Roth conversion should I?

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sidwin516
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Joined: Fri Feb 26, 2021 1:46 am

Roth conversion should I?

Post by sidwin516 »

Last year I was able to do mega Roth but my new job doesn’t allow it. My wife is still doing hers. So this year I’m going 15k Roth $4500 401k from old job and $3k was in plan converted. Back door Roth for both of us.

Our agi is $441k. Should I do $40k a year out of my old 401k to make up for that mega that I would have been getting from the old company?

I keep reading to stay at the 22% or under. TurboTax said my effective fed rate is 21%.

I spoke with fidelity and they said since I left my old company I can convert whatever I want from my 401k to Roth. I had multiple advisors tell us that we have enough pretax funds for retirement but not enough after tax fund which got me started down the path of mega Roth.

Thanks!
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David Jay
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Re: Roth conversion should I?

Post by David Jay »

sidwin516 wrote: Sat Apr 17, 2021 6:02 amI keep reading to stay at the 22% or under. TurboTax said my effective fed rate is 21%.
Your effective rate doesn’t matter for these types of decisions, it is your marginal rate, that is, the rate you pay on the next dollar of income. One must decide, based on what additional tax one will pay, whether or not to proceed.

At your income, I suspect that you are most likely in the 32% tax bracket, depending on your deductions. The easy way to tell is go to your tax return in TurboTax and add $100 to one of your income figures, say to a 1099-INT. Then observe what happens to the “tax due” figure: does it go up $24 (or if a refund, down $24) or $32.

Very few here would recommend paying taxes on Roth conversions while in the 32% tax bracket. Most would wait and do Roth conversions at lower tax rates in early retirement.
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TomatoTomahto
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Re: Roth conversion should I?

Post by TomatoTomahto »

David Jay wrote: Sat Apr 17, 2021 7:25 am Very few here would recommend paying taxes on Roth conversions while in the 32% tax bracket.
I’m one of the few that might recommend it in certain circumstances. We did some small conversions at the maximum marginal rates, but as the saying goes, the spirit was willing but the flesh was weak. My widow will likely wish that we had done more conversions, but by definition it will no longer be my problem :D
I get the FI part but not the RE part of FIRE.
tibbitts
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Re: Roth conversion should I?

Post by tibbitts »

TomatoTomahto wrote: Sat Apr 17, 2021 7:30 am
David Jay wrote: Sat Apr 17, 2021 7:25 am Very few here would recommend paying taxes on Roth conversions while in the 32% tax bracket.
I’m one of the few that might recommend it in certain circumstances. We did some small conversions at the maximum marginal rates, but as the saying goes, the spirit was willing but the flesh was weak. My widow will likely wish that we had done more conversions, but by definition it will no longer be my problem :D
One reason for converting into the highest bracket is to break the cycle of a deferred balance growing indefinitely (assuming whatever amount of appreciation you choose), triggering related taxes (IRMAA, NIIT) indefinitely.
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retiredjg
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Re: Roth conversion should I?

Post by retiredjg »

sidwin516 wrote: Sat Apr 17, 2021 6:02 am So this year I’m going 15k Roth $4500 401k from old job and $3k was in plan converted.
What does this sentence mean?


Our agi is $441k. Should I do $40k a year out of my old 401k to make up for that mega that I would have been getting from the old company?
Probably not. You are in the 32% tax bracket. That's too high unless you can predict you are likely to be in a higher bracket in retirement. Besides, adding $40k income may push you into an even higher bracket.

Most importantly....it would not be "making up". These is not an equal comarison.

For the mega-backdoor, you are putting money that would be going into a taxable account into an after-tax account. In other words, that money is going to be taxed no matter what you do with it. You are not adding taxable income by using the mega-backdoor.

For the Roth conversion you are considering, that would add $40k taxable income.


In my opinion, the only reason for you to use Roth 401k or to do Roth conversions now is if you can clearly see your marginal tax rate will be higher later on or your tax-deferred account is so large that it is clearly going to be a problem. We don't know enough about your situation to know if either of those could be the case.
Topic Author
sidwin516
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Joined: Fri Feb 26, 2021 1:46 am

Re: Roth conversion should I?

Post by sidwin516 »

thanks for all the great input.

when all those advisors told me that my issue was I don't have enough after tax money to make it to 59.5 is when I started thinking about mega roth. it was hard in the beginning. my wife wanted to kill me but after 3 years of doing it, i'm now sitting on a lot of money that I need to figure out something to do with it. :)

i'm hoping to retire in the next 18 months. our AGI should fall down to 240k. I was reading about doing the ladder roth and that's why I thought it would be a good idea to go do it now. but to be honest, i'm pretty sure I have enough principal in my roth to wait it out and do it when i'm fully retire and I can do 100k at a time to bring our agi back to up....

love this place!!!!
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