Setting up Roth Pipeline Conversion: My DH recently separated from his job

[LiseE]

I've been reading a great deal about the ROTH Pipeline conversion since with our two incomes (now only mine) we don't qualify to open a ROTH IRA directly.  My DH, newly separated from his company, has the option now of rolling his 401K over.  It has been my understanding that when you are setting up a ROTH pipeline conversion, the amount that you convert is taxed along with all of your other IRA account holdings.  Is this correct?

My DH rolls his 401K (valued at 200K) into a Traditional IRA account.  We then start the pipeline conversion with10K the first year.  How will this be taxed?  Tax on 10K or a pro-rated amount of our total Traditional IRA holdings (which would be 200K)?

I thought I read somewhere that your total IRA account balances are included in the calculation of tax when the pipeline is started?

[seattlecyclone]

I think you may be confusing two separate things: backdoor Roth contributions and the Roth pipeline.

A "backdoor Roth" contribution is when you make non-deductible contributions to a traditional IRA and then convert this amount to a Roth IRA. You do this because your income is too high to make deductible traditional IRA contributions or direct contributions to a Roth IRA. The end result of this is that you are able to put $5,500 of new money into a Roth IRA. The catch is that there is a pro-rata rule that comes into play on the conversion step where you have to look at what fraction of all your traditional IRA money is pre-tax or post-tax. For this reason, the backdoor Roth IRA can only really be accomplished when you don't already have any pre-tax traditional IRA savings.

The "Roth pipeline" is where you convert pre-tax money from traditional to Roth, paying tax on the full value in that year. Five years later, you are eligible to withdraw that amount from your Roth IRA tax-free.

In your example, if you move $200k from a traditional 401(k) to your traditional IRA, and then covert $10k to Roth, you'll pay tax on $10k, not $200k.

[LiseE]

Thank you seattlecyclone!  That's what happens when you start reading too much!  Appreciate the clarification.

[KidneyMD]

In your example, if you move $200k from a traditional 401(k) to your traditional IRA, and then covert $10k to Roth, you'll pay tax on $10k, not $200k.

Does this work the same as in a 403b? I'm switching jobs soon and want to move my 403b funds to my Roth IRA at Vanguard, since I know in the distant future I'll be taxed at a higher rate and would rather take the tax now. Does making the move from the traditional IRA to Roth IRA count as a contribution since you're essentially going from pre-tax to post-tax dollars, or can I still make a Roth contribution for the year?

[seattlecyclone]

In your example, if you move $200k from a traditional 401(k) to your traditional IRA, and then covert $10k to Roth, you'll pay tax on $10k, not $200k.

Does this work the same as in a 403b?

Yes.

Does making the move from the traditional IRA to Roth IRA count as a contribution since you're essentially going from pre-tax to post-tax dollars, or can I still make a Roth contribution for the year?

Rollovers and conversions do not count against your contribution limit. You can contribute up to $5,500 to IRAs each year you work, regardless of how you move your existing savings around between retirement accounts.

[forummm]

In your example, if you move $200k from a traditional 401(k) to your traditional IRA, and then covert $10k to Roth, you'll pay tax on $10k, not $200k.

Does this work the same as in a 403b? I'm switching jobs soon and want to move my 403b funds to my Roth IRA at Vanguard, since I know in the distant future I'll be taxed at a higher rate and would rather take the tax now. Does making the move from the traditional IRA to Roth IRA count as a contribution since you're essentially going from pre-tax to post-tax dollars, or can I still make a Roth contribution for the year?

You know that you'll be paying a higher tax rate at the time you are withdrawing money from your IRA in the future than you are now? That's unusual, unless your tax rate right now is 0%. Presumably you'll only be taking out money from your IRA once you have retired (and presumably have low or no other income).

[KidneyMD]

In your example, if you move $200k from a traditional 401(k) to your traditional IRA, and then covert $10k to Roth, you'll pay tax on $10k, not $200k.

Does this work the same as in a 403b? I'm switching jobs soon and want to move my 403b funds to my Roth IRA at Vanguard, since I know in the distant future I'll be taxed at a higher rate and would rather take the tax now. Does making the move from the traditional IRA to Roth IRA count as a contribution since you're essentially going from pre-tax to post-tax dollars, or can I still make a Roth contribution for the year?

You know that you'll be paying a higher tax rate at the time you are withdrawing money from your IRA in the future than you are now? That's unusual, unless your tax rate right now is 0%. Presumably you'll only be taking out money from your IRA once you have retired (and presumably have low or no other income).

I'll be a clinical fellow for the next 3 years, so my salary is nowhere near my potential maximum and thus my tax rate is lower currently. I hope to be semi-retired or work part-time once I'm eligible to take out IRA money at 59 1/2, but I imagine my salary will still be higher than it is currently. My goal is to maximize my contributions to the Roth IRA now before my income jumps and I no longer qualify.

[seattlecyclone]

Just because you expect your salary to go up later in your career doesn't mean your tax rate will be higher in retirement than it is now. Do you expect your part-time salary during your "semi-retirement" to be higher than your full-time salary now? Do you expect to keep working in some capacity until you die, or do you expect to fully retire at some point?

The only thing that really matters in the Roth vs. traditional decision is whether or not you expect your tax bracket to be higher when you actually withdraw the money. Your salary in intervening years is completely irrelevant. If you're a reasonably frugal person working part-time as an MD with a couple decades of experience, you probably won't be needing to tap into your IRA yet.

You're the one who is in the best position to predict what your tax bracket will be when you withdraw from your IRAs. It certainly could be higher than today. I just want to make sure you're not falling into the spendypants trap of assuming that your tax bracket in retirement will be huge just because you expect your salary to go up before you retire, and so of course you'll have a super high income forever.