401K to Roth 401K

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cam240
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401K to Roth 401K

Post by cam240 » Sat Feb 10, 2018 6:54 pm

Hello Community,

My wife just found out that her employer offers a Roth 401K. She wants to switch but is uncertain about how to do so. I told her to contact her HR department or the plan administrator (Mass Mutual) and ask if this is possible. I read that some employers will allow to do this conversion and others will not. Assuming her employer does, she would pay taxes on the contributions? or the contributions and unrealized gains? She just started contributing a few months ago so we are not concern with the tax bill that it would generate. Has anyone else done this? and if so what are other things to consider when doing this conversion?

Thanks,

niceguy7376
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Re: 401K to Roth 401K

Post by niceguy7376 » Sat Feb 10, 2018 6:56 pm

Why not direct future contributions to roth 401k? For this, she should have an option either in her 401k page or her benefits page to change to roth 401k.
Which income bracket will you be in that you are considering roth 401k?

retiredjg
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Re: 401K to Roth 401K

Post by retiredjg » Sat Feb 10, 2018 7:00 pm

There is a difference between contributing to Roth 401k and converting traditional 401k to Roth 401k. In fact, the second choice may not even be offered by her plan.

Remember that "convert" and "conversion" mean something very specific here, not just a change of which account she contributes to.

Which thing are you asking about?

I she contributes to traditional 401k, that lowers your taxable income.

If she contributes to Roth 401k, that does not lower your taxable income (meaning the contributions are taxed as part of your taxable income).

If she converts traditional 401k to Roth 401k, she will pay taxes on however much she converts to Roth.

cam240
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Re: 401K to Roth 401K

Post by cam240 » Sat Feb 10, 2018 9:40 pm

Just to clarify I meant rolling over her contribution in her 401K to a Roth 401K. Basically she does not want to keep her 401K but instead contribute and use her company's Roth 401K option. She has high expectations for both us and believe we will be in a higher tax bracket in the future than we are now. We are ok with losing the tax break from her 401K contributions.

ionball
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Re: 401K to Roth 401K

Post by ionball » Sat Feb 10, 2018 9:58 pm

cam240 wrote:
Sat Feb 10, 2018 9:40 pm
Just to clarify I meant rolling over her contribution in her 401K to a Roth 401K.
This is confusing to me. A rollover is very different from a contribution. If it's a rollover of existing balance, be sure to investigate the tax impact of such. Changing your future contributions from 401k to Roth 401k seems reasonable if your tax rate is expected to be higher when you begin distributions in your retirement period.

cam240
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Re: 401K to Roth 401K

Post by cam240 » Sat Feb 10, 2018 10:18 pm

ionball wrote:
Sat Feb 10, 2018 9:58 pm
cam240 wrote:
Sat Feb 10, 2018 9:40 pm
Just to clarify I meant rolling over her contribution in her 401K to a Roth 401K.
This is confusing to me. A rollover is very different from a contribution. If it's a rollover of existing balance, be sure to investigate the tax impact of such. Changing your future contributions from 401k to Roth 401k seems reasonable if your tax rate is expected to be higher when you begin distributions in your retirement period.
Sorry I can see how my previous answer would be confusing. I guess this the scenario she has XXXX amount on her 401K we want to move that XXXX amount to the Roth 401K ( I called it a "rollover" please correct me if I am using the wrong terminology). Anyways, I read she would have to pay taxes on XXXX amount before being able to go into her new Roth 401K and I wanted to check in the forum if anybody else had done that before. I understand any future payroll deductions (contributions) will go into her Roth 401K so we are good there.

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Q's Laptop
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Re: 401K to Roth 401K

Post by Q's Laptop » Sat Feb 10, 2018 10:24 pm

cam240 wrote:
Sat Feb 10, 2018 9:40 pm
Just to clarify I meant rolling over her contribution in her 401K to a Roth 401K. Basically she does not want to keep her 401K but instead contribute and use her company's Roth 401K option. She has high expectations for both us and believe we will be in a higher tax bracket in the future than we are now. We are ok with losing the tax break from her 401K contributions.
How much time until she retires? Why not keep the tax deferred 401(k) plan and designate future contributions to the Roth IRA? Or maybe do a low percentage to the tax deferred 401(k) and a larger percentage to the Roth 401(k).

My wife recently decided she would stop contributing to her employer's traditional, tax deferred 401(k) and start contributing to her employer sponsored Roth 401(k) plan. We could have contributed to both tax deferred and the Roth IRA but chose to go with the Roth IRA only. The tax deferred 401(k) will be idle, but will continue to grow returns as the mutual funds inside it grow.

I would not take money out of the tax deferred 401(k) and roll it over to the Roth 401(k) plan because you will probably pay a tax penalty on that money.

