When I start doing a Roth Conversion...

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
barliss2
Posts: 29
Joined: Tue Jan 21, 2020 5:10 pm

When I start doing a Roth Conversion...

Post by barliss2 » Fri May 22, 2020 11:41 am

Hi there. I've searched and searched and can't seem to find a direct answer to this question.

I have a Rollover IRA that far exceeds my Traditional 401k.

Can I do a Roth Conversion with my Rollover IRA?

I was planning on doing this when I leave the FT work life so I'll be doing it once I'm at a 15% or 0% tax bracket. I understand that I'll need to wait for 5 years to take the converted money from the Roth, but I just want to be sure now that I can do the conversion with my Rollover IRA.

Many thanks!

terran
Posts: 1310
Joined: Sat Jan 10, 2015 10:50 pm

Re: When I start doing a Roth Conversion...

Post by terran » Fri May 22, 2020 11:45 am

Yes, your rollover IRA can be converted to Roth.

retiredjg
Posts: 40483
Joined: Thu Jan 10, 2008 12:56 pm

Re: When I start doing a Roth Conversion...

Post by retiredjg » Fri May 22, 2020 11:49 am

You can convert any amount of your Rollover IRA to Roth at any time. You will pay taxes on the amount you convert. No need to convert the entire thing at once and if you do it at once, it may raise your tax bracket.


This answer assumes you have no other IRA that contains any basis (already taxed money such as a non-deductible contribution to tIRA). If you do have basis in any IRA, the answer gets a little more complicated (but you can still do the conversion).

Topic Author
barliss2
Posts: 29
Joined: Tue Jan 21, 2020 5:10 pm

Re: When I start doing a Roth Conversion...

Post by barliss2 » Fri May 22, 2020 12:09 pm

My husband and I both have SEP IRAs (that we don't contribute to anymore bc we opened solo 401ks instead) and Roth IRAs. Now what?

lakpr
Posts: 5075
Joined: Fri Mar 18, 2011 9:59 am

Re: When I start doing a Roth Conversion...

Post by lakpr » Fri May 22, 2020 12:21 pm

barliss2 wrote:
Fri May 22, 2020 12:09 pm
My husband and I both have SEP IRAs (that we don't contribute to anymore bc we opened solo 401ks instead) and Roth IRAs. Now what?
Where, I mean with which custodian, did you open the Solo 401k with?
I was going to suggest simply roll the SEP-IRA to the Solo 401k, but that's possible only if the custodian allows it.
Vanguard does not, for example.
Fidelity does, but does not allow Roth conversions.

Topic Author
barliss2
Posts: 29
Joined: Tue Jan 21, 2020 5:10 pm

Re: When I start doing a Roth Conversion...

Post by barliss2 » Fri May 22, 2020 12:40 pm

lakpr wrote:
Fri May 22, 2020 12:21 pm
barliss2 wrote:
Fri May 22, 2020 12:09 pm
My husband and I both have SEP IRAs (that we don't contribute to anymore bc we opened solo 401ks instead) and Roth IRAs. Now what?
Where, I mean with which custodian, did you open the Solo 401k with?
I was going to suggest simply roll the SEP-IRA to the Solo 401k, but that's possible only if the custodian allows it.
Vanguard does not, for example.
Fidelity does, but does not allow Roth conversions.
I see. Thanks for clarifying.

Here is the layout:
SEP IRAs are in Vanguard.
Solo 401ks are in eTrade.
I do have Solo 401ks in Vanguard, but there's nothing in them as I reverted to eTrade instead.
A rogue $100 somehow ended up in 401k is my old Fidelty account.
Current 401k is in Paychex Flex using index funds, so low on the fees.

terran
Posts: 1310
Joined: Sat Jan 10, 2015 10:50 pm

Re: When I start doing a Roth Conversion...

Post by terran » Fri May 22, 2020 12:42 pm

You should be able to roll both the SEP IRAs and the old 401(k) into the etrade solo 401(k). I would ask them how to proceed.

lakpr
Posts: 5075
Joined: Fri Mar 18, 2011 9:59 am

Re: When I start doing a Roth Conversion...

Post by lakpr » Fri May 22, 2020 1:14 pm

E-Trade is really the best choice for Solo 401k plans, as they would not only accept rollover from external IRA and other tax-deferred vehicles, but also allow you to make in-plan Roth conversions. As @terran said, proceed to migrate the SEP-IRA funds immediately into the Solo 401k plan.

You can also move that stray $100 from old 401k plan into the Solo 401k plan and close it.

