Fund Roth IRA from taxable to avoid state tax?

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jeg208
Posts: 42
Joined: Wed Jul 05, 2017 2:42 pm

Fund Roth IRA from taxable to avoid state tax?

Post by jeg208 » Fri May 18, 2018 10:31 am

Current age: 32
Tax bracket (2018 jointly): 22%
State tax (Idaho): 7.4%
Goal age for retirement: 52-55
Current holdings: ~95k in taxable with roughly $6k long term capital gains

Future investments: Maxing out employee sponsored 401k and 403b will meet our needs, so I do not foresee any future taxable investments (other than a windfall).

Retirement withdraw plan: Goal is to live quite minimalist in the 15% fed tax bracket (or equivalent). If we work until 55, we will separate from service and begin withdraw from 401k and 403b, or SEPP if we retire sooner. We additionally have tIRAs that we could draw on via SEPP or wait until 59.5. I want to minimize my taxes once I decide to claim SS, so tax deferred will be my first accounts to draw on. I will likely work part time as we scale things back and adjust our budget to fit our retirement goals. I will likely continue working at least enough to cover medical insurance costs and ensure that we keep our retirement balances in order with the hopefully long retirement horizon (upwards of 45+ years).

Does it make sense to start funding Roth IRAs from taxable due to the low capital gains I currently have? My goal is to avoid the 7.4% state income tax in retirement. The funds in the roth IRA would not be touched until likely 65-70, because I understand that SEPP distributions from a roth IRA would be subject to the state income tax.
Last edited by jeg208 on Fri May 18, 2018 10:56 am, edited 3 times in total.

bloom2708
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Location: Fargo, ND

Re: Convert taxable to Roth IRA to avoid state tax?

Post by bloom2708 » Fri May 18, 2018 10:35 am

It isn't a conversion. Yes it makes sense if you aren't funding your Roth IRAs currently.

Sell $11k of taxable (today) and put $5,500 into each of your Roth IRA for 2018. Repeat for 2019.

Essentially you are transferring it to Roth (as long as you are under the joint income phase out levels).

You pay tax on the small gains now. The Roth grows tax free for 20, 30 years.
"We are here not to please but to provoke thoughtfulness" Unknown Boglehead

boglegirl
Posts: 272
Joined: Mon Dec 17, 2012 1:41 pm

Re: Convert taxable to Roth IRA to avoid state tax?

Post by boglegirl » Fri May 18, 2018 10:35 am

jeg208 wrote:
Fri May 18, 2018 10:31 am
...

Does it make sense to start converting my taxable account to a Roth IRA due to the low capital gains I currently have? My goal is to avoid the 7.4% state income tax in retirement. The funds in the roth IRA would not be touched until likely 65-70, because I understand that SEPP distributions from a roth IRA would be subject to the state income tax.
But don't you have the 7.4% state income tax now? How will paying it now help you? This is why we can't/won't do Roth conversions...we're currently in a 9+% state bracket. Fingers crossed that we'll be in a lower tax state in retirement.

jeg208
Posts: 42
Joined: Wed Jul 05, 2017 2:42 pm

Re: Convert taxable to Roth IRA to avoid state tax?

Post by jeg208 » Fri May 18, 2018 10:37 am

bloom2708 wrote:
Fri May 18, 2018 10:35 am
It isn't a conversion. Yes it makes sense if you aren't funding your Roth IRAs currently.

Sell $11k of taxable (today) and put $5,500 into each of your Roth IRA for 2018. Repeat for 2019.

Essentially you are transferring it to Roth (as long as you are under the joint income phase out levels).

You pay tax on the small gains now. The Roth grows tax free for 20, 30 years.
Thank you, poor choice of words on my part. Updated the title to make more sense. Thank you for your advice!

KlangFool
Posts: 9547
Joined: Sat Oct 11, 2008 12:35 pm

Re: Convert taxable to Roth IRA to avoid state tax?

Post by KlangFool » Fri May 18, 2018 10:37 am

OP,

1) Yes, contribute to Roth IRAs.

