Author Topic: Should I convert my tradtional to a ROTH?  (Read 4027 times)

investor_n00b

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Should I convert my tradtional to a ROTH?
« on: December 04, 2015, 07:37:41 AM »
I have both a traditional and Roth IRA. The traditional is from a 401k rollover from an old employer. It's a much larger amount than my Roth and it's just been sitting there. I have been trying to decide what to do with it. Is it a good idea to convert to it a Roth and just focus on the Roth? What do you guys recommend do with it?

MVal

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Re: Should I convert my tradtional to a ROTH?
« Reply #1 on: December 04, 2015, 08:42:17 AM »
Ewww, no, I don't think so. Why would you want to convert a tax-advantaged account to a Roth? You'll have to pay taxes on the conversion amount! I would just leave the Roth where it is and focus on your tIRA. You'll get the tax benefit each year on that, and then someday when you're not working anymore, you can convert your tIRA funds to the Roth in small enough doses that you will pay very minimal or no taxes on it.

nereo

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Re: Should I convert my tradtional to a ROTH?
« Reply #2 on: December 04, 2015, 08:56:39 AM »
This all boils down to what your taxable income is now, and what you expect your taxable income to be during retirement.  The rest is just noise.  For most mustachians currently working, they plan on spending less money than they are currently earning (that makes sense; we're a bunch of people who tend to have very high savings rates).  A few plan on increasing their spending (for example, having a large travel budget).
If, however, you are not earning very much money currently than converting that 401(k) into a ROTH could be a smart move.  That is what I did with several of my accounts while in graduate school; I had years when my AGI was at or near $0, so I executed a conversion.

One thing to note, despite what MVal said, Both a ROTh and a tIRA are considered tax-advantaged accounts.  The differences are when you pay taxes.

johnny847

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Re: Should I convert my tradtional to a ROTH?
« Reply #3 on: December 04, 2015, 08:59:18 AM »
Ewww, no, I don't think so. Why would you want to convert a tax-advantaged account to a Roth? You'll have to pay taxes on the conversion amount! I would just leave the Roth where it is and focus on your tIRA. You'll get the tax benefit each year on that, and then someday when you're not working anymore, you can convert your tIRA funds to the Roth in small enough doses that you will pay very minimal or no taxes on it.

What? You can't say anything when knowing virtually nothing about the OP's situation.

What if the OP was unemployed for the whole year? Hence, OP has zero income, and converting the tIRA to a Roth now could result in $0 paid in taxes (this would be true if the conversion amount is less than or equal to $10300).

Or what if the OP has a very large tIRA which will be subject to RMD's, and the RMD's will push the OP up in tax brackets such that it is cheaper to pay some tax now to convert some of the tIRA to a Roth?

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OP, you need to provide far more information to get any good advice. Income, age, goal for years to FIRE, balances of all your retirement accounts, your tax bracket, what state you live in, your annual expenses, etc.

Left

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Re: Should I convert my tradtional to a ROTH?
« Reply #4 on: December 04, 2015, 09:23:36 AM »
One advantage to keeping it in tIRA is that while you pay normal income taxes on the amount you roll over, you can "roll" the capital gains/interest and use that as part of roth pipeline. If you rolled it over now, you can't touch that without the penalty for early withdraw.

I do use a roth IRA and count on the $6k contribution as part of my roth ladder conversion priming. After 10-15 years, I'd have a $60-90k prime... not enough for a full prime for me. If I rolled into it now, I can get it to $100+ plus, but still won't be enough for me. But instead, if I keep it as tIRA for now, and until a few years over, used that to prime my roth IRA ladder, I will have enough. Once that is done, the 401k will take over.

This might be a tax inefficient way but I feel better having this setup than being "locked" out of my ladder for a full 5 years... And my 401k doesn't allow me to make withdraws while working to start ladder either and I don't want to be without ladder when I start retirement. I may not need it, but I want it primed and ready in case I do need it.

for me, it's the "end plan" of having a functioning ladder on retirement date that I keep rolled 401k as tIRA instead of rolling into current 401k or converting it to roth now. I plan to convert it later once the value of it grows to make it be a better prime.

