The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: Melf on November 08, 2016, 01:15:36 PM
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Hey all. Looking for some specifics on how exactly the Trad IRA to Roth IRA conversions are done. I'm guessing they are pretty much just a sale of funds in the Traditional and then transfer of funds to into the Roth with investments made with the funds once there.
My plan is to roll my company 401k at Wells Fargo into a traditional IRA at Vanguard soon. My taxable and RothIRA accounts are already with Vanguard. My last day of work is Friday so I'll probably initiate the roll-over before the end of the year. I'll also probably be taking a lump sum payment for my small company pension as well. I'm hoping that too will be able to roll into a traditional IRA with no tax consequences. I think I have up to 180 days from my last day worked to get that done.
The total of the 401K and pension should be around 470K. I'm hoping to make Traditional IRA to Roth IRA conversions going forward to put myself in a sweet spot for ACA subsidies. I know these conversions are taxable and count toward my income for each year in addition to dividends and any capital gains. I think I'm supposed to be able to cover the taxes on the conversion and I don't think that will be a problem using my cash savings for at least the first 2 or 3 years. I've also got my taxable investment account. I don't anticipate any regular income from working going forward. I'm currently 50 years old.
Please let me know if you have any specifics or pointers on how these conversions actually work. I'm sure it's probably a lot simpler than it seems sometimes. Also, please let me know if I made any incorrect assumptions above. As always, thanks in advance for any input.
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I have not done this personally, but I think the cleanest way to do it would be to sell what you need to in the traditional IRA then convert the cash over to your Roth.
When you do the conversion, you have to wait 5 tax years before you can take the money out (if you convert that money in 2016 you can pull it out in 2021), so you will need to have cash/taxable account investments to cover you for that period.
Re: the pension, you should be able to roll that into the IRA without paying tax.
Congrats on pulling the trigger!
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There is no tax consequence from moving investments from a 401k to a tIRA.
There are no sales required for a tIRA-to-Roth conversion. Just call up the brokerage house and request a conversion. There is some paperwork to sign (or e-sign) and the company does the rest. It should all be pretty much transparent to you. However, going from one brokerage to another may require sales. If your Wells account has assets that Vanguard cannot accept, for whatever reason, Vanguard will advise that you have to sell.
Where is gets dicey is if you take a distribution from a tIRA with the intent of manually moving your money from one brokerage to another. If you don't complete it within 60 days you be hit with a tax bill and 10% penalty. I would let the company handle this.
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Hey all. Looking for some specifics on how exactly the Trad IRA to Roth IRA conversions are done.
Is https://investor.vanguard.com/ira/roth-conversion helpful?
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Thanks all. I am still confused and need to do more research. I understand that the roll-over/conversion of my work 401K to an IRA should be no big deal and have no tax implications. Hopefully, the same thing applies with the pension lump sum. I want to get both of those into a new traditional IRA at Vanguard.
I just want to make sure I use the proper method to get that money from the IRA into the Roth IRA and have everything work to my benefit. I guess this is the what we all see called the Roth conversion ladder right? I want to convert a certain amount of that money every year from a pre-tax IRA to an after-tax Roth. I understand this is supposed to be treated as regular income so I want to convert just enough to count toward my MAGI so that I qualify for good ACA subsidies every year going forward. I do not plan on needing to pull any of these funds from the Roth IRA until after I'm 59 1/2 since I've got my taxable investment account to pull from between now and 59 1/2 or later.
I guess I'll call Vanguard and talk with a rep soon and get their take on what I can do and need to do. I'm pretty sure getting the 401K and pension lump sum to them isn't going to be an issue since those are standard procedures as I understand it.
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I understand that the roll-over/conversion of my work 401K to an IRA should be no big deal and have no tax implications.
An anecdotal word of wisdom- try to make sure that the rollover happens in the same year.
A former coworker of mine once had a bear of a time with the IRS. I'm not sure of all the details, but from what I recall the rollover was one where Company A mailed him a check, that he then had to send on to Company B. Even though he was within the needed time frame, Company A had sent the check in December and Company B had deposited it in January, a new tax year. It apparently threw up all sorts of red flag audit stuff with the IRS. I don't know if this would happen today, but I think if I could avoid even having to worry about it, I would do so.
I'm pretty sure getting the 401K and pension lump sum to them isn't going to be an issue since those are standard procedures as I understand it.
I've done both with Vanguard and found it to be very simple and straightforward. Their reps are also really good, so don't hesitate to call.
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Your 401k dollars are pre-tax dollars. Rolling them into a rollover IRA is straightforward, and not a taxable event. Let them grow in the rollover IRA account.
