Convert TIRA to Roth, nondeductible

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
AstroGirl
Posts: 13
Joined: Thu Jul 04, 2013 3:22 pm

Convert TIRA to Roth, nondeductible

Post by AstroGirl » Mon Oct 15, 2018 7:43 am

Hi,

I’d apreciate some help w this.
I have about $150,000 in traditional IRA w a mix of
deductible and nondeductible contributions. Last
8606 showed 50k for nondeductible contributions.
I also have 50k in Roth IRA.

Total retirement assets about 1.2 M, also 600K taxable;
tax bracket 33%.
I max contributions to Roth 401, income 280K, married.
Age 54.

I am thinking of converting TIRA to Roth, can pay taxes
w nonretirement funds. Or should I wait several years until my income is less, after partial retirement?

I’ve been told my Roth 401 plan (Fidelity) won’t accept my IRA funds.

Prefer paying taxes up front, having as much as possible in Roth going forward.

Any thoughts?
Thank you.

-ag

magicrat
Posts: 452
Joined: Sat Nov 29, 2014 7:04 pm

Re: Convert TIRA to Roth, nondeductible

Post by magicrat » Mon Oct 15, 2018 7:55 am

Do you have an active 401k where you can contribute pre-tax money? If so, will it take a rollover contribution? If yes to both, you may be able to roll the pre-tax portion of your IRA to the 401k and the after-tax portion to your Roth IRA. This is likely better than paying tax now.

User avatar
cheese_breath
Posts: 7991
Joined: Wed Sep 14, 2011 7:08 pm

Re: Convert TIRA to Roth, nondeductible

Post by cheese_breath » Mon Oct 15, 2018 7:55 am

AstroGirl wrote:
Mon Oct 15, 2018 7:43 am

....tax bracket 33%....

...Or should I wait several years until my income is less, after partial retirement?...

...Prefer paying taxes up front...
Do you really prefer paying 33% in taxes now if you might be able to pay a lesser rate later?
The surest way to know the future is when it becomes the past.

User avatar
BL
Posts: 8335
Joined: Sun Mar 01, 2009 2:28 pm

Re: Convert TIRA to Roth, nondeductible

Post by BL » Mon Oct 15, 2018 8:05 am

cheese_breath wrote:
Mon Oct 15, 2018 7:55 am
AstroGirl wrote:
Mon Oct 15, 2018 7:43 am

....tax bracket 33%....

...Or should I wait several years until my income is less, after partial retirement?...

...Prefer paying taxes up front...
Do you really prefer paying 33% in taxes now if you might be able to pay a lesser rate later?
+1
Also would your 401k accept trad. IRA amount if you changed to trad. 401k? See Wiki for 401k vs. Roth:
https://www.bogleheads.org/wiki/Traditional_versus_Roth

User avatar
grabiner
Advisory Board
Posts: 22873
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Convert TIRA to Roth, nondeductible

Post by grabiner » Mon Oct 15, 2018 8:25 am

cheese_breath wrote:
Mon Oct 15, 2018 7:55 am
AstroGirl wrote:
Mon Oct 15, 2018 7:43 am

....tax bracket 33%....

...Or should I wait several years until my income is less, after partial retirement?...

...Prefer paying taxes up front...
Do you really prefer paying 33% in taxes now if you might be able to pay a lesser rate later?
(There is no 33% tax bracket now; it has become 32%.)

It's not quite that simple. The IRA is 1/3 non-deductible, so the tax would be 22% of the value. If you wait, the IRA is likely to grow, which will decrease the non-deductible fraction, so you will pay tax at a lower rate but on a higher fraction of the value.

So what matters is how long it takes for your tax rate to decreases, and what it becomes then. If your tax rate doesn't decrease until 2026, the current 24% tax bracket will become 28%. If the IRA grows to $250K by then, the tax would be 28% of 80% of the IRA, the same 22%.

You can continue to make non-deductible contributions to the traditional IRA, with the intention of converting when you convert the rest.
Wiki David Grabiner

retiredjg
Posts: 34133
Joined: Thu Jan 10, 2008 12:56 pm

Re: Convert TIRA to Roth, nondeductible

Post by retiredjg » Mon Oct 15, 2018 9:05 am

AstroGirl wrote:
Mon Oct 15, 2018 7:43 am
I’ve been told my Roth 401 plan (Fidelity) won’t accept my IRA funds.
I'd look into this again. It is uncommon (but not impossible) for a 401k not to accept incoming IRA rollovers. A 401k that allows Roth contributions also offers traditional (pre-tax) contributions so that is not the problem.

