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Roth IRA Questions

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tacpoly
Established Contributor

Re: Roth IRA Questions


@Revelate wrote:

@brother7 wrote:

I have issues with what...


That said we're at, and I hate this word, historically low personal tax rates that are going to expire as I understand it and doubt they will be renewed: I'm converting some of my Traditional IRA's to Roth's when I have limited income as a result; I probably will be out of the workforce temporarily while in school within the next 5 years and I may convert my main IRA's over piecemeal at that time at the lowest marginal tax rate I'm probably ever going to see in addition to playing games with "backdoor" Roth contributions currently since I can't deduct a traditional IRA when I'm working anyway.

 

In general Roth's are good things, but because a traditional 401k reduces my AGI whereas a Roth 401k does not, I doubt I'll ever get large sums into it short of massive rollovers which are their own special blend of tax fun.


I may be misunderstanding your post, but if you are doing a backdoor conversion to a Roth and you have traditional pre-tax IRA contributions, you need to pay taxes on a proportion of your backdoor conversion that is equal to the proportion of your IRA contribution that are pre-tax. That is, you can’t specify that you’re only converting the $6,000 that were post-tax money — the government sees it as you pulling out of a total pool of IRA contributions and if half of those are pre- and half are post-tax (for example) then you would need to pay income tax on $3,000 out of the $6,000 you were backdoor converting. 

 

I’ve never had pre-tax IRA contributions as I’ve always made over the income limits, but if I did a 401k rollover to a regular IRA then the situation above would apply (which is why it’s advisable to think well ahead about future tax consequences when making these moves). 

 

OP, don’t forget you’ll incur income tax if you’re moving pre-tax contributions to a Roth. 

Message 21 of 32
Revelate
Moderator Emeritus

Re: Roth IRA Questions


@tacpoly wrote:

@Revelate wrote:

@brother7 wrote:

I have issues with what...


That said we're at, and I hate this word, historically low personal tax rates that are going to expire as I understand it and doubt they will be renewed: I'm converting some of my Traditional IRA's to Roth's when I have limited income as a result; I probably will be out of the workforce temporarily while in school within the next 5 years and I may convert my main IRA's over piecemeal at that time at the lowest marginal tax rate I'm probably ever going to see in addition to playing games with "backdoor" Roth contributions currently since I can't deduct a traditional IRA when I'm working anyway.

 

In general Roth's are good things, but because a traditional 401k reduces my AGI whereas a Roth 401k does not, I doubt I'll ever get large sums into it short of massive rollovers which are their own special blend of tax fun.


I may be misunderstanding your post, but if you are doing a backdoor conversion to a Roth and you have traditional pre-tax IRA contributions, you need to pay taxes on a proportion of your backdoor conversion that is equal to the proportion of your IRA contribution that are pre-tax. That is, you can’t specify that you’re only converting the $6,000 that were post-tax money — the government sees it as you pulling out of a total pool of IRA contributions and if half of those are pre- and half are post-tax (for example) then you would need to pay income tax on $3,000 out of the $6,000 you were backdoor converting. 

 

I’ve never had pre-tax IRA contributions as I’ve always made over the income limits, but if I did a 401k rollover to a regular IRA then the situation above would apply (which is why it’s advisable to think well ahead about future tax consequences when making these moves). 

 

OP, don’t forget you’ll incur income tax if you’re moving pre-tax contributions to a Roth. 


Yeah there's some complications if you're mixing and matching pre-tax and post-tax IRA monies, but in my case I keep them rigidly separate.

 

Basically with the way the income limits work, when I can contribute to a Roth IRA I do, and when I can't I wind up with a non-deductable Trad IRA... and that's the backdoor account.

 

I may at some point in the future if I have zero income again (like school) see about converting portions of my Rollover IRA that I've been consolidating all my wayward 401k's into, and that will absolutely be taxable on the full monty.




