In what order: Convert TIRA, Rollover, and 403b funds to ROTH IRA? Amounts? $100K

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Topic Author
Poppy
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In what order: Convert TIRA, Rollover, and 403b funds to ROTH IRA? Amounts? $100K

Post by Poppy » Wed Feb 12, 2020 5:25 pm

I have accumulated a number of eligible funds to convert to a ROTH IRA.

Believing that a ROTH IRA is the best place to put money, how and when should I transfer about $100K of eligible funds into my Roth?

I have the following funds to convert to a ROTH:
TIAA Traditional IRA: $6K
Fidelity Rollover IRA: $12K
TIAA 403b: $82K (that was originally in a 401k at CIRS, then rolled into a Fidelity Rollover IRA in 2011, then rolled again (at $62K in 2014) into TIAA 403b where I am currently employed, and now valued at $82K, fully vested and marked as “Rollover”.)

For better or worse, I have already contributed $7K to my ROTH for 2020. (I am age 54, single.)

Order: I believe that one can only do ONE conversion per year into a Roth IRA. Is there a “priority” order from the list above of what should go into a ROTH first?

Amount: How much should I convert per year? I am currently at the bottom end of the 24% Federal tax bracket [$85,526 to $163,300] with a MAGI of $96K in 2018. I have to keep my 2020 MAGI under $124K in order to be able to contribute to Roth (which I have already done at $7K in Jan. 2020. Hope that wasn’t premature!) This leaves only about $28K of “wiggle room” for additional income in the form of a Roth conversion or other sources. (I realize I could do a partial Roth Contribution if my MAGI is from $124-$139K, but I am not versed in that, and I have already contributed $7K to my Roth for 2020. BTW: Should I try to “un-do” that, if possible, or would that incur a penalty fee?)

Timing: Given that I can only do this once a year, should I wait until later in the year to see what my MAGI is, and therefore how much I can convert to the ROTH, which will count towards my MAGI?

Are there any other factors to consider in this decision?
Thanks for any advice!

DSInvestor
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Re: In what order: Convert TIRA, Rollover, and 403b funds to ROTH IRA? Amounts? $100K

Post by DSInvestor » Wed Feb 12, 2020 5:31 pm

Multiple Roth conversions per year are permitted.

Roth conversion income is not included in the MAGI for the purposes of Roth IRA contributions. While Roth conversions do increase your AGI, they do not increase your MAGI for Roth IRA purposes.

Do you have state income tax?

Do you have assets in taxable accounts?

Will you have a pension? If you will not have a generous defined benefit pension, it may be better not to convert now and wait until retirement for Roth conversion.

If you currently live in a state with high state income tax, your Roth conversions will likely be taxable by your state. If you may move to another state with no state income tax in retirement, you'll kick yourself for converting while living in a high income tax state. I waited until I moved to a no income tax state before I started Roth conversion and my conversions were done at tax rates far lower than 24%, closer to 0%.

If retired without pension and living off taxable account a couple married filing jointly has 24K of standard deduction which means that 24K of Roth conversion can be taxed at 0%, then conversions in excess of 24K would break into higher brackets (10%, 12% etc).
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retiredjg
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Re: In what order: Convert TIRA, Rollover, and 403b funds to ROTH IRA? Amounts? $100K

Post by retiredjg » Thu Feb 13, 2020 7:55 am

Agree with DSInvestor.

Roth conversions do increase AGI and taxable income but are subtracted out when calculating the MAGI for contributing to Roth IRA.

You can do as many Roth conversions as you want in a year. They are not included in the "once per year" count.

The 24% bracket is not usually a great time to do Roth conversions. You might be an exception, but there is nothing in your post to indicate why you would be.

Your understanding that Roth is somehow better is a myth that will not die.

GAAP
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Re: In what order: Convert TIRA, Rollover, and 403b funds to ROTH IRA? Amounts? $100K

Post by GAAP » Thu Feb 13, 2020 11:39 am

Things to consider (or not):

Current tax brackets will expire in 2026, probably placing you in at least the 28% bracket at that time, so I do agree that conversions now can make sense. However, unless you have significant other income sources in retirement beyond Social Security and/or a large taxable portfolio, you will quite likely be in a lower bracket at retirement.

My general approach has been more about which asset types to move. I'm converting investments in the order that they are most likely to grow the most over the long term -- equities before bonds for example. Since you have multiple potential sources, I would also consider the relative quality of the investment choices (expense ratios, index choices, management fees, etc.), I'm also a big fan of simplification, so would seriously look at first converting your two smaller accounts for that reason. Any remaining conversion room would then come from the largest account.

I estimate my earnings for the year, leaving some room for error, convert what I know is safe, and do a final true-up conversion at the end of the year.

My general rule is that is better to put new money into a Roth than to convert already tax-sheltered money to Roth. Therefore, I would not even consider reversing your current contribution.