GrowthSeeker
Posts: 158
Joined: Tue May 15, 2018 10:14 pm

Re: Convert TIRA to Roth, nondeductible

Post by GrowthSeeker » Mon Oct 15, 2018 10:08 am

retiredjg wrote:
Mon Oct 15, 2018 9:05 am
AstroGirl wrote:
Mon Oct 15, 2018 7:43 am
I’ve been told my Roth 401 plan (Fidelity) won’t accept my IRA funds.
I'd look into this again. It is uncommon (but not impossible) for a 401k not to accept incoming IRA rollovers. A 401k that allows Roth contributions also offers traditional (pre-tax) contributions so that is not the problem.

I assume the OP is saying that her Roth 401 will not accept a rollover from her traditional IRA, which I thought was true of all Roth 401s.

Note: Vanguard 401s (even when not Roth) do not accept IRA rollovers of any kind, AFAIK.

Note also that once the Roth conversion goes high enough to drive MAGI above a threshold ($250k for married filing jointly) it triggers the NIIT tax which is 3.8% of either (LTCG+ Qual DIVs) or (MAGI - threshold), which ever is less.
Just because you're paranoid doesn't mean they're NOT out to get you.

retiredjg
Posts: 34133
Joined: Thu Jan 10, 2008 12:56 pm

Re: Convert TIRA to Roth, nondeductible

Post by retiredjg » Mon Oct 15, 2018 12:27 pm

GrowthSeeker wrote:
Mon Oct 15, 2018 10:08 am
I assume the OP is saying that her Roth 401 will not accept a rollover from her traditional IRA, which I thought was true of all Roth 401s.
"Roth 401k" is a commonly accepted term, but it is really just an ordinary 401k that accepts both pre-tax and Roth contributions. If what the original poster is actually saying is "I can't roll my IRA into the Roth account in my 401k", I guess I don't know - I can't recall people wanting to do that.

Note: Vanguard 401s (even when not Roth) do not accept IRA rollovers of any kind, AFAIK.
I've heard that is true of their solo 401k plans. I doubt it is true of their other plans (if other plans even exist - they may all be farmed out to another entity).

Note also that once the Roth conversion goes high enough to drive MAGI above a threshold ($250k for married filing jointly) it triggers the NIIT tax which is 3.8% of either (LTCG+ Qual DIVs) or (MAGI - threshold), which ever is less.
Are you saying that the NIIT tax is applied to ordinary income, not just investment income? I don't recall hearing that before.

AstroGirl
Posts: 13
Joined: Thu Jul 04, 2013 3:22 pm

Re: Convert TIRA to Roth, nondeductible

Post by AstroGirl » Mon Oct 15, 2018 1:33 pm

My workplace 401k (Fidelity) accepts both post tax and
pretax contributions. I’ve been maxing out w Roth contributions because I prefer to pay taxes upfront.

I’ve been told before (by Fidelity) I could not roll over my Vanguard IRA funds in, due to particulars of
the workplace 401K. My IRA funds are a mix of pre-and post tax funds and I’m trying to simplify things but also avoid a huge tax hit. My goal is to maxify retirement funds that will not be taxed, for me, and for estate planning purposes. For now, I plan on continuing w nondeductible IRA contributions, keeping track w 8606 form, and eventually, somehow get these in to Roth accounts.

retiredjg
Posts: 34133
Joined: Thu Jan 10, 2008 12:56 pm

Re: Convert TIRA to Roth, nondeductible

Post by retiredjg » Mon Oct 15, 2018 1:51 pm

I would not convert $150k (with $50k basis) to Roth while in that tax bracket. It would, in fact, push you into an even higher bracket. Wait until you are in a lower bracket.

You are already paying what will probably be extra tax by using Roth 401k instead of traditional 401k (apparently you have your reasons) so you really don't need to do more of that.

Keep in mind that you NEED some not yet taxed income in retirement to fill in the lower tax brackets and to offset your deductions. If you have a pension, that will do it. SS will also fill in some of that, maybe not all.

Rather than put more non-deductible contributions into the tIRA, have you considered putting that money into a taxable account instead? Unless you just need more tax-deferred space to hold bonds, taxable would be better.

