When to roll a 401k into a Roth vs Traditional IRA?

[netskyblue]

I'm about to be moving to a new job, and wanting to know if I'm better off rolling my 401k from this job (vested balance approx 11k) into a traditional IRA, which I already have, or a Roth IRA.

My starting salary at the new job will be 62k, but with four months worked at my current salary, I'm expecting my 2018 income to be approx $58,000.

This year, I'm anticipating contributing 10,200 to 401k, 2800 to HSA, and 1150 spent on pre-tax insurance premiums.  Leaving my taxable gross income at $43,850.  I'll be taking the standard decuction because I have nothing worth itemizing for.

I anticipate my total tax liability for 2018 to be approx $9995 (Federal, state, and FICA).  That's if I roll the 401k into my traditional IRA.

If I roll it into a Roth, that would increase my taxable income by approx $11k, and raise me from the 12% federal bracket to 22% bracket, and from state 6.8% bracket to 7.92% bracket.  I estimate my tax liability in that case to be $13,375.

So, a $3380 tax hit this year if I do that.

My total annual spend is approx $30k (yeah I could reduce that by a couple thousand, but I'm super comfortable...).  My total annual take home after taxes and savings vehicles will be approx $34,000 this year.  So if I'm going to do the Roth thing, I need to know from the get-go so I can have additional taxes withheld and probably reduce my spending this year by a little.

I just...don't know how to determine whether that $3380 tax hit this year would be a worthwile thing or not.  What do I need to consider?

My best guess for retirement (which is 15-20 years down the road) is that I'd like to draw $50k/year.  Who KNOWS what health insurance is going to look like that far down the road though.

I'm anticipating my salary reaching at least 90k within 10 years, hopefully in the 125-150k range by retirement.  I'm also hopeful that I'll be in a position to max out all retirement vehicles (401k, IRA, HSA) within the next 5 years, while keeping around the same annual take-home pay.  Once I cross 75k salary, I'll start accumulating more than a surplus of 3-4k per year and hopefully buy a home around that time.

So, what do you recommend I do about that 11k 401k, and why?

[Jrr85]

I'm about to be moving to a new job, and wanting to know if I'm better off rolling my 401k from this job (vested balance approx 11k) into a traditional IRA, which I already have, or a Roth IRA.

My starting salary at the new job will be 62k, but with four months worked at my current salary, I'm expecting my 2018 income to be approx $58,000.

This year, I'm anticipating contributing 10,200 to 401k, 2800 to HSA, and 1150 spent on pre-tax insurance premiums.  Leaving my taxable gross income at $43,850.  I'll be taking the standard decuction because I have nothing worth itemizing for.

I anticipate my total tax liability for 2018 to be approx $9995 (Federal, state, and FICA).  That's if I roll the 401k into my traditional IRA.

If I roll it into a Roth, that would increase my taxable income by approx $11k, and raise me from the 12% federal bracket to 22% bracket, and from state 6.8% bracket to 7.92% bracket.  I estimate my tax liability in that case to be $13,375.

So, a $3380 tax hit this year if I do that.

My total annual spend is approx $30k (yeah I could reduce that by a couple thousand, but I'm super comfortable...).  My total annual take home after taxes and savings vehicles will be approx $34,000 this year.  So if I'm going to do the Roth thing, I need to know from the get-go so I can have additional taxes withheld and probably reduce my spending this year by a little.

I just...don't know how to determine whether that $3380 tax hit this year would be a worthwile thing or not.  What do I need to consider?

My best guess for retirement (which is 15-20 years down the road) is that I'd like to draw $50k/year.  Who KNOWS what health insurance is going to look like that far down the road though.

I'm anticipating my salary reaching at least 90k within 10 years, hopefully in the 125-150k range by retirement.  I'm also hopeful that I'll be in a position to max out all retirement vehicles (401k, IRA, HSA) within the next 5 years, while keeping around the same annual take-home pay.  Once I cross 75k salary, I'll start accumulating more than a surplus of 3-4k per year and hopefully buy a home around that time.

So, what do you recommend I do about that 11k 401k, and why?

Can you roll it into your new employer's 401k?  I would do that if it's an option and the 401k isn't terrible as far as fees and options.  That way you preserve the option of doing a backdoor roth later with as little mess as possible.   

[netskyblue]

Can you roll it into your new employer's 401k?  I would do that if it's an option and the 401k isn't terrible as far as fees and options.  That way you preserve the option of doing a backdoor roth later with as little mess as possible.

I'm not sure yet.  I'm still waiting on them to set my start date (just did background check, drug test, and mailed in signed offer letter within the past 2 days).

I do know that their 401k is with Schwab, and my current one is with Fidelity.  And my existing IRA is with Vanguard.  That's the extent of what I know so far about the plan.  I'll be eligible to contribute as of the first of the month following my date of hire.  *Hopefully* I'll be starting at the end of April, if they get their stuff together quick enough, and will be eligible the first of May.  Or else I'll have to wait until June.

In what way would rolling over into a Roth now complicate backdoor Roth later?

