rollover IRA question

[LivingAlmostLarge]

Does it make sense to pay taxes on money from a rollover ira to a roth IRA? Does it make sense to rollover the amount to the top of the 25% tax bracket? I'm not sure it makes sense at the next 28% bracket.

Also if we roll over all his old 401k $300k and only roll a portion into a Roth IRA but leave the rest, we can no longer do the Backdoor Roth IRA contributions correct? We'll have the Non-Deductible account but the $5500 we roll over into the Roth IRA every year won't be 100% taxed because we have a non-taxed Rollover IRA.

Yes?

[Like2Plan]

This is a very complicated question. There are a lot of aspects to consider.

I believe your DH has been in school and will only be earning income for half the year? So, it seems like it might be a good opportunity to convert some pretax money while you are in a lower bracket. Do you have to roll over the entire amount or can you just do a partial for the amount you intend to convert?

I believe if your DH has a pretax IRA of 300K, the pro ratio rule in the conversion would make most of his 5500 annual IRA backdoor conversion taxable--you could try modeling in tax software to see what would happen.

On the other hand, you could continue to do backdoor conversions on your IRA just as you have been doing (assuming you don't have any pretax IRA).

[tripods68]

Does it make sense to pay taxes on money from a rollover ira to a roth IRA? Does it make sense to rollover the amount to the top of the 25% tax bracket? I'm not sure it makes sense at the next 28% bracket.

Also if we roll over all his old 401k $300k and only roll a portion into a Roth IRA but leave the rest, we can no longer do the Backdoor Roth IRA contributions correct? We'll have the Non-Deductible account but the $5500 we roll over into the Roth IRA every year won't be 100% taxed because we have a non-taxed Rollover IRA.

Yes?

I would do gradual/partial (rollover conversion) for half of this year and next year. Let say, you plan to roll over 100K into ROTH from Traditional IRA.

I've done this in the past to avoid huge tax bill end of the year. If you have more than 300K, I would do it gradually rollover for couple of years. This also helps plan your future tax liabilities with earned income going to be.


Example: This year 2016
Aug 10K rollover to ROTH (no withholding)
Sept 10K
Octo 10K
Nov 10K
Dec 10K
End of the year $50K Taxable X .25 = $12,500

Next Year 2017
Jan 10K
Feb 10K
Mar 10K
April 10K
May 10K
$50K Taxable X .25 = $12,500

Phased out limit starts AGI 183K - married couple

http://www.rothira.com/2016-roth-ira-limits-announced

[LivingAlmostLarge]

Like2Plan I am not sure and think we need to talk to a tax person but was hoping some accountants on the board would give me some tips so I can start planning now. Yes I was thinking last and this year would put us into the right brackets to convert. After that it doesn't necessarily make sense.

Tripod, the problem is that after the 25% bracket I'm not sure it makes sense to convert and pay 28% taxes on the money. I think we can manage our retirement tax efficiency to beat 28% because that's $150k for a married couple and we don't live on that now. So if we start drawing in retirement then it'll be lower than 28%. It's only 2015 and 2016. We don't have much play on our numbers from 2015 and 2016 we have more space with half a year income.

[GoodSteward]

My thought would be if you have a long time left to retire, and plan to let it build up a lot I don't see where it makes sense to not move it. If you have 20-30 years, that 300k could double or triple. Now your paying taxes on 600k or more as you pull from it. Taxes only go up. Even if you are in a lower bracket, there is no guarantee it'll be less taxes then. Plus even if it is a lower tax rate, you are paying on more volume of money, so possibly more out of pocket.

I don't do taxes, and I've only dipped my finger in the investment side (was going to get a securities license but never finished), so I might be off. I just know if you have time to recoup the loss, having tax free retirement is a major win.

[Like2Plan]

Like2Plan I am not sure and think we need to talk to a tax person but was hoping some accountants on the board would give me some tips so I can start planning now. Yes I was thinking last and this year would put us into the right brackets to convert. After that it doesn't necessarily make sense.

For sure--It is a good idea to talk to a tax professional who will know all the aspects of your specific situation.

