Should I Convert Traditional IRA to Roth, and How Do I Pay Estimated Tax

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Ricchan
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Should I Convert Traditional IRA to Roth, and How Do I Pay Estimated Tax

Post by Ricchan » Sun Sep 09, 2018 3:35 pm

Hello bogleheads,

Background:
I had a 401k through a prior job. When I changed jobs 7 years ago, I did not participate in the new company's 401k (for various reasons probably not relevant here), and rolled over my prior company's 401k to a Traditional IRA ($25k worth). I've been making $5.5k yearly tax deductible contributions to the Traditional IRA for the past 7 years. Earlier this year, I transferred another Traditional IRA ($22k) I held at another institution to my "main" Traditional IRA just to consolidate things. Also earlier this year, I changed jobs (again) and started contributing to the new company's 401k. I have already made a $5.5k contribution to my Traditional IRA for 2018.

What I have now:
1. Traditional IRA with $134k, including $5.5k contribution for 2018. Aside from the $5.5k contributed this year (which I assume will not be tax deductible because of the 401k), all cost basis in the IRA is from deductible (pre-tax) contributions.
2. Roth IRA with $12k.
3. Company 401k that I joined this year, currently $1.5k.

What I am considering:
- Convert Traditional IRA to Roth IRA by moving all assets in kind from Traditional IRA to Roth IRA.

What I am worried about:
- Tax hit for extra $134k income this year. Last year my AGI was ~$190k with ~$170k taxable. This year is going to be about $20k more, so I'm probably either at the top of the 32% federal tax bracket or bottom of the 35% bracket (single).

- Is converting to a Roth IRA even a good idea? I assume I would pay 35% tax on the entire amount converted this year. I have maybe 25 years left until retirement. I will probably not be withdrawing from the Roth IRA immediately when I retire, so there may be a few more years of growth in the Roth IRA beyond 25 years. Given this scenario, is the Roth conversion a good idea?

- If I do go ahead with the Roth conversion, how do I pay the extra taxes for 2018 so as to avoid any tax penalties? I am not 100% sure if my tax payments for 2018 are enough for safe harbor, but I believe there's a significant chance they won't be. Based on what I've googled, my current plan is to make estimated payments of $23.5k each for the 9/17/2018 and 1/15/2019 estimated tax deadlines via https://www.irs.gov/payments. Will that sufficiently cover the extra taxes from the Roth conversion? (I have not yet made any estimated tax payments for 2018.)

This would be my first time doing any sort of Roth conversion, and it feels daunting since this involves my entire IRA savings, and I definitely do not want to screw it up. Any help would be greatly appreciated. Thank you!

mtbouchard
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Re: Should I Convert Traditional IRA to Roth, and How Do I Pay Estimated Tax

Post by mtbouchard » Sun Sep 09, 2018 3:42 pm

Others on the forum will likely have better advice, but because I have done this recently I thought I would add a few things:

1. I did an (T)IRA-> Roth conversation when I had little income due to research/education and even then only converted ~$40k since that was the lowest tax bracket.

2. To me, during retirement the ideal is a combo of both 401k and Roth: take out from 401k up to first tax bracket and the rest from ROTH.

There are advantages to Roth though - after 5 years, the principle amount can be taken out at any time....essentially if you keep the capital gains within the ROTH structure you never pay capital gains if taken out after retirement age.

Now Id like to hear from others since Im continually impressed by the knowledge-base on this forum.

Matt

retiredjg
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Re: Should I Convert Traditional IRA to Roth, and How Do I Pay Estimated Tax

Post by retiredjg » Sun Sep 09, 2018 4:49 pm

Ricchan wrote:
Sun Sep 09, 2018 3:35 pm
- Is converting to a Roth IRA even a good idea?
No. Not even close. Stop even thinking about it.

It is not smart to convert while in a high tax bracket. It also appears you may pay a higher tax rate than your rate when you deducted the contributions in the first place. That is backwards. You should defer taxes while your rate is high and convert when your rate is low.

Maybe not what you wanted to hear, but this is not a good idea on any level.

You should also have your custodian return your contribution this year if this is the first time you've made a non-deductible contribution. If you have made them before, it will take something else to unwind all this.

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Re: Should I Convert Traditional IRA to Roth, and How Do I Pay Estimated Tax

Post by niceguy7376 » Sun Sep 09, 2018 5:04 pm

I DONT see any benefit of converting TIRA to Roth IRA this year. Why do you want to do it this year?
What was your income the last 7 years?

You should first be worried about the contribution you made to TIRA this year as it wont be tax deductible.

After looking at many recent posts of contributing early to TIRA in the beginning of the year and then a scenario change of job causing people to notice that it became a non deductible, i suggest to everyone to contribute to TIRA/Roth IRA late in the year or beginning of next year for simplicity.

in the big picture, you still have a IRA contribution every year except for the first year.