Consider how the taxes work. If you put $5,500 into tIRA you will pay tax on the front end. If invested in stocks, the earnings from that $5,500 in stocks will be taxed as ordinary income.

But if you put your $5,500 into taxable, also paying tax on the front end, and invest it in stocks, the earnings would be taxed at the lower capital gains rates. Which would you rather pay?

User avatar
FiveK
Posts: 5705
Joined: Sun Mar 16, 2014 2:43 pm

Re: Convert TIRA to Roth, nondeductible

Post by FiveK » Mon Oct 15, 2018 2:00 pm

retiredjg wrote:
Mon Oct 15, 2018 12:27 pm
GrowthSeeker wrote:
Mon Oct 15, 2018 10:08 am
...the NIIT tax which is 3.8% of either (LTCG+ Qual DIVs) or (MAGI - threshold), which ever is less.
Are you saying that the NIIT tax is applied to ordinary income, not just investment income? I don't recall hearing that before.
The "which ever is less" phrase means "no investment income = no NIIT". One can go through form 8960, line 16, for the official calculation.

User avatar
cheese_breath
Posts: 7991
Joined: Wed Sep 14, 2011 7:08 pm

Re: Convert TIRA to Roth, nondeductible

Post by cheese_breath » Mon Oct 15, 2018 2:28 pm

retiredjg wrote:
Mon Oct 15, 2018 1:51 pm
....Consider how the taxes work. If you put $5,500 into tIRA you will pay tax on the front end.....
?????
The surest way to know the future is when it becomes the past.

retiredjg
Posts: 34133
Joined: Thu Jan 10, 2008 12:56 pm

Re: Convert TIRA to Roth, nondeductible

Post by retiredjg » Mon Oct 15, 2018 2:34 pm

cheese_breath wrote:
Mon Oct 15, 2018 2:28 pm
retiredjg wrote:
Mon Oct 15, 2018 1:51 pm
....Consider how the taxes work. If you put $5,500 into tIRA you will pay tax on the front end.....
?????
This poster is not eligible to make a deductible contribution to IRA. So the money is taxed now.

User avatar
cheese_breath
Posts: 7991
Joined: Wed Sep 14, 2011 7:08 pm

Re: Convert TIRA to Roth, nondeductible

Post by cheese_breath » Mon Oct 15, 2018 2:38 pm

retiredjg wrote:
Mon Oct 15, 2018 2:34 pm
cheese_breath wrote:
Mon Oct 15, 2018 2:28 pm
retiredjg wrote:
Mon Oct 15, 2018 1:51 pm
....Consider how the taxes work. If you put $5,500 into tIRA you will pay tax on the front end.....
?????
This poster is not eligible to make a deductible contribution to IRA. So the money is taxed now.
I guess I would have known that if I'd paid attention to the thread title. :oops: :oops: :oops:
The surest way to know the future is when it becomes the past.

Busdrvr
Posts: 17
Joined: Fri Jan 29, 2016 11:56 am

Re: Convert TIRA to Roth, nondeductible

Post by Busdrvr » Mon Oct 15, 2018 5:06 pm

David Grabiner said
"It's not quite that simple. The IRA is 1/3 non-deductible, so the tax would be 22% of the value. If you wait, the IRA is likely to grow, which will decrease the non-deductible fraction, so you will pay tax at a lower rate but on a higher fraction of the value.

So what matters is how long it takes for your tax rate to decreases, and what it becomes then. If your tax rate doesn't decrease until 2026, the current 24% tax bracket will become 28%. If the IRA grows to $250K by then, the tax would be 28% of 80% of the IRA, the same 22%.

You can continue to make non-deductible contributions to the traditional IRA, with the intention of converting when you convert the rest."


Thank you David, this and retiredjg's post below this one regarding taxable vs tIRA is excellent. At the risk of hijacking I am in the same boat. Same income and age. Fed plus state =30% rate. Only I max out pre tax in fido 401 and considered backdoors to get some Roth $. Current Roth =0. Have tIRA's to deal with (convert some, roll others) before any BD roth would work. But maybe taxable here is better at current tax rates.