Generally speaking withdrawals from a Roth 401(k) are not taxable. I think there is an IRS rule that requires the account to have been set up and the initial contribution made at least 5 years before the first withdrawal.

cam240
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Re: 401K to Roth 401K

Post by cam240 » Sat Feb 10, 2018 10:39 pm

Q's Laptop wrote:
Sat Feb 10, 2018 10:24 pm
cam240 wrote:
Sat Feb 10, 2018 9:40 pm
Just to clarify I meant rolling over her contribution in her 401K to a Roth 401K. Basically she does not want to keep her 401K but instead contribute and use her company's Roth 401K option. She has high expectations for both us and believe we will be in a higher tax bracket in the future than we are now. We are ok with losing the tax break from her 401K contributions.
How much time until she retires? Why not keep the tax deferred 401(k) plan and designate future contributions to the Roth IRA? Or maybe do a low percentage to the tax deferred 401(k) and a larger percentage to the Roth 401(k).

My wife recently decided she would stop contributing to her employer's traditional, tax deferred 401(k) and start contributing to her employer sponsored Roth 401(k) plan. We could have contributed to both tax deferred and the Roth IRA but chose to go with the Roth IRA only. The tax deferred 401(k) will be idle, but will continue to grow returns as the mutual funds inside it grow.

I would not take money out of the tax deferred 401(k) and roll it over to the Roth 401(k) plan because you will probably pay a tax penalty on that money.

Generally speaking withdrawals from a Roth 401(k) are not taxable. I think there is an IRS rule that requires the account to have been set up and the initial contribution made at least 5 years before the first withdrawal.
Yes so basically my wife is looking to do exactly what your wife did (obviously with the exception that she is looking into rolling over the 401K balance) She ( and myself) have many years until retirements (35-40 years). I know that she would have to pay taxes on the roll over amount but not sure about a penalty per se. I see your point though and if her balance was higher I would agree letting in sit idle but the balance is so low (since she is only being contributing for 4 months) that it feels not worth it. I am wondering if she would have more maintenance to do between the two kinds of 401Ks that it is justify to do the roll over. And yeah the rule you mentioned applies definitely to Roth IRAs not sure how it goes for Roth 401Ks.

ionball
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Re: 401K to Roth 401K

Post by ionball » Sat Feb 10, 2018 10:45 pm

cam240 wrote:
Sat Feb 10, 2018 10:18 pm
ionball wrote:
Sat Feb 10, 2018 9:58 pm
cam240 wrote:
Sat Feb 10, 2018 9:40 pm
Just to clarify I meant rolling over her contribution in her 401K to a Roth 401K.
This is confusing to me. A rollover is very different from a contribution. If it's a rollover of existing balance, be sure to investigate the tax impact of such. Changing your future contributions from 401k to Roth 401k seems reasonable if your tax rate is expected to be higher when you begin distributions in your retirement period.
Sorry I can see how my previous answer would be confusing. I guess this the scenario she has XXXX amount on her 401K we want to move that XXXX amount to the Roth 401K ( I called it a "rollover" please correct me if I am using the wrong terminology). Anyways, I read she would have to pay taxes on XXXX amount before being able to go into her new Roth 401K and I wanted to check in the forum if anybody else had done that before. I understand any future payroll deductions (contributions) will go into her Roth 401K so we are good there.
OK, I see. I have done an IRA conversion to Roth-IRA which would be very similar except that your 401k administer can impose their own rules which may apply. The total $ amount that you convert will be treated as ordinary income in the year of the conversion. If the tax amount is withheld from the 401k, many will advise against it. It's better to convert when you can pay the tax amount from personal funds outside of the 401k. You should check with the plan administrator, but I think it's unlikely that they would convert without withholding a percentage for income tax.

cam240
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Re: 401K to Roth 401K

Post by cam240 » Sat Feb 10, 2018 10:51 pm

ionball wrote:
Sat Feb 10, 2018 10:45 pm
cam240 wrote:
Sat Feb 10, 2018 10:18 pm
ionball wrote:
Sat Feb 10, 2018 9:58 pm
cam240 wrote:
Sat Feb 10, 2018 9:40 pm
Just to clarify I meant rolling over her contribution in her 401K to a Roth 401K.
This is confusing to me. A rollover is very different from a contribution. If it's a rollover of existing balance, be sure to investigate the tax impact of such. Changing your future contributions from 401k to Roth 401k seems reasonable if your tax rate is expected to be higher when you begin distributions in your retirement period.
Sorry I can see how my previous answer would be confusing. I guess this the scenario she has XXXX amount on her 401K we want to move that XXXX amount to the Roth 401K ( I called it a "rollover" please correct me if I am using the wrong terminology). Anyways, I read she would have to pay taxes on XXXX amount before being able to go into her new Roth 401K and I wanted to check in the forum if anybody else had done that before. I understand any future payroll deductions (contributions) will go into her Roth 401K so we are good there.
OK, I see. I have done an IRA conversion to Roth-IRA which would be very similar except that your 401k administer can impose their own rules which may apply. The total $ amount that you convert will be treated as ordinary income in the year of the conversion. If the tax amount is withheld from the 401k, many will advise against it. It's better to convert when you can pay the tax amount from personal funds outside of the 401k. You should check with the plan administrator, but I think it's unlikely that they would convert without withholding a percentage for income tax.