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Artsdoctor
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Re: Should I Convert Traditional IRA to Roth, and How Do I Pay Estimated Tax

Post by Artsdoctor » Sun Sep 09, 2018 5:05 pm

Vanguard did a very thorough analysis of this recently. You might find it helpful:

https://personal.vanguard.com/pdf/ISGBETR.pdf

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FiveK
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Re: Should I Convert Traditional IRA to Roth, and How Do I Pay Estimated Tax

Post by FiveK » Sun Sep 09, 2018 5:09 pm

retiredjg wrote:
Sun Sep 09, 2018 4:49 pm
No. Not even close. Stop even thinking about it.
+1

Ricchan, see above quote and apply it to your pre-tax IRA balance

Now, if your current 401k has decent investment options and fees, and will accept incoming rollovers from your IRA, you might
1) Roll over your current pre-tax IRA balance to the 401k
2) Convert this year's non-deductible contribution to Roth
3) Include Form 8606 when you file 2018 taxes.

See Backdoor Roth IRA - Bogleheads for more.

retiredjg
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Re: Should I Convert Traditional IRA to Roth, and How Do I Pay Estimated Tax

Post by retiredjg » Sun Sep 09, 2018 5:21 pm

I agree this can be done. But only do it if your 401k has good low cost choices and if you have nothing else named IRA (except Roth IRA) in your name.

And figure out the paperwork first (Form 8606), not after you do it.

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Ricchan
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Re: Should I Convert Traditional IRA to Roth, and How Do I Pay Estimated Tax

Post by Ricchan » Sun Sep 09, 2018 7:31 pm

mtbouchard wrote:
Sun Sep 09, 2018 3:42 pm
2. To me, during retirement the ideal is a combo of both 401k and Roth: take out from 401k up to first tax bracket and the rest from ROTH.
That makes a lot of sense. I never really thought about it that way. Thanks for the input! :)

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Ricchan
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Re: Should I Convert Traditional IRA to Roth, and How Do I Pay Estimated Tax

Post by Ricchan » Sun Sep 09, 2018 7:34 pm

retiredjg wrote:
Sun Sep 09, 2018 4:49 pm
It is not smart to convert while in a high tax bracket. It also appears you may pay a higher tax rate than your rate when you deducted the contributions in the first place. That is backwards. You should defer taxes while your rate is high and convert when your rate is low.
I agree with this general principle, and that's why I was (and am) hesitant about the conversion. But what about the change in value of assets in the IRA during the 25+ years from now until retirement? If the overall market goes up during that time, then doing a conversion now would result in taxes being paid on a smaller amount than paying taxes after the assets have appreciated in value, which would help offset the difference in tax rate between now and retirement. (Edit: This was incorrect thinking on my part.)

The PDF linked by Artsdoctor (https://personal.vanguard.com/pdf/ISGBETR.pdf) discusses aspects of a Roth which leads to a comparison between current tax rate and a BETR (break-even tax rate) rate, rather than a straightforward future tax rate, when deciding whether or not to convert. Specifically, the article cites the following two factors which are relevant in my case:
- When the conversion tax is paid from a taxable account. (In such a case, the longer the investment horizon, the lower the BETR.)
- When the conversion of the traditional IRA opens the “back door” to future Roth contributions.
I am still hesitant about the conversion, and seeing the strong advice here to the contrary gives me even further pause. Still, I would like to hear if you have any thoughts about these arguments in favor of a Roth conversion.

I googled "Roth conversion calculator" and found a couple sites that have forms you fill out with your own parameters. The results in my case are slightly in favor of not converting, but can vary depending on how optimistic (or pessimistic) I am about market returns, retirement age, life expectancy, etc.
retiredjg wrote:
Sun Sep 09, 2018 4:49 pm
You should also have your custodian return your contribution this year if this is the first time you've made a non-deductible contribution. If you have made them before, it will take something else to unwind all this.
The non-deductrible contribution came from myself. I've been putting $5.5k in my IRA every year as contribution limits allow, and this was the first year I did so while also having a 401k. Is it not advisable to contribute to an IRA, even if it is non-deductible? Do you not still take advantage of the tax deferred growth?
Last edited by Ricchan on Sun Sep 09, 2018 8:45 pm, edited 1 time in total.

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Ricchan
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Re: Should I Convert Traditional IRA to Roth, and How Do I Pay Estimated Tax

Post by Ricchan » Sun Sep 09, 2018 7:38 pm

niceguy7376 wrote:
Sun Sep 09, 2018 5:04 pm
I DONT see any benefit of converting TIRA to Roth IRA this year. Why do you want to do it this year?
What was your income the last 7 years?
There's no reason for me doing it this year other than the fact that I never thought about it until now. :oops:
I probably should have started doing backdoor Roth conversions 7 years ago. That's my mistake.

