Going to single income for a couple of years, Convert tIRA to Roth

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
Oddball
Posts: 43
Joined: Thu May 03, 2018 9:35 am

Going to single income for a couple of years, Convert tIRA to Roth

Post by Oddball » Mon Feb 11, 2019 4:33 pm

Let me try to condense this down as much as possible:

Married filing jointly, one kid (4 months old)
State: IL
Both of us ~40 years old, plan to work for 20 more years
Me: income $90k. DW is going back to school so no income in 2019 and 2020. After that she should be at the $90-100k range
My taxable income in 2017 was ~72k, 2019 should be about the same. This number gets reduced more (~$5k-10k less) due to a depreciation on a couple of rental properties we have.
Both of us already have tIRA (roll over 401k) and Roth IRA accounts with vanguard. I am still maxing my Roth but with no income DW is only going to put in $2400 into her Roth this year, which could go up or down depending on how this one income works out for us.

So my questions are:
1) Pretty much a no brainer to guestimate what our taxable income would be below the 22% tax bracket and convert that amount from a tIRA to a Roth and pay the 12% now.
2) does it matter if we use my or DW accounts to convert?

I don't know if it matters but the current breakdown is:
DW tIRA: 45%
DW Roth: 6%
Me tIRA: 13%
Me 401k: 16%
Me Roth: 18%

dbltrbl
Posts: 893
Joined: Thu Mar 01, 2007 11:52 am

Re: Going to single income for a couple of years, Convert tIRA to Roth

Post by dbltrbl » Mon Feb 11, 2019 4:43 pm

No it doesn't matter if you file jointly whose tira you convert to Roth. . Do not forget $2000.00 kid credit. Play with numbers but you should get a big chunk converted.

User avatar
RickBoglehead
Posts: 2095
Joined: Wed Feb 14, 2018 9:10 am

Re: Going to single income for a couple of years, Convert tIRA to Roth

Post by RickBoglehead » Mon Feb 11, 2019 4:51 pm

Keep in mind that ROTH contributions can be withdrawn if need be. You should consider maxing out both ROTH IRAs each year, even if you wait until April of the following year to do so.
Avid user of forums on a variety of interests - financial, home brewing, F-150, PHEV, home repair and more. Enjoy learning and passing on knowledge.

bdpb
Posts: 1553
Joined: Wed Jun 06, 2007 3:14 pm

Re: Going to single income for a couple of years, Convert tIRA to Roth

Post by bdpb » Mon Feb 11, 2019 6:32 pm

Oddball wrote:
Mon Feb 11, 2019 4:33 pm

State: IL
Me: income $90k. DW is going back to school so no income in 2019 and 2020. After that she should be at the $90-100k range

I am still maxing my Roth but with no income DW is only going to put in $2400 into her Roth this year, which could go up or down depending on how this one income works out for us.
Remember, there is no state tax on Roth conversions in IL (actually, there is no IL state tax on any IRA withdrawals at any age).

So, you should probably not be making Roth "contributions". Instead of making Roth contributions, use this money to convert traditional to Roth at the same federal tax rate but avoid the state tax rate. Either, make traditional contributions and immediately convert to Roth, or convert existing traditional IRA to Roth.

megabad
Posts: 966
Joined: Fri Jun 01, 2018 4:00 pm

Re: Going to single income for a couple of years, Convert tIRA to Roth

Post by megabad » Mon Feb 11, 2019 7:21 pm

Yes to the above I think based on past posts. Illinois has silly tax laws. Basically, if you want Roth IRA funds and if your situation allows (like yours will for the next 2 years), you are likely going to want to contribute to tIRAs for you and wife and then convert to Roth. Make sure you max wife's IRA contribution next year if you can spare the funds. You will likely want to prioritize this since you may have a double state tax advantage by doing this. Basically, you are getting an upfront deduction for what will become a Roth IRA contribution (it is both pre and post tax free at the state level).

If your 401k is ok and/or if wife is planning on working in industry that is likely to provide good 401k, than I would convert your tIRA first. If your 401k stinks and/or wife is not planning on having 401k when she rejoins workforce, than I would convert wife's first. I would clear one person's tIRA completely if possible to clear path for backdoor Roth. Ideally you should clear both paths for backdoor Roth since you will be close to Roth IRA limits in the future and you might need this.

Topic Author
Oddball
Posts: 43
Joined: Thu May 03, 2018 9:35 am

Re: Going to single income for a couple of years, Convert tIRA to Roth

Post by Oddball » Tue Feb 12, 2019 10:51 am

Thanks everyone for the great info! So basically, instead of using funds from my checking account to contribute to the Roth accounts, I should funnel the money directly from my paycheck pre-tax into the tIRA, and then convert the tIRA funds to Roth. I would still pay the same amount of federal tax (just as a lump sum along with my taxes at the end of the year) but I would avoid paying the 4.95% IL state income tax completely on these funds? If so, that would save us almost $600 a year IL tax.
megabad wrote:
Mon Feb 11, 2019 7:21 pm
Yes to the above I think based on past posts. Illinois has silly tax laws. Basically, if you want Roth IRA funds and if your situation allows (like yours will for the next 2 years), you are likely going to want to contribute to tIRAs for you and wife and then convert to Roth. Make sure you max wife's IRA contribution next year if you can spare the funds. (Can you explain what you mean in bold in more detail, please? divert $6000 from my pay check pre-tax to both my and my wife's tIRA to convert to Roth?) You will likely want to prioritize this since you may have a double state tax advantage by doing this. Basically, you are getting an upfront deduction for what will become a Roth IRA contribution (it is both pre and post tax free at the state level).

