Roth conversion before RMD question

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lepa71
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Roth conversion before RMD question

Post by lepa71 »

Hi all
1st. Is it a backdoor Roth conversion or just Roth conversion? Am I right to assume that this is the process? I would transfer the trad 401k portion into Roth IRA and the portion from 401k would be considered an income that I would pay taxes on. It is the same process as tIRA to Roth ira conversion. I assume I can not have anything in tIRA in my name.
Does it matter if my wife has tIRA with money?

I'm 51 and would like to retire around 60. I'm as of last year in 22% tax bracket. Based on some projections I will have around $1M-ish in Trad 401K. I would like to convert as much as possible before I hit 72. I will probably wait until 67 to start withdrawing SS.
Please let me know if there is more information needed.


Thanks
Last edited by lepa71 on Fri May 13, 2022 10:43 am, edited 1 time in total.
Silk McCue
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Re: Roth conversion before RMD question

Post by Silk McCue »

From a recent post I see that you are 51. Please edit your original post and help us understand how RMDs play into your question.

Cheers
Topic Author
lepa71
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Re: Roth conversion before RMD question

Post by lepa71 »

Silk McCue wrote: Fri May 13, 2022 10:36 am From a recent post I see that you are 51. Please edit your original post and help us understand how RMDs play into your question.

Cheers
Is that enough? Thanks
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retired@50
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Re: Roth conversion before RMD question

Post by retired@50 »

This isn't a backdoor. That term isn't applicable here.

Typically, and most simply, a Roth conversion is done from a traditional IRA to a Roth IRA when both of the IRAs are at the same custodian.

If you're trying to convert money from a traditional 401k at work (or from an old job) to a Roth IRA at a different custodian, I suppose this might be possible, but it will likely be confusing for all parties.

The 401k will mark this withdrawal as an early withdrawal, and they won't know one way or the other if you really do wind up putting the money into your Roth IRA. So, they will want to withhold taxes from the early withdrawal, which you probably don't want to do... See how this gets confusing, very quickly.

Do you have a traditional IRA and a Roth IRA at the same custodian? If not, I'd get to this point first, then worry about performing Roth conversions.

More details here: https://www.bogleheads.org/wiki/Roth_IRA_conversion

Regards,
This is one person's opinion. Nothing more.
Topic Author
lepa71
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Re: Roth conversion before RMD question

Post by lepa71 »

retired@50 wrote: Fri May 13, 2022 11:04 am This isn't a backdoor. That term isn't applicable here.

Typically, and most simply, a Roth conversion is done from a traditional IRA to a Roth IRA when both of the IRAs are at the same custodian.

If you're trying to convert money from a traditional 401k at work (or from an old job) to a Roth IRA at a different custodian, I suppose this might be possible, but it will likely be confusing for all parties.

The 401k will mark this withdrawal as an early withdrawal, and they won't know one way or the other if you really do wind up putting the money into your Roth IRA. So, they will want to withhold taxes from the early withdrawal, which you probably don't want to do... See how this gets confusing, very quickly.

Do you have a traditional IRA and a Roth IRA at the same custodian? If not, I'd get to this point first, then worry about performing Roth conversions.

More details here: https://www.bogleheads.org/wiki/Roth_IRA_conversion

Regards,
This is what I as a family have today.
I have 2 401Ks from prior employment. The new employer will have 401k with Trad and Roth options but I don't know what funds are available yet.
I have tIRA( with zero balance at this time) and Roth IRA with some money in it.
My wife is on SS Disability but does have 401K from a prior employer and she has her own tIRA with money in it.
Let's talk about some hypotheticals.
So the plan was to retire at 60 and somehow convert the trad portion from 401K or tIRA into Roth IRA. The reason I'm looking into this is that I'm concerned that at 72 RMD will push me into a higher tax bracket than I would be in age from 60 to 72.
I hope it makes sense.

Thanks
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retired@50
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Re: Roth conversion before RMD question

Post by retired@50 »

lepa71 wrote: Fri May 13, 2022 11:19 am
retired@50 wrote: Fri May 13, 2022 11:04 am This isn't a backdoor. That term isn't applicable here.