In 9 years, you will also care about IRMAA effects on Medicare. Finishing the conversion before that point may help with costs at retirement.
“Adapt what is useful, reject what is useless, and add what is specifically your own.” ― Bruce Lee

retiredjg
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Re: In what order: Convert TIRA, Rollover, and 403b funds to ROTH IRA? Amounts? $100K

Post by retiredjg » Thu Feb 13, 2020 11:59 am

Poppy wrote:
Wed Feb 12, 2020 5:25 pm
I am age 54, single.
Here's an out in the weeds thought.

If you are near certain that you will not marry, conversions now might be smart because it is fairly unlikely that you will ever be in a lower bracket than now.

On the other hand, it is quite common for married people to be in the 12% (15%) bracket in retirement and that's a good time to do conversions.

Predicting the future is generally stupid, but at your age, you should have a reasonable idea if you are interested in being married or not.

Topic Author
Poppy
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Re: In what order: Convert TIRA, Rollover, and 403b funds to ROTH IRA? Amounts? $100K

Post by Poppy » Fri Feb 21, 2020 6:16 pm

Agree with DSInvestor.

Roth conversions do increase AGI and taxable income but are subtracted out when calculating the MAGI for contributing to Roth IRA.
retiredjg wrote:
Thu Feb 13, 2020 7:55 am
You can do as many Roth conversions as you want in a year. They are not included in the "once per year" count.
I have a mish-mash of IRAs (Traditional IRA at Vanguard; Rollover IRA at Fidelity; and rolled over funds in 403b at TIAA (rolled from an old 401K, then to a Rollover IRA, and then into the 403b). If I wanted to convert any/all of them to my Roth IRA, is there a certain order in which to convert them? Must the Traditional IRA be converted first? Then the Rollover IRA? And what steps are needed to get the "rolled over" 403b monies into a Roth IRA? Thanks.

The 24% bracket is not usually a great time to do Roth conversions. You might be an exception, but there is nothing in your post to indicate why you would be.

Your understanding that Roth is somehow better is a myth that will not die.

Topic Author
Poppy
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Joined: Mon Dec 31, 2012 9:52 am

Re: In what order: Convert TIRA, Rollover, and 403b funds to ROTH IRA? Amounts? $100K

Post by Poppy » Fri Feb 21, 2020 7:08 pm

DSInvestor wrote:
Wed Feb 12, 2020 5:31 pm
1) Multiple Roth conversions per year are permitted.

Roth conversion income is not included in the MAGI for the purposes of Roth IRA contributions. While Roth conversions do increase your AGI, they do not increase your MAGI for Roth IRA purposes.

2) Do you have state income tax?

3) Do you have assets in taxable accounts?

4) Will you have a pension? If you will not have a generous defined benefit pension, it may be better not to convert now and wait until retirement for Roth conversion.

5) If you currently live in a state with high state income tax, your Roth conversions will likely be taxable by your state. If you may move to another state with no state income tax in retirement, you'll kick yourself for converting while living in a high income tax state. I waited until I moved to a no income tax state before I started Roth conversion and my conversions were done at tax rates far lower than 24%, closer to 0%.

If retired without pension and living off taxable account a couple married filing jointly has 24K of standard deduction which means that 24K of Roth conversion can be taxed at 0%, then conversions in excess of 24K would break into higher brackets (10%, 12% etc).
*********************************
Thanks! To follow up on your answers:
1) Good to know that more than one conversion can be done in a year. Is there a required order in which to convert the different types (Traditional, Rollover, or from a 403b?) Thanks.

2) Yes, I do have Federal Tax rate bracket of 24%; NY State (at ~6.57%) and Local NYC income (at ~3.876%) tax so = ~34% tax!

3) Yes, I have some assets in taxable accounts: $410,000 (including $60K in Emergency Fund at 1.6%.) I have enough set aside to pay the taxes. (What other impact does the taxable account factor have?)

4) Here's my Qualified Accounts = $1,163,000
• 403b = $735K (including goodies like TIAA annuities at 3% (liquid) and 3.5% (in lieu of bonds), QREARX, and VIIIX)
• Roth IRAs = $328K ($62K at TIAA; $58K at Fidelity; $125K at Vanguard; and $83K at MUA including funds in 3% GIA)
• Rollover/Traditional IRA (that could become Roth?) = $100K
- TIAA Traditional IRA: $6K
- Fidelity Rollover IRA: $12K
- TIAA 403b (rolled-over from IRA): $82K (including investments in things I like specific to TIAA: QREARX, VIIIX and 3% GIA (in lieu of bonds)

For retirement income I have the following for potential Monthly Income:
(maybe about gross $84K per year?): [What's a good way to calculate this?]

See my possible income streams below:
- Pension: $400
- Soc. Sec: ~$2,500
- Non-Roth IRA RMDs [if I don’t convert the current $100K]: $________ I don't know how to calculate this income
- 403b RMDs: ~$2,500 (?)

