Author Topic: ELI5 Roth Conversion Ladder  (Read 476 times)

missundecided

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ELI5 Roth Conversion Ladder
« on: April 30, 2019, 04:56:02 PM »
I thought I understood the conversion ladder, but after doing some further reading, I am now confuzzled. Please correct me where I am wrong.

Hypothetical: Let's say I have $95k in a traditional IRA, from both traditional IRA contributions and 401k rollovers, and I want to build a conversion ladder for ants, aka $10k per year converted to a Roth until depleted and/or I hit age 59.5.

According to the pro rata rule, I'll be taxed on the full $95k the first year, then assuming no growth, $85k the next year, and so on? And not the $10k per annum I'm actually converting?

If true, I would need to convert $85k to either a solo 401k or to an employer 401k, then convert the remaining $10k in the tIRA funds to a Roth. But...then what do I do with that 401k? I'd still be stuck with an account that will have RMDs.

Where have I gone wrong in my assumptions?

EvenSteven

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Re: ELI5 Roth Conversion Ladder
« Reply #1 on: April 30, 2019, 07:16:48 PM »
The tIRA can have 2 kinds of money, pre-tax and post-tax. I assume it is all pre-tax, as in you deducted the contributions from your income the year you contributed, or it is rolled over from a 401k or 403b that was tax deferred.

In this case the pro-rata rule does not apply. That applies only to post-tax contributions, and only to the portion of tIRA that is post-tax.

If you convert 10K in a year, then that 10k is taxed at your marginal rate as if it were normal income. The remaining money in the tIRA isn't taxed.


missundecided

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Re: ELI5 Roth Conversion Ladder
« Reply #2 on: April 30, 2019, 07:21:46 PM »
Thank you! The pieces are clicking into place for me now.