        
Message 22 of 32
iv
Valued Contributor

Re: Roth IRA Questions


@Revelate wrote:

Yeah there's some complications if you're mixing and matching pre-tax and post-tax IRA monies, but in my case I keep them rigidly separate.

 

Basically with the way the income limits work, when I can contribute to a Roth IRA I do, and when I can't I wind up with a non-deductable Trad IRA... and that's the backdoor account.

 

I may at some point in the future if I have zero income again (like school) see about converting portions of my Rollover IRA that I've been consolidating all my wayward 401k's into, and that will absolutely be taxable on the full monty.


Rev, you realize that just having two separate Trad IRAs, one with pre-tax money, and one with after-tax money does NOT help when doing a Roth conversion, right?  ALL your Trad IRAs get counted together for the Roth conversion math. Be careful!

 

You can get around that by rolling the pre-tax IRA "back" into a new company's 401k first.  But if you've been converting an after-tax IRA to Roth while also holding another pre-tax IRA... you may have a new tax problem.

 

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Message 23 of 32
Revelate
Moderator Emeritus

Re: Roth IRA Questions


@iv wrote:

@Revelate wrote:

Yeah there's some complications if you're mixing and matching pre-tax and post-tax IRA monies, but in my case I keep them rigidly separate.

 

Basically with the way the income limits work, when I can contribute to a Roth IRA I do, and when I can't I wind up with a non-deductable Trad IRA... and that's the backdoor account.

 

I may at some point in the future if I have zero income again (like school) see about converting portions of my Rollover IRA that I've been consolidating all my wayward 401k's into, and that will absolutely be taxable on the full monty.


Rev, you realize that just having two separate Trad IRAs, one with pre-tax money, and one with after-tax money does NOT help when doing a Roth conversion, right?  ALL your Trad IRAs get counted together for the Roth conversion math. Be careful!

 

You can get around that by rolling the pre-tax IRA "back" into a new company's 401k first.  But if you've been converting an after-tax IRA to Roth while also holding another pre-tax IRA... you may have a new tax problem.

 


Yeah, I looked into that before heading downt his route heh.  Near as I can tell it's all above board after a few hours of Internet research to confirm the specifics in the IRS code heh. 

 

Do appreciate your pointing out the gotchas though for anyone else that goes down this route.




        
Message 24 of 32
tacpoly
Established Contributor

Re: Roth IRA Questions


@iv wrote:

@Revelate wrote:

Yeah there's some complications if you're mixing and matching pre-tax and post-tax IRA monies, but in my case I keep them rigidly separate. 


Rev, you realize that just having two separate Trad IRAs, one with pre-tax money, and one with after-tax money does NOT help when doing a Roth conversion, right?  ALL your Trad IRAs get counted together for the Roth conversion math. Be careful!

 

You can get around that by rolling the pre-tax IRA "back" into a new company's 401k first.  But if you've been converting an after-tax IRA to Roth while also holding another pre-tax IRA... you may have a new tax problem.

 


Exactly this.  Basically if you have ANY PRE-TAX money currently in an IRA (either by pre-tax contributions or a rollover), then you should be paying tax on a portion of your backdoor conversion to a Roth.  I don’t know of any exception to this. 

Message 25 of 32
iced
Valued Contributor

Re: Roth IRA Questions

Now I'm curious - do rollovers with 401ks work the same as with IRAs? How would taxes work if you wanted to rollover employer matches for a 401k into a Roth 401k? Does it all need to be rolled at once or can I do it in smaller annual chunks to avoid jumping tax brackets?

Message 26 of 32
tacpoly
Established Contributor

Re: Roth IRA Questions


@iced wrote:

Now I'm curious - do rollovers with 401ks work the same as with IRAs? How would taxes work if you wanted to rollover employer matches for a 401k into a Roth 401k? Does it all need to be rolled at once or can I do it in smaller annual chunks to avoid jumping tax brackets?


