Converting a Traditional IRA to Roth IRA

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EMDW
Posts: 79
Joined: Thu Jul 04, 2013 11:18 am

Converting a Traditional IRA to Roth IRA

Post by EMDW » Fri Jul 04, 2014 11:58 am

My sibling just completed graduate school and has 2 traditional IRAs under the money market account with Fidelity with less than 5K total. He will begin working next month with a pay that will qualify him to contribute to a Roth IRA. He will like to move the money into a Lifestrategy growth fund with Vanguard under a Roth IRA. What are the tax implications now? Thank you.

DSInvestor
Posts: 11067
Joined: Sat Oct 04, 2008 11:42 am

Re: Converting a Traditional IRA to Roth IRA

Post by DSInvestor » Fri Jul 04, 2014 12:22 pm

It would have been better for to convert to Roth IRA when he was still in school for a full year with little or no income. There may have been no tax cost to convert then. If he converts now in calendar 2014, the conversion income (5K) is added to whatever income he earns in total for 2014. Still, it is probably better to convert in 2014 with partial year income than in 2015 where he will have income for a full year.

He can run some numbers with taxcaster. Enter an estimate of the income he expects to earn in total for 2014 without the conversion and get the Fed Tax. Add the conversion income and see how much the Fed Tax increases. The difference in tax is the tax cost for the conversion. Unfortunately Taxcaster only covers Fed Tax. If he resides in a state with state income tax, there will be additional taxes.

Taxcaster: https://turbotax.intuit.com/tax-tools/c ... taxcaster/
Enter the Roth conversion amount in the section for Other income in IRA/Pension Distributions.

If he has 2 Fidelity IRA accounts and wants to transfer those assets to a Vanguard IRA, Fidelity may charge an IRA transfer fee or close account fee for each account. Find out how much those fees will be. If he doesn't want to pay those fees, there may be some low cost funds that he can buy at Fidelity. For example, Fidelity Four-In-One Index is like a LifeStrategy fund with 85% stocks and 15% bonds. It may be a good alternative to LifeStrategy Growth (80/20).
Last edited by DSInvestor on Fri Jul 04, 2014 12:33 pm, edited 2 times in total.
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celia
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Re: Converting a Traditional IRA to Roth IRA

Post by celia » Fri Jul 04, 2014 12:32 pm

The amount that is converted to a Roth is taxed as ordinary income for the year in which the conversion is done.

For those with large traditional IRAs who want to convert, you can convert some of it and leave some for converting in another year(s).
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.

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