[Jrr85]

Can you roll it into your new employer's 401k?  I would do that if it's an option and the 401k isn't terrible as far as fees and options.  That way you preserve the option of doing a backdoor roth later with as little mess as possible.

I'm not sure yet.  I'm still waiting on them to set my start date (just did background check, drug test, and mailed in signed offer letter within the past 2 days).

I do know that their 401k is with Schwab, and my current one is with Fidelity.  And my existing IRA is with Vanguard.  That's the extent of what I know so far about the plan.  I'll be eligible to contribute as of the first of the month following my date of hire.  *Hopefully* I'll be starting at the end of April, if they get their stuff together quick enough, and will be eligible the first of May.  Or else I'll have to wait until June.

In what way would rolling over into a Roth now complicate backdoor Roth later?

It wouldn't if you do it into a roth now.  I didn't read closely enough. 

But if you roll it into a traditional IRA, it will complicate any backdoor roth later because y ou will have to do the backdoor conversion proportionally between your IRA funds.  So if you roll 11k into a traditional IRA now and say in 5 years it's grown to $16,500 and you need to do a back door roth and put 5500 into a non-deductible IRA, then if you try to convert that $5500 into a roth, for tax purposes I beleive it will be treated as if 25% of that conversion came from the $5,500 non-deductible ira (on which no taxes would be owed), and 75% of that conversion would come from the traditional IRA (on which you would pay your marginal tax rate).  So then the next year, if you tried to do a back door roth again, you would have say $11k plus one year's growth in the traditional IRA, and then $9625 of nondeductible contributions in an IRA (plus the growth on what was left over from the previous year's nondeductible contribution).  So again, you'd do a proportional conversion, and you'd owe taxes on the proportion attributable to the traditional IRA and growth on the nondeductible contribution, and not on the proportion attributable to the non-deductible contributions. 

At least that's the way I understand it.  Maybe that's not quite right or maybe it is right but in reality it's easy to keep track of, but it seems like it's inferior to having your 401k rolled into a new 401k, and then your backdoor roth's simply looking exactly like a normal roth, with no additional taxes as part of the conversion and no mix of deductible and non-deductible contributions in traditional IRAs. 

[netskyblue]

At some point, I'm going to have to do Roth conversions, because my aim is to retire between age 50-52, and I don't anticipate having seven to nine years of living expenses in taxable accounts by that time.

I currently only have a rollover IRA, which is what was previously a 401k at a previous job.

You are saying my best option is to try to roll the 401k into my new 401k if 1) that is even an option and 2) I'm satisfied with the fund choices available.

If I can't, or if the fund choices are not satisfactory, I should roll into a Roth at this time and pay the extra 3k taxes that will incur me?

It may be 4-5 years before I start making IRA contributions, which I will do specifically to lower my taxable income to stay within my tax bracket.

What's my best conversion strategy, then?  Let's go with best-case scenario, I want to retire at 50, and I'll have 3 years living expenses in taxable accounts.  (I'll be 35 this year.)

Bare minimum, I'd need to start converting one year's expenses at a time the year I turn 47 in order for the amount of the conversion to be available to me at age 53, right?  But the tax hit of an additional 50k of income is going to be so high.  Shouldn't I begin converting smaller amounts earlier?  Am I only allowed to convert out of my rollover IRA the amount that was principal to begin with?

[Jrr85]

At some point, I'm going to have to do Roth conversions, because my aim is to retire between age 50-52, and I don't anticipate having seven to nine years of living expenses in taxable accounts by that time.

I currently only have a rollover IRA, which is what was previously a 401k at a previous job.

You are saying my best option is to try to roll the 401k into my new 401k if 1) that is even an option and 2) I'm satisfied with the fund choices available.

If I can't, or if the fund choices are not satisfactory, I should roll into a Roth at this time and pay the extra 3k taxes that will incur me?

It may be 4-5 years before I start making IRA contributions, which I will do specifically to lower my taxable income to stay within my tax bracket.

What's my best conversion strategy, then?  Let's go with best-case scenario, I want to retire at 50, and I'll have 3 years living expenses in taxable accounts.  (I'll be 35 this year.)

Bare minimum, I'd need to start converting one year's expenses at a time the year I turn 47 in order for the amount of the conversion to be available to me at age 53, right?  But the tax hit of an additional 50k of income is going to be so high.  Shouldn't I begin converting smaller amounts earlier?  Am I only allowed to convert out of my rollover IRA the amount that was principal to begin with?

To be clear, it won't complicate most conversions. 

It only complicates it if you are trying to do a backdoor roth where you make nondeductible contributions to a traditional IRA (because your income makes you ineligible for Roth) and then immediately convert that to a Roth (which means it's identical to a Roth, it just takes an extra step).  If you have other traditional IRA assets, my understanding is that you can't just convert the non-deductible contributions, you have to convert the non-deductible contributions, deductible contributions, and any earnings proportionally, which means you will have to pay taxes on the portion of the conversions comeing from deductible contributions or earnings.