Over the past 7 years my taxable income has been between $110k and $170k, or 28% - 32% federal tax. My past 401k contributions (from 7+ years ago) were made while I was probably in 25% - 28% brackets. The Roth IRA contributions were from part time jobs while in school and in the lowest bracket.
niceguy7376 wrote:
Sun Sep 09, 2018 5:04 pm
You should first be worried about the contribution you made to TIRA this year as it wont be tax deductible.
I'm aware the TIRA contribution this year will not be tax deductible, but as I asked retiredjg above, is it not still advisable to contribute to a TIRA, even without the tax deduction? (Edit: I'm not eligible for Roth IRA contributions.)
Last edited by Ricchan on Sun Sep 09, 2018 9:27 pm, edited 5 times in total.

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FiveK
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Re: Should I Convert Traditional IRA to Roth, and How Do I Pay Estimated Tax

Post by FiveK » Sun Sep 09, 2018 7:39 pm

Ricchan wrote:
Sun Sep 09, 2018 7:31 pm
mtbouchard wrote:
Sun Sep 09, 2018 3:42 pm
2. To me, during retirement the ideal is a combo of both 401k and Roth: take out from 401k up to first tax bracket and the rest from ROTH.
That makes a lot of sense. I never really thought about it that way. Thanks for the input! :)
Depends on the tax brackets at which one could have saved by making traditional contributions. For example, someone who could save 28% or more would do well to do so, even if that meant paying 10%, 12%, or even 22% when withdrawing.

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Ricchan
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Re: Should I Convert Traditional IRA to Roth, and How Do I Pay Estimated Tax

Post by Ricchan » Sun Sep 09, 2018 7:43 pm

FiveK wrote:
Sun Sep 09, 2018 5:09 pm
Now, if your current 401k has decent investment options and fees, and will accept incoming rollovers from your IRA, you might
1) Roll over your current pre-tax IRA balance to the 401k
2) Convert this year's non-deductible contribution to Roth
3) Include Form 8606 when you file 2018 taxes.
Thanks for the suggestion! At first glance I don't see anything about my 401k accepting an IRA rollover, but I can call tomorrow for more information. My current 401k really only has one fund I'm interested in, VWIAX (Vanguard Wellseley Income Adm). My IRA is pretty much 100% VTSAX. I'm fairly certain I don't want to rollover all that into VWIAX.

So perhaps this won't be actionable in the end, but it's nice to know it's (possibly) an option.

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FiveK
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Re: Should I Convert Traditional IRA to Roth, and How Do I Pay Estimated Tax

Post by FiveK » Sun Sep 09, 2018 7:45 pm

Ricchan wrote:
Sun Sep 09, 2018 7:34 pm
...doing a conversion now would result in taxes being paid on a smaller amount than paying taxes after the assets have appreciated in value, which would help offset the difference in tax rate between now and retirement.
No, it wouldn't. See the commutative property of multiplication as it applies to this situation.
The PDF linked by Artsdoctor (https://personal.vanguard.com/pdf/ISGBETR.pdf) discusses aspects of a Roth which leads to a comparison between current tax rate and a BETR (break-even tax rate) rate, rather than a straightforward future tax rate, when deciding whether or not to convert.
This is a legitimate point. What do you think your BETR is?
The non-deductrible contribution came from myself. I've been putting $5.5k in my IRA every year as contribution limits allow, and this was the first year I did so while also having a 401k. Is it not advisable to contribute to an IRA, even if it is non-deductible? Do you not still take advantage of the tax deferred growth?
A Roth IRA is preferable to a non-deductible traditional IRA, because in a Roth the growth is not only tax-deferred, it is tax free.

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Ricchan
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Re: Should I Convert Traditional IRA to Roth, and How Do I Pay Estimated Tax

Post by Ricchan » Sun Sep 09, 2018 7:52 pm

FiveK wrote:
Sun Sep 09, 2018 7:45 pm
The non-deductrible contribution came from myself. I've been putting $5.5k in my IRA every year as contribution limits allow, and this was the first year I did so while also having a 401k. Is it not advisable to contribute to an IRA, even if it is non-deductible? Do you not still take advantage of the tax deferred growth?
A Roth IRA is preferable to a non-deductible traditional IRA, because in a Roth the growth is not only tax-deferred, it is tax free.
Sorry, I forgot to mention, I'm not eligible to contribute to a Roth IRA. In recent years the only IRA available to me has been the Traditional IRA. In this case, should I not just continue to contribute to the Traditional IRA, even if the contributions are non-deductible?

Edit: Regarding my BETR, I'll have to give it some more thought, but possibly around 20%?
Last edited by Ricchan on Sun Sep 09, 2018 8:46 pm, edited 1 time in total.

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Ricchan
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Re: Should I Convert Traditional IRA to Roth, and How Do I Pay Estimated Tax

Post by Ricchan » Sun Sep 09, 2018 8:36 pm

FiveK wrote:
Sun Sep 09, 2018 7:45 pm
Ricchan wrote:
Sun Sep 09, 2018 7:34 pm
...doing a conversion now would result in taxes being paid on a smaller amount than paying taxes after the assets have appreciated in value, which would help offset the difference in tax rate between now and retirement.
No, it wouldn't. See the commutative property of multiplication as it applies to this situation.
Oh, you're absolutely right. I don't know what I was thinking. Thanks for pointing that out!

