In what order: Convert TIRA, Rollover, and 403b funds to ROTH IRA? Amounts? $100K

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Poppy
Posts: 9
Joined: Mon Dec 31, 2012 9:52 am

In what order: Convert TIRA, Rollover, and 403b funds to ROTH IRA? Amounts? $100K

Post by Poppy » Wed Feb 12, 2020 5:25 pm

I have accumulated a number of eligible funds to convert to a ROTH IRA.

Believing that a ROTH IRA is the best place to put money, how and when should I transfer about $100K of eligible funds into my Roth?

I have the following funds to convert to a ROTH:
TIAA Traditional IRA: $6K
Fidelity Rollover IRA: $12K
TIAA 403b: $82K (that was originally in a 401k at CIRS, then rolled into a Fidelity Rollover IRA in 2011, then rolled again (at $62K in 2014) into TIAA 403b where I am currently employed, and now valued at $82K, fully vested and marked as “Rollover”.)

For better or worse, I have already contributed $7K to my ROTH for 2020. (I am age 54, single.)

Order: I believe that one can only do ONE conversion per year into a Roth IRA. Is there a “priority” order from the list above of what should go into a ROTH first?

Amount: How much should I convert per year? I am currently at the bottom end of the 24% Federal tax bracket [$85,526 to $163,300] with a MAGI of $96K in 2018. I have to keep my 2020 MAGI under $124K in order to be able to contribute to Roth (which I have already done at $7K in Jan. 2020. Hope that wasn’t premature!) This leaves only about $28K of “wiggle room” for additional income in the form of a Roth conversion or other sources. (I realize I could do a partial Roth Contribution if my MAGI is from $124-$139K, but I am not versed in that, and I have already contributed $7K to my Roth for 2020. BTW: Should I try to “un-do” that, if possible, or would that incur a penalty fee?)

Timing: Given that I can only do this once a year, should I wait until later in the year to see what my MAGI is, and therefore how much I can convert to the ROTH, which will count towards my MAGI?

Are there any other factors to consider in this decision?
Thanks for any advice!

DSInvestor
Posts: 11076
Joined: Sat Oct 04, 2008 11:42 am

Re: In what order: Convert TIRA, Rollover, and 403b funds to ROTH IRA? Amounts? $100K

Post by DSInvestor » Wed Feb 12, 2020 5:31 pm

Multiple Roth conversions per year are permitted.

Roth conversion income is not included in the MAGI for the purposes of Roth IRA contributions. While Roth conversions do increase your AGI, they do not increase your MAGI for Roth IRA purposes.

Do you have state income tax?

Do you have assets in taxable accounts?

Will you have a pension? If you will not have a generous defined benefit pension, it may be better not to convert now and wait until retirement for Roth conversion.

If you currently live in a state with high state income tax, your Roth conversions will likely be taxable by your state. If you may move to another state with no state income tax in retirement, you'll kick yourself for converting while living in a high income tax state. I waited until I moved to a no income tax state before I started Roth conversion and my conversions were done at tax rates far lower than 24%, closer to 0%.

If retired without pension and living off taxable account a couple married filing jointly has 24K of standard deduction which means that 24K of Roth conversion can be taxed at 0%, then conversions in excess of 24K would break into higher brackets (10%, 12% etc).
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retiredjg
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Joined: Thu Jan 10, 2008 12:56 pm

Re: In what order: Convert TIRA, Rollover, and 403b funds to ROTH IRA? Amounts? $100K

Post by retiredjg » Thu Feb 13, 2020 7:55 am

Agree with DSInvestor.

Roth conversions do increase AGI and taxable income but are subtracted out when calculating the MAGI for contributing to Roth IRA.

You can do as many Roth conversions as you want in a year. They are not included in the "once per year" count.

The 24% bracket is not usually a great time to do Roth conversions. You might be an exception, but there is nothing in your post to indicate why you would be.

Your understanding that Roth is somehow better is a myth that will not die.

GAAP
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Joined: Fri Apr 08, 2016 12:41 pm

Re: In what order: Convert TIRA, Rollover, and 403b funds to ROTH IRA? Amounts? $100K

Post by GAAP » Thu Feb 13, 2020 11:39 am

Things to consider (or not):

Current tax brackets will expire in 2026, probably placing you in at least the 28% bracket at that time, so I do agree that conversions now can make sense. However, unless you have significant other income sources in retirement beyond Social Security and/or a large taxable portfolio, you will quite likely be in a lower bracket at retirement.

My general approach has been more about which asset types to move. I'm converting investments in the order that they are most likely to grow the most over the long term -- equities before bonds for example. Since you have multiple potential sources, I would also consider the relative quality of the investment choices (expense ratios, index choices, management fees, etc.), I'm also a big fan of simplification, so would seriously look at first converting your two smaller accounts for that reason. Any remaining conversion room would then come from the largest account.

I estimate my earnings for the year, leaving some room for error, convert what I know is safe, and do a final true-up conversion at the end of the year.

My general rule is that is better to put new money into a Roth than to convert already tax-sheltered money to Roth. Therefore, I would not even consider reversing your current contribution.

In 9 years, you will also care about IRMAA effects on Medicare. Finishing the conversion before that point may help with costs at retirement.
“Adapt what is useful, reject what is useless, and add what is specifically your own.” ― Bruce Lee

retiredjg
Posts: 39265
Joined: Thu Jan 10, 2008 12:56 pm

Re: In what order: Convert TIRA, Rollover, and 403b funds to ROTH IRA? Amounts? $100K

Post by retiredjg » Thu Feb 13, 2020 11:59 am

Poppy wrote:
Wed Feb 12, 2020 5:25 pm
I am age 54, single.
Here's an out in the weeds thought.

If you are near certain that you will not marry, conversions now might be smart because it is fairly unlikely that you will ever be in a lower bracket than now.

On the other hand, it is quite common for married people to be in the 12% (15%) bracket in retirement and that's a good time to do conversions.

Predicting the future is generally stupid, but at your age, you should have a reasonable idea if you are interested in being married or not.

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