Teacher from NY / Very specific Roth Conversion tax question

[earlysaverteacher]

Hi all,

I learned about saving early and for retirement from the Bogelheads forum years ago, which I loved. Since starting my teaching job at an independent school, I've been maxing out my 403b and maxing out a Roth IRA. I even got an HSA recently when my school started offering it a few years ago (and am using it as a retirement vehicle). Even though I teach math, there's something magical about seeing (versus knowing) that the first $100,000 is the hardest and then everything gets much much easier/faster as compounding snowballs. I'm in my early 40s and have reached the "two comma club," which I never thought I'd be at as a teacher.

Recently my dad (who is happily retired, after years of smart savings) sent me the link to this forum, when I shared with him my plans to retire early. I've really enjoyed lurking and reading all the stories and questions and help! Detail-oriented nerds unite!

I do have a super specific question involving Roth Conversions if anyone is able to help. (That's what's getting me from lurker to joiner!)

The background info:
I will have about $125k in taxable income this year from my job.
I will have about $5-10k in taxable income this year from regular investments (non-retirement accounts).
I'm single.

I maxed out my Roth IRA for this year (2024) a while ago. I didn't think twice it because my Modified Adjusted Gross Income (MAGI) is under $146k, so I'm allowed to.

Here's the issue I'm grappling with:
A few years ago, my school recently allowed us to put retirement money into a roth account instead of traditional.
So in my 403b, I now have money in two buckets: I have about $950k in traditional. I have about $50k in roth.

I talked with my dad, did some research, and decided to do an in-plan conversion in my 403b: moving $50k from my traditional "bucket" to my roth "bucket." I have the money to pay for the taxes for that conversion separately, and it will keep me under the next tax bracket. (For now, anyway, I'd like to ignore the wisdom or non-wisdom of doing the roth conversion, since it's done.)

Here's my question:
Does this create a problem with me contributing to my Roth IRA? Does the $50k from the 403b conversion get counted as part of my MAGI?

• If the conversion gets added to my MAGI, that puts it at around $185k ($125k [job] +$10k [investments] + $50k [conversion]). And at that value, I can't contribute anything to my Roth IRA and then I have to basically "undo" that.
• If the conversion doesn't get added to my MAGI, then I'm in the clear for contributing to my Roth IRA.

I'm just wondering which of these two things holds true, so I know if I have to take any next steps.

I did a ton of googling, and I when I came up for air, I was more confused than ever.

I found this thread which was the most helpful on the Bogelheads forum, but I am not yet savvy enough to understand it.
This is the relevant tax publication, but I couldn't really make heads or tails of that either.
Overall, I found lots of sites that address IRA conversions in this context (traditional->roth), but not 403b/401k conversions.

If there are any financially savvy tax people out there, I'd love any advice. Or if you need any more information to help, just ask!

But regardless, HELLO NEW FORUM! I'm excited to join!

 

[rodi]

The Roth conversion does count towards Magi associated with ACA tax credits. The bogglehead thread suggests it does not count towards the Roth contribution Magi.

I didn't know but hopefully @cathy63 , @SecondCor521 , or @pb4uski will chime in...

Welcome to the forum and great job accumulating a nice nest egg and a teacher!

 

[Texas Proud]

Just asking... but are you putting money in the deferred accounts now?

If it were me I would not... I would put all future contributions in the ROTH...

Another question.. when are you retiring? And age... you might be able to convert when you stop earning a salary much easier than when you are..

 

[SecondCor521]

The Roth conversion does count towards Magi associated with ACA tax credits. The bogglehead thread suggests it does not count towards the Roth contribution Magi.

I didn't know but hopefully @cathy63 , @SecondCor521 , or @pb4uski will chime in...

Thanks for the ping.

OP, the Roth conversion adds to your AGI. But for purposes of eligibility to make a Roth contribution, you need to calculate that specific MAGI and compare it to the limit for your filing status.

That calculation is done in Worksheet 2-1 in IRS Pub 590-A, which you have already been looking at.

I'm not familiar with in-plan rollovers, but it sure looks like you will receive a 1099-R from your employer.