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FiveK
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Re: Should I Convert Traditional IRA to Roth, and How Do I Pay Estimated Tax

Post by FiveK » Sun Sep 09, 2018 8:41 pm

Ricchan wrote:
Sun Sep 09, 2018 7:52 pm
Sorry, I forgot to mention, I'm not eligible to contribute to a Roth IRA. In recent years the only IRA available to me has been the Traditional IRA. In this case, should I not just continue to contribute to the Traditional IRA, even if the contributions are non-deductible?
You probably should either clear the way for and then do backdoor Roths, or just contribute to taxable instead of the non-deductible tIRA. See Non-deductible traditional IRA - Bogleheads and then the spreadsheet mentioned in that wiki to evaluate for your situation.
EDIT: Regarding my BETR, I'll have to give it some more thought, but possibly around 20%?
There is guesswork involved, so do give it some thought and then lay out the step-by-step calculation with your guesses. See also ~row 150 on the 'Misc. calcs' tab of the same spreadsheet mentioned above for that calculation.

Once you have your best guess at the Break-Even Tax Rate, you need another set of guesses to estimate the tax rate you will pay when withdrawing from your traditional account in retirement....

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Re: Should I Convert Traditional IRA to Roth, and How Do I Pay Estimated Tax

Post by retiredjg » Mon Sep 10, 2018 7:06 am

Ricchan wrote:
Sun Sep 09, 2018 7:34 pm
The non-deductrible contribution came from myself. I've been putting $5.5k in my IRA every year as contribution limits allow, and this was the first year I did so while also having a 401k. Is it not advisable to contribute to an IRA, even if it is non-deductible? Do you not still take advantage of the tax deferred growth?
You can leave the non-deductible contribution if you want and even add to it, but many people would avoid that because you have to keep up with your contributions for the rest of your life (or until the IRA is empty) and each withdrawal has to be pro-rated. Many people would prefer to just invest in a taxable account instead.

Your choices are to do that (above) or have the custodian return your contribution (make it like it never happened) or roll everything except that contribution into your 401k and convert that contribution to Roth IRA.

If your 401k has Wellesley Income, it is unlikely that is the only good choice you have available.

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Re: Should I Convert Traditional IRA to Roth, and How Do I Pay Estimated Tax

Post by Bacchus01 » Mon Sep 10, 2018 7:12 am

FiveK wrote:
Sun Sep 09, 2018 5:09 pm
retiredjg wrote:
Sun Sep 09, 2018 4:49 pm
No. Not even close. Stop even thinking about it.
+1

Ricchan, see above quote and apply it to your pre-tax IRA balance

Now, if your current 401k has decent investment options and fees, and will accept incoming rollovers from your IRA, you might
1) Roll over your current pre-tax IRA balance to the 401k
2) Convert this year's non-deductible contribution to Roth
3) Include Form 8606 when you file 2018 taxes.

See Backdoor Roth IRA - Bogleheads for more.
This is the right answer

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Ricchan
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Re: Should I Convert Traditional IRA to Roth, and How Do I Pay Estimated Tax

Post by Ricchan » Tue Sep 11, 2018 6:33 am

retiredjg wrote:
Mon Sep 10, 2018 7:06 am
If your 401k has Wellesley Income, it is unlikely that is the only good choice you have available.
I'd be happy if that were the case. Maybe I'm overlooking something, but here is what is available.

Code: Select all

                                                Category                Exp   Load  SEC Yield
RGAGX  American Funds Growth Fund of Amer R6    Large Growth            0.33  0     0.8
DLTNX  DoubleLine Total Return Bond N           Intermediate-Term Bond  0.72  0     3.58
IVFIX  Federated Intl Strategic Val Div Instl   Foreign Large Value     0.86  0     4.23
VSEAX  JPMorgan Small Cap Equity Fund Class A   Small Blend             1.24  5.25  --
JDSNX  Janus Henderson Small Cap Value N        Small Value             0.88  0     --
OGLYX  Oppenheimer Global Y                     World Large Stock       0.89  0     --
PISIX  PIMCO StocksPLUS Intl (USD-Hedged) Inst  Foreign Large Blend     0.84  0     2.86
PRGIX  T. Rowe Price Growth and Income Fund     Large Blend             0.66  0     0
VEVIX  Victory Sycamore Established Value       Mid-Cap Value           0.62  0     0.89
VEIRX  Vanguard Equity Income Fund Admiral      Large Value             0.17  0     2.83
VMGRX  Vanguard Mid Cap Growth Inv              Mid-Cap Growth          0.36  0     0.53
VSEQX  Vanguard Strategic Equity                Mid-Cap Blend           0.18  0     1.19
VSTCX  Vanguard Strategic Small-Cap Equity      Small Blend             0.29  0     1.02
VWINX  Vanguard Wellesley Income Fund Admiral   Alloc 30% to 50% Equity 0.22  0     3.17
       Various target date funds 2010 - 2060    Target-Date             0.39  0     --
I called and confirmed it's possible to roll in my IRA to the 401k. If I could find a good substitute for VTSAX, I would seriously consider it. The closest thing may be the 2060 target date fund, or a mix of VEIRX, VSEQX, VSTCX, but I'd really rather just have VTSAX.