Yes I also read that as well. I will make sure she checks that as well. The taxable amount is insignificant so the tax bill is not a concern. But I definitely agree that we would much rather be able to pay with touching the 401K money. Just out curiosity, what is the logic behind avoiding the funds being withdrawn out of the 401K balance before the transfer? What is so bad about it?

ionball
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Re: 401K to Roth 401K

Post by ionball » Sat Feb 10, 2018 10:56 pm

cam240 wrote:
Sat Feb 10, 2018 10:39 pm

I know that she would have to pay taxes on the roll over amount but not sure about a penalty per se.

I see your point though and if her balance was higher I would agree letting in sit idle but the balance is so low (since she is only being contributing for 4 months) that it feels not worth it. I am wondering if she would have more maintenance to do between the two kinds of 401Ks that it is justify to do the roll over.
There is no penalty to do a conversion at any age, just the ordinary income tax amount.

For a small amount, my opinion is that simplification would outweigh the optimal tax methodology in this case.

ionball
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Re: 401K to Roth 401K

Post by ionball » Sat Feb 10, 2018 11:06 pm

cam240 wrote:
Sat Feb 10, 2018 10:51 pm

Yes I also read that as well. I will make sure she checks that as well. The taxable amount is insignificant so the tax bill is not a concern. But I definitely agree that we would much rather be able to pay with touching the 401K money. Just out curiosity, what is the logic behind avoiding the funds being withdrawn out of the 401K balance before the transfer? What is so bad about it?
Just that you are losing those withdrawn dollars from tax exempt status. The small amount and your long horizon make it negligible in my opinion.

retiredjg
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Re: 401K to Roth 401K

Post by retiredjg » Sun Feb 11, 2018 7:00 am

cam240, tax deferral is a good thing. Making contributions to traditional tax-deferred 401k is almost always the better choice for most people. There are some exceptions. Do you believe your situation may be an exception? Just "being in a higher tax bracket later" is not really a good reason (although it may be part of a good reason).

What you are talking about is called an "in plan Roth rollover" - IRR. You will pay tax on it at your marginal tax rate and the tax should not come out of the 401k because you that will trigger a 10% early withdrawal penalty on the amount used to pay the tax. If you decide to do this, pay the tax out of savings or out of salary.

This Wiki article may have some information that will be helpful. It has not yet been updated to address the new tax laws.

https://www.bogleheads.org/wiki/Traditional_versus_Roth


If you are not in a very low tax bracket, I would suggest that you consider using tax-deferred 401k and Roth IRA as a combination for your retirement accounts. But exactly what you do depends on your tax bracket (now and after retirement) and how much money you are able to save and what your other accounts are. We know nothing about that.

cam240
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Re: 401K to Roth 401K

Post by cam240 » Sun Feb 11, 2018 9:30 pm

retiredjg wrote:
Sun Feb 11, 2018 7:00 am
cam240, tax deferral is a good thing. Making contributions to traditional tax-deferred 401k is almost always the better choice for most people. There are some exceptions. Do you believe your situation may be an exception? Just "being in a higher tax bracket later" is not really a good reason (although it may be part of a good reason).

What you are talking about is called an "in plan Roth rollover" - IRR. You will pay tax on it at your marginal tax rate and the tax should not come out of the 401k because you that will trigger a 10% early withdrawal penalty on the amount used to pay the tax. If you decide to do this, pay the tax out of savings or out of salary.

This Wiki article may have some information that will be helpful. It has not yet been updated to address the new tax laws.

https://www.bogleheads.org/wiki/Traditional_versus_Roth


If you are not in a very low tax bracket, I would suggest that you consider using tax-deferred 401k and Roth IRA as a combination for your retirement accounts. But exactly what you do depends on your tax bracket (now and after retirement) and how much money you are able to save and what your other accounts are. We know nothing about that.
Thanks for the info. I will be sure to check that link. Thanks also for providing the actual name of what my wife is trying to accomplish (IRR). In regards to your comment to provide you some more info we have two Roth IRAs and 401Ks.

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PaddyMac
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Re: 401K to Roth 401K

Post by PaddyMac » Mon Feb 12, 2018 12:26 pm

Don't do it. It's always a good idea to have SOME money "tax deferred" because unlike what you may think, you will probably get to take it out tax free!

When you retire, you will have have a Standard Tax Deduction (in 2018 that's $24,000 a year per couple). So it makes sense not to have ALL your money in Roth space. There's also the 0% tax bracket.

https://turbotax.intuit.com/tax-tips/ta ... /L7oiVM1DH

https://www.bankrate.com/finance/taxes/ ... ckets.aspx

Alan S.
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Re: 401K to Roth 401K

Post by Alan S. » Mon Feb 12, 2018 1:15 pm

Note that for an IRR to be done here, the plan would not only have to offer IRRs, but it would have to include IRRs of "otherwise non distributable amounts". These are amounts that the employee would not otherwise be able to distribute from the plan until separation, and the elective pre tax 401k deferrals your wife has already made to the 401k are otherwise non distributable.

And since they are non distributable, withholding cannot apply to them. Therefore, if her withholding is now based on making pre tax contributions that would be changed by an IRR into taxable contributions, she or you probably need to increase your normal paycheck withholding in order not to be under withheld at the end of the year.