When you put that in tax software, the amount in box 1 of your 1099-R is very likely going to show up on line 4b or line 5b of your 1040.

Here's the rub: The language in Worksheet 2-1 on line 2 says to subtract out certain amounts which show up on line 4b or line 5b of your 1040, but the specific text in the instructions does not include in plan conversions.

Bottom line: my amateur opinion is that I am fairly certain you could exclude the in-plan conversion amount on line 2 of Worksheet 2-1, which would mean your Roth contribution would be OK. But the fact that the language of Worksheet 2-1 line 2 doesn't explicitly include in-plan conversions would make me want to check with someone who knows more than me.

 

[pb4uski]

I think you are ok. It looks to me like the 403(b) to Roth IRA would fall under the second part of line 2 and be adjusted out in calculating MAGI for Roth conversions. Hopefully, cathy63 can confirm (or refute).

That said, I really question the wisdom of converting in the 24% tax bracket. Plus, you're paying NY tax which could be totally
avoided if you happen to be in a no-tax state later.

 

[pb4uski]

Just asking... but are you putting money in the deferred accounts now?

If it were me I would not... I would put all future contributions in the ROTH...

Why is that TP? I would think given the OP is in a high tax bracket (24%) that tax-deferred savings would be the way to go. Take the 24% federal/6.33% NY savings now and cross your fingers that your combined federal/state effective tax rate on later withdrawals is less than 30.33%.

 

[jim584672]

If you are 59.5 or older NY has a $20,000 exclusion for pensions and or IRA withdrawals.

 

[earlysaverteacher]

Thank you all for your replies and the warm welcome!

The Roth conversion does count towards Magi associated with ACA tax credits. The bogglehead thread suggests it does not count towards the Roth contribution Magi.

I didn't know but hopefully @cathy63 , @SecondCor521 , or @pb4uski will chime in...

Welcome to the forum and great job accumulating a nice nest egg and a teacher!

Thank you for pinging these other folks!!! And for letting me know what the bogelhead thread suggests. It was very confusing for me!

Just asking... but are you putting money in the deferred accounts now?

If it were me I would not... I would put all future contributions in the ROTH...

Another question.. when are you retiring? And age... you might be able to convert when you stop earning a salary much easier than when you are..

I'm putting all my personal contributions in the roth bucket of my 403b. My school makes a contribution but that automatically goes in the traditional bucket of my 403b (I don't have a choice for that). My hope is to retire at 55 (I'm 43 now). I had that exact thought about converting at 55 when I don't have an income! I worried that the traditional part of my 403b might be too big to do it all at that time -- but I'll crunch some numbers early next year to see if that makes sense.

Thanks for the ping.

OP, the Roth conversion adds to your AGI. But for purposes of eligibility to make a Roth contribution, you need to calculate that specific MAGI and compare it to the limit for your filing status.

That calculation is done in Worksheet 2-1 in IRS Pub 590-A, which you have already been looking at.

I'm not familiar with in-plan rollovers, but it sure looks like you will receive a 1099-R from your employer.

When you put that in tax software, the amount in box 1 of your 1099-R is very likely going to show up on line 4b or line 5b of your 1040.

Here's the rub: The language in Worksheet 2-1 on line 2 says to subtract out certain amounts which show up on line 4b or line 5b of your 1040, but the specific text in the instructions does not include in plan conversions.

Bottom line: my amateur opinion is that I am fairly certain you could exclude the in-plan conversion amount on line 2 of Worksheet 2-1, which would mean your Roth contribution would be OK. But the fact that the language of Worksheet 2-1 line 2 doesn't explicitly include in-plan conversions would make me want to check with someone who knows more than me.

This is SO helpful. Even though it leaves things ambiguous, I appreciate you taking the time to dig into things and explain things in a way I could understand.

I think you are ok. It looks to me like the 403(b) to Roth IRA would fall under the second part of line 2 and be adjusted out in calculating MAGI for Roth conversions. Hopefully, cathy63 can confirm (or refute).

That said, I really question the wisdom of converting in the 24% tax bracket. Plus, you're paying NY tax which could be totally
avoided if you happen to be in a no-tax state later.