Right now I'm leaning towards reversing the IRA contribution for 2018 and leaving everything else as it is.

Thanks again to everyone who responded so far. I really appreciate and value everyone's comments.

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Re: Should I Convert Traditional IRA to Roth, and How Do I Pay Estimated Tax

Post by retiredjg » Tue Sep 11, 2018 7:32 am

There are other good choices. They are just not the choice you want most. :happy However, a reasonable facsimile of a broad US index could be cobbled together out of it.

What you are missing is a good low cost bond fund. Is there a stable value fund available? If yes, what it is paying this year?

I don't think you have mentioned why you want to convert your tIRA to Roth other than you just never thought about it before. I think we have convinced you the time to convert is not now because you would be paying a 35% tax rate to achieve it.

There is no harm in leaving the tIRA as it is (other than possibly removing the last $5,500 contribution) and that tIRA would be a good place to hold low cost bonds.

If you wish to start using the backdoor to contribute to Roth IRA, you will have to move the tIRA (except that $5,500) into your less than perfect 401k. I don't believe you have mentioned this as a motivation, but it certainly is one if you are willing to learn about the backdoor and go through that process.

Which choice appeals to you most?

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Re: Should I Convert Traditional IRA to Roth, and How Do I Pay Estimated Tax

Post by Ricchan » Tue Sep 11, 2018 8:30 am

retiredjg wrote:
Tue Sep 11, 2018 7:32 am
What you are missing is a good low cost bond fund. Is there a stable value fund available? If yes, what it is paying this year?
I have some BND ETF in my tIRA, and I consider (67% of) the Wellesley Income Fund as part of my bond allocation. As for bond funds in my 401k, what I listed is all I have access to. I could add municipal bond funds in my taxed accounts, and I could also go for treasuries or CDs.
retiredjg wrote:
Tue Sep 11, 2018 7:32 am
I don't think you have mentioned why you want to convert your tIRA to Roth other than you just never thought about it before.
Sorry, I should have mentioned this in my original post. The sequence of events / thought process was this:

- Early in the year, I made a $5.5k contribution to my tIRA as I've always done.
- Later in the year, I joined my new company's 401k plan.
- I realize that my $5.5k tIRA contribution is now no longer tax deductible.
- When looking around for options, I find out about backdoor Roth. I realize my situation is not ideal because of my existing tIRA, but thought it might still be worth it to convert to a Roth and take the tax hit now, so I can continue doing backdoor Roths in the future.

When I mentioned that I was doing the Roth conversion now because I had never thought about it before, it was because had I known about backdoor Roths earlier, I would have looked into doing the Roth conversion while my tIRA was still in its infancy rather than now.

After reading through everyone's posts, I'm considering either (1) rolling the tax-deductible portion of my tIRA into my 401k and doing a Roth conversion on the remaining $5.5k (plus whatever interest/growth I need to factor in), or (2) reversing the $5.5k contribution and leaving my tIRA as it is. The main deciding factor seems to be whether or not I'm comfortable with reallocating my tIRA into the available funds in the 401k. With the second option I also give up the chance of any backdoor Roths in the future, but if that's the best course of action, I'm fine with it.

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Re: Should I Convert Traditional IRA to Roth, and How Do I Pay Estimated Tax

Post by JBTX » Tue Sep 11, 2018 9:19 am

I tend to be more "pro Roth" than many here, but at a 30%+ tax rate I'd definitely not do the conversion. I would take the gamble that somewhere in your future (presumably retirement) you will be below 30% and can do the conversion then.

Also, every situation is different, but if you retire well before social security, or you have no other retirement income or pension, you can accumulate probably around $500K or so in traditional, and take distributions or rollovers of $20-$25K per year once retired and stay in the 0% bracket, and much more in the 10% or 12% (or 15% if tax law reverts in 2026) if you retire prior to drawing social security.

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Re: Should I Convert Traditional IRA to Roth, and How Do I Pay Estimated Tax

Post by retiredjg » Tue Sep 11, 2018 9:31 am

Ricchan wrote:
Tue Sep 11, 2018 8:30 am
...so I can continue doing backdoor Roths in the future.
Ah ha!

After reading through everyone's posts, I'm considering either (1) rolling the tax-deductible portion of my tIRA into my 401k and doing a Roth conversion on the remaining $5.5k (plus whatever interest/growth I need to factor in), or (2) reversing the $5.5k contribution and leaving my tIRA as it is.
No need to factor in growth - that is pre-tax and can go into the 401k as well.

The main deciding factor seems to be whether or not I'm comfortable with reallocating my tIRA into the available funds in the 401k. With the second option I also give up the chance of any backdoor Roths in the future, but if that's the best course of action, I'm fine with it.
I suppose one of the math people could tell you which might be better. It may be largely personal preference. Some people don't want to get involved in the back door at all - they would just keep the IRA. Others think that getting money into Roth is important enough to go to the trouble of the rollover and back doors each year.