Taxes while important, isn't the biggest thing for me in this regard of picking what to do with old 401ks. It's what I plan to do with them that matters more to me. And I want them as primers so I want them to grow and be able to use the entire value for the priming. So they stay tIRA until that time.

investor_n00b

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Re: Should I convert my tradtional to a ROTH?
« Reply #5 on: December 04, 2015, 12:54:01 PM »
Hmm, none of you guys answered my question. Should I just let the money sit in the traditional IRA since I'm mostly focusing on my Roth?

oldmannickels

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Re: Should I convert my tradtional to a ROTH?
« Reply #6 on: December 04, 2015, 01:03:50 PM »
Hmm, none of you guys answered my question. Should I just let the money sit in the traditional IRA since I'm mostly focusing on my Roth?

That's because the answer is it depends. Since you are focusing on your Roth now you must have done an analysis that says that Roth would be more beneficial now, so I would transfer to a Roth up to the next tax bracket and then do your analysis over again.

investor_n00b

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Re: Should I convert my tradtional to a ROTH?
« Reply #7 on: December 04, 2015, 01:24:44 PM »
Hmm, none of you guys answered my question. Should I just let the money sit in the traditional IRA since I'm mostly focusing on my Roth?

That's because the answer is it depends. Since you are focusing on your Roth now you must have done an analysis that says that Roth would be more beneficial now, so I would transfer to a Roth up to the next tax bracket and then do your analysis over again.

Well, I haven't contributed to my traditional IRA at all. It's just been sitting there. I just don't know what to do with it. I'm focusing on my Roth since the money is pre-taxed before I contribute to it and less when I later withdrawl. I haven't done any analysis. Like my usernames says, I'm an investor n00b. I'm totally clueless.
« Last Edit: December 04, 2015, 01:28:36 PM by investor_n00b »

Cheddar Stacker

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Re: Should I convert my tradtional to a ROTH?
« Reply #8 on: December 04, 2015, 01:32:25 PM »
You should focus on both accounts. Invest in appropriate vehicles. Contribute to appropriate types of accounts. Convert your T to R if it makes sense.

The problem is you haven't given any facts, so it's impossible to give you a good answer. Garbage in, garbage out.

If you keep both accounts as is, you should likely put your insanely aggressive investments in the Roth, and your safe ones in the Traditional. You want your Roth to grow more since you won't have to pay taxes on withdrawals. Other than that, I have nothing for you without knowing:

Age.
Income.
Balance in each account.
Goals.
Etc.

nereo

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Re: Should I convert my tradtional to a ROTH?
« Reply #9 on: December 04, 2015, 01:41:51 PM »
Hmm, none of you guys answered my question. Should I just let the money sit in the traditional IRA since I'm mostly focusing on my Roth?
I answered your question.  So did eyem and cheddar stacker and several others.  THe answer is: it depends on a bunch of factors you aren't giving us.  Most notably, what your AIG is now, and what you expect your spending levels to be in retirement. 
If you have high AIG now I'd let the money sit in your tIRA.  If you have a lot AIG now I'd consider converting it.  As cheddar stacker said, your age, goals nad balances play a role too.

To give you an analogy, it's kind of like saying "yo, should I buy a 2bedroom home in downtown Boston or rent a 3 bedroom outside the city" with absolutely no other information (price, where you work, how big your family is, whether you'd get roommates, etc).  The answer is obviously "it depends" on all that additional info.

investor_n00b

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Re: Should I convert my tradtional to a ROTH?
« Reply #10 on: December 04, 2015, 02:36:21 PM »
You should focus on both accounts. Invest in appropriate vehicles. Contribute to appropriate types of accounts. Convert your T to R if it makes sense.

The problem is you haven't given any facts, so it's impossible to give you a good answer. Garbage in, garbage out.

If you keep both accounts as is, you should likely put your insanely aggressive investments in the Roth, and your safe ones in the Traditional. You want your Roth to grow more since you won't have to pay taxes on withdrawals. Other than that, I have nothing for you without knowing:

Age.
Income.
Balance in each account.
Goals.
Etc.

