401 k to. Roth rollover - min taxes?

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JohnSmith123
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401 k to. Roth rollover - min taxes?

Post by JohnSmith123 » Fri Jun 15, 2018 8:28 am

I have a 401k plan.

I would like to rollover (or partial rollover) my 401k to a Roth 401k my plan allows it). I have about $40k in the plan

I have maybe $2k capital gains and interest income a year.
No w2 income for the next 3 years (going back to college).

My parents will claim me as a dependent (I think that works better for them?) as I am going to college.

How much can I rollover per year to my Roth 401k to minimize taxes?
How much can I rollover to only pay 10% tax bracket?

I am 22.

Thanks.

bloom2708
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Re: 401 k to. Roth rollover - min taxes?

Post by bloom2708 » Fri Jun 15, 2018 8:34 am

Don't purposefully pay tax now. Defer to 30 years down the road. Let your pre-tax dollars grow. I really don't care if 10% or 12% or 22% is "low". Nobody knows what the tax rates will look like 30 years, 40 years down the road.

There are no gains/losses in a 401k or Roth IRA, so that does not matter.

You should focus on pre-tax 401k (as much as you can) and Roth IRA to $5,500.

When you are 59.5 and not yet at SS age, you can look at Roth conversions. Focus on saving more pre-tax and Roth.
"We are here not to please but to provoke thoughtfulness" Unknown Boglehead

bradpevans
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Re: 401 k to. Roth rollover - min taxes?

Post by bradpevans » Fri Jun 15, 2018 8:45 am

JohnSmith123 wrote:
Fri Jun 15, 2018 8:28 am
I have a 401k plan.

I would like to rollover (or partial rollover) my 401k to a Roth 401k my plan allows it). I have about $40k in the plan

I have maybe $2k capital gains and interest income a year.
No w2 income for the next 3 years (going back to college).

My parents will claim me as a dependent (I think that works better for them?) as I am going to college.

How much can I rollover per year to my Roth 401k to minimize taxes?
How much can I rollover to only pay 10% tax bracket?

I am 22.

Thanks.
With various deductions, there may be an amount/year that you can partial rollover with ZERO taxes.
That's the route i would investigate, especially since whatever you do this year you can do the next two as well.

retiredjg
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Re: 401 k to. Roth rollover - min taxes?

Post by retiredjg » Fri Jun 15, 2018 8:59 am

If your parents can claim you as a dependent, how does this affect your taxes? Does your standard deduction go down?

If your only income is from the Roth conversion, it seems to me you could convert some each year for 0% (assuming you do have a standard deduction) and maybe some for 10% and get the whole thing converted before you go back to work. But I just don't know how taxes work if you can be claimed as a dependent by someone else.

Converting while in a very low tax bracket sounds like an excellent idea to me.

JohnSmith123
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Re: 401 k to. Roth rollover - min taxes?

Post by JohnSmith123 » Fri Jun 15, 2018 9:12 am

So I’m trying to figure out what are the limits so that:
- I pay 0% tax with my scenario above.

Anyone help with that? I have difficulty figuring this out.

Thanks

retiredjg
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Re: 401 k to. Roth rollover - min taxes?

Post by retiredjg » Fri Jun 15, 2018 9:15 am

I know little about this, but went looking around. Prior to the changes in the tax law, if you were claimed as a dependent by someone else, they got to claim the "personal exemption" on you which was in the neighborhood of $4k. In this case, you would give up the ability to claim it yourself.

Personal exemptions have been eliminated by the new tax law.

So before actually doing anything about the Roth conversions, your parents need to find out if it is even a good idea to claim you as a dependent under the new tax lax. I have no idea. I just found this one thing. There might be more involved than that.

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teen persuasion
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Re: 401 k to. Roth rollover - min taxes?

Post by teen persuasion » Fri Jun 15, 2018 9:16 am

Do you expect to receive financial aid? Your AGI will influence your EFC (Expected Family Contribution), so increasing your AGI by converting traditional accounts to Roth could have repercussions beyond your income tax owed.

There may be a threshold you can stay under safely. The first $6570 of your AGI is protected, plus some other amounts like fed tax paid and a state tax proxy; 50% above the protection amount is included in EFC calculations.

Google "EFC formulas 2018-19" for the calculation worksheets and charts.

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teen persuasion
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Re: 401 k to. Roth rollover - min taxes?

Post by teen persuasion » Fri Jun 15, 2018 9:24 am

retiredjg wrote:
Fri Jun 15, 2018 9:15 am
I know little about this, but went looking around. Prior to the changes in the tax law, if you were claimed as a dependent by someone else, they got to claim the "personal exemption" on you which was in the neighborhood of $4k. In this case, you would give up the ability to claim it yourself.