You just have to figure out what you want. And there's really not a great rush to decide. Maybe let it sit on the back burner for a few months.

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Re: Should I Convert Traditional IRA to Roth, and How Do I Pay Estimated Tax

Post by ExitStageLeft » Tue Sep 11, 2018 3:31 pm

The lure of so many years of making backdoor Roth contributions would be irresistable to me. The limited offerings in the 401k aren't so bad, and you're doing well to make the Wellesley fund be your bond holdings. I would roll the tIRA into the 401k and make a four-fund portfolio to approximate a blend of VTSAX and VBTLX. Within the 401k you can get close to VTSAX with two parts each of RGAGX and VEIRX to one part VSTCX.

If you make a backdoor Roth contribution of this year's $5.5k and roll the rest into the 401k, your resulting assets will be:

401k $129,500
Roth IRA $17,500

If you wanted a 70/30 asset allocation with 30% of stocks in international markets, that means you would have 49% US stocks, 21% international stocks, and 30% bonds. With Wellesly running 64% fixed income assets, that means you need 47% of your assets in VWINX. Put the remainder of your 401k in the 2/2/1 blend above, and put all your Roth IRA in a Vanguard international fund such as VTIAX. Resulting portfolio would be:

401k
$24,000 (16.33%) RGAGX (0.33%)
$24,000 (16.33%) VEIRX (0.17%)
$12,000 (8.16%) VSTCX (0.29%)
$69,500 (47.28%) VWINX (0.22%)

Roth IRA
$17,500 (11.90%) VTIAX (0.11%)

Here's a comparison of this portfolio with a simple three-fund portfolio:
https://www.portfoliovisualizer.com/bac ... n8_2=11.90

If you look at the Explosures tab you can see how closely you can match with the funds available in your 401k. The higher return is due to the choice of bonds in the Wellesley fund.

In future years you can build your Roth IRA and have it grow and compound all tax-free. The cost comes at having an expense ratio in the 401k of about 0.24%. That's not as low as you will get at Vanguard but it is pretty darn good compared to the other offerings n the 401k.

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Re: Should I Convert Traditional IRA to Roth, and How Do I Pay Estimated Tax

Post by bertilak » Tue Sep 11, 2018 5:43 pm

Estimated taxes can be paid online here: https://www.eftps.gov/eftps/index.jsp, The Electronic Federal Tax Payment System.
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SoAnyway
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Re: Should I Convert Traditional IRA to Roth, and How Do I Pay Estimated Tax

Post by SoAnyway » Tue Sep 11, 2018 8:27 pm

Ricchan wrote:
Tue Sep 11, 2018 8:30 am
After reading through everyone's posts, I'm considering either (1) rolling the tax-deductible portion of my tIRA into my 401k and doing a Roth conversion on the remaining $5.5k (plus whatever interest/growth I need to factor in), or (2) reversing the $5.5k contribution and leaving my tIRA as it is. The main deciding factor seems to be whether or not I'm comfortable with reallocating my tIRA into the available funds in the 401k.
I agree with others that you'd be nuts to do the full conversion now, OP, esp. since option (1) is available to you. (Some 401k plans don't allow it.) I'd go with #1. You can decide each year whether it's better for you from a tax/growth perspective to either (a) make a non-deductible tIRA contribution and immediately backdoor it, or (b) simply invest the funds in your taxable account.

As far as the not-horrible-but-less-than-optimal investment options in your 401k, how long (roughly) do you suppose you'll stay with this employer? Unless you plan to work for this company for the next ~25 or so years that you say you have until retirement, remember that you will have the opportunity when you leave your employer to rollover the 401k balance to your (hopefully pristine, i.e. no basis) tIRA without paying taxes - just as you did when you left the employer you had a 401k with 7 years ago. IOW, whenever it is that you leave your current employer, at that point you will have better investment options available.
Ricchan wrote:
Tue Sep 11, 2018 8:30 am
With the second option I also give up the chance of any backdoor Roths in the future, but if that's the best course of action, I'm fine with it.
I don't understand this part. You can still backdoor; you'd just be subject to the pro rata rule, no? And btw, the pro rata rule isn't the end of the world. If your after-tax contributions are a pittance compared to the pre-tax balance, it might not matter much.