Typically, and most simply, a Roth conversion is done from a traditional IRA to a Roth IRA when both of the IRAs are at the same custodian.

If you're trying to convert money from a traditional 401k at work (or from an old job) to a Roth IRA at a different custodian, I suppose this might be possible, but it will likely be confusing for all parties.

The 401k will mark this withdrawal as an early withdrawal, and they won't know one way or the other if you really do wind up putting the money into your Roth IRA. So, they will want to withhold taxes from the early withdrawal, which you probably don't want to do... See how this gets confusing, very quickly.

Do you have a traditional IRA and a Roth IRA at the same custodian? If not, I'd get to this point first, then worry about performing Roth conversions.

More details here: https://www.bogleheads.org/wiki/Roth_IRA_conversion

Regards,
This is what I as a family have today.
I have 2 401Ks from prior employment. The new employer will have 401k with Trad and Roth options but I don't know what funds are available yet.
I have tIRA( with zero balance at this time) and Roth IRA with some money in it.
My wife is on SS Disability but does have 401K from a prior employer and she has her own tIRA with money in it.
Let's talk about some hypotheticals.
So the plan was to retire at 60 and somehow convert the trad portion from 401K or tIRA into Roth IRA. The reason I'm looking into this is that I'm concerned that at 72 RMD will push me into a higher tax bracket than I would be in age from 60 to 72.
I hope it makes sense.

Thanks
If you're still working, then it might be too early to consider t-IRA to Roth IRA conversions.
If you want to dabble in conversions before retirement, then I'd suggest converting a small amount from the wife's traditional IRA to a Roth IRA at the same custodian. You could also consolidate/rollover the wife's old 401k money into her existing t-IRA.

As for your old 401k accounts, you could leave them as is until retirement, or you could roll them into your current 401k if your current plan is low cost. It will simplify things a bit. Then, once you retire, you could roll all your 401k money into a t-IRA and begin the process of annual Roth conversions if desired.

Regards,
This is one person's opinion. Nothing more.
Topic Author
lepa71
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Re: Roth conversion before RMD question

Post by lepa71 »

retired@50 wrote: Fri May 13, 2022 11:30 am
lepa71 wrote: Fri May 13, 2022 11:19 am
retired@50 wrote: Fri May 13, 2022 11:04 am This isn't a backdoor. That term isn't applicable here.

Typically, and most simply, a Roth conversion is done from a traditional IRA to a Roth IRA when both of the IRAs are at the same custodian.

If you're trying to convert money from a traditional 401k at work (or from an old job) to a Roth IRA at a different custodian, I suppose this might be possible, but it will likely be confusing for all parties.

The 401k will mark this withdrawal as an early withdrawal, and they won't know one way or the other if you really do wind up putting the money into your Roth IRA. So, they will want to withhold taxes from the early withdrawal, which you probably don't want to do... See how this gets confusing, very quickly.

Do you have a traditional IRA and a Roth IRA at the same custodian? If not, I'd get to this point first, then worry about performing Roth conversions.

More details here: https://www.bogleheads.org/wiki/Roth_IRA_conversion

Regards,
This is what I as a family have today.
I have 2 401Ks from prior employment. The new employer will have 401k with Trad and Roth options but I don't know what funds are available yet.
I have tIRA( with zero balance at this time) and Roth IRA with some money in it.
My wife is on SS Disability but does have 401K from a prior employer and she has her own tIRA with money in it.
Let's talk about some hypotheticals.
So the plan was to retire at 60 and somehow convert the trad portion from 401K or tIRA into Roth IRA. The reason I'm looking into this is that I'm concerned that at 72 RMD will push me into a higher tax bracket than I would be in age from 60 to 72.
I hope it makes sense.

Thanks
If you're still working, then it might be too early to consider t-IRA to Roth IRA conversions.
If you want to dabble in conversions before retirement, then I'd suggest converting a small amount from the wife's traditional IRA to a Roth IRA at the same custodian. You could also consolidate/rollover the wife's old 401k money into her existing t-IRA.