Ok, here goes...

Age: 36
Income: Approx 85k/year
Traditional IRA: About 40k
Roth: About 27k
Goals: Save for retirement. Long term investing
Background:  I started late investing late. Been laid off three times but work has become steadier the past few years. Didn't take it seriously until a five years ago. Trying to catch up before I'm 60.

seattlecyclone

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Re: Should I convert my tradtional to a ROTH?
« Reply #11 on: December 04, 2015, 02:46:05 PM »
Based on your income you're solidly in the 25% tax bracket. You probably would benefit from leaving that traditional IRA money where it is. If you convert that money to Roth you'll owe 25-28% federal income tax on that money, plus any state taxes. That's a decent chunk of change that you could instead invest right now. Going forward, if you're allowed to make pre-tax traditional IRA contributions, that will probably be a better idea than Roth contributions, again because you're in a relatively high tax bracket.

Cheddar Stacker

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Re: Should I convert my tradtional to a ROTH?
« Reply #12 on: December 04, 2015, 02:46:55 PM »
Assuming single and no kids since they weren't mentioned? That would have some impact on how much you can save, and what tax bracket you are in. I'd do this:

Leave the traditional where it is. Invest in the most conservative holdings from your asset allocation.

Invest the most aggressively in your roth pursuant to your asset allocation.

Max out your 401k at 18k/year.

Max out your traditional ira at 5,500/year.

You'll be done well before 60.

Left

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Re: Should I convert my tradtional to a ROTH?
« Reply #13 on: December 04, 2015, 03:00:11 PM »
I'm focusing on my Roth since the money is pre-taxed before I contribute to it and less when I later withdrawl..
um... you might have your info mixed up... roth is not pre-taxed...

this might make a difference if you thought it was

or I misunderstood you and you meant that it is already taxed before you contribute, then yes it has been taxed already.
« Last Edit: December 04, 2015, 03:01:42 PM by eyem »

investor_n00b

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Re: Should I convert my tradtional to a ROTH?
« Reply #14 on: December 04, 2015, 03:30:07 PM »
Assuming single and no kids since they weren't mentioned? That would have some impact on how much you can save, and what tax bracket you are in. I'd do this:

Leave the traditional where it is. Invest in the most conservative holdings from your asset allocation.

Invest the most aggressively in your roth pursuant to your asset allocation.

Max out your 401k at 18k/year.

Max out your traditional ira at 5,500/year.

You'll be done well before 60.

Yes I'm single and have no kids. The only debt I have are student loans which I'm halfway done paying. I'm a full time freelancer so I don't have a 401k. Does that affect my investing?

I thought you can only max one IRA account per year?

Should I split the max between the traditional and Roth?

Thanks guys!

Left

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Re: Should I convert my tradtional to a ROTH?
« Reply #15 on: December 04, 2015, 03:57:01 PM »
you can contribute up to the max, you don't have to limit it to one account but it makes it simple if you do

TomTX

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Re: Should I convert my tradtional to a ROTH?
« Reply #16 on: December 05, 2015, 06:55:45 AM »
Assuming single and no kids since they weren't mentioned? That would have some impact on how much you can save, and what tax bracket you are in. I'd do this:

Leave the traditional where it is. Invest in the most conservative holdings from your asset allocation.

Invest the most aggressively in your roth pursuant to your asset allocation.

Max out your 401k at 18k/year.

Max out your traditional ira at 5,500/year.

You'll be done well before 60.

Yes I'm single and have no kids. The only debt I have are student loans which I'm halfway done paying. I'm a full time freelancer so I don't have a 401k. Does that affect my investing?

I thought you can only max one IRA account per year?

Should I split the max between the traditional and Roth?

Thanks guys!

Okay, your LLC/sole proprietorship can open an Individual 401k at someplace like Vanguard, and put in $18k + 25% of compensation (employer side)

https://investor.vanguard.com/what-we-offer/small-business/individual-401k

...and you have time to do it for 2015 if you act now.

You may be able to roll your old IRA into the 401k.