If your 401k is ok and/or if wife is planning on working in industry that is likely to provide good 401k, than I would convert your tIRA first. If your 401k stinks and/or wife is not planning on having 401k when she rejoins workforce, than I would convert wife's first. I would clear one person's tIRA completely if possible to clear path for backdoor Roth. Ideally you should clear both paths for backdoor Roth since you will be close to Roth IRA limits in the future and you might need this.
My 401k plan is solid with low fees and good choices. DW future job/401k is totally an unknown, but her tIRA is ~$135k so converting that would take some time or a big tax hit, if I understand this correctly.

retiredjg
Posts: 35135
Joined: Thu Jan 10, 2008 12:56 pm

Re: Going to single income for a couple of years, Convert tIRA to Roth

Post by retiredjg » Tue Feb 12, 2019 11:01 am

I think converting up to the top of the 12% bracket is a good idea since it seems unlikely you will ever be in a lower bracket.

However, you will need to have money in savings (or salary) to pay the tax. The tax should not come out of the IRA since that would be an early withdrawal which requires a 10% penalty.

User avatar
Darth Xanadu
Posts: 584
Joined: Sat Jan 27, 2018 1:47 am
Location: Middle Earth

Re: Going to single income for a couple of years, Convert tIRA to Roth

Post by Darth Xanadu » Tue Feb 12, 2019 11:56 am

Oddball wrote:
Mon Feb 11, 2019 4:33 pm

2) does it matter if we use my or DW accounts to convert?

I don't know if it matters but the current breakdown is:
DW tIRA: 45%
DW Roth: 6%
Me tIRA: 13%
Me 401k: 16%
Me Roth: 18%
One thing to consider is that if you are able to convert your entire tIRA balance (or your spouse's, but her balance is higher), this could set you up in the future for backdoor Roth IRA contributions if, at some point, you collectively exceed the income thresholds for direct contributions.

EDIT: I see Megabad already made this point upthread.
"A courageous teacher, failure is."

megabad
Posts: 966
Joined: Fri Jun 01, 2018 4:00 pm

Re: Going to single income for a couple of years, Convert tIRA to Roth

Post by megabad » Tue Feb 12, 2019 3:54 pm

Oddball wrote:
Tue Feb 12, 2019 10:51 am
megabad wrote:
Mon Feb 11, 2019 7:21 pm
Yes to the above I think based on past posts. Illinois has silly tax laws. Basically, if you want Roth IRA funds and if your situation allows (like yours will for the next 2 years), you are likely going to want to contribute to tIRAs for you and wife and then convert to Roth. Make sure you max wife's IRA contribution next year if you can spare the funds. (Can you explain what you mean in bold in more detail, please? divert $6000 from my pay check pre-tax to both my and my wife's tIRA to convert to Roth?) You will likely want to prioritize this since you may have a double state tax advantage by doing this. Basically, you are getting an upfront deduction for what will become a Roth IRA contribution (it is both pre and post tax free at the state level).
All I meant was you would likely want to prioritize contributing to tIRAs for both you and wife (total of $12k) this year if you can spare the funds and then convert to Roth due to state tax situation. Contributions to tIRAs usually are not connected to your paycheck but you can auto draft your bank account if you wish in most cases. In your case tIRA (and convert to Roth) is likely more valuable space than 401k.

User avatar
Watty
Posts: 15246
Joined: Wed Oct 10, 2007 3:55 pm

Re: Going to single income for a couple of years, Convert tIRA to Roth

Post by Watty » Tue Feb 12, 2019 4:40 pm

Oddball wrote:
Mon Feb 11, 2019 4:33 pm
1) Pretty much a no brainer to guestimate what our taxable income would be below the 22% tax bracket and convert that amount from a tIRA to a Roth and pay the 12% now.
If you wait until late November or early December to do any Roth conversions you would not have to even make a guestimate since you would pretty well know your 2019 numbers.
Oddball wrote:
Mon Feb 11, 2019 4:33 pm
2) does it matter if we use my or DW accounts to convert?

I don't know if it matters but the current breakdown is:
DW tIRA: 45%
DW Roth: 6%
Me tIRA: 13%
Me 401k: 16%
Me Roth: 18%
I would try to keep the amounts in the accounts somewhat even since it might make a difference the future.

I am in Georgia where they have a generous retirement income exclusion where you do not pay state income tax on your first $65,000 of income which is $130,000 for a couple when they are over 65.(There are of course lots of details). The catch is that the $65K is per person and most of the money was saved in a 401k that was in my name so we cannon make use of the full $130K limit. In practice that has not been an actual problem for us yet but if they don't index the limits we could run into that limit some day.

Anyway, as long as it doesn't cost you anything extra you might as well try to keep them as even as possible whenever you can since there is no telling what the tax laws will be 30 years from now.

bdpb
Posts: 1553
Joined: Wed Jun 06, 2007 3:14 pm

Re: Going to single income for a couple of years, Convert tIRA to Roth

Post by bdpb » Tue Feb 12, 2019 6:15 pm

You will want to run a number of different tax scenarios to optimize conversion amounts. You would probably want to avoid very high bumps in marginal rates due to losing tax credits like the child tax credit. A good tax estimator is the Personal finance toolbox. It's somewhat overwhelming but can be used for simple tax calculations by just entering income and conversion amounts.

Post Reply