Rollover IRA or Roth conversion
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Rollover IRA or Roth conversion
Greetings, I have a question regarding my wife's old 401(k) accounts. My wife has three different inactive 401(k) accounts that I am working to get consolidated and organized. There are two accounts of roughly $5k and one with roughly $13k, we are both in our early - mid 30s (32 and 33), my wife is currently not working and is a stay at home mom.
Emergency funds: 3 months
Debt: $28k in student loans and $92k in mortgage
Tax Filing Status: Married Filing Jointly with one dependent (1 year old)
Tax Rate: 12% Federal (marginal), 5% State
State of Residence: Wisconsin
Age: I am 32 and she is 33
Taxable = negligible
His 403b
40% Vanguard 2045 Target Date Retirement Fund (VTIVX) (0.08%)
No company match
His Roth IRA at Vanguard
60% Vanguard Total World (VTWAX) (0.1%)
Contributions
New annual Contributions
$3600 his 403b
$6000 his Roth IRA
$1200 his 457 (governmental)
I currently make $60k a year and will make $73k next year, this is our only source of income.
My question(s) are:
1. When I consolidate my wife's old accounts should I simply do a Rollover IRA or does it make sense to do a Roth conversion with these funds?
2. Will the convertible dollars be taxed at my current regular tax rate?
3. Are there any issues I need to be prepared for?
Emergency funds: 3 months
Debt: $28k in student loans and $92k in mortgage
Tax Filing Status: Married Filing Jointly with one dependent (1 year old)
Tax Rate: 12% Federal (marginal), 5% State
State of Residence: Wisconsin
Age: I am 32 and she is 33
Taxable = negligible
His 403b
40% Vanguard 2045 Target Date Retirement Fund (VTIVX) (0.08%)
No company match
His Roth IRA at Vanguard
60% Vanguard Total World (VTWAX) (0.1%)
Contributions
New annual Contributions
$3600 his 403b
$6000 his Roth IRA
$1200 his 457 (governmental)
I currently make $60k a year and will make $73k next year, this is our only source of income.
My question(s) are:
1. When I consolidate my wife's old accounts should I simply do a Rollover IRA or does it make sense to do a Roth conversion with these funds?
2. Will the convertible dollars be taxed at my current regular tax rate?
3. Are there any issues I need to be prepared for?
- retired@50
- Posts: 12707
- Joined: Tue Oct 01, 2019 2:36 pm
- Location: Living in the U.S.A.
Re: Rollover IRA or Roth conversion
I'd start by getting the 3 old 401k accounts consolidated into a single Rollover IRA.WalnutBadger wrote: ↑Mon May 16, 2022 9:52 am
My question(s) are:
1. When I consolidate my wife's old accounts should I simply do a Rollover IRA or does it make sense to do a Roth conversion with these funds?
2. Will the convertible dollars be taxed at my current regular tax rate?
3. Are there any issues I need to be prepared for?
This will simplify things, then, if you decide to proceed with a Roth conversion on any of the money in the Rollover IRA, you could set up a Roth IRA at the same custodian. Trying to convert from a 401k -> directly to a Roth IRA will likely lead to confusion and withholding taxes on the 401k distributions.
As for question 2, yes, any money converted from Rollover IRA to Roth IRA will be taxed at your marginal rate. I'd suggest that you pay the additional taxes out of an emergency fund or other taxable account assets if you decide to do a conversion. In other words, if $1,000 leaves the Rollover IRA, then $1,000 should go into the Roth IRA.
As for question 3, if you're concerned as to how this will impact your income tax returns (Federal + State) then I'd suggest a small conversion amount (say $2,000) to get familiar with the added paperwork. Then, once you understand the process, you can convert more in the future if you decide to.
Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
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- Joined: Wed Sep 29, 2021 8:36 am
Re: Rollover IRA or Roth conversion
retired@50, thank you for the quick feedback! Your answers are extremely helpful and exactly what I was looking for, I appreciate it!retired@50 wrote: ↑Mon May 16, 2022 10:05 am
I'd start by getting the 3 old 401k accounts consolidated into a single Rollover IRA.