2) Please check out the following URL.

https://www.madfientist.com/how-to-acce ... nds-early/

3) Contribute to HSA too if you have one.

KlangFool
Last edited by KlangFool on Fri May 18, 2018 10:38 am, edited 1 time in total.

niceguy7376
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Joined: Wed Jul 10, 2013 2:59 pm
Location: Metro ATL

Re: Convert taxable to Roth IRA to avoid state tax?

Post by niceguy7376 » Fri May 18, 2018 10:38 am

If by "convert" you mean contribute to Roth IRA each year, there are rules if you and your spouse are eligible to contribute to roth ira.

You also mention trad ira existence and that might prevent you getting the full benefit of another method called Back Door Roth.

So we need more information to provide a correct answer.

What types of accounts do you two contribute on yearly basis?

You CANNOT just move a taxable account into Roth IRA like that.
Also, if you are contributing to ROTH, you already paid the fed and state tax on contributions. Most states (if not all) dont tax Roth IRA withdrawls.

jeg208
Posts: 42
Joined: Wed Jul 05, 2017 2:42 pm

Re: Convert taxable to Roth IRA to avoid state tax?

Post by jeg208 » Fri May 18, 2018 10:39 am

boglegirl wrote:
Fri May 18, 2018 10:35 am
But don't you have the 7.4% state income tax now? How will paying it now help you? This is why we can't/won't do Roth conversions...we're currently in a 9+% state bracket. Fingers crossed that we'll be in a lower tax state in retirement.
Yes, but I have already paid tax on nearly 95% of that income, so the 7.4% would only apply to the $6k in capital gains. Additionally, I would have 30-35 years of growth that I could withdraw without state tax (I think)

jeg208
Posts: 42
Joined: Wed Jul 05, 2017 2:42 pm

Re: Convert taxable to Roth IRA to avoid state tax?

Post by jeg208 » Fri May 18, 2018 10:43 am

niceguy7376 wrote:
Fri May 18, 2018 10:38 am
If by "convert" you mean contribute to Roth IRA each year, there are rules if you and your spouse are eligible to contribute to roth ira.

You also mention trad ira existence and that might prevent you getting the full benefit of another method called Back Door Roth.

So we need more information to provide a correct answer.

What types of accounts do you two contribute on yearly basis?

You CANNOT just move a taxable account into Roth IRA like that.
Also, if you are contributing to ROTH, you already paid the fed and state tax on contributions. Most states (if not all) dont tax Roth IRA withdrawls.
We are eligible (now) to contribute to Roth IRA for the full 5,500 per. We have been over the phase out for the last 3 years.

We have small tIRAs that were roll overs from early careers. His: tIRA, 403b Hers: tIRA, 401k Joint: taxable

Our future contributions will only be maxing out 403b and 401k

Correct, you must sell to cash and then fund the Roth. I invested $20k in taxable earlier this year, so it will qualify as "earned income"

That is my goal, to have a decent sized Roth IRA when it comes time to claim SS, so that my taxes are very low or 0 due to our minimalistic lifestyle goal.

boglegirl
Posts: 272
Joined: Mon Dec 17, 2012 1:41 pm

Re: Convert taxable to Roth IRA to avoid state tax?

Post by boglegirl » Fri May 18, 2018 11:00 am

jeg208 wrote:
Fri May 18, 2018 10:39 am
boglegirl wrote:
Fri May 18, 2018 10:35 am
But don't you have the 7.4% state income tax now? How will paying it now help you? This is why we can't/won't do Roth conversions...we're currently in a 9+% state bracket. Fingers crossed that we'll be in a lower tax state in retirement.
Yes, but I have already paid tax on nearly 95% of that income, so the 7.4% would only apply to the $6k in capital gains. Additionally, I would have 30-35 years of growth that I could withdraw without state tax (I think)
OK, got it. I didn't read your post carefully enough. I thought you were doing conversions from a pre-tax IRA to a Roth IRA. But you are talking about using current non-IRA money to start a Roth. In that case, yes, you should start investing in a Roth. You'll be doing what we do: maxing out pre-tax employer accounts, and investing the max in Roth IRAs also.

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