax-rates-brackets/

 

[Finance Dave]

I'd study RMDs, IIRMA, and depending on your age, the ACA subsidy you may not get if you retire prior to Medicare.

 

[RetireBy90]

I'd study RMDs, IIRMA, and depending on your age, the ACA subsidy you may not get if you retire prior to Medicare.

In this regard you can check out this thread for important limits:
https://www.early-retirement.org/fo...-trigger-income-levels-for-2022-a-111659.html

 

[Dash man]

Also consider the “what if one dies” scenario where the surviving spouse has to file at the single rate.

 

[corn18]

See if your plan allows a full in service rollover of the after tax not taxable portion to a Roth IRA and the after tax taxable portion to a traditional IRA. No taxes will be due if they can do this. Until you withdraw from the TIRA.

If you like your 401k you could then see if they would allow you to roll the TIRA back into your 401k. No real benefit other than if you are considering taking advantage of the rule of 55, if your plan offers that.

 

[NgineER]

I do rollovers from the after tax portion in my 401k every month, that way you only have the gains in your Roth IRA.

When you go through the process of the rollover, it has a series of questions, and it allows you to roll over all assets or just the portion without tax. That might be a way for you to do a conversion now and still reap the gains in a tax free roth acccount.

 

[Delawaredave5]

I do rollovers from the after tax portion in my 401k every month, that way you only have the gains in your Roth IRA.

When you go through the process of the rollover, it has a series of questions, and it allows you to roll over all assets or just the portion without tax. That might be a way for you to do a conversion now and still reap the gains in a tax free roth acccount.

Thanks ! Just did test/first rollover of non taxable that system would let me.

Looks like the bulk of it is 60% taxable. So the question is is it advantageous to convert now at 32% federal rate - versus waiting 3 years and the possibility of being able to convert at 24% in the future.

Best I can analyze that it is about a wash.

 

[Exchme]

The decision clearly has quite a bit if money on the line, so why don't you buy a year by year calculator?

One of the more inexplicable behaviors I see from some is making big $ decisions with no tool to help or trying to home brew one because they won't spend a couple bucks on a proven tool. After reading reviews, I got Pralana Gold, (Excel sheet, $99 1st yr, $49 renewal). That helped me make a Roth plan, ACA subsidy plan and cash management plan that will be worth six figures in today's dollars over our lifespans. I figure I can afford my upcoming renewal too. If tax increases worry you, you can model a generalized increase in tax rates or a reversion to pre-TCJA tax law (even including AMT).

If "middle brackets" are 22-24%, my life experience tells me that tax rates for those brackets and lower are not likely to rise as there are too many people there, human nature is to vote to increase taxes on the other guy, but not ourselves.