FWIW, earlier in my career I was maxing 401k and (like you) ineligible for direct Roth. I still wanted tax-deferred growth, so I was making non-deductible contributions to a tIRA for about 6 years. Back-door conversions would have made no sense in my tax bracket, so I was just letting it grow tax-deferred. When I left my job, my only choices for the 401k were to take a lump sum (and pay taxes at the 35% marginal rate) or rollover. I rolled it over, thus (like you) commingling pre-tax and after-tax in my tIRA. :( Unlike you, though, I've not had an employer 401k plan since that would accept my tIRA assets; if I had, I'd have taken advantage. The good news: I learned from the experience, and in the one low-income year I had between then and now (layoff), I converted the whole tIRA. :)

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Ricchan
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Re: Should I Convert Traditional IRA to Roth, and How Do I Pay Estimated Tax

Post by Ricchan » Wed Sep 12, 2018 10:07 am

ExitStageLeft wrote:
Tue Sep 11, 2018 3:31 pm
Here's a comparison of this portfolio with a simple three-fund portfolio:
https://www.portfoliovisualizer.com/bac ... n8_2=11.90
Thank you so much for the portfolio! I've been playing around with it since yesterday. I think I can make it work, especially since I can move things around in my taxed accounts to make room for the limited 401k options.
bertilak wrote:
Tue Sep 11, 2018 5:43 pm
Estimated taxes can be paid online here: https://www.eftps.gov/eftps/index.jsp, The Electronic Federal Tax Payment System.
Thanks for the link! I've read somewhere that the IRS doesn't like it if you backload your estimated tax payments. So I wasn't sure if not making payments for the first 3 quarters and then making a large payment in the 4th would be a cause for concern. But, it seems like I won't be doing a Roth conversion of my entire tIRA this year, so I probably won't have to worry about this after all. *whew*
SoAnyway wrote:
Tue Sep 11, 2018 8:27 pm
how long (roughly) do you suppose you'll stay with this employer?
Probably a couple years. I changed employer when I moved this year, and I may have to move again in a couple years depending on family situation. So you're right, once I change jobs again I can roll the 401k back to a tIRA.
SoAnyway wrote:
Tue Sep 11, 2018 8:27 pm
Ricchan wrote:
Tue Sep 11, 2018 8:30 am
With the second option I also give up the chance of any backdoor Roths in the future, but if that's the best course of action, I'm fine with it.
I don't understand this part. You can still backdoor; you'd just be subject to the pro rata rule, no? And btw, the pro rata rule isn't the end of the world. If your after-tax contributions are a pittance compared to the pre-tax balance, it might not matter much.
You're right again, it doesn't literally prevent me from doing a backdoor Roth. But if most of my tIRA is pre-tax (currently all of it is pre-tax other than the $5.5k I contributed this year), then with the pro rata rule, if I contribute $5.5k post-tax to my tIRA and then convert $5.5k to Roth, I'd have to pay tax on most of that $5.5k.

For example, right now $5.5k is 4.1% of the $134k tIRA. If I try to backdoor $5,500 worth of my tIRA this year, I'll have to pay tax on 95.9%, or $5,274.50, of that. If I continue doing this every year, over time the post-tax basis in the tIRA will grow relative to the pre-tax basis, so the pro rata tax portion will decrease. However, this series of events trends towards the same result as doing a full conversion now, which I believe we've agreed is a bad option. The situation may be different when I'm in a lower tax bracket in the future, at which point it would make more sense to do these partial conversions. However, the pro rata rule does dissuade me from doing backdoor Roths while I'm still in a high tax bracket and most of my tIRA basis is pre-tax, if I'm understanding this correctly.

Also, thank you for sharing your story. It's very reassuring to hear and learn from someone who has gone through similar experiences.
Last edited by Ricchan on Wed Sep 12, 2018 10:39 am, edited 2 times in total.

MotoTrojan
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Re: Should I Convert Traditional IRA to Roth, and How Do I Pay Estimated Tax

Post by MotoTrojan » Wed Sep 12, 2018 10:25 am

FiveK wrote:
Sun Sep 09, 2018 5:09 pm
retiredjg wrote:
Sun Sep 09, 2018 4:49 pm
No. Not even close. Stop even thinking about it.
+1

Ricchan, see above quote and apply it to your pre-tax IRA balance

Now, if your current 401k has decent investment options and fees, and will accept incoming rollovers from your IRA, you might
1) Roll over your current pre-tax IRA balance to the 401k
2) Convert this year's non-deductible contribution to Roth
3) Include Form 8606 when you file 2018 taxes.

See Backdoor Roth IRA - Bogleheads for more.
This is what I would do. Solves two problems; 1: it gets your 2018 deduction into Roth since it is in the dreaded non-deductible IRA state currently. 2: it allows you to do future backdoor Roths, otherwise you'll likely want to stop contributing to an IRA entirely (non-deductible is worse than taxable in most cases).

Do not convert the existing pre-tax IRA to Roth, that makes no sense to me.

