Roth conversion advice

[gregbig2]

Hello! Really just have a quick question for the board. My wife and I are thinking about doing a roth conversion. We are 42, %15 tax bracket. We have $130,000 in ira/401k and about the same already in roths. I was planning to convert $20,000 per year for the next several years. That would keep us in the %15 bracket. I'd be paying the $3000 extra in tax out of pocket, would not be using IRA funds to pay the taxes.

I'm assuming tax rate at full retirement age will be the same or higher than it is now, most likely higher. I've used calculators online and they all seem to indicate that it's a wise move, but just looking for confirmation. Keep thinking I'm missing something or not factoring something in. We are in PA, so %3.2 income tax rate.

Thanks!

Greg

[corn18]

Greg, I think you will need to talk to a tax advisor about this. Converting part of it to a Roth might incur taxes on all of the 401k if it were contributed pre-tax. This is a complicated area and could get you into way more tax burden than you expect.

[gregbig2]

Yes, it's all pretax. I'm assuming I'd have to pay tax on all of the conversion as it's all pretax 401k $.

[MakeAStash]

Yes, the most significant factor is tax now vs. tax later. If taxes later will be higher, convert to Roth now.

[Petunia 100]

Hello! Really just have a quick question for the board. My wife and I are thinking about doing a roth conversion. We are 42, %15 tax bracket. We have $130,000 in ira/401k and about the same already in roths. I was planning to convert $20,000 per year for the next several years. That would keep us in the %15 bracket. I'd be paying the $3000 extra in tax out of pocket, would not be using IRA funds to pay the taxes.

I'm assuming tax rate at full retirement age will be the same or higher than it is now, most likely higher. I've used calculators online and they all seem to indicate that it's a wise move, but just looking for confirmation. Keep thinking I'm missing something or not factoring something in. We are in PA, so %3.2 income tax rate.

Thanks!

Greg

What income are you expecting in retirement? SS benefits, withdrawals from your IRAs, what else?

[gregbig2]

Income we are expecting... IRA/401k, roth and SS. Obviously if I convert all of 401k/IRA to roth, our income would only come from SS and roth and perhaps roth 401k if we want to contribute more than the max ROTH of $5500 each.

[Petunia 100]

Income we are expecting... IRA/401k, roth and SS. Obviously if I convert all of 401k/IRA to roth, our income would only come from SS and roth and perhaps roth 401k if we want to contribute more than the max ROTH of $5500 each.

You don't want all of your money in Roths. That would mean you paid too much income tax along the way. Don't forget that some taxable income is taxed at 0%. There's no reason to pay 15% now in order to avoid paying 0% later.

For 2014, a MFJ couple can have 20.3k of income taxed at 0%, 22.7k if both are over age 65.

Say your annual income was 24k from SS and 20k from a Roth IRA withdrawal. Your tax would be zero. Now suppose your annual income was 24k from SS and 20k from a traditional IRA withdrawal. Your tax would be zero. Your standard deduction and personal exemptions wipe out your 20k of taxable income. In other words, there was no benefit at all to having paid the upfront income tax on the Roth contributions.

For people with no pension, rental income, or other source of taxable income, it makes sense to have 400k - 600k in tax-deferred accounts as that can be withdrawn tax-free or close to it. Make sure you're on track to have that much before funding Roths.

[gregbig2]

Thanks Petunia! That's the part I was forgetting about. I won't convert then. You saved me lots of dollars, thanks.