Swap to a Roth 401k?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
TexasCPA
Posts: 13
Joined: Mon Jun 25, 2018 1:19 pm

Swap to a Roth 401k?

Post by TexasCPA » Fri Oct 05, 2018 7:03 pm

Here's my situation

I have about $18,000 in a traditional 401k and I'm wondering if I should instead pay the taxes and roll this over to my employer's Roth 401k or just continue to contribute to a traditional 401k. I also have about $20,000 in a Roth IRA

This year my income will be very low (around 20k) and I also have about around $1400 in a tax credit from the lifetime learning credit. Next year, I will be in the 22% bracket

Would now be a good time to switch to a Roth 401k (since my income is so low and I have the tax credit), or am I better off with the tax diversification of a traditional 401k plus a Roth IRA?

User avatar
Peter Foley
Posts: 4619
Joined: Fri Nov 23, 2007 10:34 am
Location: Lake Wobegon

Re: Swap to a Roth 401k?

Post by Peter Foley » Fri Oct 05, 2018 7:20 pm

I would make the conversion in an unusually low income year such as the one you are experiencing.

lakpr
Posts: 325
Joined: Fri Mar 18, 2011 9:59 am

Re: Swap to a Roth 401k?

Post by lakpr » Fri Oct 05, 2018 7:20 pm

Given your facts it should be a no brainer to contribute/convert to Roth 401k this year.

fabdog
Posts: 322
Joined: Wed Jan 16, 2013 1:59 pm
Location: Williamsburg VA

Re: Swap to a Roth 401k?

Post by fabdog » Fri Oct 05, 2018 7:50 pm

assuming you have the cash to pay the taxes on the conversion?

Mike

User avatar
FiveK
Posts: 5847
Joined: Sun Mar 16, 2014 2:43 pm

Re: Swap to a Roth 401k?

Post by FiveK » Fri Oct 05, 2018 8:45 pm

TexasCPA wrote:
Fri Oct 05, 2018 7:03 pm
I have about $18,000 in a traditional 401k and I'm wondering if I should instead pay the taxes and roll this over to my employer's Roth 401k or just continue to contribute to a traditional 401k. I also have about $20,000 in a Roth IRA

This year my income will be very low (around 20k) and I also have about around $1400 in a tax credit from the lifetime learning credit. Next year, I will be in the 22% bracket
You will lose the saver's credit, but your marginal rate will still be so low with $38K income and the $1400 LL credit that Roth 401k contributions and t->R conversion both look good.

TexasCPA
Posts: 13
Joined: Mon Jun 25, 2018 1:19 pm

Re: Swap to a Roth 401k?

Post by TexasCPA » Fri Oct 05, 2018 11:14 pm

Can’t I pay the conversion taxes with the funds from my 401k?

JBTX
Posts: 4268
Joined: Wed Jul 26, 2017 12:46 pm

Re: Swap to a Roth 401k?

Post by JBTX » Fri Oct 05, 2018 11:26 pm

TexasCPA wrote:
Fri Oct 05, 2018 11:14 pm
Can’t I pay the conversion taxes with the funds from my 401k?
Pretty sure that would constitute a withdrawal.

You are better off doing it with funds outside of your 401k. You could pull the funds out of your Roth IRA but I wouldn't recommend it and I'd really try to find funds outside of retirement accounts to do it.

nolesrule
Posts: 831
Joined: Thu Feb 26, 2015 10:59 am

Re: Swap to a Roth 401k?

Post by nolesrule » Sat Oct 06, 2018 10:06 am

Is what the OP asking even possible? The plan has to allow in-plan Roth conversions of pre-tax balances.

TexasCPA
Posts: 13
Joined: Mon Jun 25, 2018 1:19 pm

Re: Swap to a Roth 401k?

Post by TexasCPA » Sat Oct 06, 2018 11:46 am

nolesrule wrote:
Sat Oct 06, 2018 10:06 am
Is what the OP asking even possible? The plan has to allow in-plan Roth conversions of pre-tax balances.
Thanks for the tip, I'll have to look into this but at the very least I should be able to convert my rolled over traditional 401k into a Roth IRA

clydewolf
Posts: 733
Joined: Tue Jul 21, 2015 12:51 pm

Re: Swap to a Roth 401k?

Post by clydewolf » Sat Oct 06, 2018 2:25 pm

TexasCPA wrote:
Fri Oct 05, 2018 7:03 pm

I have about $18,000 in a traditional 401k
Is this 401k from a former employer? If "yes", do a transfer to your Roth IRA. and pay the income tax from other savings or current income.
and I'm wondering if I should instead pay the taxes and roll this over to my employer's Roth 401k
Does your current 401k accept transfers from other plans or IRAs? Not all 401k plans accept transfers.
or just continue to contribute to a traditional 401k.
Next year you may appreciate the tax deferred contributions to your 401k.
I also have about $20,000 in a Roth IRA

This year my income will be very low (around 20k) and I also have about around $1400 in a tax credit from the lifetime learning credit. Next year, I will be in the 22% bracket

Would now be a good time to switch to a Roth 401k (since my income is so low and I have the tax credit), or am I better off with the tax diversification of a traditional 401k plus a Roth IRA?
I like that plan. Just know that you could split your 401k contribution between traditional and Roth.

User avatar
Earl Lemongrab
Posts: 5864
Joined: Tue Jun 10, 2014 1:14 am

Re: Swap to a Roth 401k?

Post by Earl Lemongrab » Sat Oct 06, 2018 2:26 pm

TexasCPA wrote:
Sat Oct 06, 2018 11:46 am
nolesrule wrote:
Sat Oct 06, 2018 10:06 am
Is what the OP asking even possible? The plan has to allow in-plan Roth conversions of pre-tax balances.
Thanks for the tip, I'll have to look into this but at the very least I should be able to convert my rolled over traditional 401k into a Roth IRA
Again, unless you have the tax money outside of the account, this is a poor idea. You'll owe penalty on any withholding money from the IRA. So now your tax rate is 22% on any conversion. I assume you're in TX, so no state income tax.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

clydewolf
Posts: 733
Joined: Tue Jul 21, 2015 12:51 pm

Re: Swap to a Roth 401k?

Post by clydewolf » Sat Oct 06, 2018 2:28 pm

TexasCPA wrote:
Fri Oct 05, 2018 11:14 pm
Can’t I pay the conversion taxes with the funds from my 401k?
Not a good idea. If you are younger than 59-1/2 it will cost you an additional 10%.

Greenman72
Posts: 190
Joined: Fri Nov 01, 2013 2:17 pm

Re: Swap to a Roth 401k?

Post by Greenman72 » Mon Oct 08, 2018 5:45 am

clydewolf wrote:
Sat Oct 06, 2018 2:28 pm
TexasCPA wrote:
Fri Oct 05, 2018 11:14 pm
Can’t I pay the conversion taxes with the funds from my 401k?
Not a good idea. If you are younger than 59-1/2 it will cost you an additional 10%.
+1
Plus, if you're going to pay the tax with IRA funds, then why not just keep it in the IRA? Part of the benefit of the conversion is the fact that you have non-IRA money to pay taxes with.

Just out of curiosity--are you really a CPA? Do you work in a tax practice?

Post Reply