Author Topic: Convert Trad IRA to ROTH?  (Read 867 times)

Easye418

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Convert Trad IRA to ROTH?
« on: December 30, 2019, 09:12:59 AM »
Hello,

Income is around $180K Gross.

inherited IRA $123K
Trad IRA $29K
old 401K $22K ($19K vested)
old 401K 2 $35K

Should I convert over to ROTH IRA or just roll everything over into my traditional IRA and call it a day?

jeroly

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Re: Convert Trad IRA to ROTH?
« Reply #1 on: December 30, 2019, 09:31:17 AM »
Hello,

Income is around $180K Gross.

inherited IRA $123K
Trad IRA $29K
old 401K $22K ($19K vested)
old 401K 2 $35K

Should I convert over to ROTH IRA or just roll everything over into my traditional IRA and call it a day?

A Roth IRA really only makes sense, IMNSHO, under two circumstances post-SECURE Act:

1.  If you expect your tax rate in retirement to be higher than your current tax rate.

- A traditional IRA has the same tax-free buildup as a Roth but you have to pay taxes on the dollars when you pull them out.  This can be shown to result in the same post-tax result as putting already-taxed dollars into a Roth (but pulling the money out tax-free in retirement) provided that the tax rates are the same.  In your case, consider what you expect to need in retirement.  If your expenses are going to be, say, $75k, then you are likely to have a significantly lower tax rate even if federal tax rates rise somewhat (as you're currently at a much higher income).  If you expect to be pulling out closer to $150k, though, you might expect your tax rate to be similar or even higher.

2.  If you want a way to pass extra $$$ to heirs without tax.

- You can pass along your Roth IRA to your heirs without any tax bill.  In contrast, your traditional IRA is now not only taxed but the withdrawal rate is accelerated under the SECURE act so that all money must be withdrawn (and taxes paid upon it) within ten years.  This ten-year schedule could well push the beneficiary into a much higher tax bracket and make the traditional IRA tax-inefficient.

- Note that an alternative strategy might be to buy something like Berkshire Hathaway stock (which does not pay dividends or capital gains) in a taxable brokerage account and the beneficiary will get a step-up in basis (no taxes due on the capital gains) and no taxes will be due at all unless your estate exceeds $5.5 million ($11 million if married).

NOTE:  not a tax lawyer or accountant, nor do I play one on TV.

Easye418

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Re: Convert Trad IRA to ROTH?
« Reply #2 on: December 30, 2019, 10:10:18 AM »
Hello,

Income is around $180K Gross.

inherited IRA $123K
Trad IRA $29K
old 401K $22K ($19K vested)
old 401K 2 $35K

Should I convert over to ROTH IRA or just roll everything over into my traditional IRA and call it a day?

A Roth IRA really only makes sense, IMNSHO, under two circumstances post-SECURE Act:

1.  If you expect your tax rate in retirement to be higher than your current tax rate.

- A traditional IRA has the same tax-free buildup as a Roth but you have to pay taxes on the dollars when you pull them out.  This can be shown to result in the same post-tax result as putting already-taxed dollars into a Roth (but pulling the money out tax-free in retirement) provided that the tax rates are the same.  In your case, consider what you expect to need in retirement.  If your expenses are going to be, say, $75k, then you are likely to have a significantly lower tax rate even if federal tax rates rise somewhat (as you're currently at a much higher income).  If you expect to be pulling out closer to $150k, though, you might expect your tax rate to be similar or even higher.

2.  If you want a way to pass extra $$$ to heirs without tax.

- You can pass along your Roth IRA to your heirs without any tax bill.  In contrast, your traditional IRA is now not only taxed but the withdrawal rate is accelerated under the SECURE act so that all money must be withdrawn (and taxes paid upon it) within ten years.  This ten-year schedule could well push the beneficiary into a much higher tax bracket and make the traditional IRA tax-inefficient.

- Note that an alternative strategy might be to buy something like Berkshire Hathaway stock (which does not pay dividends or capital gains) in a taxable brokerage account and the beneficiary will get a step-up in basis (no taxes due on the capital gains) and no taxes will be due at all unless your estate exceeds $5.5 million ($11 million if married).

NOTE:  not a tax lawyer or accountant, nor do I play one on TV.

Thank you.  I would guess that my tax bracket will be lower in retirement.

slappy

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Re: Convert Trad IRA to ROTH?
« Reply #3 on: December 30, 2019, 10:49:52 AM »
What makes you want to do the conversion?

Easye418

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Re: Convert Trad IRA to ROTH?
« Reply #4 on: December 30, 2019, 11:43:14 AM »
What makes you want to do the conversion?

From what I was reading, it seems that since I cannot deduct contributions from my tIRA on my taxes that ROTH is a better solution for me. 