This will simplify things, then, if you decide to proceed with a Roth conversion on any of the money in the Rollover IRA, you could set up a Roth IRA at the same custodian. Trying to convert from a 401k -> directly to a Roth IRA will likely lead to confusion and withholding taxes on the 401k distributions.
As for question 2, yes, any money converted from Rollover IRA to Roth IRA will be taxed at your marginal rate. I'd suggest that you pay the additional taxes out of an emergency fund or other taxable account assets if you decide to do a conversion. In other words, if $1,000 leaves the Rollover IRA, then $1,000 should go into the Roth IRA.
As for question 3, if you're concerned as to how this will impact your income tax returns (Federal + State) then I'd suggest a small conversion amount (say $2,000) to get familiar with the added paperwork. Then, once you understand the process, you can convert more in the future if you decide to.
Regards,
- retired@50
- Posts: 12707
- Joined: Tue Oct 01, 2019 2:36 pm
- Location: Living in the U.S.A.
Re: Rollover IRA or Roth conversion
You're welcome.WalnutBadger wrote: ↑Mon May 16, 2022 10:18 am
retired@50, thank you for the quick feedback! Your answers are extremely helpful and exactly what I was looking for, I appreciate it!
Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
Re: Rollover IRA or Roth conversion
At least for this year (and assuming you don't increase your AGI above the limit for the credit named later), contributing (not converting) at least $2000 to her IRA (either traditional or Roth) would provide an extra $200 from the Saver's credit. E.g., instead of $6K to his and $0K to hers, do $4K to his and $2K to hers, or $3K to each, etc.WalnutBadger wrote: ↑Mon May 16, 2022 9:52 am New annual Contributions
$3600 his 403b
$6000 his Roth IRA
$1200 his 457 (governmental)
I currently make $60k a year and will make $73k next year, this is our only source of income.
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- Posts: 673
- Joined: Tue Jun 16, 2020 5:08 pm
Re: Rollover IRA or Roth conversion
You mention consolidating your wife's old 401k accounts but you do not list any existing IRA accounts for her. If you are filing as MFJ, she is eligible to contribute to an IRA based on your earnings, even if she has no earned income herself (commonly known as a spousal IRA, but not titled as such at the brokerage). You may want to weigh the options of using spare cash to pay the taxes for Roth conversion of her existing retirement funds relative to the benefits of making new Roth IRA contributions for her.
ETA: I see that FiveK beat me to this concept and has additional information regarding the potential benefit of the saver's tax credit.
ETA: I see that FiveK beat me to this concept and has additional information regarding the potential benefit of the saver's tax credit.
Re: Rollover IRA or Roth conversion
If you convert the $23k in old 401ks to Roth, it will all be taxed at 12% ($2,760) unless you are in some kind of phase out. To my knowledge, there are no phase outs in the range where you are, but I'm not sure. You might want to run this through tax software to be sure.
With the salary numbers you mentioned, you should easily be in the 12% bracket next year as well.
All of the tax needs to be paid out of savings, not from the 401ks/rollover IRA. If money is withheld for taxes, there will be a penalty because it would be considered an early withdrawal. You want to avoid that.
Getting money into Roth at only 12% is a very good thing as it seems pretty unlikely that you will ever be in a tax bracket lower than 12%. So if you can find the money to pay the tax, I think this is a good choice.
With the salary numbers you mentioned, you should easily be in the 12% bracket next year as well.
All of the tax needs to be paid out of savings, not from the 401ks/rollover IRA. If money is withheld for taxes, there will be a penalty because it would be considered an early withdrawal. You want to avoid that.
Getting money into Roth at only 12% is a very good thing as it seems pretty unlikely that you will ever be in a tax bracket lower than 12%. So if you can find the money to pay the tax, I think this is a good choice.
