Traditional IRA to ROTH and pay taxes now?

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niners9088
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Traditional IRA to ROTH and pay taxes now?

Post by niners9088 »

A friend is currently maxing out 401k, HSA has no debt and a good emergency fund. They currently have about $6k in a Traditional (tax deferred) IRA from several years ago. They are currently in their mid-30s and in the 24% marginal tax bracket. Most likely the taxes will be lower in retirement but probably not in the near term. Do you think it is more beneficial to do a Roth conversion and pay the taxes now to allow for future backdoor contributions or to just invest in a non-tax advantage fund? Any other suggestions?
mcraepat9
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Re: Traditional IRA to ROTH and pay taxes now?

Post by mcraepat9 »

niners9088 wrote: Mon Jul 30, 2018 10:08 am A friend is currently maxing out 401k, HSA has no debt and a good emergency fund. They currently have about $6k in a Traditional (tax deferred) IRA from several years ago. They are currently in their mid-30s and in the 24% marginal tax bracket. Most likely the taxes will be lower in retirement but probably not in the near term. Do you think it is more beneficial to do a Roth conversion and pay the taxes now to allow for future backdoor contributions or to just invest in a non-tax advantage fund? Any other suggestions?
Mid-30s makes this a no-brainer. Convert the traditional IRA, take the tax hit, and then contribute $5500 a year to the backdoor Roth IRA every year. You could be talking about $150+k in Roth contributions assuming the friend contributes yearly and the backdoor Roth IRA survives that long.
Amateur investors are not cool-headed logicians.
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David Jay
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Re: Traditional IRA to ROTH and pay taxes now?

Post by David Jay »

You say "they" have "a" tIRA. If that is the case then one of them has a tIRA (the "I" in IRA is "individual" - two people can't share a tIRA).

This means that they already have one person without a tIRA, so one person has the ability to do a backdoor Roth now ($5500 per year). If they are married, one spouse's income can be used to fund the other spouse's backdoor (i.e. a stay-at-home spouse can do a backdoor using spouse's income).

If they want to contribute more than $5500 per year, then the advice above is correct, convert the $6000 to Roth and pay the one-time tax. Then they will have $11,000 available for backdoor Roth.

Never invest retirement money in taxable if Roth space is available (directly or through backdoor).
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
ExitStageLeft
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Re: Traditional IRA to ROTH and pay taxes now?

Post by ExitStageLeft »

Yes, convert ansd start doing backdoor Roths every year. If one of the 401k plans support it, then a mega backdor Roth should be considered.
Charon
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Re: Traditional IRA to ROTH and pay taxes now?

Post by Charon »

David Jay wrote: Mon Jul 30, 2018 12:40 pm You say "they" have "a" tIRA. If that is the case then one of them has a tIRA (the "I" in IRA is "individual" - two people can't share a tIRA).
"A friend".

Seems pretty clear that the OP was using "they" as a gender-neutral singular pronoun here, which is very common usage and totally fine.
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FiveK
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Re: Traditional IRA to ROTH and pay taxes now?

Post by FiveK »

Or, roll the IRA into the current 401k (if the current 401k allows this) to defer taxes on the $6K until later and then do all the backdoor IRA allowed.
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David Jay
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Re: Traditional IRA to ROTH and pay taxes now?

Post by David Jay »

Charon wrote: Mon Jul 30, 2018 1:56 pm
David Jay wrote: Mon Jul 30, 2018 12:40 pm You say "they" have "a" tIRA. If that is the case then one of them has a tIRA (the "I" in IRA is "individual" - two people can't share a tIRA).
"A friend".

Seems pretty clear that the OP was using "they" as a gender-neutral singular pronoun here, which is very common usage and totally fine.
It may be pretty clear to you, but to me the interpretation is that the friend is in a domestic relationship. I guess I am getting old - I would not understand "they" as singular.
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
Charon
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Re: Traditional IRA to ROTH and pay taxes now?

Post by Charon »

David Jay wrote: Mon Jul 30, 2018 3:54 pm
Charon wrote: Mon Jul 30, 2018 1:56 pm Seems pretty clear that the OP was using "they" as a gender-neutral singular pronoun here, which is very common usage and totally fine.
It may be pretty clear to you, but to me the interpretation is that the friend is in a domestic relationship. I guess I am getting old - I would not understand "they" as singular.
Fair enough, the post isn't entirely unambiguous, but still seems fairly clear... For what it's worth, "they" has been used as a singular pronoun in English since the 1300s (including by Chaucer, Austen, Byron, and Thackeray). I do think the usage has increased recently, though, with a rise of gender-neutral language. Garner's Modern American Usage reports it as "more or less standard" in British English today, but still facing some resistance in American English (which he calls an "unfortunate obstacle").
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