What I have been looking at with our retirement funds is not so much our expenses, but what the RMDs will be. (The tax man wants his due. ) But, the RMDs are not at the 3-4% safe withdraw rate that would cover our expenses.

Lately, I have been concerned with RMDs putting us in a higher bracket. There is little to be done for this while DH is still working, but after he quits I am going to have to do a lot of modeling to see how much we can convert. ( RMDs are not so far away for us.)

[corn18]

Like others have said, there is a balance to be made between pre-tax, taxable and no tax funds. Don't convert because you can, convert because you should. If you can convert at 0% tax bracket, that's a no brainer. That seems silly but if you start withdrawing from taxable accounts and have a 2 year stash of cash, you may be in the 0% tax bracket early in retirement. And everyone says convert up to the top of the 15% bracket. Once you start poking into 25% then it depends. I'm not smart enough to explain all the depends bits, but you could ask this on bogleheads.org and they will help you out.

[LivingAlmostLarge]

Tom definitely convert in 15% bracket. Problem is we already last year and this year are probably in the 25% bracket. So my thought is might as well convert up to the top of the 25% bracket since we are in it already.

My question is whether to roll all 401k to a rollover ira because will that prevent backdoor roth ira contributions going forward. After this year we would t qualify again for roth iras

[tripods68]

My question is whether to roll all 401k to a rollover ira because will that prevent backdoor roth ira contributions going forward. After this year we would t qualify again for roth iras

No.

401K rollover into IRA is not considered current year contributions.

[corn18]

No.

401K rollover into IRA is not considered current year contributions.

The 401k rollover will be considered an ira for backdoor Roth purposes and will count in the prorata rule. So don't roll it over if you want to continue doing backdoor roths.

[Like2Plan]

Tom definitely convert in 15% bracket. Problem is we already last year and this year are probably in the 25% bracket. So my thought is might as well convert up to the top of the 25% bracket since we are in it already.

My question is whether to roll all 401k to a rollover ira because will that prevent backdoor roth ira contributions going forward. After this year we would t qualify again for roth iras

The rollover of your DHs 401k into an IRA would probably make future conversions of his tIRAs into ROTH IRAs mostly taxable. But yours would be unaffected- you could still do back door conversions on your tIRA since they are considered individually on your taxes.

One other option that might be open to your DH (assuming he can't do a partial rollover of just the amount he wants to convert)-- you could see if he could
1. Rollover 401k into tIRA.
2. Convert the amount you have planned to pay taxes on tIRA to ROTH
3. Rollover remaining tIRA funds into DHs new 401K at his new company (assuming his new 401k has good investment options and will accept the roll in --you will have to read up on the plan information to see if it is allowed). Then, after that happens your DH can go back to making his tIRA contributions and converting them to Roth.

[LivingAlmostLarge]

The rollover of your DHs 401k into an IRA would probably make future conversions of his tIRAs into ROTH IRAs mostly taxable. But yours would be unaffected- you could still do back door conversions on your tIRA since they are considered individually on your taxes.

One other option that might be open to your DH (assuming he can't do a partial rollover of just the amount he wants to convert)-- you could see if he could
1. Rollover 401k into tIRA.
2. Convert the amount you have planned to pay taxes on tIRA to ROTH
3. Rollover remaining tIRA funds into DHs new 401K at his new company (assuming his new 401k has good investment options and will accept the roll in --you will have to read up on the plan information to see if it is allowed). Then, after that happens your DH can go back to making his tIRA contributions and converting them to Roth.

This we were thinking of doing. What is the difference between a traditional IRA versus a Rollover IRA? I think years ago we were told we couldnt' do a tIRA only a Rollover IRA? We have to see the new 401k plan.

Suggestions for how to find a tax person who could help us?

[Like2Plan]

This we were thinking of doing. What is the difference between a traditional IRA versus a Rollover IRA? I think years ago we were told we couldnt' do a tIRA only a Rollover IRA? We have to see the new 401k plan.

Suggestions for how to find a tax person who could help us?

Some 401k plans will only allow rollover tIRAs to be rolled in. So, for that reason it would be a good idea not to co-mingle future regular tIRA contributions with rollover funds.