Personal exemptions have been eliminated by the new tax law.

So before actually doing anything about the Roth conversions, your parents need to find out if it is even a good idea to claim you as a dependent under the new tax lax. I have no idea. I just found this one thing. There might be more involved than that.
It will be interesting to see how the new rules play out.

It seems that the student dependent should get his single standard deduction. The parents could be eligible for a CTC of $500 for a dependent not under 17. They could also be eligible for the AOTC up to $2500 for college expenses.

If the student is not a dependent, he gets his single standard deduction (same), but there's no CTC for anyone. He might be eligible for some AOTC, but there are limits for students under 24 with limited earned income.

On a whole, the combined family may be eligible for greater credits with the student as a dependent. The devil's in the details, though, and those aren't all out there yet.


ETA: As far as the FAFSA is concerned, the student at age 22 will be considered a dependent and require parent information when filing the FAFSA, unless he meets some other criteria like married, military, graduate school, etc.

JohnSmith123
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Re: 401 k to. Roth rollover - min taxes?

Post by JohnSmith123 » Fri Jun 15, 2018 9:30 am

I will not be getting any financial aid for college so don’t need to worry about this.

Still searching for definitive answers here....thanks everyone....

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teen persuasion
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Re: 401 k to. Roth rollover - min taxes?

Post by teen persuasion » Fri Jun 15, 2018 10:03 am

For 2018, the standard deduction amount for an individual who may be claimed as a dependent by another taxpayer cannot exceed the greater of $1,050 or the sum of $350 and the individual’s earned income
The above was from Forbes. If your income was earned income, you could use the full $12k single standard deduction, but as I believe Roth conversions are not considered earned income your dependent standard deduction is much lower.

JohnSmith123
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Re: 401 k to. Roth rollover - min taxes?

Post by JohnSmith123 » Sat Jun 16, 2018 8:20 am

Ok, so based on this, since I have no earned income, and I am not taking the dependent deduction (my parents are), I will end up paying full tax based on the income tax slabs?

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FiveK
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Re: 401 k to. Roth rollover - min taxes?

Post by FiveK » Sun Jun 17, 2018 7:02 am

Or your parents will. Might be worth reading about the 2018 kiddie tax - Google Search.

JohnSmith123
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Re: 401 k to. Roth rollover - min taxes?

Post by JohnSmith123 » Sun Jun 17, 2018 10:16 pm

Thank you! Wow this is new kiddie tax being taxed at the estate rates is bad.
Probably makes more sense that I wait until I am 24 and then convert my 401k to a Roth and that way it will be at a lower tax rate and also have my exception and not impact my parents. I will still be in college so my income should be low.

Fire wicket
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Re: 401 k to. Roth rollover - min taxes?

Post by Fire wicket » Mon Jun 18, 2018 10:07 am

I am very confused here.

Aside from the kiddie tax.
You have a young man with a fair amount of money in a 401k.
He could roll this amount over entirely to a Roth IRA.
You never get a chance to put such a large sum into a Roth unless you are rolling a 401k over.
That Roth would the grow for the next 40 years and the gains would never be taxed again.

Personally I would take a Roth dollar over a 401k dollar any day.
I dont see much of an argument against converting the whole thing over to a Roth unless you cant cover the taxes on your marginal rate.

just my 2 cents.

JohnSmith123
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Re: 401 k to. Roth rollover - min taxes?

Post by JohnSmith123 » Mon Jun 18, 2018 10:26 am

I don’t think you understood my post.
I want to roll over my 401k to a Roth IRA, but want toinize taxes. The question is how much can I do per year to minimize the tax hit when this is done.

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FiveK
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Re: 401 k to. Roth rollover - min taxes?

Post by FiveK » Mon Jun 18, 2018 11:00 am

Fire wicket wrote:
Mon Jun 18, 2018 10:07 am
I am very confused here.

Aside from the kiddie tax.
You have a young man with a fair amount of money in a 401k.
He could roll this amount over entirely to a Roth IRA.
You never get a chance to put such a large sum into a Roth unless you are rolling a 401k over.
That Roth would the grow for the next 40 years and the gains would never be taxed again.

Personally I would take a Roth dollar over a 401k dollar any day.
I dont see much of an argument against converting the whole thing over to a Roth unless you cant cover the taxes on your marginal rate.
Are you familiar with the commutative property of multiplication as it applies to this decision?

Under the 2018 Kiddie Tax Rules And Rates, most of the $40K being considered here would be taxed at 37%. Assuming the tax rate 40 years from now when withdrawing will be less than 37%, converting to a Roth now would mean less money available for spending in 40 years.

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