The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: missundecided on April 30, 2019, 04:56:02 PM
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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?
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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.
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Thank you! The pieces are clicking into place for me now.