There is no minimum amount for 401k conversion to a Roth 401k required by the IRS, however, the company you work for that offer the Roth 401k likely have rules dictating conversions (some don’t allow it) so best check with your plan administrator. 

 

I’m curious — I thought you have a very high salary level (based on my recollection of your posts) — why do you want to convert?  Even if you think you’ll have a much higher income in retirement, it’s so much easier to manipulate income when you’re no longer earning a regular salary.

Message 27 of 32
iced
Valued Contributor

Re: Roth IRA Questions


@tacpoly wrote:


There is no minimum amount for 401k conversion to a Roth 401k required by the IRS, however, the company you work for that offer the Roth 401k likely have rules dictating conversions (some don’t allow it) so best check with your plan administrator. 

 

I’m curious — I thought you have a very high salary level (based on my recollection of your posts) — why do you want to convert?  Even if you think you’ll have a much higher income in retirement, it’s so much easier to manipulate income when you’re no longer earning a regular salary.


Our current retirement plan is aiming to put us at around 150% of current household income for retirement, meaning our tax situation will probably be worse in retirement if it's all "income" from an IRS perspective. This will be further compounded since a lot of our deductions today won't still exist. That means our strategy for several years has been to amass as much as possible in vehicles that will have the lowest tax consequences. That basically means that pre-tax 401k is our worst form of retirement income, and I want to minimize it. 

 

Fortunately, only around 20% of our total retirement savings is in a pre-tax 401k today. The rest is in standard brokerages (capital gains), Roth IRAs and Roth 401ks (no tax), and HSA (also no tax, at least for medical). Our ideal would be that Social Security and traditional interest would be our lone income-taxed-at-income-rates in retirement, with all other funding coming via Roth/dividends/sales of equities taxed at capital gains rates. We already do an annual Roth conversion to continue filling our Roth IRAs, and if I can start moving that remaining 20% into something Roth-y I can inch even closer to that goal. Even with putting my annual 401k allotment into Roth 401k, that still leaves employer matches to figure out, and my wife does not have a Roth option at her career so I need to find a way to migrate that out when we have breathing room in a tax bracket. If I can move those as well as some of my previous years' pre-tax 401k accumulations when there's wiggle room left in the 24% bracket, great. Worst case is I break even after NIIT, but a good chunk of my retirement income would be below NIIT and thus I would come out ahead.

 

At least that's my crazy theory. Maybe I'm over-thinking this, but it seems like the smartest play, if it's a play I can make.

 

How else would I manipulate that income, or is the thought just to let it fill in most of what would be the 10-15% brackets and let capital gains run through the 15% bracket? I was hoping to push income down so far as to get a little bit of 0% love on capital gains each year...

Message 28 of 32
tacpoly
Established Contributor

Re: Roth IRA Questions


@iced wrote:

@tacpoly wrote:


There is no minimum amount for 401k conversion to a Roth 401k required by the IRS, however, the company you work for that offer the Roth 401k likely have rules dictating conversions (some don’t allow it) so best check with your plan administrator. 

 

I’m curious — I thought you have a very high salary level (based on my recollection of your posts) — why do you want to convert?  Even if you think you’ll have a much higher income in retirement, it’s so much easier to manipulate income when you’re no longer earning a regular salary.


Our current retirement plan is aiming to put us at around 150% of current household income for retirement, meaning our tax situation will probably be worse in retirement if it's all "income" from an IRS perspective. This will be further compounded since a lot of our deductions today won't still exist. That means our strategy for several years has been to amass as much as possible in vehicles that will have the lowest tax consequences. That basically means that pre-tax 401k is our worst form of retirement income, and I want to minimize it. 