Topic Author
barliss2
Posts: 29
Joined: Tue Jan 21, 2020 5:10 pm

Re: When I start doing a Roth Conversion...

Post by barliss2 » Fri May 22, 2020 1:51 pm

lakpr wrote:
Fri May 22, 2020 1:14 pm
E-Trade is really the best choice for Solo 401k plans, as they would not only accept rollover from external IRA and other tax-deferred vehicles, but also allow you to make in-plan Roth conversions. As @terran said, proceed to migrate the SEP-IRA funds immediately into the Solo 401k plan.

You can also move that stray $100 from old 401k plan into the Solo 401k plan and close it.
I was planning on funding the solo 401k (I can't remember which one we need to go with...roth or traditional for this instance, as we signed up for both) at $2k--per the recco from our tax person, since our S-Corp won't be making as much this year. The SEPs + old 401k exceeds that $2k. So should I then roll over just the $2k this year, another $2k next year, etc etc?

terran
Posts: 1310
Joined: Sat Jan 10, 2015 10:50 pm

Re: When I start doing a Roth Conversion...

Post by terran » Fri May 22, 2020 1:57 pm

barliss2 wrote:
Fri May 22, 2020 1:51 pm
lakpr wrote:
Fri May 22, 2020 1:14 pm
E-Trade is really the best choice for Solo 401k plans, as they would not only accept rollover from external IRA and other tax-deferred vehicles, but also allow you to make in-plan Roth conversions. As @terran said, proceed to migrate the SEP-IRA funds immediately into the Solo 401k plan.

You can also move that stray $100 from old 401k plan into the Solo 401k plan and close it.
I was planning on funding the solo 401k (I can't remember which one we need to go with...roth or traditional for this instance, as we signed up for both) at $2k--per the recco from our tax person, since our S-Corp won't be making as much this year. The SEPs + old 401k exceeds that $2k. So should I then roll over just the $2k this year, another $2k next year, etc etc?
A rollover contribution is not included in the limits. You should roll over the whole thing (talk with etrade to find out what the procedure is so they know it's a rollover) and then contribute an additional $2k as a contribution if you can afford it and the business earnings are enough to justify it.

Topic Author
barliss2
Posts: 29
Joined: Tue Jan 21, 2020 5:10 pm

Re: When I start doing a Roth Conversion...

Post by barliss2 » Fri May 22, 2020 2:58 pm

terran wrote:
Fri May 22, 2020 1:57 pm
barliss2 wrote:
Fri May 22, 2020 1:51 pm
lakpr wrote:
Fri May 22, 2020 1:14 pm
E-Trade is really the best choice for Solo 401k plans, as they would not only accept rollover from external IRA and other tax-deferred vehicles, but also allow you to make in-plan Roth conversions. As @terran said, proceed to migrate the SEP-IRA funds immediately into the Solo 401k plan.

You can also move that stray $100 from old 401k plan into the Solo 401k plan and close it.
I was planning on funding the solo 401k (I can't remember which one we need to go with...roth or traditional for this instance, as we signed up for both) at $2k--per the recco from our tax person, since our S-Corp won't be making as much this year. The SEPs + old 401k exceeds that $2k. So should I then roll over just the $2k this year, another $2k next year, etc etc?
A rollover contribution is not included in the limits. You should roll over the whole thing (talk with etrade to find out what the procedure is so they know it's a rollover) and then contribute an additional $2k as a contribution if you can afford it and the business earnings are enough to justify it.
AMAZING! Thank you for being so clear. Have a lovely weekend.

retiredjg
Posts: 40483
Joined: Thu Jan 10, 2008 12:56 pm

Re: When I start doing a Roth Conversion...

Post by retiredjg » Fri May 22, 2020 3:23 pm

barliss2 wrote:
Fri May 22, 2020 12:09 pm
My husband and I both have SEP IRAs (that we don't contribute to anymore bc we opened solo 401ks instead) and Roth IRAs. Now what?
The presence of the SEP IRAs is not a problem in doing a simple Roth conversion. Only other IRAs that contain basis - already taxed money - such as from a non-deductible contribution to tIRA. It is the basis that causes the problems, not other IRAs.

retiredjg
Posts: 40483
Joined: Thu Jan 10, 2008 12:56 pm

Re: When I start doing a Roth Conversion...

Post by retiredjg » Fri May 22, 2020 3:27 pm

At this point, the only reason to roll IRAs into the 401k is to consolidate accounts. There is no problem in doing that, but there is no compelling reason that you have given us to do that....unless you just want to reduce the number of accounts you have.

terran
Posts: 1310
Joined: Sat Jan 10, 2015 10:50 pm

Re: When I start doing a Roth Conversion...

