Author Topic: At what point does it make sense to start a Roth conversion pipeline from 401k?  (Read 9215 times)

MickeyMoustache

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I now max out my & my wife's 401k every year, backdoor Roth IRAs, HSAs, and 529s and was reading about the Roth pipeline conversion from 401ks to Roth IRAs.  I get the concept since I already backdoor Roth IRAs but I don't know when it makes sense to start making the conversion.  I also have 401ks all over the place from multiple employments and I wouldn't mind getting the 2 that are not with my current employer out of the current companies.  Same for my wife's 401k's.

Also, is it taxed when you convert from 401k to tIRA?  Or is it exactly like a backdoor Roth where you only get taxed from tIRA -> Roth on any gains in that tiny window of a day or two?

seattlecyclone

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Go ahead and roll those old 401(k) accounts into traditional IRAs to simplify your financial life and move away from your old employer's fund choices.

As to the Roth pipeline, the timeline depends very much on your personal circumstances. The full amount of a pre-tax to Roth conversion will be taxed in the year of your conversion. For that reason you probably don't want to do these while you're still working if you can avoid it.

That leaves the question of where you're going to get money for those first five years of retirement. The principal from your existing Roth accounts can help here, and so can HSA savings. Any taxable investments can also help (I assume that since you're already maxing out your tax-advantaged accounts that you have at least a few dollars left over to put in a taxable account).

If all that won't be enough to last five years, consider your tax brackets. If you expect your tax rate to be at least 10 percentage points lower in retirement, withdrawing straight from your traditional IRA and paying the early withdrawal tax can be better than making more Roth contributions or conversions while you're still working.

ender

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If all that won't be enough to last five years, consider your tax brackets. If you expect your tax rate to be at least 10 percentage points lower in retirement, withdrawing straight from your traditional IRA and paying the early withdrawal tax can be better than making more Roth contributions or conversions while you're still working.

+1

There are times when early withdrawal from 401ks can be really useful, especially if you have a bunch of kids and can get your taxfree income pretty high prior to owing any taxes. You can withdraw a nominal amount each year for living expenses and pay the penalty while starting your Roth pipeline with the rest of your tax free space.

We already have a bunch of Roth money so we probably won't need to do this (our contributions should be a good chunk of money from our Roth accounts for early withdrawing) but it's definitely an option we'd consider.

I think people on the whole do not consider this option because it's a "penalty" -- just because it's a penalty doesn't mean it cannot be the best option :-)


teen persuasion

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Go ahead and roll those old 401(k) accounts into traditional IRAs to simplify your financial life and move away from your old employer's fund choices.

As to the Roth pipeline, the timeline depends very much on your personal circumstances. The full amount of a pre-tax to Roth conversion will be taxed in the year of your conversion. For that reason you probably don't want to do these while you're still working if you can avoid it.

That leaves the question of where you're going to get money for those first five years of retirement. The principal from your existing Roth accounts can help here, and so can HSA savings. Any taxable investments can also help (I assume that since you're already maxing out your tax-advantaged accounts that you have at least a few dollars left over to put in a taxable account).

If all that won't be enough to last five years, consider your tax brackets. If you expect your tax rate to be at least 10 percentage points lower in retirement, withdrawing straight from your traditional IRA and paying the early withdrawal tax can be better than making more Roth contributions or conversions while you're still working.

Wait, if the OP is doing backdoor Roth IRAs wouldn't it be bad to roll the old 401Ks to tIRA?  Better to roll them into his current 401k if possible.

seattlecyclone

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Oh, good catch. You're right.

tonysemail

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Is there a calculator or spreadsheet you would recommend for this?

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MDM

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Is there a calculator or spreadsheet you would recommend for this?
Recommend for...what?  There are a few different things discussed above....

tonysemail

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I am just getting started on planning withdrawal from taxable accounts while building a roth ladder.   Actually, i havent even calculated whether rental income plus capital gains realized would use up the 0 percent bracket for roth conversions.  Theres a lot to think about, so i started searching for a template to copy from.

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MDM

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I am just getting started on planning withdrawal from taxable accounts while building a roth ladder.   Actually, i havent even calculated whether rental income plus capital gains realized would use up the 0 percent bracket for roth conversions.  Theres a lot to think about, so i started searching for a template to copy from.
See the case study spreadsheet for some relatively simple Excel.

See www.i-orp.com for a more sophisticated, time-dependent, tool.

And good luck!

tonysemail

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thanks for the link! 
That looks like what I'm searching for.
I'll try it out.