Time to Convert Rollover IRA to My Roth IRA?

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Topic Author
Daedalus
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Joined: Sat Oct 21, 2017 5:22 pm

Time to Convert Rollover IRA to My Roth IRA?

Post by Daedalus » Thu Mar 26, 2020 7:44 am

Hey guys, conversion question here. I'm 29, annual salary is around $70k. I have 3 main retirement accounts: 401k, Roth IRA, and a Rollover IRA.

I've got a Rollover IRA account with Vanguard (Opened in 2018). Current value is about $20k. I've always wondered about converting it over to my Vanguard Roth IRA for simplicity sake and to take advantage of the next 3 decades of compound interest growth tax-free. I understand I would have to pay taxes for year 2020, which I'm OK with. I think for me the benefit of 30+ years of compound interest tax-free in a Roth outweighs paying some tax now. With the dip in the market right now I'm wondering if this could be a good opportunity for me to finally convert the Rollover IRA to my Roth IRA. I would plan to move 100% VTSAX from Rollover to the Roth.

A few questions: does the tax apply to both Federal and state (PA)? What should I be careful doing during this transaction? Is it smart to move 100% VTSAX straight to 100% VTSAX in my Roth or would a money market fund be better to start? Anything else I've overlooked?

Thanks guys!

Silk McCue
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Joined: Thu Feb 25, 2016 7:11 pm

Re: Time to Convert Rollover IRA to My Roth IRA?

Post by Silk McCue » Thu Mar 26, 2020 8:07 am

Yes this is a good time to do this. Don't let perfect be the enemy of the good. If I were in your shoes I would do this today.

Do the conversion directly in one fell swoop as a single sell to buy transaction/exchange. According to this link (Google is your friend) PA doesn't charge tax on conversions. Read this for yourself and confirm.

https://www.revenue.pa.gov/FormsandPubl ... ev-636.pdf

Cheers

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

Re: Time to Convert Rollover IRA to My Roth IRA?

Post by lakpr » Thu Mar 26, 2020 8:14 am

Does your 401k plan offer ability to convert within the plan? I suggest the alternative of rolling the Rollover IRA to your 401k plan, then convert to Roth 401k within the plan.

My reasoning for doing so: 401k plans fall under the purview of ERISA, and ERISA law has the "non-alienation provisions", which means that your creditors, those who you owe money to, cannot lay claim to these funds ever. That sort of asset protection is not easy to obtain.

But 401k plans will not allow rollover of Roth IRAs, only pre-tax funds.

Hence the suggestion to roll the Rollover IRA into your 401k plan first, then convert within the plan. Your end result is the same taxes-wise, but you will have sheltered an additional $20k into the 401k plan.

Silk McCue
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Re: Time to Convert Rollover IRA to My Roth IRA?

Post by Silk McCue » Thu Mar 26, 2020 8:24 am

^^

FYI - IRA's and Roths are protected from creditors in PA.

Cheers

lakpr
Posts: 4492
Joined: Fri Mar 18, 2011 9:59 am

Re: Time to Convert Rollover IRA to My Roth IRA?

Post by lakpr » Thu Mar 26, 2020 8:32 am

Just as an FYI as well, according to this link: https://www.assetprotectionplanners.com ... -by-state/ :
The Pennsylvania state IRA creditor protection exemption does not apply to amounts added to the retirement fund in excess of $15,000 or within one year prior to the debtor filing for bankruptcy. This does not include rollover IRAs.
Rollover IRAs are protected in Pennsylvania.

However ... in general, IRAs are protected by state laws not federal laws, so in a "creditor seizing assets" scenario, the defendant may have to file for protection in both federal and state courts, doubling the legal costs ... my argument is more along the lines of keep it simple, and consolidate all assets that you can within the 401k wrapper ...

Topic Author
Daedalus
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Joined: Sat Oct 21, 2017 5:22 pm

Re: Time to Convert Rollover IRA to My Roth IRA?