If you want to postpone the decision for awhile, if an IRR of these amounts can be done at all, she could wait until later in the year and still to the IRR if desired. Or - just change the direction of her current elective deferrals to Roth, and leave the pre tax deferrals already done alone. This does not have to be an "all or nothing" situation.

cam240
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Re: 401K to Roth 401K

Post by cam240 » Mon Feb 12, 2018 7:30 pm

Alan S. wrote:
Mon Feb 12, 2018 1:15 pm
Note that for an IRR to be done here, the plan would not only have to offer IRRs, but it would have to include IRRs of "otherwise non distributable amounts". These are amounts that the employee would not otherwise be able to distribute from the plan until separation, and the elective pre tax 401k deferrals your wife has already made to the 401k are otherwise non distributable.

And since they are non distributable, withholding cannot apply to them. Therefore, if her withholding is now based on making pre tax contributions that would be changed by an IRR into taxable contributions, she or you probably need to increase your normal paycheck withholding in order not to be under withheld at the end of the year.

If you want to postpone the decision for awhile, if an IRR of these amounts can be done at all, she could wait until later in the year and still to the IRR if desired. Or - just change the direction of her current elective deferrals to Roth, and leave the pre tax deferrals already done alone. This does not have to be an "all or nothing" situation.
Thanks for your response Alan. I read and understand the non distributable amounts but not sure I fully grasped the withholding portion. Her future contributions would come after taxes so would the top line (gross income) be the same? actually would she not pay actually more taxes due to the fact she is not getting the pre- 401K contribution break? Just asking and I appreciate the clarification before hand. But I got you on the "distributable amounts" part. Just to disclose the amount we are discussing her is less than $1,500 dollars. Not sure if that changes some of the comments above.

Alan S.
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Re: 401K to Roth 401K

Post by Alan S. » Mon Feb 12, 2018 7:50 pm

Gross income will be the same, but take home pay will drop if current contributions are changed to Roth.
And if an IRR is done with the 1500, that has the same effect as if the earlier contributions were Roth as well, although likely some of those might have been in late 2017.

The withholding tables are being changed right now to reflect the new tax bill's lower rates. And a change to Roth deferrals will cause an automatic increase in withholding, due to higher taxable income. Since both of these are automatic and somewhat offset each other, you probably do not have to increase your withholding unless you were underwithheld before all this.

cam240
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Re: 401K to Roth 401K

Post by cam240 » Mon Feb 12, 2018 8:03 pm

Alan S. wrote:
Mon Feb 12, 2018 7:50 pm
Gross income will be the same, but take home pay will drop if current contributions are changed to Roth.
And if an IRR is done with the 1500, that has the same effect as if the earlier contributions were Roth as well, although likely some of those might have been in late 2017.

The withholding tables are being changed right now to reflect the new tax bill's lower rates. And a change to Roth deferrals will cause an automatic increase in withholding, due to higher taxable income. Since both of these are automatic and somewhat offset each other, you probably do not have to increase your withholding unless you were underwithheld before all this.
That makes sense to me. Thanks Alan. So with that low balance you still think its worth doing IRR (assuming her adminstrator offers it and also on non distributable amounts). I understand the concept of diverysifying your taxes. I have a traditional 401K so I feel that evens the field off

CppCoder
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Re: 401K to Roth 401K

Post by CppCoder » Mon Feb 12, 2018 8:10 pm

Do you have a large, future retirement income source like a pension? If not, I would not do the IRR. In fact, unless you are in a very low tax bracket, I highly doubt moving to a Roth 401k is a good option for her future contributions.

cam240
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Re: 401K to Roth 401K

Post by cam240 » Mon Feb 12, 2018 9:23 pm

CppCoder wrote:
Mon Feb 12, 2018 8:10 pm
Do you have a large, future retirement income source like a pension? If not, I would not do the IRR. In fact, unless you are in a very low tax bracket, I highly doubt moving to a Roth 401k is a good option for her future contributions.
No pension (we are in our young 20s so hard to say with so many years ahead) or bracket is 24%. No state taxes.

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FiveK
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Re: 401K to Roth 401K

Post by FiveK » Mon Feb 12, 2018 9:41 pm

cam240 wrote:
Mon Feb 12, 2018 9:23 pm
CppCoder wrote:
Mon Feb 12, 2018 8:10 pm
Do you have a large, future retirement income source like a pension? If not, I would not do the IRR. In fact, unless you are in a very low tax bracket, I highly doubt moving to a Roth 401k is a good option for her future contributions.
No pension (we are in our young 20s so hard to say with so many years ahead) or bracket is 24%. No state taxes.
With no pension, if you have all your tax-advantaged money in Roth accounts, when you retire and start withdrawing your likely marginal rate will be 0%. And that is why it probably makes sense to put money in the traditional 401k.