I want to put my RMD into my retirement account and want to figure out whether I should start the process to move over to ROTH before I dump another RMD into the tIRA.


terran

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Re: Convert Trad IRA to ROTH?
« Reply #5 on: December 30, 2019, 02:50:09 PM »
Inherited IRA's can't be converted to Roth.

I would't convert to Roth at that income as I would expect to have much lower taxable income in retirement.

Runrooster

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Re: Convert Trad IRA to ROTH?
« Reply #6 on: December 30, 2019, 04:25:34 PM »
I want to put my RMD into my retirement account and want to figure out whether I should start the process to move over to ROTH before I dump another RMD into the tIRA.

Are you just figuring out your RMD today, the last day of the year, or are you planning for next year?
From what I've read, you can't put your RMD into a tax favored account.  If you're still working, you can put the max contribution in out of current year's income only.
Also you know you don't have to take an RMD distribution from your current 401K as long as you're still employed, right?

MDM

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Re: Convert Trad IRA to ROTH?
« Reply #7 on: December 30, 2019, 05:36:08 PM »
What makes you want to do the conversion?
From what I was reading, it seems that since I cannot deduct contributions from my tIRA on my taxes that ROTH is a better solution for me.
There is often a difference between what one should do with new contributions vs. what one should do with existing balances.  Are you familiar with the difference between contribution and conversion?

Quote
I want to put my RMD into my retirement account and want to figure out whether I should start the process to move over to ROTH before I dump another RMD into the tIRA.
What do you think an RMD is?  The RMD I'm thinking of (Required Minimum Distribution) usually doesn't apply to someone with $180K gross (salary?) income.

Easye418

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Re: Convert Trad IRA to ROTH?
« Reply #8 on: December 31, 2019, 08:19:27 AM »

Are you just figuring out your RMD today, the last day of the year, or are you planning for next year?
From what I've read, you can't put your RMD into a tax favored account.  If you're still working, you can put the max contribution in out of current year's income only.
Also you know you don't have to take an RMD distribution from your current 401K as long as you're still employed, right?

No, I have my RMD set up to pull the appropriate amount yearly. 

The RMD is from my inherited IRA.

Yes, when I draw out of my inherited IRA, I like to use my current income and replace it in a tIRA.

What makes you want to do the conversion?
From what I was reading, it seems that since I cannot deduct contributions from my tIRA on my taxes that ROTH is a better solution for me.

There is often a difference between what one should do with new contributions vs. what one should do with existing balances.  Are you familiar with the difference between contribution and conversion?

Quote
I want to put my RMD into my retirement account and want to figure out whether I should start the process to move over to ROTH before I dump another RMD into the tIRA.
What do you think an RMD is?  The RMD I'm thinking of (Required Minimum Distribution) usually doesn't apply to someone with $180K gross (salary?) income.

Sorry for the confusion, the RMD is from an inherited IRA that I have stretched over 30 years.  I have to take a RMD from it.  However, I replace the money I pull out with current income and throw it back into my tIRA.  IE If my RMD was $2K, I would put $2K into my tIRA.

I just want to know if the tIRA best suits my needs going forward or if I should just convert to a ROTH.

Inherited IRA's can't be converted to Roth.

I would't convert to Roth at that income as I would expect to have much lower taxable income in retirement.

Sorry, I am not converting my inherited IRA, I would be converting my individual tIRA that I have. 

MDM

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Re: Convert Trad IRA to ROTH?
« Reply #9 on: December 31, 2019, 08:46:37 AM »
IE If my RMD was $2K, I would put $2K into my tIRA.

I just want to know if the tIRA best suits my needs going forward or if I should just convert to a ROTH.
...
Sorry, I am not converting my inherited IRA, I would be converting my individual tIRA that I have.
Probably best to ignore the sources of income: i.e., don't think of it as "$180K W-2 income and $2K RMD." 

Just think of it as "$182K gross income" and then decide where it should go.  To that end, see Investment Order for a prioritization that fits most.

Because you expect a lower marginal tax rate in retirement, you would not want to convert now and pay a higher rate.  See Traditional versus Roth - Bogleheads for more.

Easye418

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Re: Convert Trad IRA to ROTH?
« Reply #10 on: December 31, 2019, 09:05:56 AM »
IE If my RMD was $2K, I would put $2K into my tIRA.

I just want to know if the tIRA best suits my needs going forward or if I should just convert to a ROTH.
...
Sorry, I am not converting my inherited IRA, I would be converting my individual tIRA that I have.
Probably best to ignore the sources of income: i.e., don't think of it as "$180K W-2 income and $2K RMD." 

Just think of it as "$182K gross income" and then decide where it should go.  To that end, see Investment Order for a prioritization that fits most.

Because you expect a lower marginal tax rate in retirement, you would not want to convert now and pay a higher rate.  See Traditional versus Roth - Bogleheads for more.

Thank you.