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Re: Rollover IRA or Roth conversion
Thank you for the feedback, I hadn't thought about splitting the $6k contribution in order to maximize the Saver's credit. Great idea!FiveK wrote: ↑Mon May 16, 2022 11:09 amAt least for this year (and assuming you don't increase your AGI above the limit for the credit named later), contributing (not converting) at least $2000 to her IRA (either traditional or Roth) would provide an extra $200 from the Saver's credit. E.g., instead of $6K to his and $0K to hers, do $4K to his and $2K to hers, or $3K to each, etc.WalnutBadger wrote: ↑Mon May 16, 2022 9:52 am New annual Contributions
$3600 his 403b
$6000 his Roth IRA
$1200 his 457 (governmental)
I currently make $60k a year and will make $73k next year, this is our only source of income.
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- Posts: 19
- Joined: Wed Sep 29, 2021 8:36 am
Re: Rollover IRA or Roth conversion
I was already planning on getting going on a "spousal IRA" for her after I had maxed mine, but I'm definitely open to funding both in order to capture the Saver's credit. Thanks!little_star wrote: ↑Mon May 16, 2022 11:13 am You mention consolidating your wife's old 401k accounts but you do not list any existing IRA accounts for her. If you are filing as MFJ, she is eligible to contribute to an IRA based on your earnings, even if she has no earned income herself (commonly known as a spousal IRA, but not titled as such at the brokerage). You may want to weigh the options of using spare cash to pay the taxes for Roth conversion of her existing retirement funds relative to the benefits of making new Roth IRA contributions for her.
ETA: I see that FiveK beat me to this concept and has additional information regarding the potential benefit of the saver's tax credit.
-
- Posts: 19
- Joined: Wed Sep 29, 2021 8:36 am
Re: Rollover IRA or Roth conversion
I was already planning on getting going on a "spousal IRA" for her after I had maxed mine, but I'm definitely open to funding both in order to capture the Saver's credit. Thanks!little_star wrote: ↑Mon May 16, 2022 11:13 am You mention consolidating your wife's old 401k accounts but you do not list any existing IRA accounts for her. If you are filing as MFJ, she is eligible to contribute to an IRA based on your earnings, even if she has no earned income herself (commonly known as a spousal IRA, but not titled as such at the brokerage). You may want to weigh the options of using spare cash to pay the taxes for Roth conversion of her existing retirement funds relative to the benefits of making new Roth IRA contributions for her.
ETA: I see that FiveK beat me to this concept and has additional information regarding the potential benefit of the saver's tax credit.
-
- Posts: 19
- Joined: Wed Sep 29, 2021 8:36 am
Re: Rollover IRA or Roth conversion
That was my thinking, I am moving into a higher paying position within my school district next school year and there is significantly more room for higher wages in this new position. In addition, my wife will be going back to work at some point so I figured this will likely be the lowest our tax rate will ever be.retiredjg wrote: ↑Mon May 16, 2022 11:27 am If you convert the $23k in old 401ks to Roth, it will all be taxed at 12% ($2,760) unless you are in some kind of phase out. To my knowledge, there are no phase outs in the range where you are, but I'm not sure. You might want to run this through tax software to be sure.
With the salary numbers you mentioned, you should easily be in the 12% bracket next year as well.
All of the tax needs to be paid out of savings, not from the 401ks/rollover IRA. If money is withheld for taxes, there will be a penalty because it would be considered an early withdrawal. You want to avoid that.
Getting money into Roth at only 12% is a very good thing as it seems pretty unlikely that you will ever be in a tax bracket lower than 12%. So if you can find the money to pay the tax, I think this is a good choice.
Re: Rollover IRA or Roth conversion
I think you will have to choose between the saver's credit and the Roth conversion(s). It seems like the Roth conversions might push your income too high for the saver's credit. You should check.
Maybe you could do the saver's credit this year and all the Roth conversion next year.
Maybe you could do the saver's credit this year and all the Roth conversion next year.
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