Practical Advice for Roth IRA Conversion

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bliksem55
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Practical Advice for Roth IRA Conversion

Post by bliksem55 » Sun Jan 22, 2017 5:21 pm

I have a very simple question ....

I have a 401K account with $500K in it an I want to roll it into a ROTH IRA all at once. Which statement is true ....?

1. I have other money [cash in the bank] to pay the taxes on this conversion and the entire balance [$500K] now is in a ROTH IRA.
2. I have to pay taxes [approx $130K] from the 401K account and have a balance of only $370K in the ROTH IRA account.

I would like option [1] to be true but not sure ...

Many Thanks ....

Sailor36
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Re: Practical Advice for Roth IRA Conversion

Post by Sailor36 » Sun Jan 22, 2017 5:29 pm

Option 1 is true. That will be a big boatload of taxes to pay in the year of the conversion. Are you sure you don't want to spread it out over a few years?

bliksem55
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Re: Practical Advice for Roth IRA Conversion

Post by bliksem55 » Sun Jan 22, 2017 5:37 pm

Thanks Sailor36 .... I realize it is a boatload of taxes and I probably will not do it all at once . Really just wanted to see if I had to sacrifice the balance in the 401K to pay the taxes.

Thanks again for your quick response ..

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FiveK
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Re: Practical Advice for Roth IRA Conversion

Post by FiveK » Mon Jan 23, 2017 12:19 am

bliksem55 wrote:I realize it is a boatload of taxes and I probably will not do it all at once.
Good plan.

See Marginal tax rate - when you get large amounts of income, various deduction phase-outs can push your marginal tax rate higher than the "bracket" you are in.

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FIREchief
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Re: Practical Advice for Roth IRA Conversion

Post by FIREchief » Mon Jan 23, 2017 1:03 am

OP - Is your 401k entirely pre-tax dollars? If so, I strongly encourage you to consider doing this in two steps:

a) request a trustee-to-trustee transfer of your 401k to a newly established and stand alone traditional rollover IRA account
b) initiate one or more Roth conversions from the new rollover IRA account to newly established and stand alone Roth IRAs

You can to both of the above in a matter of days/weeks and you will have until October 2018 to change your mind and recharacterize some or all of the Roth conversions.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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LadyGeek
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Re: Practical Advice for Roth IRA Conversion

Post by LadyGeek » Mon Jan 23, 2017 4:01 pm

This thread is now in the Investing - Help with Personal Investments forum (Roth IRA conversion help).
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

cherijoh
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Re: Practical Advice for Roth IRA Conversion

Post by cherijoh » Mon Jan 23, 2017 4:06 pm

FIREchief wrote:OP - Is your 401k entirely pre-tax dollars? If so, I strongly encourage you to consider doing this in two steps:

a) request a trustee-to-trustee transfer of your 401k to a newly established and stand alone traditional rollover IRA account
b) initiate one or more Roth conversions from the new rollover IRA account to newly established and stand alone Roth IRAs

You can to both of the above in a matter of days/weeks and you will have until October 2018 to change your mind and recharacterize some or all of the Roth conversions.
+1

For step a be sure and request 0% withholding.

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PhysicianOnFIRE
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Re: Practical Advice for Roth IRA Conversion

Post by PhysicianOnFIRE » Mon Jan 23, 2017 4:08 pm

You're free to do that, but do you really want to? Unless you're already squarely in the top federal and state income tax brackets, and plan to be for a long time, it probably makes more sense to convert smaller portions each year over a period of time.

I converted closer to $300k all at once back in 2010 when it was believed income limits would be reinstated on conversions the following year. It cost me $107,000 in taxes over two years.

I plan to cut my income drastically in a year or two, and anticipate making much smaller annual conversions over the years.

:beer
-PoF

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