2021 Roth Contribution thru small tIRA or Roll tIRA into old 401k then Conversion of same funds?

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Eager for FIRE
Posts: 28
Joined: Sat Oct 30, 2021 9:43 pm
Location: CT

2021 Roth Contribution thru small tIRA or Roll tIRA into old 401k then Conversion of same funds?

Post by Eager for FIRE »

It's late and I'm confusing myself... regarding this years Roth IRA contribution & Roth Conversion of my only $16k tIRA.
I'ts my first year that my income is mid phaseout or above Roth IRA Income limits ~$130-140k.

by the end of December 2021
I want to contribute my $7k for 2021 Roth IRA;
and convert my only tIRA ($16k) to a Roth IRA .
Starting 2022 I hope to begin conversion of my old 401k ($85k) to a Roth IRA. But I can't afford that step unplanned, this late in this year.


If I've got this part right, before the end of Dec 2021, I could either:

1)Contribute my $7k nondeductible funds into my only tIRA (technically a rollover tIRA of a prior 100% pretax tIRA) (currently $16k), then convert it all to a Roth IRA at Fidelity, paying 24% Marginal on $16k (~$3840) plus 24% on [(16k/23k) x $7k] (~$1168) for a Total Federal Income tax cost of about $5008 to convert $23k to a Roth IRA. Plus CT 6% Marginal on the ?whole $23k. (~$1380) (So, at a cost of ~$6380 I could convert $16k tIRA & enable adding another $7k to Roth Funds.)

OR

2)Roll the $16k tIRA into my old employers 401k ($85k value currently) (if they'll allow my rollover; Not sure, as I can no longer contribute New 401k funds there since I separated from that employer) and then immediately Convert that $16K to a Roth IRA (Taxable at 24%); Then, Separately contribute this years nondeductible $7k to a new IRA & immediately convert that to a Roth IRA. MY confusion really starts here: Would that $7k NOT be taxable at conversion as long as I emptied the original tIRA prior? Or does that not pass muster since it's the same year when I emptied it? (Is that $7k is still taxable under the pro rata rule due to the tIRA preexisting this year?) I hope to convert the $85k 401k to a Roth IRA, hopefully next year. Just can't swing it right now.

OR

3. Use my current 401k to do the same; I may have to wait to separate from current employer before I can convert it though


Some background ramblings....

I'm 57, Single Filer, Mid $130k-140's Taxable income predicted this year, 24% Marginal Fed + CT 6% ( :annoyed )

NO Debt, No house, No dependents. My brother & I are looking after Mom who's 90 & has Alzheimer's. By chance, timing has synced up. I'm scrambling to begin winding up my own work-myself-to-death years & meanwhile I feel obliged to stick around anyway to help until whenever Mom passes on to join Dad & my younger brother. She's lived a good life, so we're ok with accepting it whenever her time comes. We're pleasantly surprised she's still here now. And so far she doesn't appear to be suffering

Hoping to retire or mostly retire in ?2023 with minimal earned income yearly. After nearly 40 years of fun - but always slaving away working mega hours. I'm done with all that. It's time. Luckily I saved a little, albeit somewhat haphazardly.

Over the last 5 months I've been doing some major learning & rethinking of retirement or semi-retirement goals, planning, late adjustments. Luckily I also stumbled on Bogleheads before I screwed it all up!! :oops: :D I think I can live pretty inexpensively & hope to start by living mobile, cruising the country, no major expenses. Have No house or other debt or real ties or dependents once I take the plunge. I've been sorta thinking along these lines for years, but just recently realized I can probably make it happen now. Which would really please me. Eventually I'll land somewhere & likely buy a small no frills shack to call my "base camp" home & continue traveling the US low budget - hiking, peak bagging, long distance thru hiking, trail running, kayaking, snowshoeing, snowmobiling, & enjoying the great outdoors & small town taverns & sights everywhere. Before I'm crippled, unable, or dead. Life's too short not to enjoy it while I can!! :sharebeer

Been slowly cleaning up / rethinking investments that have just evolved into their current state....

Still revising my AA overall & within each investment and overall. Been mostly all stock funds for 30 years, even riding thru several stressful downturns, never panicked, but I also had "years to recover", so I ignored huge temporary losses. Though I now realize my retirement accounts could probably be double or triple what they are, had I rebalanced with bond funds during downturns, used cheaper index funds, etc. Not sure I'd ever want that extreme risk now or going forward, especially now that I've realized I can basically stop working anytime & I'll be just fine (living frugal & just chillin). Never been interested in fancy things. Until now, I've basically just pissed away what's left of most of my income after large automatic payroll investments into retirement funds, etc.. Aside from my Harley, 2 snowmobiles, and my RAM pickup, I don't really own much of any value. Or mind. So once I cut my mega work hours & cut mega wasteful daily spending on snacks, coffee, and "energy drinks", etc., and I probably no longer max out all retirement savings, I'm pretty sure I can continue to live on that small fraction of income I've actually lived on for years. Probably even less.

Sorry for the rambling....

Here's a quick snapshot of my finances:

I'm 57, Single Filer, Mid $130k-140's Taxable income predicted this year,
24% Marginal Fed + CT 6% ( :annoyed )
NO Debt, No house, No dependents.
I rent, intend to move once I stop working mega hours;
eventually will buy a small inexpensive shack to call home, somewhere.