View attachment 53074

Thank you. My only concern is that you wrote "It looks to me like the 403(b) to Roth IRA..." But I did an in plan conversion -- so no money went from the 403b to my IRA. Money in the "traditional" bucket in my 403b was converted to the "roth" bucket in my 403b.

Why is that TP? I would think given the OP is in a high tax bracket (24%) that tax-deferred savings would be the way to go. Take the 24% federal/6.33% NY savings now and cross your fingers that your combined federal/state effective tax rate on later withdrawals is less than 30.33%.

I was worried that if things grew too much in the traditional part of my 403b, it might trigger some huge RMDs way down the road. So I wanted to head that off. I will run some more numbers early next year to help!

If you are 59.5 or older NY has a $20,000 exclusion for pensions and or IRA withdrawals.

Thanks. I'm 43 -- but this is good to know in the future!

Thank you all for your thoughts! I'm excited to be part of this helpful online community!

 

[pb4uski]

Thank you all for your replies and the warm welcome!
... I was worried that if things grew too much in the traditional part of my 403b, it might trigger some huge RMDs way down the road. So I wanted to head that off. I will run some more numbers early next year to help! ...

While it's possible that your taxes on RMDs might exceed the 30.33% combined rate that you would save by using tax-deferred savings now, I think if would be very unlikely.

I was a high earner and most of our tax-deferred savings saved us 34% (28% federal and 6% state) and now I'm paying 12% (12% federal and 0% state). Even once I start SS, I project that I'll only pay ~16% federal (a mix of 12% and 22%) and 0% state.

Luckily, our sources of income until I start SS are such that I can manage our income to be able to do low tax cost Roth conversions each year.

 

[pjigar]

pb4uski may be right about avoiding higher brackets in RMD. I created a google sheet a while back which can project AGI in RMD. This sheet is meant to be customized for your specific situation but it is a good start.

RMD Scenarios

docs.google.com

 

[pb4uski]

... This is SO helpful. Even though it leaves things ambiguous, I appreciate you taking the time to dig into things and explain things in a way I could understand.


Thank you. My only concern is that you wrote "It looks to me like the 403(b) to Roth IRA..." But I did an in plan conversion -- so no money went from the 403b to my IRA. Money in the "traditional" bucket in my 403b was converted to the "roth" bucket in my 403b. ...

I agree that the wording in Worksheet 2-1 isn't exactly on point and understand your concern. That said, an in-plan conversion from the 403(b) to the Roth 403(b) is substantively the same as a rollover from a 403(b) to a Roth IRA, which is why I "think" that you will be ok. Like you, I can't find anything totally on point about your question as to whether income from a 403(b) to Roth 403(b) in plan conversion should be adjusted in calculating MAGI for Roth contribution purposes so it depends on how much tax risk you are willing to take on.

This IRS Notice is the closest thing that I can find but I couldn't find anything in there that is totally on point. https://www.irs.gov/pub/irs-drop/n-10-84.pdf

You might visit Ed Slott's website. There is a IRA discussion forum and you might pose your question there.

 

[sengsational]

Do you know anyone in finance/payroll at your work? If you can find the right person, you can ask about how the company will be populating the 1099. Someone knows, but depending on how big the organization is, and if the process is outsourced, it might not be easy to get the specifics.

But if you manage to get the info about how the conversion will be reported on the 1099, then you just enter the data into tax software and let the software so what it does, which will answer your question.

Another idea is to find another employee that did the same transaction you did, but sometime before 2024. Ask them to dig out their 1099.

 

[Texas Proud]

Why is that TP? I would think given the OP is in a high tax bracket (24%) that tax-deferred savings would be the way to go. Take the 24% federal/6.33% NY savings now and cross your fingers that your combined federal/state effective tax rate on later withdrawals is less than 30.33%.

I see a lot of money in the regular 403... and very little in ROTH....

I happened to convert a 401 way back when it first came out... I am glad that I did as I have been using ROTH money the past few years after running out of 'cheap' taxable account money... IMO if you want to manage your taxable income you need a big bucket of money that is not taxable...