As for your old 401k accounts, you could leave them as is until retirement, or you could roll them into your current 401k if your current plan is low cost. It will simplify things a bit. Then, once you retire, you could roll all your 401k money into a t-IRA and begin the process of annual Roth conversions if desired.

Regards,
Do you think I'm overcomplicating it and I should just contribute more to Roth portion of the 401k with the new employer?
sycamore
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Re: Roth conversion before RMD question

Post by sycamore »

One big factor when considering Roth conversion (or Roth contributions) is whether your tax rate now will be lower in retirement or now. And of course that depends on various things, including unknown things like how Congress might change the brackets, etc. So it's not an easy task.

But you can use estimates like an estimate of your Social Security benefits (yours & wife's), taxable account dividend distributions (if any), and RMDs. And of course you may need to withdraw more RMDs if that's what your spending needs call for.

You'll need to understand how SS benefits are taxed to make an estimate of what your future tax rate will be during withdrawal/retirement. (Note there's also an article on SS tax impact calculator).

If the future rate is lower than 22%, then some Roth conversion up to the 22% bracket makes sense.

To be sure we're talking rather rough estimates, but better than nothing. What many Bogleheads do is re-run the estimate each year to see if makes sense to do more or less Roth conversion.
wolf359
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Re: Roth conversion before RMD question

Post by wolf359 »

Nobody really explained what a "backdoor" Roth conversion is.

Contributing to a Roth IRA is limited by income level. If you're married and file jointly, your MAGI must be under $208,000 for the tax year 2021 and 214,000 for the tax year 2022.

If you exceed that income level, it is possible for you to contribute to a traditional non-deductible IRA, then convert that IRA to a Roth. (The act of contributing to a Roth is limited by income, but the act of converting a Roth is not. Therefore, you might be viewed as contributing to the Roth "through the backdoor."

It doesn't sound like it applies in your case.
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retired@50
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Re: Roth conversion before RMD question

Post by retired@50 »

lepa71 wrote: Fri May 13, 2022 12:21 pm Do you think I'm overcomplicating it and I should just contribute more to Roth portion of the 401k with the new employer?
I'm not sure. It depends on a number of factors, some of which are current marginal income tax rates (known), and marginal income tax rates during your retirement period, both before and after RMDs begin (unknown). So, some guess work will be involved to make a decision.

Have you read the wiki on Traditional versus Roth? - linked here: https://www.bogleheads.org/wiki/Traditional_versus_Roth

If all of this seems too perplexing, then doing a bit of both (Roth & Traditional) probably won't be a mistake.

Regards,
This is one person's opinion. Nothing more.
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retiredjg
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Re: Roth conversion before RMD question

Post by retiredjg »

lepa71 wrote: Fri May 13, 2022 10:23 am Hi all
1st. Is it a backdoor Roth conversion or just Roth conversion? Am I right to assume that this is the process? I would transfer the trad 401k portion into Roth IRA and the portion from 401k would be considered an income that I would pay taxes on.
This sounds like a Roth conversion. What you have in tIRA is not relevant if you go from 401k directly to Roth IRA (which is possible).

If you move money from traditional 401k to tIRA and then to Roth IRA, what you have in tIRA might matter. If you have basis in tIRA (non-deductible contributions) it matters. If you don't have basis in tIRA, it does not matter.

What your wife has in tIRA is not relevant in any scenario.

However, doing Roth conversions at 22% while still working is not necessarily a good idea. Why are you considering this?

I'm 51 and would like to retire around 60. I'm as of last year in 22% tax bracket. Based on some projections I will have around $1M-ish in Trad 401K. I would like to convert as much as possible before I hit 72.
You project to have $1 million in t401k at some point, but when?

Having $1 million in 401k at retirement is not usually a reason to do conversions before retirement.
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Re: Roth conversion before RMD question

Post by LadyGeek »

New member orchidtrail has a question which I've moved into a new thread. See: [Should I do Roth IRA conversion, when to claim Social Security?]
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