Traditional IRA Conversion Question - 28yo

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joemama919
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Traditional IRA Conversion Question - 28yo

Post by joemama919 »

To experienced Bogleheads:

We (Him 28, Her 29) have a combination of 3 IRA accounts: 2 for me (1 rollover traditional and 1 rollover roth), 1 new roth for wife. I am pondering the idea of converting his traditional IRA account roth and combining since all contributions moving forward will be to the roth anyway. The account balances are as listed below:

HIs Traditional IRA - $9k
His Roth IRA - $19k

We make roughly $125k with contributions going into our 401k and 403b accounts separately.

Question: Does it make sense to convert the Traditional Roth now for both simplicity and growth purposes? This would also allow the me to setup a 2-3 fund AA within the Roth more easily moving forward.

Any input would be much appreciated!
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njboater74
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Re: Traditional IRA Conversion Question - 28yo

Post by njboater74 »

What's your top tax bracket? I'm guessing you're in the 25% bracket based on your income. However, if you're Married, Filing Jointly, are contributing the max to your 401ks, and have deductions, then you would probably find yourself in the 15% bracket.

Do you have the cash to pay the taxes on the conversion?
Do you anticipate your income rising in the future?

If you have the cash, it probably makes sense to do the conversion either way and get things lined up neatly for the future, although if you're in the 15% bracket, it makes even more sense.
When the mob and the press and the whole world tell you to move, your job is to plant yourself like a tree beside the river of truth and tell the whole world - 'No, YOU move'--Captain America, Boglehead
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BL
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Re: Traditional IRA Conversion Question - 28yo

Post by BL »

It is not clear to me if that is your W-2 income, or you lower it by the 401ks and deductions/exemptions to get into the 15% bracket.

If you are in the 25% tax bracket, (look up the number in line 43, taxable income, on your 1040 for bracket), then you will pay 25% + state tax on the conversion. It may still be worthwhile, especially if your income is going up a lot in the future. Still, that is a high % to lose, so think about it carefully. Will there be a time in the near future when you only have one income, for instance? We may be talking about under $3k in taxes.
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joemama919
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Re: Traditional IRA Conversion Question - 28yo

Post by joemama919 »

I'm pretty sure we fell into the 25% bracket last year as we were not maxing out 401k/403b accounts. Having just gotten married and buying a house in late 2015, last year was spent more wisely on emergency fund accrual and getting on track.

We assumed more than $4k in tax return last year through itemizing, etc. This would help buffer the difference.

We do anticipate a roughly 5% increase in income each year in the near term. However, you make a good point regarding a single salary in the coming years. We will most likely be trying for our first child next year, which could bring a host of options to consider from an income perspective. Currently, my salary is 75k and the wife is at 50k.

Thanks for the input!
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joemama919
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Re: Traditional IRA Conversion Question - 28yo

Post by joemama919 »

I stand corrected...just took a look at last year's return and it reads as follows:

Total Income - $114k
Total Deductions & Exemptions - $30k
Taxable Income - $84k
Total Federal Taxes - $12.5k or 15%

In 2017, we will make approx. $125k.
Topic Author
joemama919
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Re: Traditional IRA Conversion Question - 28yo

Post by joemama919 »

IDK, now I'm really confused...the tax brackets for 15% last year were 18.5-75.3? So how do my numbers work out as described above?
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njboater74
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Re: Traditional IRA Conversion Question - 28yo

Post by njboater74 »

joemama919 wrote:IDK, now I'm really confused...the tax brackets for 15% last year were 18.5-75.3? So how do my numbers work out as described above?
You don't pay 15% on all of your income.
- You pay 10% on income up to 18,650
- You pay 15% on income between 18,650-75,900
- You pay 25% on income between 75,900-153,100

The numbers just worked out that way that you happened to pay 15% on your total income, but you are in the 25% bracket.

So you anticipate your income increasing by 10k next year. That's good! If that's a trend, it makes a stronger case to do the conversion now.
When the mob and the press and the whole world tell you to move, your job is to plant yourself like a tree beside the river of truth and tell the whole world - 'No, YOU move'--Captain America, Boglehead
kaneohe
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Re: Traditional IRA Conversion Question - 28yo

Post by kaneohe »

njboater74 wrote:
joemama919 wrote:I..................................................
The numbers just worked out that way that you happened to pay 15% on your total income, but you are in the 25% bracket.

..........................................................
Is that taxable income?
Topic Author
joemama919
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Re: Traditional IRA Conversion Question - 28yo

Post by joemama919 »

njboater74 wrote:
So you anticipate your income increasing by 10k next year. That's good! If that's a trend, it makes a stronger case to do the conversion now.
This has been the trend and is the expectation in the near term at least. I have taken early jobs in my career based on the level of experience and opportunity they have offered and am not beginning to reap some of the benefits. My wife has worked for a non-profit for 7+ years now and they are finally able to return for her hard work and Senior Management status now. We should be able to put all of these increases directly toward future investments! To the future!

Will just need to discuss the whole child, time out off work concept approaching in the next year timeframe...
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grabiner
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Re: Traditional IRA Conversion Question - 28yo

Post by grabiner »

joemama919 wrote:
njboater74 wrote:
So you anticipate your income increasing by 10k next year. That's good! If that's a trend, it makes a stronger case to do the conversion now.
This has been the trend and is the expectation in the near term at least. I have taken early jobs in my career based on the level of experience and opportunity they have offered and am not beginning to reap some of the benefits. My wife has worked for a non-profit for 7+ years now and they are finally able to return for her hard work and Senior Management status now. We should be able to put all of these increases directly toward future investments! To the future!
This suggests converting your traditional IRAs to Roth IRAs now, and contributing to Roth IRAs, while you stay in the 25% bracket. You are likely to move into the 28% bracket later in your career, and will want to make traditional investments then.

In addition, if you do not yet have a child but will have one in the future, your marginal tax rate is likely to become 30% even if you stay in the 25% tax bracket, because of the phase-out of the child tax credit. This is another reason to contribute to Roth accounts now, and traditional accounts later.
Wiki David Grabiner
Topic Author
joemama919
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Re: Traditional IRA Conversion Question - 28yo

Post by joemama919 »

grabiner,

Thanks for this thoughts. Our 401k/403b accounts are both traditional contributions. My initial thoughts were that traditional contributions would get us tax advantages for those accounts, but that we now have phased out of getting full tax advantages using traditional IRA contributions.

I'm not sure I'm following your comments regarding the child tax credit. If the wife takes time off and we now have an additional credit applied, how will the marginal taxes increase? And are you referring to the child tax credit no longer being available in the future?
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grabiner
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Re: Traditional IRA Conversion Question - 28yo

Post by grabiner »

joemama919 wrote:grabiner,

Thanks for this thoughts. Our 401k/403b accounts are both traditional contributions. My initial thoughts were that traditional contributions would get us tax advantages for those accounts, but that we now have phased out of getting full tax advantages using traditional IRA contributions.

I'm not sure I'm following your comments regarding the child tax credit. If the wife takes time off and we now have an additional credit applied, how will the marginal taxes increase? And are you referring to the child tax credit no longer being available in the future?
The child tax credit phases out with income. For a married couple filing jointly, the phase-out range begins at $110,000 adjusted gross income, and continues until the credit drops to zero. If you are in the phase-out range, every $1000 in additional income costs you $50 of child tax credit. Therefore, if you convert $1000 from a traditional IRA to a Roth IRA, you will pay $250 tax in the 25% tax bracket, but also lose $50 of child tax credit, for a total tax increase of $300, a 30% marginal tax rate.
Wiki David Grabiner
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