E.g., it takes ~$2.5 million in traditional accounts before 4% withdrawals from those alone will cause MFJ filers to reach the 22% bracket. You may have dividends, interest, etc., that would decrease the $2.5 million need, but still....

cam240
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Re: 401K to Roth 401K

Post by cam240 » Mon Feb 12, 2018 10:00 pm

FiveK wrote:
Mon Feb 12, 2018 9:41 pm
cam240 wrote:
Mon Feb 12, 2018 9:23 pm
CppCoder wrote:
Mon Feb 12, 2018 8:10 pm
Do you have a large, future retirement income source like a pension? If not, I would not do the IRR. In fact, unless you are in a very low tax bracket, I highly doubt moving to a Roth 401k is a good option for her future contributions.
No pension (we are in our young 20s so hard to say with so many years ahead) or bracket is 24%. No state taxes.
With no pension, if you have all your tax-advantaged money in Roth accounts, when you retire and start withdrawing your likely marginal rate will be 0%. And that is why it probably makes sense to put money in the traditional 401k.

E.g., it takes ~$2.5 million in traditional accounts before 4% withdrawals from those alone will cause MFJ filers to reach the 22% bracket. You may have dividends, interest, etc., that would decrease the $2.5 million need, but still....
So let me just summarizes the statement above to make sure I got it. Because most of our retirement money will be in Roth accounts and we obviously would not pay taxes our marginal tax rate would effectively be 0%. Therefore, having some taxable withdrawls like those from a 401K would not hurt since it would take a high withdrawl rate to even reach some of middle ground tax brackets. Just making sure I follow the logic above :)

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FiveK
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Re: 401K to Roth 401K

Post by FiveK » Mon Feb 12, 2018 10:07 pm

cam240 wrote:
Mon Feb 12, 2018 10:00 pm
So let me just summarizes the statement above to make sure I got it. Because most of our retirement money will be in Roth accounts and we obviously would not pay taxes our marginal tax rate would effectively be 0%. Therefore, having some taxable withdrawls like those from a 401K would not hurt since it would take a high withdrawl rate to even reach some of middle ground tax brackets. Just making sure I follow the logic above :)
You are following very well indeed.

CppCoder
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Re: 401K to Roth 401K

Post by CppCoder » Tue Feb 13, 2018 12:33 pm

cam240 wrote:
Mon Feb 12, 2018 10:00 pm
So let me just summarizes the statement above to make sure I got it. Because most of our retirement money will be in Roth accounts and we obviously would not pay taxes our marginal tax rate would effectively be 0%. Therefore, having some taxable withdrawls like those from a 401K would not hurt since it would take a high withdrawl rate to even reach some of middle ground tax brackets. Just making sure I follow the logic above :)
Correct. There is a good chance that you are proposing a strategy of paying 24% in taxes now to avoid paying 0% in taxes later.

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teen persuasion
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Re: 401K to Roth 401K

Post by teen persuasion » Tue Feb 13, 2018 3:58 pm

If your spouse has a match, that must be placed in a traditional 401k account, even if she makes 100% of her contributions to the Roth 401k. So she will always have funds in both types of accounts. If you are converting the small amount already contributed to traditional in an attempt to have only a Roth account, it is pointless.

cam240
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Re: 401K to Roth 401K

Post by cam240 » Tue Feb 13, 2018 7:03 pm

teen persuasion wrote:
Tue Feb 13, 2018 3:58 pm
If your spouse has a match, that must be placed in a traditional 401k account, even if she makes 100% of her contributions to the Roth 401k. So she will always have funds in both types of accounts. If you are converting the small amount already contributed to traditional in an attempt to have only a Roth account, it is pointless.
Glad you brought that up. I read that a few days ago and I guess I have some questions. First of, why is that? , second if my wife ever leaves the company (likely as she does not believe she will work there for 35 years haha) and we want to rollover her Roth 401K (assuming she does the IRR) to a Roth IRA will she has to pay taxes on the employer pre-tax matching contributions? Obviously .

PFInterest
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Re: 401K to Roth 401K

Post by PFInterest » Tue Feb 13, 2018 8:17 pm

cam240 wrote:
Tue Feb 13, 2018 7:03 pm
teen persuasion wrote:
Tue Feb 13, 2018 3:58 pm
If your spouse has a match, that must be placed in a traditional 401k account, even if she makes 100% of her contributions to the Roth 401k. So she will always have funds in both types of accounts. If you are converting the small amount already contributed to traditional in an attempt to have only a Roth account, it is pointless.
Glad you brought that up. I read that a few days ago and I guess I have some questions. First of, why is that? , second if my wife ever leaves the company (likely as she does not believe she will work there for 35 years haha) and we want to rollover her Roth 401K (assuming she does the IRR) to a Roth IRA will she has to pay taxes on the employer pre-tax matching contributions? Obviously .
That's the rule.
Yes but you would just move it to a tIRA.

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arcticpineapplecorp.
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Re: 401K to Roth 401K

Post by arcticpineapplecorp. » Tue Feb 13, 2018 8:36 pm

Also you may not be aware of this (many aren't) but Roth 401ks require RMDs at 70 1/2 unlike Roth IRAs. Therefore you will have to rollover your Roth 401k money into a Roth IRA at 70 1/2 to avoid RMDs. Not a major deal, but something to be aware of.