Converting tIRA dollars to Roth IRA dollars usually *IS* a taxable event, and increases your MAGI. Many people save up in taxable accounts to cover expenses during the first 5 years of FIRE, and use those years of low income (and low tax bracket) to do the conversion.
Here's my understanding of it. I did this 2 years ago during a full-earning year, (I'm pre-FIRE) converted $39k into my Roth and ended up paying more taxes than it was worth. If I had it to do over again, I would have waited until after FIRE to start the ladder. Here are two examples - hopefully this will help. Single retiree will convert $30K/year for expenses. Tax brackets are different for married filing jointly (YMMV). [MDM, and others... please correct any mistakes]
Example 1:
Start today. Pre-conversion MAGI $120k. Post conversion MAGI $150k ($120K + $30K conversion). 28% tax bracket. Tax=$8,400
Example 2:
Start AFTER FIRE. Pre-conversion MAGI $0k by living off long-term capital gains from a taxable account - will pay cap gains of 0% if selling funds purchased >1 year ago and MAGI stays below the 15% tax bracket. Post conversion MAGI $30,000-to-$37,649. 15% tax bracket. Tax=$4,500 (i.e $1,900 more in YOUR account).
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The rollover between your workplace and Vanguard will probably require a phone call or two, plus some paperwork. Once the money is in Vanguard, converting to Roth is easy. You first need to open a Roth IRA. Once that's done, each conversion just requires logging into their website and saying you want to transfer money between the two accounts.
For tax reporting purposes, Vanguard will send you a 1099-R at the end of each year detailing the amount you converted. You'll need to report the conversion amount on Form 8606.
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Here are two examples - hopefully this will help. Single retiree will convert $30K/year for expenses.
Example 1:
Start today. Pre-conversion MAGI $120k. Post conversion MAGI $150k ($120K + $30K conversion). 28% tax bracket. Tax=$8,400
Yes.
Example 2:
Start AFTER FIRE. Pre-conversion MAGI $0k by living off long-term capital gains from a taxable account - will pay cap gains of 0% if selling funds purchased >1 year ago and MAGI stays below the 15% tax bracket. Post conversion MAGI $30,000-to-$37,649. 15% tax bracket. Tax=$4,500 (i.e $1,900 more in YOUR account).
Correct in intent.
Some nomenclature: AGI is the number at the bottom of the first form 1040 page (it's also the number at the top of the 2nd page). Without any tIRA contributions, MAGI is likely to be the same as (or at least close to) AGI. (https://www.irs.gov/publications/p590a/ch01.html#en_US_2015_publink100025076)
The amount of tax paid on long term capital gains and qualified dividends (LTCG&QD) is determined by the Qualified Dividends and Capital Gain Tax Worksheet found in the Form 1040 Instructions (line 44 for the 2015 returns). The amount of tax one has to pay on $30K of tIRA withdrawals will depend on the LTCG&QD amount, which in turn depends on how much of the taxable account withdrawals was gain, and how much was return of the original amount invested. E.g., there would be a significant difference between $30K of LTCG plus $30K of tIRA withdrawal, vs. $15K of LTCG (on an original $15K investment, for a total sale of $30K) plus $30K of tIRA withdrawal.
See the case study spreadsheet (http://forum.mrmoneymustache.com/forum-information-faqs/case-study-spreadsheet-updates/), using different LTCG numbers in cell B26, and cell B25 as the data table column input cell for the data table in cells P61:R562. For the last case in the above paragraph (and a 5 in cell P61), one gets
(http://s16.postimg.org/klcab07at/screenshot_37.png)
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Thanks for the additional info. Everything sounds like it's going to be straightforward then. Today was my last day of work so I'm officially FI'd and RE'd now! Just have to wait on my final payment with severance/last week of pay/vacation payout. I'll probably initiate my 401K rollover next week. I'm going to give it a few days for my last contribution to be complete. I maxed my contribution and catch-up contribution for this year with the exception of being $4 short of the $24K i was eligible to contribute.
I don't anticipate any income for next year other than dividends from my taxable account and a small bonus payout from work for this year. My plan is/was to use transfers from a traditional IRA to my existing Roth IRA as my income source for ACA subsidies. I guess that's still the plan until something happens with the ACA as we know it now. I've got plenty of cash savings and taxable investments that I shouldn't have to touch any of the IRA funds for quite some time. I'll be rolling my pension lump sum into the same IRA as well. I think I'll be in decent shape.
I'm going to wait and see what my net worth and invested assets are after everything is finalized. I should be quite a bit below the 4% SWR that I was basing FIRE once I get the pension lump sum and some/most of my severance/final pay invested.....maybe closer to 3.25%. That give me a good cushion I think. I think I'll take a little more time looking at the numbers now that I don't have a job to fall back on. No more OMY now! Thanks again for all of the info!