 

Fortunately, only around 20% of our total retirement savings is in a pre-tax 401k today. The rest is in standard brokerages (capital gains), Roth IRAs and Roth 401ks (no tax), and HSA (also no tax, at least for medical). Our ideal would be that Social Security and traditional interest would be our lone income-taxed-at-income-rates in retirement, with all other funding coming via Roth/dividends/sales of equities taxed at capital gains rates. We already do an annual Roth conversion to continue filling our Roth IRAs, and if I can start moving that remaining 20% into something Roth-y I can inch even closer to that goal. Even with putting my annual 401k allotment into Roth 401k, that still leaves employer matches to figure out, and my wife does not have a Roth option at her career so I need to find a way to migrate that out when we have breathing room in a tax bracket. If I can move those as well as some of my previous years' pre-tax 401k accumulations when there's wiggle room left in the 24% bracket, great. Worst case is I break even after NIIT, but a good chunk of my retirement income would be below NIIT and thus I would come out ahead.

 

At least that's my crazy theory. Maybe I'm over-thinking this, but it seems like the smartest play, if it's a play I can make.

 

How else would I manipulate that income, or is the thought just to let it fill in most of what would be the 10-15% brackets and let capital gains run through the 15% bracket? I was hoping to push income down so far as to get a little bit of 0% love on capital gains each year...


Are you saying that you (and your wife) have enough in trad IRAs and 401k that RMD from those and taxable interest and dividends would equal 150% of your current salary?  If that’s the case, then sure, you should convert everything to a Roth now.  Otherwise you aren’t required to pull money out of brokerage or Roth accounts during your retirement or at all, for that matter. So if your RMD is less than your current income, then I’d convert then. Also, maybe convert after you’re no longer earning a full salary but before the RMD kicks in. 

 

I don’t understand what you’re saying about capital gains and 0% love...  You can offset capital gains with capital losses — unless you’re that one investing genius that has never picked a loser. 

Message 29 of 32
iced
Valued Contributor

Re: Roth IRA Questions


@tacpoly wrote:


Are you saying that you (and your wife) have enough in trad IRAs and 401k that RMD from those and taxable interest and dividends would equal 150% of your current salary?  If that’s the case, then sure, you should convert everything to a Roth now.  Otherwise you aren’t required to pull money out of brokerage or Roth accounts during your retirement or at all, for that matter. So if your RMD is less than your current income, then I’d convert then. Also, maybe convert after you’re no longer earning a full salary but before the RMD kicks in. 

 

I don’t understand what you’re saying about capital gains and 0% love...  You can offset capital gains with capital losses — unless you’re that one investing genius that has never picked a loser. 


Our total income from all sources would be about 150% of our current household income. However, our current investment breakdown is about 80% individual stocks in brokerages, 10% Roth sources, and 10% 401k/403b sources. Our retirement goal is to have enough in equities to generate at least our current household income from just dividends so we could live in perpetuity. Income from Social Security, RMDs, and Roth would supplement that and push it even higher.

A typical year would be something like $50,000 from Social Security income, $25,000 from 401k/interest, $25,000 from Roth, and $200,000 from dividends. If we can roll the 401k sources to Roth, that means our only income actually taxable at income rates would be interest and Social Security. That's our ideal.

 

If I understand you correctly, you're saying why not wait till retirement when I'll be in the 15% income bracket to convert. That makes a lot of sense, but my concern is time. I'm about 30  years away from retirement still. Today I only have about $250,000 in traditional 401k, but even with the only additional contributions being employer match, that could still grow to $2 million or more. I'm asking the question of what will cost more - paying 24% on $250,000 or 15% on $2 million? That's why I think converting now makes more sense, but I also admit I may be missing something here.

 

As for investing genius, no. I don't always pick the best stocks, but we do tend to pick stable mid and large cap companies for the most part. Time is again a factor here - we buy and hold for decades at a time, and it's hard to realize losses on a stock held for 30+ years. They'll happen now and then, but will not be nearly enough to offset gains. Besides, if we do hit our goal, we'd never sell stocks in the first place.

Message 30 of 32
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