Post by terran » Fri May 22, 2020 4:52 pm

retiredjg wrote:
Fri May 22, 2020 3:27 pm
At this point, the only reason to roll IRAs into the 401k is to consolidate accounts. There is no problem in doing that, but there is no compelling reason that you have given us to do that....unless you just want to reduce the number of accounts you have.
Good point, I'm not really sure why we started down that path since the OP is talking making taxable Roth conversion, not backdoor Roth contributions.

Topic Author
barliss2
Posts: 29
Joined: Tue Jan 21, 2020 5:10 pm

Re: When I start doing a Roth Conversion...

Post by barliss2 » Sun May 24, 2020 11:46 am

Ok, but then I was reading more on doing the Roth Conversion and saw this on ERN's site:

https://earlyretirementnow.com/2016/07/ ... x-bracket/

I'm a bit confused by his post, but it seems that the conversion, even at a 15% tax bracket could cause a 30% tax payment. When we roll it in and when we take it out.

We don't plan on earning much beyond renting out our home in the summer months at first, maybe have some passive income (husband is currently making beats to sell very passively), maybe do some freelance or PT work--but nothing more than $18k a year, but could be more when we decide to rent our home all year at $2500/mo hence the 15% jic.

So our plan once we retire is to:
a) earn a little that goes direct to cash
b) dip into our taxable accounts (stop reinvesting divs and have them go direct to cash)
c) sell shares in taxable accounts
d) dip into HSA (through saved receipts)
e) start the conversion, wait 5 years, get that sweet converted money

But this tax loophole he's talking about makes that Roth conversion seem not so great anymore. I get very lost when doing Taxcaster and seem to get different numbers every time I attempt it. So nothing makes sense.

Anyone know if that post holds true? What should I expect? If there's another way to go?
Last edited by barliss2 on Sun May 24, 2020 12:01 pm, edited 1 time in total.

mhalley
Posts: 8240
Joined: Tue Nov 20, 2007 6:02 am

Re: When I start doing a Roth Conversion...

Post by mhalley » Sun May 24, 2020 12:01 pm

I am not sure what you mean by "when we roll it in and when we roll it out". Once money is converted to a Roth, it is NEVER TAXED AGAIN. You do have to be mindful when doing roth conversions about what it does to your bracket. Plus he is talking about a 2015 tool, taxes are much different now. Your plan looks fine to me, though you might want to wait as long as possible to spend the hsa money. If taxcaster is giving you problems, try credit karma tax or freetaxusa.

Topic Author
barliss2
Posts: 29
Joined: Tue Jan 21, 2020 5:10 pm

Re: When I start doing a Roth Conversion...

Post by barliss2 » Sun May 24, 2020 12:09 pm

mhalley wrote:
Sun May 24, 2020 12:01 pm
I am not sure what you mean by "when we roll it in and when we roll it out". Once money is converted to a Roth, it is NEVER TAXED AGAIN. You do have to be mindful when doing roth conversions about what it does to your bracket. Plus he is talking about a 2015 tool, taxes are much different now. Your plan looks fine to me, though you might want to wait as long as possible to spend the hsa money. If taxcaster is giving you problems, try credit karma tax or freetaxusa.
I mean, I understand we'll be taxed on the conversion IN, but I thought it would be at 15% and this post is saying that isn't true. That it'll actually be at 30%.

02nz
Posts: 3938
Joined: Wed Feb 21, 2018 3:17 pm

Re: When I start doing a Roth Conversion...

Post by 02nz » Sun May 24, 2020 12:12 pm

terran wrote:
Fri May 22, 2020 1:57 pm
A rollover contribution is not included in the limits. You should roll over the whole thing (talk with etrade to find out what the procedure is so they know it's a rollover) and then contribute an additional $2k as a contribution if you can afford it and the business earnings are enough to justify it.
"Rollover contribution" is really confusing - we don't generally refer to rollovers as contributions, because they are different things. OP should not use that terminology when talking with eTrade.

02nz
Posts: 3938
Joined: Wed Feb 21, 2018 3:17 pm

Re: When I start doing a Roth Conversion...