User avatar
FiveK
Posts: 5705
Joined: Sun Mar 16, 2014 2:43 pm

Re: Convert TIRA to Roth, nondeductible

Post by FiveK » Mon Oct 15, 2018 5:52 pm

Busdrvr wrote:
Mon Oct 15, 2018 5:06 pm
Fed plus state =30% rate. Only I max out pre tax in fido 401 and considered backdoors to get some Roth $. Current Roth =0. Have tIRA's to deal with (convert some, roll others) before any BD roth would work. But maybe taxable here is better at current tax rates.
Dealing with the tIRAs, preferably by rolling all pre-tax amounts into your 401k, is likely your best strategy, unless you expect a large annual "unavoidable" income in retirement.

Busdrvr
Posts: 17
Joined: Fri Jan 29, 2016 11:56 am

Re: Convert TIRA to Roth, nondeductible

Post by Busdrvr » Mon Oct 15, 2018 6:54 pm

FiveK wrote:
Mon Oct 15, 2018 5:52 pm
Busdrvr wrote:
Mon Oct 15, 2018 5:06 pm
Fed plus state =30% rate. Only I max out pre tax in fido 401 and considered backdoors to get some Roth $. Current Roth =0. Have tIRA's to deal with (convert some, roll others) before any BD roth would work. But maybe taxable here is better at current tax rates.
Dealing with the tIRAs, preferably by rolling all pre-tax amounts into your 401k, is likely your best strategy, unless you expect a large annual "unavoidable" income in retirement.
Thanks, mine can be rolled into 401. Spouses will have to be converted as she no longer works. Its only 30k though.

bdpb
Posts: 1533
Joined: Wed Jun 06, 2007 3:14 pm

Re: Convert TIRA to Roth, nondeductible

Post by bdpb » Mon Oct 15, 2018 11:45 pm

AstroGirl wrote:
Mon Oct 15, 2018 7:43 am
I have about $150,000 in traditional IRA w a mix of
deductible and nondeductible contributions. Last
8606 showed 50k for nondeductible contributions.

I max contributions to Roth 401

I am thinking of converting TIRA to Roth, can pay taxes
w nonretirement funds. Or should I wait several years until my income is less, after partial retirement?
At a minimum, you should change your Roth 401k contributions to deductible 401k contributions and make an equivalent Roth conversion. You end up owing the same taxes and end up with the same in Roth accounts but are able to convert an additional 50% of the non-deductible IRA contributions to the Roth effectively for free.

ivk5
Posts: 455
Joined: Thu Sep 22, 2016 9:05 am

Re: Convert TIRA to Roth, nondeductible

Post by ivk5 » Tue Oct 16, 2018 2:16 am

GrowthSeeker wrote:
Mon Oct 15, 2018 10:08 am
Note: Vanguard 401s (even when not Roth) do not accept IRA rollovers of any kind, AFAIK.
OT but for the record this is incorrect.

I have executed an inbound rollover from IRA to Vanguard 401(k).

GrowthSeeker
Posts: 158
Joined: Tue May 15, 2018 10:14 pm

Re: Convert TIRA to Roth, nondeductible

Post by GrowthSeeker » Wed Oct 17, 2018 7:45 am

retiredjg wrote:
Mon Oct 15, 2018 12:27 pm
Note also that once the Roth conversion goes high enough to drive MAGI above a threshold ($250k for married filing jointly) it triggers the NIIT tax which is 3.8% of either (LTCG+ Qual DIVs) or (MAGI - threshold), which ever is less.
Are you saying that the NIIT tax is applied to ordinary income, not just investment income? I don't recall hearing that before.
Yes, you're right. I stated that wrong and here's how I made my mistake:

When I researched the NIIT a while back, I made the following formula for calculating it in my spreadsheet:
=0.038*MIN( (LTCG+qDIVs+interest) , MAX(0,(MAGI - threshold)) )

Note that: MAX(0,(MAGI - threshold)) is equivalent to IF( MAGI < threshold , 0 , MAGI - threshold )

So then when I went to make the post, being in a hurry, I just looked at my spreadsheet formula and misinterpreted it. Sorry about that.

If the MAGI is below a threshold, the NIIT is zero.
If the MAGI is above the threshold then the NIIT is 3.8% of either: (a) net investment income OR (b) [MAGI - threshold] whichever is smaller.

Net investment income includes: interest, dividends, rents, royalties, passive activities, and gain from the sale of most properties.
Just because you're paranoid doesn't mean they're NOT out to get you.

Post Reply