No pensions;
Social Security says @62 I could get $2178/month (2027) or
@67 I could get $3162/month (2032) but that I assumes I'd keep working, funding Soc Sec
at $130-140k/year; But I DON'T plan to;
If I stop funding it soon, but don't collect til 67 I researched and think it'll be closer to $2900/month

Savings ~ $1.5M Total:

Current Employer Fidelity 401k $1.02M - I max $26k yearly
Current Employer, old Voya 403b $287k - no New contributions, but I'm Trapped in it til I separate from my employer :annoyed :oops:
Old Employer, old Empower 401k $85k - no New contributions, considering Roth Conversion

My only tIRA $16k - Rollover of my very 1st $2k tIRA, funded in 1991 :D

Several Roth IRAs totaling ~$38k - hope to add $7k this year + ???

HSA ~$10k (adding $2040 to max this year by Dec 2021)

Emergency Funds/Other Available Savings:
Taxable mutual funds $20,863
& old Prudential Stock

I- Bonds $20k + $5k (counting 2022 allotment already gifted)
Current Cash $2500 (typically closer to $20k at any given time)

Old Universal Life Policy $150k Death Benefit;
Surrender Value $20k - but that's NOT added to Death Benefit payout; (still debating how best to cut losses,
it's taxable as income if I cash it in, stalling til lower income
Year by Year Term Life $125k - it's cheap thru employer; considered dropping this & buying 25yr term policy for kicks
but that's another whole discussion


Also, for 2022, since I'm hoping to convert or start converting the $85k 401k, should I prioritize that over maxing funding into current 401k beyond my employer 4% match? Or not?

I'm very lopsided with 92% of my retirement in my current tax deferred 401k.
Working on boosting the Roth component as aggressively as possible going forward;
along with other taxable savings/cash to bank at least $50-100k before taking the big plunge.

If I'm able, not sure how aggressive I should be about converting the $1M+ 401k to Roth IRA vs. just saving as much money in ?taxable funds and/or not worrying about the large amount all in tax deferred that I might need for long term medical care as I age (which could be used for tax deductions once it gets expensive).

And as mentioned, at some point wherever I land, I'll need some of this $ to buy my small shack. (I planned to read up more and thought I'd save that for a separate search or post for suggestions on buying a house from just retirement funds, etc)

It's really hard to guess, but I think I'll otherwise get buy just fine on $50-75k /year (maybe adjusted a little for inflation). What about long term Health costs? depends whether I get lucky and just drop dead, or whither away spending beaucoup $$$$ for medical expenses. :? Been reading lots on hear about the decumulation part I had never considered!

Thanks for enduring all that.....

Any thoughts / corrections on my main 2021 Roth IRA & tIRA conversion questions on options or the rest of the above saga appreciated.
LIVE 'Outside the Box' !
shess
Posts: 2163
Joined: Wed May 17, 2017 12:02 am

Re: 2021 Roth Contribution thru small tIRA or Roll tIRA into old 401k then Conversion of same funds?

Post by shess »

WRT your $16k tIRA and $7k planned backdoor Roth contribution, I'd go with #1. You almost certainly cannot roll it over to a prior employer's 401k. You may be able to roll it over to your current employer's 401k, but you're right, then it's likely stuck there until you leave that job. And you indicated interest in converting the prior employer's 401k, so running your tIRA through multiple steps seems flawed.

There's no particular reason to convert all at once, you could do $8k+$7k this year, and another $8k+$7k next year. Yes, you'd have to account for pro-rata impact this year. But that's not all that big of a deal, some of the $7k will be left behind, and you'll reclaim it next year.

Note that the pro-rata rules only care about the value of the tIRA on 12/31 and the amount converted. The only things from the past that matter are any after-tax basis, tracked on 8606 forms.

WRT the prior employer 401k, realize that you'll PROBABLY have to rollover the entire amount to a tIRA before you can start converting. With the above point about the 12/31 value, this means that if next year you did $7k after-tax contribution, and convert 100% to Roth, and then rollover the 401k to the tIRA, you'll have pro-rata concerns because the only balance that matters is 12/31. Again, like with the current tIRA, you don't have to do it all at once, you could spread it out over 3-4 years.

You should read up on the "rule of 55":
https://www.forbes.com/advisor/retireme ... etirement/
Basically, if you leave a position after you turn 55, you can withdraw from that job's 401k without penalties, though you still pay income tax. Your plan has to opt into this, I think. If your plan allows you to take partial withdrawals in this case, then you could just take those withdrawals and live on them, rather than doing things like a Roth ladder to support yourself while doing conversions.

You definitely should look at RMD requirements to help guide how aggressive to be on conversions. Given your current balance plus 15 years of growth and filing single, IMHO your RMDs might be getting into the range of a little painful. That said, giving up current tax deductions is also painful :-).

Honestly not sure why you have any life insurance at all going on. It seems to me like if you die, you're already going to leave a substantial amount of beneficiaries, adding $275k to that isn't going to move the needle. You might consider long-term disability insurance, though.
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