Do I convert my traditional IRA to a Roth IRA?

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rentonhighlands
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Do I convert my traditional IRA to a Roth IRA?

Post by rentonhighlands »

Hello forum members,
Please provide your thoughts and options, Do I convert my Traditional IRA to a Roth IRA?
Age 37
Traditional IRA is $33 717.97
Work 401K is $32,886.08 with a Roth option inside of it. I just started adding to the Roth option. It currently has $1075.30
Would it be smart to open a Roth IRA (separate of my Traditional IRA and 401k and fund it)? I only think this because this way I would not have to pay taxes on the Traditional IRA.
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retiredjg
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Re: Do I convert my traditional IRA to a Roth IRA?

Post by retiredjg »

The answer mostly depends on your tax bracket. Compare your taxable income, line 43 on form 1040, to this chart. http://www.moneychimp.com/features/tax_brackets.htm

Your tax bracket in retirement will affect this too. Will you have a pension? If so, will it be sizable or tiny?
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Zabar
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Re: Do I convert my traditional IRA to a Roth IRA?

Post by Zabar »

Four issues to consider in making the decision:

• Current marginal tax bracket (known) vs. anticipated future marginal tax bracket in retirement (unknown).
• Desire to build a "portfolio of tax rates" during retirement.
• Desire not to have RMDs in retirement so as to minimize future taxes.
• Desire to leave a tax-free inheritance that can be stretched over the anticipated lifetime of a non-spouse beneficiary
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siamond
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Re: Do I convert my traditional IRA to a Roth IRA?

Post by siamond »

Your cost basis on the tIRA also matters. If you happen to have made very little gains so far, then it might be a good time to switch as it will (likely) be significantly more painful later on. That was the trigger for me earlier this year... Check (and archive) those 5498 forms...
Topic Author
rentonhighlands
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Re: Do I convert my traditional IRA to a Roth IRA?

Post by rentonhighlands »

what is the 5498 form?
I will have a pension in retirement but I am not sure how much it will be.
If I convert tIRA to Roth IRA would I only have to pay taxes on the gains? How can I find out what amount of money I would have to pay taxes on if I decide to convert?
I am currently in the 25% tax bracket.
Last edited by rentonhighlands on Mon Apr 07, 2014 1:21 pm, edited 1 time in total.
MathWizard
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Re: Do I convert my traditional IRA to a Roth IRA?

Post by MathWizard »

siamond wrote:Your cost basis on the tIRA also matters. If you happen to have made very little gains so far, then it might be a good time to switch as it will (likely) be significantly more painful later on. That was the trigger for me earlier this year... Check (and archive) those 5498 forms...
Would you please explain or give a reference?

I understand needing the cost basis for a taxable account, but the cost basis for a Traditional IRA
would be zero, wouldn't it?
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celia
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Re: Do I convert my traditional IRA to a Roth IRA?

Post by celia »

If you have not made non-deductible contributions to the traditional IRA, then you pay taxes on the amount that is being converted.

If all contributions to the traditional IRA were non-deductible, then the conversion is tax-free. (Some people can't make deductible contributions since their income is too high. They would make non-deductible contributions to the traditional IRA, and usually the next day, they convert them to a Roth.)

If you made deductible and non-deductible contributions, you pro-rate the amount being converted to the same percentage that the deductible vs non-deductible contributions that were made to all your traditional IRAs. (I suggest that you not put deductible and non-deductible contributions into the same IRA account as the calculations get messy, especially if conversions are spaced out over time.)

Remember, that each dollar is taxed once, either when it is contributed to a Roth or non-deductible traditional IRA or when it (and the earnings) are withdrawn from a traditional IRA.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
JW-Retired
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Re: Do I convert my traditional IRA to a Roth IRA?

Post by JW-Retired »

celia wrote: If all contributions to the traditional IRA were non-deductible, then the conversion is tax-free.
Slight correction. All the IRA earnings (gains) in the conversion would get taxed since they have not been taxed yet.

Also, the cost basis being referred to is the amount of non-deductible contributions made to the IRA. Usually just called "basis".
JW
Retired at Last
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Duckie
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Re: Do I convert my traditional IRA to a Roth IRA?

Post by Duckie »

rentonhighlands wrote:what is the 5498 form?
If you contribute to, convert to, roll over to, or withdraw from an IRA the custodian will send you (and the IRS) Form 5498 in May. Keep these forms. You may need them when you retire and start taking distributions.

(The form you receive may not look exactly like this. Vanguard's is different, but it has the same information.)
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siamond
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Re: Do I convert my traditional IRA to a Roth IRA?

Post by siamond »

MathWizard wrote:
siamond wrote:Your cost basis on the tIRA also matters. If you happen to have made very little gains so far, then it might be a good time to switch as it will (likely) be significantly more painful later on. That was the trigger for me earlier this year... Check (and archive) those 5498 forms...
Would you please explain or give a reference?

I understand needing the cost basis for a taxable account, but the cost basis for a Traditional IRA
would be zero, wouldn't it?
Previous posters already answered, but let me repeat in my own words. Cost basis for a tIRA might not zero, it's actually the sum of the non-deductible contributions you made. And if you didn't keep good track of your contributions, forms 5498 will help you rebuild such data. Been there a few months ago, done just that! :wink:

In my case, I never had the opportunity to make a deductible contribution since we opened our IRAs. And I selected REITs for our IRAs, which did poorly in the past few years. So I had very little (taxable) gain overall. So I converted from tIRA to Roth-IRA at a very low cost (i.e. taxes). And now I'm waiting for those REITs to go through the roof... :wink:
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