(Does anyone know of a good RMD calculator where someone age 54 can find out their RMD at age 70? This one only starts at year 2025: https://www.voya.com/tool/rmd-calculator)

(So looks like(?) my "retirement year's" income from the above will put me in the just at or below the current 24% Tax Bracket rate -which may go up to 28% in 2026, as per GAAP's post.)

However, if I am only 54 now, wouldn't 20 years' worth of growth being tax free at the time of withdrawal be worth paying the current 34% tax hit now - or how does one calculate that?

5) Unfortunately, I don't foresee leaving my high tax state of NY. I do appreciate your tip about living off taxable accounts and then doing the Roth at 0%-yeah! (On this point, in the future I may ease up on putting the max ($26K) each year into my 403b which will generate future RMDs and instead put some of that $$ into regular investments, to be taxed at the lower cap gains rate later. However, on this time, I am worried that I already contributed to Roth IRA my $7K for 2020, so MUST keep my income below the $124K income cap for Roth. My gross salary is $110K. Given ordinary dividends ($10K in 2019) I will be cutting it close. I will have to remember not to reshuffle or sell any mutual funds in my non-qualified accounts which could increase my MAGI. :-( (Next year I will try to plan better. I was just doing a financial make-over and got impatient and wanted to "do" all the things I was "supposed" to do, and contribute to Roth was one of them (and the easiest on the list, instead of all this hard "figuring it out" stuff), so I did it without considering how I would be boxing myself in to not having higher income (above the $124K Roth cap).

Thanks again to the respondents for your guidance!

Sahara
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Re: In what order: Convert TIRA, Rollover, and 403b funds to ROTH IRA? Amounts? $100K

Post by Sahara » Sat Feb 22, 2020 10:49 am

You might take the NY pension and annuity exclusion of $20,000 after age 59.5 into consideration.

retiredjg
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Re: In what order: Convert TIRA, Rollover, and 403b funds to ROTH IRA? Amounts? $100K

Post by retiredjg » Sun Feb 23, 2020 8:31 am

Poppy wrote:
Fri Feb 21, 2020 6:16 pm
I have a mish-mash of IRAs (Traditional IRA at Vanguard; Rollover IRA at Fidelity; and rolled over funds in 403b at TIAA (rolled from an old 401K, then to a Rollover IRA, and then into the 403b). If I wanted to convert any/all of them to my Roth IRA, is there a certain order in which to convert them? Must the Traditional IRA be converted first? Then the Rollover IRA? And what steps are needed to get the "rolled over" 403b monies into a Roth IRA? Thanks.
There is no specific order. Things that you might consider are where the highest cost funds are, which account has extra administrative fees, and whether you want to keep the protection that a 403b might offer over an IRA (this varies from state to state and not all people are concerned about this).


However, if I am only 54 now, wouldn't 20 years' worth of growth being tax free at the time of withdrawal be worth paying the current 34% tax hit now - or how does one calculate that?
It does not work the way you think. Consider this example.
  • If you have $1,000 and it doubles to $2000 and you pay 25% tax on it many years down the road, you end up with $1,500 in your pocket.

    If you have $1,000 and you pay 25% tax (convert to Roth now) and invest the remaining $750 and it doubles, you still end up with $1,500 in your pocket.

    If you instead pay 34% to convert it to Roth now rather than wait until you fall into the 25% bracket in retirement, you end up with less money in your pocket.
I'll grant that this example does not take into account where the money to pay the taxes comes from...but maybe you can see that converting at a high rate now is not magically overcome by "years of tax free growth".

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Eagle33
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Re: In what order: Convert TIRA, Rollover, and 403b funds to ROTH IRA? Amounts? $100K

Post by Eagle33 » Sun Feb 23, 2020 11:09 am

OP

The SECURE Act passed last Dec. changed RMD to 72 for those of us born after June 30, 1949. Though can still start QCDs at 70.5.
Rocket science is not “rocket science” to a rocket scientist, just as personal finance is not “rocket science” to a Boglehead.

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FiveK
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Re: In what order: Convert TIRA, Rollover, and 403b funds to ROTH IRA? Amounts? $100K

Post by FiveK » Sun Feb 23, 2020 7:29 pm

Poppy wrote:
Fri Feb 21, 2020 7:08 pm
(Does anyone know of a good RMD calculator where someone age 54 can find out their RMD at age 70?
See Retirement Topics — Required Minimum Distributions (RMDs) | Internal Revenue Service and links therein.

See also Traditional versus Roth - Bogleheads for thoughts on several of your other questions.

Topic Author
Poppy
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Re: In what order: Convert TIRA, Rollover, and 403b funds to ROTH IRA? Amounts? $100K

Post by Poppy » Mon Feb 24, 2020 5:07 pm

Thanks all for these great updates!

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