Practical Advice for Roth IRA Conversion

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
bliksem55
Posts: 23
Joined: Thu Sep 08, 2016 6:43 pm

Practical Advice for Roth IRA Conversion

Post by bliksem55 »

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
Posts: 21
Joined: Mon May 04, 2015 7:15 pm

Re: Practical Advice for Roth IRA Conversion

Post by Sailor36 »

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?
Topic Author
bliksem55
Posts: 23
Joined: Thu Sep 08, 2016 6:43 pm

Re: Practical Advice for Roth IRA Conversion

Post by bliksem55 »

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 ..
User avatar
FiveK
Posts: 15693
Joined: Sun Mar 16, 2014 2:43 pm

Re: Practical Advice for Roth IRA Conversion

Post by FiveK »

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.
User avatar
FIREchief
Posts: 6916
Joined: Fri Aug 19, 2016 6:40 pm

Re: Practical Advice for Roth IRA Conversion

Post by FIREchief »

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.
User avatar
LadyGeek
Site Admin
Posts: 95466
Joined: Sat Dec 20, 2008 4:34 pm
Location: Philadelphia
Contact:

Re: Practical Advice for Roth IRA Conversion

Post by LadyGeek »

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
Posts: 6591
Joined: Tue Feb 20, 2007 3:49 pm
Location: Charlotte NC

Re: Practical Advice for Roth IRA Conversion

Post by cherijoh »

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.
User avatar
PhysicianOnFIRE
Posts: 470
Joined: Fri Jan 08, 2016 2:46 pm
Location: Up North

Re: Practical Advice for Roth IRA Conversion

Post by PhysicianOnFIRE »

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
Post Reply