Convert rollover IRA to Roth?

[La Bibliotecaria Feroz]

Forgive me--I know this topic has been covered on here, but I'm getting a splitting headache trying to figure out how advice meant for other people applies to our situation. Which is this:

1. I have a rollover IRA and a small existing Roth.
2. Mr. FP has an abandoned 403(b). (Current school district has a pension system and no individual accounts).

That's the total of of our retirement accounts. We are far, far under any of the income limits (we have young children and this year are making under $60K. We may not pay any taxes at all--didn't last year). So I guess my questions are these:

1. Is there any downside to converting my rollover IRA to a Roth?
2. I have Vanguard flagship service through my grandfather. Can they do this for me and walk me through it?
3. If I transferred my rollover IRA to a Roth, would I still be able to fund my existing Roth? Would they be separate accounts or one account?
4. Is there any downside to converting Mr. FP's 403(b) to a Roth IRA?

Any advice is appreciated. The whole idea would never have occurred to me had I not seen it floating by in the forums...

[La Bibliotecaria Feroz]

Hmmm... I see now that you have to use actual cash to pay taxes when you convert to a Roth. That will probably be a deal breaker, since we have very little cash and need to save for a house downpayment and eventually a replacement vehicle. (Even Hondas don't run forever... 15 years old and counting.)

I hate not to take advantage now while our tax rates are low, but this will probably have to wait until we are closer to FIRE. (I plan to get a job ASAP, which will of course raise our tax bracket.)

[Cheddar Stacker]

Any tax wouldn't be due until April 15th. You could do this in 2014 while income is low, only convert a small amount to ensure your tax bill won't be crazy high, then get your job ASAP to save for the tax bill.

Converting to a Roth is best to do when your income is unusually low.

Making a Roth contribution is still possible since a conversion doesn't count as a current year contribution, but if you have cash for a Roth contribution wouldn't you also have cash to pay the tax bill?

[seattlecyclone]

1. Is there any downside to converting my rollover IRA to a Roth?

The big downside is that your taxable income will go up for this year. If you don't owe any taxes now, you may after converting your IRA. For maximum tax efficiency, you may want to calculate roughly how much more you could earn without owing taxes and only convert that much this year. Do this bit by bit until all your savings are Rothified.

2. I have Vanguard flagship service through my grandfather. Can they do this for me and walk me through it?

Vanguard can definitely help you with this. Whether the flagship service representatives would do it specifically, I can't say.

3. If I transferred my rollover IRA to a Roth, would I still be able to fund my existing Roth? Would they be separate accounts or one account?

Yes, conversions don't affect your ability to make new Roth contributions. You should be able to put it all in one account.

4. Is there any downside to converting Mr. FP's 403(b) to a Roth IRA?

Same answer as (1) above. You'll have more taxable income this year if you make the conversion, so plan accordingly.

[La Bibliotecaria Feroz]

Any tax wouldn't be due until April 15th. You could do this in 2014 while income is low, only convert a small amount to ensure your tax bill won't be crazy high, then get your job ASAP to save for the tax bill.

Converting to a Roth is best to do when your income is unusually low.

Making a Roth contribution is still possible since a conversion doesn't count as a current year contribution, but if you have cash for a Roth contribution wouldn't you also have cash to pay the tax bill?

Would I actually have until April 15th to do the rollover, or just to pay the taxes? (Because don't you have until April to make contributions for the previous tax year?)

LOL, I don't actually have money for the Roth. Just checking, you know, in case someone comes and stuff my mailbox with money.

Thanks for the excellent advice--you have all been really helpful.

[seattlecyclone]

Roth conversions are taxed for the calendar year they are performed. So if you want it to count for this year's income, you need to complete the conversion by the end of December. You then have until April to pay that tax, provided that the estimated tax rules don't say you owe it earlier.

[Cheddar Stacker]

Roth conversions are taxed for the calendar year they are performed. So if you want it to count for this year's income, you need to complete the conversion by the end of December. You then have until April to pay that tax, provided that the estimated tax rules don't say you owe it earlier.

+1.

Regarding estimated taxes, since they didn't owe any tax last year they would not owe a penalty for not paying estimated taxes this year. You have to pay in the smaller of 100% of prior years tax ($0) or 90% of current years tax to avoid penalties. Very high income people have some different rules, but that should be accurate for OP and most mustachians.

[TomTX]

Thanks Cheddar!

Hm, I have a nice block of Tilamook black in the fridge which has not yet been opened....