While my 457(b) representative has encouraged the Roth over traditional, she made it a point to make sure a company I choose in the future would allow a rollover from Roth 401k to Roth IRA. She made it seem like not all companies do that. I assume Vanguard does, but haven't asked them yet (haven't switched from 401k to Roth 401k yet). Does anyone know if they do?

https://www.google.com/search?q=roth+40 ... fox-b-1-ab
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

cam240
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Re: 401K to Roth 401K

Post by cam240 » Tue Feb 13, 2018 9:27 pm

arcticpineapplecorp. wrote:
Tue Feb 13, 2018 8:36 pm
Also you may not be aware of this (many aren't) but Roth 401ks require RMDs at 70 1/2 unlike Roth IRAs. Therefore you will have to rollover your Roth 401k money into a Roth IRA at 70 1/2 to avoid RMDs. Not a major deal, but something to be aware of.

While my 457(b) representative has encouraged the Roth over traditional, she made it a point to make sure a company I choose in the future would allow a rollover from Roth 401k to Roth IRA. She made it seem like not all companies do that. I assume Vanguard does, but haven't asked them yet (haven't switched from 401k to Roth 401k yet). Does anyone know if they do?

https://www.google.com/search?q=roth+40 ... fox-b-1-ab
Thanks for the info. I was aware that unlike a Roth IRA(no require minimum age for RMDs) a Roth 401K does require RMDs. Great point about whether the plan administrator allows for such conversation. Question though, are we referring to old-to-be plan administrator or the one where the funds will be move to? Or both? For example wife PA is Mass Mutual and if funds were moved to Roth IRA then it is Fidelity.

jpsc
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Re: 401K to Roth 401K

Post by jpsc » Tue Feb 13, 2018 11:33 pm

I have similar question.
Let say my 401K is about $1M
my tax bracket currently at 0%
I have another 10 years until 60years old.
How much can I convert from regular 401K to Roth 401K without paying any tax?
I also see that I could convert my 401K to an insurance annuities.
Any suggestions?

thanks

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FiveK
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Re: 401K to Roth 401K

Post by FiveK » Wed Feb 14, 2018 12:00 am

jpsc wrote:
Tue Feb 13, 2018 11:33 pm
I have similar question.
Let say my 401K is about $1M
my tax bracket currently at 0%
I have another 10 years until 60years old.
How much can I convert from regular 401K to Roth 401K without paying any tax?
Depends on specifics of your other income. You could do a dummy return using whatever tax software you use to file your real return, or use an estimator such as the personal finance toolbox spreadsheet.
I also see that I could convert my 401K to an insurance annuities.
Any suggestions?
You could, but you probably shouldn't. Most insurance annuities are not good, especially when one is only 50 years old.

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teen persuasion
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Re: 401K to Roth 401K

Post by teen persuasion » Wed Feb 14, 2018 8:40 am

cam240 wrote:
Tue Feb 13, 2018 7:03 pm
teen persuasion wrote:
Tue Feb 13, 2018 3:58 pm
If your spouse has a match, that must be placed in a traditional 401k account, even if she makes 100% of her contributions to the Roth 401k. So she will always have funds in both types of accounts. If you are converting the small amount already contributed to traditional in an attempt to have only a Roth account, it is pointless.
Glad you brought that up. I read that a few days ago and I guess I have some questions. First of, why is that? , second if my wife ever leaves the company (likely as she does not believe she will work there for 35 years haha) and we want to rollover her Roth 401K (assuming she does the IRR) to a Roth IRA will she has to pay taxes on the employer pre-tax matching contributions? Obviously .
The employer's contributions are pre-tax, so must go into the pre-tax bucket (traditional).

When you roll the accounts over, each will go into an analogous IRA account: pre-tax to traditional IRA, Roth to Roth IRA. Employers may treat them as sub-accounts or separate accounts, but they have to keep track of which bucket a given contribution goes into, because the rules are different for each.

Alan S.
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Re: 401K to Roth 401K

Post by Alan S. » Wed Feb 14, 2018 1:06 pm

arcticpineapplecorp. wrote:
Tue Feb 13, 2018 8:36 pm
Also you may not be aware of this (many aren't) but Roth 401ks require RMDs at 70 1/2 unlike Roth IRAs. Therefore you will have to rollover your Roth 401k money into a Roth IRA at 70 1/2 to avoid RMDs. Not a major deal, but something to be aware of.

While my 457(b) representative has encouraged the Roth over traditional, she made it a point to make sure a company I choose in the future would allow a rollover from Roth 401k to Roth IRA. She made it seem like not all companies do that. I assume Vanguard does, but haven't asked them yet (haven't switched from 401k to Roth 401k yet). Does anyone know if they do?

https://www.google.com/search?q=roth+40 ... fox-b-1-ab
To expand on this post somewhat, even fewer are aware that IRS rules allow 401k plan RMDs to be aggregated between the pre tax and the Roth account. That means you could take your entire RMD in any combination from these accounts. However, many plans do NOT allow aggregation, which is a plan restriction. And even if plans do allow aggregation and that helps with flexible tax planning, your total RMD does not change which means you are drawing done your retirement accounts faster.

