Author Topic: What should I do with my traditional IRA?  (Read 1667 times)

SachaFiscal

  • Bristles
  • ***
  • Posts: 270
What should I do with my traditional IRA?
« on: September 15, 2016, 04:06:10 PM »
I have a Traditional IRA with Vanguard that I opened a few years ago to consolidate 401Ks and Rollover IRAs from previous employers.  I make too much to deduct contributions, but the past couple of years I put in the max amount $5500. But this was non-deductible. So now I have a mixed IRA which I am learning may be messy, tax-wise. So I'm wondering what I should do with it.

1. Rollover into a Roth using backdoor conversion (can I do this regardless of what my income is?)
2. Keep contributing the max amount (non-deductible) every year until I retire, then roll it over to a Roth when my taxable income is lower.
3. Stop contributing to it and contribute more to my taxable account instead. Leave it alone til I retire then convert it to Roth when I retire.
4. Don't ever convert it and just take distributions when I reach 59.5. This will be long after I retire.
5. Other options I didn't think of?

Much thanks

dividendman

  • Handlebar Stache
  • *****
  • Posts: 1204
  • Age: 37
Re: What should I do with my traditional IRA?
« Reply #1 on: September 15, 2016, 05:14:09 PM »
#1. is the best option. You want the after tax money you contributed to your Trad. IRA in the ROTH ASAP so you can get tax free gains on it ASAP. The gains to the after tax money in your Trad. IRA will be subject to tax when you withdraw the money.

whodidntante

  • 5 O'Clock Shadow
  • *
  • Posts: 80
Re: What should I do with my traditional IRA?
« Reply #2 on: September 15, 2016, 08:25:56 PM »
If you have a 401k that accepts rollovers, convert the non deductible contributions to a Roth IRA and roll the remainder to your 401k.  There is a thread and a wiki entry over at bogleheads on this topic. Check the mechanics.

If you don't have a 401k, make some self employed income and open a solo 401k.

MDM

  • Walrus Stache
  • *******
  • Posts: 9924
Re: What should I do with my traditional IRA?
« Reply #3 on: September 15, 2016, 09:09:46 PM »
So I'm wondering what I should do with it....
You will also have to pay tax on the deductible portion of the IRA in the year you do the rollover.  If your marginal rate will be much lower in retirement, and retirement is only a few years away, it might be better to wait until then to do the rollover.

Some time with a spreadsheet to evaluate your options is probably worthwhile. 

SachaFiscal

  • Bristles
  • ***
  • Posts: 270
Re: What should I do with my traditional IRA?
« Reply #4 on: September 15, 2016, 11:06:35 PM »
Thanks for the responses. I am pretty sure I will retire in a few years if not sooner (barring a major market downturn). My DH will still be working though. I was thinking maybe to convert to Roth then.  But if I wait until then, should I keep contributing to the traditional IRA in the meantime or just put that money in my taxable account?

I didn't realize I could roll the deductible part into my 401k. Most of my IRA is rollovers from previous 401ks.

Another catch is that I use this IRA for some investments that aren't available in my 401k so I'm not sure if I should roll the deductible part into my 401K.
« Last Edit: September 16, 2016, 02:42:34 AM by SachaFiscal »

MustacheAndaHalf

  • Handlebar Stache
  • *****
  • Posts: 2264
Re: What should I do with my traditional IRA?
« Reply #5 on: September 15, 2016, 11:59:59 PM »
Rollover into a Roth using backdoor conversion (can I do this regardless of what my income is?)
To illustrate, let's say you have $90k pre-tax (401k rollovers) and $10k from non-deductible IRAs for a total Traditional IRA of $100k.  The IRS says you withdraw/convert equal percentages from both parts.  So if you convert $20k from this IRA into a Roth IRA, you will remove $18k pre-tax and $2k after-tax.  You'll owe taxes on the $18k of pre-tax.

Since you control the timing, you can pick a year with a lower tax bracket.  If you have high income this year, and will retire next year, you can wait and convert next year.  You will still need to fund your retirement expenses (and pay for tax on the conversion), so some money needs to be available outside retirement.  But converting to Roth while in a low tax bracket can make a lot of sense.

SachaFiscal

  • Bristles
  • ***
  • Posts: 270
Re: What should I do with my traditional IRA?
« Reply #6 on: September 16, 2016, 05:01:02 PM »
Okay I think I have a plan. My tentative plan is to retire either in 2017 or early 2018. I'll wait until 2018 to convert the entire IRA to Roth. I'll save enough extra to cover the taxes I'll have to pay in early 2019. DH will still be working and I'm not sure for how long so I won't wait until he retires to do the conversion because I want all those tax-free investment returns over that undetermined time period.

I guess I will continue to make the max contribution to the Traditional IRA until I roll it over so that I get that extra money in the Roth when I do the conversion. After I retire we will be under the income limit to contribute to Roth so we will just do that (instead of Traditional IRA contributions).