Post by 02nz » Sun May 24, 2020 12:16 pm

barliss2 wrote:
Sun May 24, 2020 12:09 pm
mhalley wrote:
Sun May 24, 2020 12:01 pm
I am not sure what you mean by "when we roll it in and when we roll it out". Once money is converted to a Roth, it is NEVER TAXED AGAIN. You do have to be mindful when doing roth conversions about what it does to your bracket. Plus he is talking about a 2015 tool, taxes are much different now. Your plan looks fine to me, though you might want to wait as long as possible to spend the hsa money. If taxcaster is giving you problems, try credit karma tax or freetaxusa.
I mean, I understand we'll be taxed on the conversion IN, but I thought it would be at 15% and this post is saying that isn't true. That it'll actually be at 30%.
There are various quirks in the tax system that can cause marginal rates to be different from the tax bracket. That's why it's usually better to do the Roth conversion near the end of the year, when you can use tax software to get a better sense of what the tax rate would be on the chunk of money you're looking to convert.

lakpr
Posts: 5075
Joined: Fri Mar 18, 2011 9:59 am

Re: When I start doing a Roth Conversion...

Post by lakpr » Sun May 24, 2020 12:17 pm

barliss2 wrote:
Sun May 24, 2020 11:46 am
Ok, but then I was reading more on doing the Roth Conversion and saw this on ERN's site:

https://earlyretirementnow.com/2016/07/ ... x-bracket/

I'm a bit confused by his post, but it seems that the conversion, even at a 15% tax bracket could cause a 30% tax payment. When we roll it in and when we take it out.
It's not levied "when we roll it in and when we take it out". That shadow 27% tax bracket still exists now, but the only way to avoid it is to be at either of these two limits (the numbers are for 2020 only):
1. Your ordinary income + your capital gains realized < $104,800
2. Your ordinary income alone > $105,050.

Only if you fail both the tests, that is when you need to be concerned with the shadow 27% tax bracket. Of course, this assumes that you have capital gains in the year to begin with. If you do not have any capital gains, nothing to worry about.

Roth conversion is NOT a capital gain, it's ordinary income. Capital gains are applicable only to taxable accounts, and that too only to stock investments (bond yields / CDs / savings accounts are ordinary income, again).

Think of your adjusted gross income as a stack. Ordinary income always resides at the bottom. Capital gains always resides at the top.
When you are in a situation where ordinary income + capital gain is exactly equal to $104,800: you pay 12% tax on ordinary income, 0% tax on cap gains.
Now to this stack, you add $10 of ordinary income.
Since this has to be added to the ordinary income, it also results in $10 capital gain being pushed above the $104,800 limit.

Thus the $10 additional income results in both 12% ordinary income tax + 15% capital gains tax rate = 27% cumulative tax effect.

retiredjg
Posts: 40483
Joined: Thu Jan 10, 2008 12:56 pm

Re: When I start doing a Roth Conversion...

Post by retiredjg » Sun May 24, 2020 12:20 pm

The post is correct although the current number is 27%, not 30%. But this only applies to people who fall into certain circumstances. It may not apply to you at all. And if it does apply to you, it may only apply to a small amount of money. More information is needed about the amounts of your expected income.

I'm not sure what you mean "When we roll it in and when we take it out."

terran
Posts: 1310
Joined: Sat Jan 10, 2015 10:50 pm

Re: When I start doing a Roth Conversion...

Post by terran » Sun May 24, 2020 12:47 pm

02nz wrote:
Sun May 24, 2020 12:12 pm
terran wrote:
Fri May 22, 2020 1:57 pm
A rollover contribution is not included in the limits. You should roll over the whole thing (talk with etrade to find out what the procedure is so they know it's a rollover) and then contribute an additional $2k as a contribution if you can afford it and the business earnings are enough to justify it.
"Rollover contribution" is really confusing - we don't generally refer to rollovers as contributions, because they are different things. OP should not use that terminology when talking with eTrade.
"We" may not use that term, but it is what they are. See https://www.irs.gov/retirement-plans/ve ... s-to-plans and throughout https://www.irs.gov/publications/p590b

User avatar
FiveK
Posts: 8988
Joined: Sun Mar 16, 2014 2:43 pm

Re: When I start doing a Roth Conversion...

Post by FiveK » Sun May 24, 2020 3:00 pm

barliss2 wrote:
Sun May 24, 2020 12:09 pm
I mean, I understand we'll be taxed on the conversion IN, but I thought it would be at 15% and this post is saying that isn't true. That it'll actually be at 30%.
As others have noted, "it depends...".

You can check your own marginal tax rate for various amounts of traditional to Roth conversions by calculating tax at different conversion amounts and then the marginal rate is (change in tax)/(change in income). Or use a tool such as the personal finance toolbox Excel spreadsheet that will do it for you and show the results in chart form.

Post Reply