To avoid a Roth 401k RMD for the year of the direct rollover to a Roth IRA, the rollover MUST be completed by 12/31 of the year before the year you will reach 70.5. Otherwise, you will have an RMD for the Roth balance (maybe taken from the pre tax if allowed) for the rollover year. And any RMD taken directly from the Roth 401k will include earnings if the Roth 401k account is not yet qualified (5 years from year of first Roth 401k contribution).

With respect to allowed rollovers of Roth 401k money to a Roth IRA, this is mandatory once you have separated from service. But a few plans may also require you to roll out pre tax 401k amounts as well. While still working, many plans will allow in service rollovers due to age attainment.

There are also a few plans that require RMDs at 70.5, even while still working, but this is fairly rare. And of course, ALL plans must require RMDs to start at 70.5 for greater than 5% owners of the company, and determination of the 5% includes family attribution rules.

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arcticpineapplecorp.
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Re: 401K to Roth 401K

Post by arcticpineapplecorp. » Thu Feb 15, 2018 8:41 pm

Alan S. wrote:
Wed Feb 14, 2018 1:06 pm
arcticpineapplecorp. wrote:
Tue Feb 13, 2018 8:36 pm
Also you may not be aware of this (many aren't) but Roth 401ks require RMDs at 70 1/2 unlike Roth IRAs. Therefore you will have to rollover your Roth 401k money into a Roth IRA at 70 1/2 to avoid RMDs. Not a major deal, but something to be aware of.

While my 457(b) representative has encouraged the Roth over traditional, she made it a point to make sure a company I choose in the future would allow a rollover from Roth 401k to Roth IRA. She made it seem like not all companies do that. I assume Vanguard does, but haven't asked them yet (haven't switched from 401k to Roth 401k yet). Does anyone know if they do?

https://www.google.com/search?q=roth+40 ... fox-b-1-ab
To expand on this post somewhat, even fewer are aware that IRS rules allow 401k plan RMDs to be aggregated between the pre tax and the Roth account. That means you could take your entire RMD in any combination from these accounts. However, many plans do NOT allow aggregation, which is a plan restriction. And even if plans do allow aggregation and that helps with flexible tax planning, your total RMD does not change which means you are drawing done your retirement accounts faster.

To avoid a Roth 401k RMD for the year of the direct rollover to a Roth IRA, the rollover MUST be completed by 12/31 of the year before the year you will reach 70.5. Otherwise, you will have an RMD for the Roth balance (maybe taken from the pre tax if allowed) for the rollover year. And any RMD taken directly from the Roth 401k will include earnings if the Roth 401k account is not yet qualified (5 years from year of first Roth 401k contribution).

With respect to allowed rollovers of Roth 401k money to a Roth IRA, this is mandatory once you have separated from service. But a few plans may also require you to roll out pre tax 401k amounts as well. While still working, many plans will allow in service rollovers due to age attainment.

There are also a few plans that require RMDs at 70.5, even while still working, but this is fairly rare. And of course, ALL plans must require RMDs to start at 70.5 for greater than 5% owners of the company, and determination of the 5% includes family attribution rules.
great info Alan S. A question...say I want to retire (for some reason) at 70 (and will turn 70 1/2 in the same year). How much time do I have to complete the rollover to Roth IRA considering you said it should be done by 12/31 of the year BEFORE you turn 70 1/2? Is there some allowance and if so is it plan specific?
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

Alan S.
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Re: 401K to Roth 401K

Post by Alan S. » Thu Feb 15, 2018 9:50 pm

To better clarify, what is mandatory is that the plan MUST allow you to roll out the Roth 401k money if you want to. But you don't have to if you want the Roth 401k to remain and become subject to RMDs.

If you retire in the year you reach 70.5, you will have to take an RMD for that year before rolling either the pre tax or Roth assets out of the plan. If you choose to delay the rollover and the first year RMD to the following year, then you will have to take 2 years of RMDs in the following year before you can roll out the funds.

If you want to avoid an RMD on the Roth balance altogether, you will have to do the direct rollover prior to the start of the year you will reach 70.5 unless you are still working. If you are still working, then you must do the rollover prior to the start of the year in which you will retire.

cam240
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Re: 401K to Roth 401K

Post by cam240 » Wed Feb 21, 2018 2:37 pm

teen persuasion wrote:
Wed Feb 14, 2018 8:40 am
cam240 wrote:
Tue Feb 13, 2018 7:03 pm
teen persuasion wrote:
Tue Feb 13, 2018 3:58 pm
If your spouse has a match, that must be placed in a traditional 401k account, even if she makes 100% of her contributions to the Roth 401k. So she will always have funds in both types of accounts. If you are converting the small amount already contributed to traditional in an attempt to have only a Roth account, it is pointless.
Glad you brought that up. I read that a few days ago and I guess I have some questions. First of, why is that? , second if my wife ever leaves the company (likely as she does not believe she will work there for 35 years haha) and we want to rollover her Roth 401K (assuming she does the IRR) to a Roth IRA will she has to pay taxes on the employer pre-tax matching contributions? Obviously .
The employer's contributions are pre-tax, so must go into the pre-tax bucket (traditional).