SoAnyway
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Re: Should I Convert Traditional IRA to Roth, and How Do I Pay Estimated Tax

Post by SoAnyway » Wed Sep 12, 2018 4:03 pm

Ricchan wrote:
Wed Sep 12, 2018 10:07 am
SoAnyway wrote:
Tue Sep 11, 2018 8:27 pm
how long (roughly) do you suppose you'll stay with this employer?
Probably a couple years. I changed employer when I moved this year, and I may have to move again in a couple years depending on family situation. So you're right, once I change jobs again I can roll the 401k back to a tIRA.
Ah, in that case, I would definitely do your option 1, i.e. FiveK's steps 1, 2 and 3.
Ricchan wrote:
Wed Sep 12, 2018 10:07 am
SoAnyway wrote:
Tue Sep 11, 2018 8:27 pm
Ricchan wrote:
Tue Sep 11, 2018 8:30 am
With the second option I also give up the chance of any backdoor Roths in the future, but if that's the best course of action, I'm fine with it.
I don't understand this part. You can still backdoor; you'd just be subject to the pro rata rule, no? And btw, the pro rata rule isn't the end of the world. If your after-tax contributions are a pittance compared to the pre-tax balance, it might not matter much.
You're right again, it doesn't literally prevent me from doing a backdoor Roth. But if most of my tIRA is pre-tax (currently all of it is pre-tax other than the $5.5k I contributed this year), then with the pro rata rule, if I contribute $5.5k post-tax to my tIRA and then convert $5.5k to Roth, I'd have to pay tax on most of that $5.5k.
Correct, OP. Sorry - When you said your option 2 (leaving your tIRA as is) would prevent you from doing backdoor Roths in the future, I was thinking like, WAY into the future. For example, let's say you were to leave the "commingled tIRA" as is and stop making non-deductible contributions in future years, so your only contributions to it over the coming years of your working life are rollovers of (100% pre-tax) tax-deferred accounts (401k, 403b, etc.) due to job changes. In 25 years or so when you retire, you might have a massive tax-deferred account that's all pre-tax except for the single $5500 contribution.

No one knows what tax laws will do over the next 25 years, of course, but for the sake of argument, let's say the basic structure of tIRA/Roth/RMD rules are still the same. At the time of your retirement, it might occur to you that it might behoove you to start aggressively converting that tIRA to Roth before you hit 70 1/2, up to the top of the tax bracket that makes sense for your situation. (Ask me how I know. Yeah, it hit me like a ton of bricks, lol... :o) SoAnyway, back to my point, application of the pro rata rule at that point in time due to the single $5500 wouldn't make much difference. All of that is only by way of explanation, btw, since I still think your best option for sure is your option 1.
Ricchan wrote:
Wed Sep 12, 2018 10:07 am
Also, thank you for sharing your story. It's very reassuring to hear and learn from someone who has gone through similar experiences.
Absolutely, OP! This stuff's not intuitive - esp. the tax stuff - and it's not always easy to know what the "right" thing to do is. Maybe this is just self-serving but I actually am ok with that, for the following reason: While (like anyone) I'd prefer to avoid mistakes and I try to learn as much as I can ahead of time to avoid them, I have to say that I've learned WAY more from my mistakes than from the times I got it right the first time. It's a win-win: If I get it right the first time, yay. If I mess up, I learn something (yay). :happy
Last edited by SoAnyway on Wed Sep 12, 2018 4:21 pm, edited 1 time in total.

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FiveK
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Re: Should I Convert Traditional IRA to Roth, and How Do I Pay Estimated Tax

Post by FiveK » Wed Sep 12, 2018 4:11 pm

SoAnyway wrote:
Wed Sep 12, 2018 4:03 pm
Step #4 (which you probably know now) is don't make any non-deductible contribution to your tIRA going forward - Just invest the money through your taxable account.
Given that "Last year my AGI was ~$190k with ~$170k taxable. This year is going to be about $20k more" it seems the OP can't use the front door for Roth contributions and will need to use the backdoor Roth approach in order to get new money into Roth IRAs each year.

SoAnyway
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Re: Should I Convert Traditional IRA to Roth, and How Do I Pay Estimated Tax

Post by SoAnyway » Wed Sep 12, 2018 4:22 pm

FiveK wrote:
Wed Sep 12, 2018 4:11 pm
SoAnyway wrote:
Wed Sep 12, 2018 4:03 pm
Step #4 (which you probably know now) is don't make any non-deductible contribution to your tIRA going forward - Just invest the money through your taxable account.
Given that "Last year my AGI was ~$190k with ~$170k taxable. This year is going to be about $20k more" it seems the OP can't use the front door for Roth contributions and will need to use the backdoor Roth approach in order to get new money into Roth IRAs each year.
Ack - My bad, FiveK. I've deleted that part of my post. :happy
OP, once FiveK's steps 1, 2, and 3 are accomplished, step #4 (as I posted earlier) is to assess each year, preferably toward year-end, whether it makes more sense for your income/tax bracket that year to (a) back-door by contributing to the tIRA and immediately converting, or (2) invest the money through taxable.

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Re: Should I Convert Traditional IRA to Roth, and How Do I Pay Estimated Tax

Post by SpideyIndexer » Thu Sep 13, 2018 12:46 pm

Is there a way the OP can earn some self-employment income in order to qualify for a SE401(k)? Fidelity's SE401(k) will accept incoming rollovers from an IRA. Rolling over the entire tIRA balance will allow Roth conversions (including backdoor) without the pro rata tax hit.

One would to figure out a way to do this so as not to violate any non-competition clause in his/her employment agreement and also not to be viewed as hobby income by the IRS.

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