Roth Conversion

[TrunkMonkey]

Hi,

If I want to convert my 401K to a Roth, I can do this but I have to pay taxes at the federal and state level.

What if in 2 years I am not working and not collecting taxable income. Can I convert the whole 401K to a roth, minimizing taxes since I have no taxable income, because I am not working?

Is this legal>?

THanks

[kork13]

I don't see why not... When you convert a 401k to a Roth, the 401k balance is taxed as regular income. So if you have $50k in your 401k and no other income in that year, your total taxable income would be that $50k, and would likely owe less in taxes on it than if you did the conversion in a year that you have other income. However, that assumes that you file individually and have no other income. Are you married? If your spouse is working and you file jointly, the 401k money would be in addition to your spouse's income.


Totally legal btw... no restrictions on when you can choose to convert to a Roth. There may be income restrictions in place that could prevent it, but otherwise no issues.

[jpg7n16]

Like kork says, yes you can.

In order to make new contributions to a retirement plan, you must have earned income. But if you're just transferring/converting from one retirement plan to another, you don't need earned income.

But don't think that because you have no taxable earned income, that you will be able to convert tax free. The amount converted to the Roth will be considered taxable income in that year, and taxes will have to be paid on it somehow. If you don't have enough cash available to pay the tax liability, you probably shouldn't convert.

[jIM_Ohio]

Hi,

If I want to convert my 401K to a Roth, I can do this but I have to pay taxes at the federal and state level.

What if in 2 years I am not working and not collecting taxable income. Can I convert the whole 401K to a roth, minimizing taxes since I have no taxable income, because I am not working?

Is this legal>?

THanks

401k could only be rolled over if you terminated employment with company which has the 401k

terminated is used loosely- I have rolled over 2 401ks because my company was bought out, and plan rules allowed for rollovers in those situations. I still have the same job, my company name is just different.

But once employment is terminated, timing the conversion in a year of low income is an excellent idea..

[jIM_Ohio]

Like kork says, yes you can.

In order to make new contributions to a retirement plan, you must have earned income. But if you're just transferring/converting from one retirement plan to another, you don't need earned income.

But don't think that because you have no taxable earned income, that you will be able to convert tax free. The amount converted to the Roth will be considered taxable income in that year, and taxes will have to be paid on it somehow. If you don't have enough cash available to pay the tax liability, you probably shouldn't convert.

agreed with a point to add

In a year with low taxable income, what is also low is your marginal bracket. The Roth conversion will occur at that marginal bracket.

A great example is me- my income hovers at very top end of the 15% tax bracket... I am not usually eligible for Roth conversions because of income. Even when the limit was recently modified, I chose to NOT convert because most taxes would be paid at 25% marginal bracket.

I do forsee a time in the future where my marginal rate should be at bottom of 15% bracket when one spouse stops working- those are years I convert, but I only convert up to top of same bracket I am in now. I do NOT want to covert any money and pay 25% federal tax, I only want to convert money and pay a 15% federal tax.

This is a common financial planning technique in early retirement (slowly convert rollovers and traditional IRAs to Roths before age 70.5) without increasing tax rate.

[TrunkMonkey]

The reason I asked was a friend was going to travel for 1-2 years and I thought that it would be a good idea to take the conversion. He will have only income off of investments.