Author Topic: Rollover 401(k) to IRA or Roth IRA?  (Read 2080 times)

Rylito

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Rollover 401(k) to IRA or Roth IRA?
« on: September 26, 2016, 06:52:38 PM »
I apologize if this has been covered before, but I wasn't able to find this specific topic in the fora.

My DH was involuntarily RE'd, and we'd like to rollover his 401(k) from his ex-employer's high fee plan to Vanguard, where he already has a Roth IRA.

We don't know when I'm going to retire as we haven't decided on a retirement location yet, so can't figure out housing costs.  I figure the earliest would be 2 years from now, and maybe up to 10 years at the far end.  We won't need to tap his retirement funds as long as I'm working, but I assume we would once I retire. 

I'm not really sure where we will be tax-wise at retirement either--we have another 10+ years to claim our son as a dependent; we don't our own home now, but conceivably could have a mortgage in retirement; income will probably go from $130-140K now to $65-80K in retirement, but I won't be contributing to my 401(k) in retirement, and it's conceivable our income could be even higher in retirement if we pursue real estate investments more aggressively.

I like the idea of rolling over to a Roth given the (hopefully) long timeline of a 40-50 years of tax-free withdrawals, but would like to figure out the tax hit if we went that route.  Does anyone know of a comparison calculator that would help us figure the best option?


ender

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Re: Rollover 401(k) to IRA or Roth IRA?
« Reply #1 on: September 26, 2016, 06:54:12 PM »
If your income is $130k as a couple, the entire IRA conversion will be taxed at a fairly high tax rate.

What is your taxable income this year?

How much is the 401k?

zolotiyeruki

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Re: Rollover 401(k) to IRA or Roth IRA?
« Reply #2 on: September 26, 2016, 06:57:17 PM »
Generally, you want to roll it over into a traditional IRA.  Otherwise, it'll count as income, and you'll pay tax on it at your current marginal rate.

Rylito

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Re: Rollover 401(k) to IRA or Roth IRA?
« Reply #3 on: September 26, 2016, 07:11:00 PM »
Hi,

Gross income this year I think will be around $140K (hubby was laid off at the end of last year but we're slackers and just getting around to rolling over his 401(k)).  The 401(k) is worth about $500k now.

ender

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Re: Rollover 401(k) to IRA or Roth IRA?
« Reply #4 on: September 26, 2016, 07:35:17 PM »
Hi,

Gross income this year I think will be around $140K (hubby was laid off at the end of last year but we're slackers and just getting around to rolling over his 401(k)).  The 401(k) is worth about $500k now.

You would pay obscene taxes converting $500k taxes into Roth accounts.

MDM

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Re: Rollover 401(k) to IRA or Roth IRA?
« Reply #5 on: September 26, 2016, 08:39:06 PM »
I like the idea of rolling over to a Roth given the (hopefully) long timeline of a 40-50 years of tax-free withdrawals, but would like to figure out the tax hit if we went that route.  Does anyone know of a comparison calculator that would help us figure the best option?
Gross income this year I think will be around $140K....  The 401(k) is worth about $500k now.
Based on the case study spreadsheet you would pay ~$174K in federal taxes (assuming 0% state tax), or ~35%.  You could check that for yourself.

That would likely be a bad deal for you.

Rylito

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Re: Rollover 401(k) to IRA or Roth IRA?
« Reply #6 on: September 27, 2016, 01:36:08 AM »
Yikes...that would definitely be out of the question then...thanks!

Spork

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Re: Rollover 401(k) to IRA or Roth IRA?
« Reply #7 on: September 27, 2016, 08:06:26 AM »
One thing worth considering: This is not an all-or-nothing decision.  This is also not a "do it all now" decision.

You can roll this into a tIRA and convert an amount that makes sense every year.  In other words, as you get near a year end and have a pretty good idea what your annual income is going to be, you can convert Income - TaxBracketTopEnd  - Exemptions - Deductions.

For example: (OMG, PLEASE DOUBLE CHECK MY MATH, I AM TERRIBLE AT MAKING NUMERIC TYPOS)
$80k retirement income
Married filing jointly, +1 dependent = 3 * $4,050
Standard deduction of $12,600
$75,300 top end of 15% bracket

$80,000 - $75,300 - $12,150 - $12,600 = 20,050  <- convert this amount and pay tax at your current tax rate

edit to add:
You can also add quite a lot if you're willing to pay at the 25% bracket.  The top end there is $151,900.

There are some situations where Roth seems to really win out with taxes.  The one I can immediately think of is if you inherit a tIRA and are going to be getting multiple RMDs.  This is likely to turn your taxes upside down in retirement and have you paying quite a bit more in retirement.
« Last Edit: September 27, 2016, 08:11:20 AM by Spork »

Rylito

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Re: Rollover 401(k) to IRA or Roth IRA?
« Reply #8 on: September 30, 2016, 06:35:25 AM »
Thank you for the suggestions.  I think I will play around in Turbotax and try some scenarios rolling over just a portion to a Roth IRA.  But you're right, it will likely make more sense to rollover to a tIRA once retired and then to a Roth