Converting 401k to Roth IRA question

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WolfpackFan
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Converting 401k to Roth IRA question

Post by WolfpackFan »

I'm planning on potentially quitting my job in the next year or so. Once unemployed would it be a good idea to start converting my 401k to a Roth IRA (assuming essentially identical funds and asset allocation and fees) at the start of a new tax year? The objective would be to reduce tax obligations.

Here's the rub though... in our particular situation my spouse would continue to work pulling approx. 120k/yr income. Could we file taxes as married/separately allowing me to show little to no income thus allowing me to convert a certain portion of my 401k to my Roth IRA only requiring me to pay little to no taxes on the conversion? We also have a child so I think we'd lose that tax benefit that we'd get if we filed jointly. Would loss of certain tax benefits basically negate this plan of action? What am I leaving out? I'm curious if there's any tax strategies to follow in this type of situation, if anyone else has done something similar, and any other info or insights.
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AndrewXnn
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Re: Converting 401k to Roth IRA question

Post by AndrewXnn »

I believe that it is generally good to convert a 401k to a Roth.
However, it will be taxable so you will need to have sufficient funds to pay those taxes.
Also, while your tax rate may be lower if you file Married and Separate, your Wife's tax rate will be higher.
There may be some slight advantage depending on deductions and the amount being rolled over, but I'd suggest figuring that out both ways ahead of time.
Qualified Nuclear Engineer & NYS Licensed Professional Engineer
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WolfpackFan
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Re: Converting 401k to Roth IRA question

Post by WolfpackFan »

If I'm not reporting any income it is the understanding I can convert a portion of my 401k to a Roth IRA without paying any taxes on said conversion. That would be my goal. I did not realize my spouse's tax rate would increase due to choosing to file separately. So you are saying (or what I'm understanding from you) that the difference between filing separately as opposed to jointly puts her automatically in a higher tax bracket?
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AndrewXnn
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Re: Converting 401k to Roth IRA question

Post by AndrewXnn »

Yes; she would be in a higher tax bracket if you all filed Married and separate.

120K of income Married-Joint = 25% tax bracket.
120K of income Married-Separate = 33% tax bracket.
She would owe about $5777 more in taxes.

Also, your taxes would not be zero as you were planning on converting some of the 401k.
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celia
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Re: Converting 401k to Roth IRA question

Post by celia »

If you are preparing your 2014 tax returns yourself, why not use the software to try our several scenarios:

Wife working and no wages for you after a certain point and no Roth conversion. (joint return)
Wife working and no wages for you after a certain point but $20k Roth conversion. (joint return)
Wife working. No wages for you after a certain point but $20k Roth conversion. (married, separate, either ONE of you can claim the child)
Wife working and no wages for you after a certain point but $40k Roth conversion. (joint return)
Wife working. No wages for you after a certain point but $40k Roth conversion. (married, separate, either ONE of you can claim the child)
etc

Tax software is your friend. Use it to find your "sweet" spot. You can use a COPY of your completed 2014 Form 1040 to simplify your data entry.
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: Converting 401k to Roth IRA question

Post by JW-Retired »

WolfpackFan wrote: I did not realize my spouse's tax rate would increase due to choosing to file separately. So you are saying (or what I'm understanding from you) that the difference between filing separately as opposed to jointly puts her automatically in a higher tax bracket?
Don't know about automatically but if she has most of the income of course her bracket will be higher. For example, the top of the 25% bracket is $90,750 taxable income for single filers, $75,600 for MFS, and $151,200 for MFJ. Google it.

I think there may be some other bad things for married filing separately taxpayers that makes it only very rarely beneficial..... don't know the specifics.
JW
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