Since we have more info on age... his regular will probably double or triple before retiring... that to me looks like a big RMD bomb... now, I will say that if OP is really smart and able to do so he can retire early and start doing the ROTH conversions he is talking about.. but that can be tricky...

 

[earlysaverteacher]

While it's possible that your taxes on RMDs might exceed the 30.33% combined rate that you would save by using tax-deferred savings now, I think if would be very unlikely.

I was a high earner and most of our tax-deferred savings saved us 34% (28% federal and 6% state) and now I'm paying 12% (12% federal and 0% state). Even once I start SS, I project that I'll only pay ~16% federal (a mix of 12% and 22%) and 0% state.

Luckily, our sources of income until I start SS are such that I can manage our income to be able to do low tax cost Roth conversions each year.

Thanks for your thoughts! I honestly didn't think about state taxes, so this is a good reminder. Clearly what I'm learning is that I have to do some projections to get a sense of what converting now, versus converting when I'm retired early (and have no income, so it puts me in a lower tax bracket), versus some other scenarios.

pb4uski may be right about avoiding higher brackets in RMD. I created a google sheet a while back which can project AGI in RMD. This sheet is meant to be customized for your specific situation but it is a good start.

RMD Scenarios

docs.google.com

THIS IS SO AWESOME. Thank you for sharing this sheet. I'm going to try to fill it out this weekend just to get a sense of things. It's amazing how free everyone is here with their resources/advice.

I agree that the wording in Worksheet 2-1 isn't exactly on point and understand your concern. That said, an in-plan conversion from the 403(b) to the Roth 403(b) is substantively the same as a rollover from a 403(b) to a Roth IRA, which is why I "think" that you will be ok. Like you, I can't find anything totally on point about your question as to whether income from a 403(b) to Roth 403(b) in plan conversion should be adjusted in calculating MAGI for Roth contribution purposes so it depends on how much tax risk you are willing to take on.

This IRS Notice is the closest thing that I can find but I couldn't find anything in there that is totally on point. https://www.irs.gov/pub/irs-drop/n-10-84.pdf

You might visit Ed Slott's website. There is a IRA discussion forum and you might pose your question there.

I'm glad you're sharing this. I'm glad multiple people have been able to parse the IRS language, but still find nothing specific to my question -- it feels ambiguous. But your logic for trad 403b -> roth 403b being akin to trad 403b -> roth IRA is comforting. I feel similarly.

Do you know anyone in finance/payroll at your work? If you can find the right person, you can ask about how the company will be populating the 1099. Someone knows, but depending on how big the organization is, and if the process is outsourced, it might not be easy to get the specifics.

But if you manage to get the info about how the conversion will be reported on the 1099, then you just enter the data into tax software and let the software so what it does, which will answer your question.

Another idea is to find another employee that did the same transaction you did, but sometime before 2024. Ask them to dig out their 1099.

Great idea. I have my 403b in TIAA-CREF and they said they'd send me a 1099-R. So maybe I'll call them to see if they have any thoughts.

I was the person at my school to get our contract changed so that we could do in-plan conversions, so no one has done one before. Otherwise, that's an amazing idea to ask someone who has done it.

I see a lot of money in the regular 403... and very little in ROTH....

I happened to convert a 401 way back when it first came out... I am glad that I did as I have been using ROTH money the past few years after running out of 'cheap' taxable account money... IMO if you want to manage your taxable income you need a big bucket of money that is not taxable...

Since we have more info on age... his regular will probably double or triple before retiring... that to me looks like a big RMD bomb... now, I will say that if OP is really smart and able to do so he can retire early and start doing the ROTH conversions he is talking about.. but that can be tricky...

The RMD bomb was my fear too. It's something my parents have been trying to deal with in their own finances, which is what put it on my radar. What I think I need to do is get some simulations comparing what happens if I do some conversions now for the next few years, what happens if I wait until I early retire and do some conversions, and maybe some other scenarios. It's all going to at least give me a sense of things. At the very least, it'll give me some direction moving forward.

I think since this forum has been so helpful with my specific first question, I might just post all my details like others have and ask for some general thoughts!

Again, a second time, THANK YOU ALL!!!