When you roll the accounts over, each will go into an analogous IRA account: pre-tax to traditional IRA, Roth to Roth IRA. Employers may treat them as sub-accounts or separate accounts, but they have to keep track of which bucket a given contribution goes into, because the rules are different for each.
Still on the fence about whether to do the IRR to a Roth 401K. I revisited this post to read all the factors that were mentioned for my consideration. Now, if my wife were to do the IRR and then leave her employer, we have a Roth IRA so her contribution and growth would go there but the employer matching contributions need to go into the TIra but... we do not have a Traditional IRA then what? Would we need to open one to receive these funds on an account with matching tax treatment.

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Re: 401K to Roth 401K

Post by bloom2708 » Wed Feb 21, 2018 2:46 pm

Let it grow pre-tax for the next 30+ years. Pre-tax 401k up to the max of $18,500.

Nodoby knows what the tax rates will look like. When you do start withdrawing, you can pull from the source that meets your needs (pre-tax, Roth, taxable).

It takes $18,500 of pre-tax income to put $18,500 into your pre-tax 401k. Match does not count and is extra.

It takes somewhere around $24k of pre-tax income to put $18,500 post-tax into your Roth IRA. Use that $5k to fund your Roth IRA to $5,500 each year.

Pre-Tax 401k + $5,500 Roth IRA is how you should proceed. Future variables are unknown and won't be known until you get there.
"We are here not to please but to provoke thoughtfulness" Unknown Boglehead

cam240
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Re: 401K to Roth 401K

Post by cam240 » Wed Feb 21, 2018 8:36 pm

bloom2708 wrote:
Wed Feb 21, 2018 2:46 pm
Let it grow pre-tax for the next 30+ years. Pre-tax 401k up to the max of $18,500.

Nodoby knows what the tax rates will look like. When you do start withdrawing, you can pull from the source that meets your needs (pre-tax, Roth, taxable).

It takes $18,500 of pre-tax income to put $18,500 into your pre-tax 401k. Match does not count and is extra.

It takes somewhere around $24k of pre-tax income to put $18,500 post-tax into your Roth IRA. Use that $5k to fund your Roth IRA to $5,500 each year.

Pre-Tax 401k + $5,500 Roth IRA is how you should proceed. Future variables are unknown and won't be known until you get there.
It seems like the general consensus is not to good through with IRR (which at this point I am almost convinced not to do). In trying to better understand the tax benefit we would get from a 18,500 pretax 401K contribution from my wife's this is the analysis I thought in my head:

With Traditional 401K:
Gross earned income: 115,000 (I added 5000 or so to account for any wage increases this year)
Both 401Ks maxed out: 37,000
MFJ standard deduction: 24,000
Total 2018 taxable income: 54,000 (12% tax bracket MFJ, tax liability of around 1,905+ 4,1993.88= 6,098.88)
With Roth 401K:
Gross earned income: 115,000 (I added 5000 or so to account for any wage increases this year)
1 401Ks maxed out: 18,500
MFJ standard deduction: 24,000
Total 2018 taxable income: 72,500 (12% tax bracket MFJ, tax liability of around 1,905+ 6,413.88= 8.318.88)

So basically converting my wife's 401K to a Roth 401K would cost us $2,220 on taxes ? is the above analysis a fair analysis? How could I compare the immediate (1 year) impact of this? As stated above my mind is almost set not do this anyways. The analysis above was almost me attempting to an amateur analysis and seeking for opinions on how I did :)

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FiveK
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Re: 401K to Roth 401K

Post by FiveK » Wed Feb 21, 2018 9:53 pm

cam240 wrote:
Wed Feb 21, 2018 8:36 pm
So basically converting my wife's 401K to a Roth 401K would cost us $2,220 on taxes ? is the above analysis a fair analysis?
Yes. Your marginal saving rate in this situation is 12%, and 12% of $18,5000 is $2,220.
How could I compare the immediate (1 year) impact of this?
Don't understand the question. E.g., compare vs. what?

Depending on your expectations for future income and career length, reasonable cases can be made either to put all $37K into traditional accounts, or to put $13,600 (in other words, just enough to drop you from the 22% bracket to the 12%) into traditional and the rest (e.g., $23,400) into Roth.

cam240
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Re: 401K to Roth 401K

Post by cam240 » Wed Feb 21, 2018 10:17 pm

FiveK wrote:
Wed Feb 21, 2018 9:53 pm
cam240 wrote:
Wed Feb 21, 2018 8:36 pm
So basically converting my wife's 401K to a Roth 401K would cost us $2,220 on taxes ? is the above analysis a fair analysis?
Yes. Your marginal saving rate in this situation is 12%, and 12% of $18,5000 is $2,220.
How could I compare the immediate (1 year) impact of this?
Don't understand the question. E.g., compare vs. what?

Depending on your expectations for future income and career length, reasonable cases can be made either to put all $37K into traditional accounts, or to put $13,600 (in other words, just enough to drop you from the 22% bracket to the 12%) into traditional and the rest (e.g., $23,400) into Roth.
Thanks for the reply. What I meant I guess had already been answered on my analysis. In this year that is the financial different between chosing one 401k contribution type over the other. I also see what you are saying about the traditional-Roth combination based on possible tax bracket advtanges.

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