401(k) Conversion Question

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diehard
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401(k) Conversion Question

Post by diehard »

I am 68.5 yrs. old, completely healthy, employed and highly compensated and am without debt. I plan to continue working for up to 5 years more. My portfolio is strong and there is cash outside of my tax deferred accounts on hand. As I see it, taxes are likely to go up in in the near future. My 401(k) is mostly a traditional one (I have also been funding a Roth 401(k) but that amount is small by comparison to the main account). Does it make sense to convert my 401(k) to a Roth (all or in part) at my age while taxes are at today's levels?
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FiveK
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Re: 401(k) Conversion Question

Post by FiveK »

You'll know in the future when you compare the marginal rate it would cost then to the marginal rate it would cost now. See Estimating future marginal tax rate.
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Nate79
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Re: 401(k) Conversion Question

Post by Nate79 »

It doesn't make sense to on one hand be contributing to a traditional 401k and on the other hand convert the 401k to a Roth. Just max out your Roth 401k.
retiredjg
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Re: 401(k) Conversion Question

Post by retiredjg »

diehard wrote: Sat Oct 17, 2020 11:32 am Does it make sense to convert my 401(k) to a Roth (all or in part) at my age while taxes are at today's levels?
What do you mean by "convert"? Are you talking about doing a Roth conversion on money that is currently in the traditional 401k? Or do you mean change your future contributions (all or in part) from traditional 401k to Roth 401k?
chassis
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Re: 401(k) Conversion Question

Post by chassis »

With your solid financial condition, as you have explained it, do you think it affects your financial outcome at the end of your current life expectancy?

How many dollars of net worth would it gain you at the end of your life expectancy, to convert the 401k as you describe? Does that dollar amount matter?
illumination
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Re: 401(k) Conversion Question

Post by illumination »

Are you already in the top bracket? Will the RMD's after retirement keep you there?

It's all just speculation about the future, but if it looks like you are going to be locked in at the top marginal rates even after retirement as a result of RMDs, might not be a bad bet to convert some now at these rates.

If your tax bracket will drop considerably once you are no longer drawing a salary, I would wait until retirement for conversions.
infotrader
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Re: 401(k) Conversion Question

Post by infotrader »

Nate79 wrote: Sat Oct 17, 2020 1:57 pm It doesn't make sense to on one hand be contributing to a traditional 401k and on the other hand convert the 401k to a Roth. Just max out your Roth 401k.
It makes perfect sense that you are actually converting your taxable account to Roth without much tax consequences.
02nz
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Re: 401(k) Conversion Question

Post by 02nz »

It's possible that it makes sense to switch part of your contributions to Roth. It's unlikely that it makes sense to do large Roth conversions now (whether in-plan in your 401k, if allowed, or within a traditional/rollover IRA).

A good answer depends on a lot of things but the most important ones are:
- Current income
- Size of tax-deferred portfolio (not Roth)
- Filing status
- Any other anticipated income in retirement (like a pension)?

Changes to the tax law make a much smaller difference than people think. The top marginal federal income tax rate has been between 35 and 39.6% for almost 3 decades (since 1993). If you're at or near that now, and unless you have a massive tax-deferred balance, you're almost certainly going to pay lower tax rates when withdrawing (and/or converting) once you retire and no longer draw a salary.
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diehard
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Location: Rocky Mountains

Re: 401(k) Conversion Question

Post by diehard »

Thank you to all for your insightful comments. I did not realize the small difference in the top marginal rate over the last 3 decades. I am presently in the top bracket and will likely always be there as the RMDs from my traditional 401(k) will keep me there. My filing status is married, I'll be working with a high income for up to 5 more years and am planning to sell my business (hopefully for 7 figures) at the end or in the next 3+ years. While I understand that the "stretch" for IRAs has been reduced to 10 years before all inherited funds need to be cashed out, I believe It would still be beneficial for my heirs to have the ten years of tax free growth that an inherited Roth would provide (unless I have that wrong). The dollar amount gained by a conversion of my 401(k) to a Roth 401(k) won't affect my lifestyle in any way as I have enough outside of the tax deferred funds. This falls more in line with estate planning for future generations as my children do not as yet have high paying positions. I am looking to provide a safety net for them and an educational fund for any grandchildren. The bottom line is that I am trying to figure out whether paying the over $1,000,000 in taxes now for the conversion is smarter in the long run to paying them at a higher tax rate in the future. I am leaning towards just leaving things alone.
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FiveK
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Re: 401(k) Conversion Question

Post by FiveK »

diehard wrote: Sun Oct 18, 2020 12:06 pm The bottom line is that I am trying to figure out whether paying the over $1,000,000 in taxes now for the conversion is smarter in the long run to paying them at a higher tax rate in the future.
Yes it would be. But not converting now is smarter in the long run to paying them at a lower tax rate in the future.

Although, depending on how much lower, it could still be beneficial to convert now. Start with the Very high earners section of that wiki article for details.
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