Here is my current situation:If your current marginal rate is lower than your expected retirement tax rate, you should convert in preference to any investment except a matched contribution to a retirement plan. If the rates are equal, max out your Roth contribution in preference to converting, but convert in preference to maxing out your 401(k).
- Age 24, slated to make ~$55k in 2012.
- Taxable account: $10k (funded entirely in 2011 before I read Bogleheads)
- 401(k) w/ no matching: $10k (funded entirely in 2012)
- Roth IRA: $11k (funded entirely in 2012)
- I am also slated to inherit ~$150k in December, all cash, tax-free. Because of this, I want to fill my 401k as much as possible in 2012, but don't have the cash to do so until December. I'm thinking my 401k will be ~$16k by year end.
Theoretical 2012 tax return: $55k wages - $16k deductible contributions - $5.9k std deduction - $3.9k personal exemption = $29.2k taxable income (the 25% rate doesn't kick in until $35.5k)
Now, based on the quote from Bogleheads wiki above, based on an assumption that my marginal rate in retirement will be 25-28%, I should convert as much of my 401(k) until as I can until I hit the 25% bracket, right?
Not to mention, the traditional vs. Roth contributions argument always seem to come down to a bet on future tax rates. So lets there is a 50/50 shot that tax rates skyrocket in 40 years. So, theoretically, I want to split my Roth and 401k 50/50 as well, to minimize risk. But a Roth limits you to $5k a year, so unless you only contribute $5k to Roth and $5k to 401k (it seems likely that most will contribute more than $5k to 401k every year), you are breaking your own 50/50 target. Therefore, this is an ideal time to beef up my Roth IRA a little more, considering I may never be in the 15% bracket again, and that throughout my life, 401k contributions are almost certainly going to out pace my Roth contributions.
Also, what do you think about selling out of my taxable now (before December inheritance), so I have the cash means to max out my 401k by year end. This would allow me to convert around an extra $6k to Roth while still keeping me in the 15% bracket, assuming my previously mentioned thought process is somewhat on track.
Thoughts? Advice? I feel like I may be missing something here (I've been known to do so). Anything is greatly appreciated.