The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: Rylito 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?
-
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?
-
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.
-
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.
-
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.
-
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 (http://forum.mrmoneymustache.com/ask-a-mustachian/how-to-write-a-%27case-study%27-topic/msg274228/#msg274228) 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.
-
Yikes...that would definitely be out of the question then...thanks!
-
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.
-
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