Author Topic: 401k to roth conversion should i?  (Read 1916 times)

locass316

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401k to roth conversion should i?
« on: December 08, 2019, 12:17:16 PM »
hey guys need some help with whether i should do a roth conversion or not
long story short the only income i have in 2019 is i sold some long term investments for about 35k in gains to live on.
i have 250k in a traditional 401k. should i be looking at converting some of this to a roth? would the 35k in long term gains affect what tax rate id hvae to pay on the conversion ?

thanks

dandarc

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Re: 401k to roth conversion should i?
« Reply #1 on: December 08, 2019, 12:28:11 PM »
The roth conversion is taxed as ordinary income - this will be your "first dollars" of income. Since you say you sold "long-term investments", I'll assume that means the gains qualify for the lower long-term capital gains tax rates.

The long term capital gains may be pushed into a higher tax rate depending on the amount you convert.

Conventional wisdom would be to convert up to the standard deduction at the very least, so long as the LTCG remains in the 0% bracket there as well. Of course, if you are getting ACA subsidies for your health insurance, that would go into the equation as well. So as with anything tax related, I suggest figuring your overall tax with several options so you can make a better decision.

terran

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Re: 401k to roth conversion should i?
« Reply #2 on: December 08, 2019, 03:43:18 PM »
The capital gains won't effect the tax rate of the conversion, but the conversion may effect that tax rate of the gains, which can result in a high marginal tax rate by pushing gains previously taxed at 0% into the 15% capital gains tax bracket. See the tax brackets for ordinary income (such as Roth conversions) and long term capital gains here: https://taxfoundation.org/2019-tax-brackets/

Keep in mind that not all of the proceeds of the sale of stock are gains. If you sold $35k worth of stock then much of that is likely basis (the amount you purchased that stock for, which is not taxed) and some smaller amount is likely gains (which are taxed). Is $35k the amount you received from the sale, or is it indeed the amount of gains you realized in the sale?

Also remember to factor in the potential loss of ACA health insurance subsidies if you buy health insurance on the exchange.

locass316

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Re: 401k to roth conversion should i?
« Reply #3 on: December 08, 2019, 04:05:14 PM »
thanks for the quick replies

the 35k LT gains is what i profited from the sale. so im seeing the long term brackets say i can go up to $39,375 in gains before i get taxed on it. im pretty sure i got an aca subsidy for this year, how do i factor in that loss?

MDM

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Re: 401k to roth conversion should i?
« Reply #4 on: December 08, 2019, 06:08:07 PM »
thanks for the quick replies

the 35k LT gains is what i profited from the sale. so im seeing the long term brackets say i can go up to $39,375 in gains before i get taxed on it. im pretty sure i got an aca subsidy for this year, how do i factor in that loss?
If you have some spreadsheet familiarity you could use the case study spreadsheet in Excel to see the marginal rates you would pay, taking your LTCG and ACA information into consideration.