Post by Daedalus » Thu Mar 26, 2020 9:13 am

Silk McCue wrote:
Thu Mar 26, 2020 8:07 am
Yes this is a good time to do this. Don't let perfect be the enemy of the good. If I were in your shoes I would do this today.

Do the conversion directly in one fell swoop as a single sell to buy transaction/exchange. According to this link (Google is your friend) PA doesn't charge tax on conversions. Read this for yourself and confirm.

https://www.revenue.pa.gov/FormsandPubl ... ev-636.pdf

Cheers
Excellent. Would it be a good idea with the one fell swoop transaction to exchange 100% VTSAX for 100% VTSAX? I remember reading somewhere previously that someone recommended converting over to a money market fund first, but I don't remember their reasoning.

Topic Author
Daedalus
Posts: 50
Joined: Sat Oct 21, 2017 5:22 pm

Re: Time to Convert Rollover IRA to My Roth IRA?

Post by Daedalus » Thu Mar 26, 2020 9:15 am

lakpr wrote:
Thu Mar 26, 2020 8:14 am
Does your 401k plan offer ability to convert within the plan? I suggest the alternative of rolling the Rollover IRA to your 401k plan, then convert to Roth 401k within the plan.

My reasoning for doing so: 401k plans fall under the purview of ERISA, and ERISA law has the "non-alienation provisions", which means that your creditors, those who you owe money to, cannot lay claim to these funds ever. That sort of asset protection is not easy to obtain.

But 401k plans will not allow rollover of Roth IRAs, only pre-tax funds.

Hence the suggestion to roll the Rollover IRA into your 401k plan first, then convert within the plan. Your end result is the same taxes-wise, but you will have sheltered an additional $20k into the 401k plan.

I'd have to check with my current 401k Plan. I know there is an option to have a Roth 401k, but I haven't utilized that. Could be an option!

Silk McCue
Posts: 4162
Joined: Thu Feb 25, 2016 7:11 pm

Re: Time to Convert Rollover IRA to My Roth IRA?

Post by Silk McCue » Thu Mar 26, 2020 9:17 am

Daedalus wrote:
Thu Mar 26, 2020 9:13 am

Excellent. Would it be a good idea with the one fell swoop transaction to exchange 100% VTSAX for 100% VTSAX? I remember reading somewhere previously that someone recommended converting over to a money market fund first, but I don't remember their reasoning.
There is no good reason to do that. By doing it this way you aren't out of the market for a minute and aren't then market timing on when to invest back into the Roth. I have been converting for years and this is the recommended approach.

Only if you were doing a Backdoor Roth (which is a completely different thing for those that make too much to contribute directly to a Roth) would you put funds into a money market and then immediately convert.

Cheers

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WoodSpinner
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Re: Time to Convert Rollover IRA to My Roth IRA?

Post by WoodSpinner » Thu Mar 26, 2020 10:15 am

OP,

If possible, simply convert In-Kind. That way you are NEVER out of the market.

Good luck

WoodSpinner

Topic Author
Daedalus
Posts: 50
Joined: Sat Oct 21, 2017 5:22 pm

Re: Time to Convert Rollover IRA to My Roth IRA?

Post by Daedalus » Thu Mar 26, 2020 1:07 pm

WoodSpinner wrote:
Thu Mar 26, 2020 10:15 am
OP,

If possible, simply convert In-Kind. That way you are NEVER out of the market.

Good luck

WoodSpinner
Thanks, WoodSpinner! Re-reading my IPS also reminds me to ever attempt "timing the market".

Silk McCue
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Joined: Thu Feb 25, 2016 7:11 pm

Re: Time to Convert Rollover IRA to My Roth IRA?

Post by Silk McCue » Thu Mar 26, 2020 1:12 pm

Daedalus wrote:
Thu Mar 26, 2020 1:07 pm

Thanks, WoodSpinner! Re-reading my IPS also reminds me to ever attempt "timing the market".
I get that. However, that doesn't mean that it might make sense even though you never considered it. It's all about the math.

I did something very advantageous this week that I had never considered doing regarding the funding of a Donor Advised Fund. I would have never considered it had the market not declined to the extend that it has.

Cheers

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