Roth IRA conversion?

[flyweightnate]

Edit: Seems like there's confusion about the question. For those who haven't heard the term a Roth IRA conversion is taking money already in a Traditional IRA/ 401k, paying income tax on that money, and moving it to a Roth account, where it can continue to grow tax-free. And... there's essentially no limit on how much you can convert, so long as you can afford to pay the taxes. (E.g if I had 100k in a 401k, I could take it all, move it to a Roth, and the only "penalty" is paying ~22k in taxes THAT YEAR. And now the money is post-tax and grows as such.)

Anyone here know lots about retirement accounts and taxes?

I'm relatively young (first gun was a Spyder Compact 2000), so I have some time ahead of me. I also have a healthy 401k, 75% of it traditional and the balance Roth. Like most people, I've lost around 15% this year.

Anyone have good rules of thumb on converting it to a Roth? I know it involves paying taxes out of pocket, but our marginal is under 25% (lots of deductions). So is it just how much tax I can afford, or is there a better metric to deciding whether to move it?

[waffles2]

Getting a financial advisor was the greatest thing I gifted myself for my 30th birthday. They'll answer all these questions and more. They call me monthly to talk about expenses, market trends, investments, etc.

[glaman5266]

I'm no pro at this, but I've been looking into this as well. I'm still learning though, so this might not help much...

My financial advisor told me to ballpark my tax in accordance with my tax bracket. If, say, you're in the 12% tax bracket then for every $10K you convert you'd pay $1200 in tax (or subtract that from your refund).

It might not offset the taxes by much, but if your significant other has an IRA you could jack up that contribution to help (less taxable income). I'm not sure exactly how this would all work with other deductions.

If you're looking to convert it all at once that might be one heck of a bill. If you don't want to take that much of a hit at once or if you rely on a healthy tax return then do it a little at a time.

Again, not a money/tax pro, but those were my main concerns.

EDIT: What waffles2 said. A financial advisor is a great thing to have & worth the cost IMO.

[Daltech]

I hire a specialist to put on my tires, balance and align them. Sure I could do it… It’s nice knowing the person doing does it for a living too.

[Lt. head-shot]

I did my conversion this year. I was out on sabbatical/unemployed, so my taxable income was going to be super low this year. I chose to roll over after losing a ton in the markets. So even though my "real" income is low, I essentially artificially inflated it by rolling over the 401K. I will get hit with a large tax bill next year. But it would have been even bigger if I did it one a year where I was making a normal salary. I figured it was better to do it now, since the longer it is in the roth, the longer it accumulates tax free, and the more benefit I will see.

Ok, I tried to type an example out like 5 times... but the graph does it better. Short answer is if you are maxing out or putting in the "true" same amount, Roth is the clear winner. (IE 10K in Roth vs 10K in traditional). It can get really complicated.... again same with the others, see a tax professional for official advice.

https://www.bankrate.com/retirement/401-k-or-roth-ira-calculator/

[BrickHaus]

Im no expert. Its really situational. Are you going to keep contributing to it? Is it currently a 401k, or Simple IRA? Are you talking IRA or 401ks in general? Your verbiage makes me think you mean 401ks, but Im not sure.

If we are talking 401k vs roth 401k. Figure out how much you need to bury into the traditional 401k to remain in the lowest tax bracket possible. Then bury the rest you can afford to into a roth. If you find you are in the lowest tax bracket, bury it all into roth.

You are going to pay taxes at one point on either, so you are gambling on yourself. 401k you avoid the tax burden this year but you pay taxes when you draw it so you are betting on them making less. Roth 401 you pay the taxes up front, and don't have to pay taxes when you draw them. So its betting they will make more. Being you are young. I'd say play the long game on the roth.

[BrickHaus]

Ill try to put it in relative terms for MY situation. My wife and I file jointly.

The Federal level brackets are wilder than the State of MN, so again you have to look at your situation.

Federal level, we will have to pay 22% taxes is we make over $83,550 combined. We will have to pay 24% if we manage to get over $178,150. And if we fly under the 83,550 mark its 10%. I don't think Ill work enough OT to hit that latter tier, BUT if I can bury enough money into my HSA ( pre tax) AND my traditional 401k, we can effectively make our household taxable income JUST below 83k. Than we fall into a 10% tax bracket. Greatly lessening our tax burden. So I have been trying to find the right balance of traditional 401k contributions to keep us in that tax bracket.

State level tiers vary and take further considerations, but the tier differences is a measly 1% for my situation, so not worth as much consideration.

At my last job, I was putting 15% of my income into a traditional 401k for that reason. We didnt have a roth option.

My current job has a roth option, but I dont intend on working as much OT as my last job, so I am putting 10% i to a traditional, and 10% i to a roth. So I increased my overall contribution for retirement, but Im offsetting my taxable income less.

All in all, Im not sure if my strategy is right,. I also wont know if it is working til taxes get filed, but I am constantly making adjustments to beat the system.

That being said, do you have an HSA also? Are you making max contributions to the HSA? If you aren't, start there.

Also, dont pay attention to what its making. You are young. Its gonna be all over the place, and you cant cash it out for a long rime regardless. Just let it ride, and hope its not totally crashed when you wanna retire.

[flyweightnate]

Yeah, I'm already focused Roth because it makes more sense at the moment. Texas has no state income tax, so that simplifies things.

The conversion is where I'm curious. Moving money that's already traditional 401k into a Roth IRA, to pay tax now and avoid it later.

Future contributions? Yeah, I'm betting on the Roth. I can't even afford to put enough into a traditional 401k to drop a tax bracket (being married with kids and all).

[flyweightnate]

Ok, so after talking to a finance guy... it's really just about how much tax I can afford to pay now. No time like the present, or at least within the next few years.

Anything I convert, I'm on the hook for probably 22% tax. (The current "default middle class" bracket that aligns with my household income.)

But... in 2026 the TCJA expires, and that tax rate goes to 25%, or if we get lucky enough to have some raises between now and then, some of the converted retirement funds might push into the 28% bracket.

So yeah... anyone thinking of this should probably strike while the tax rates are lower. And with some analysts suggesting market bottoming out in the next 6 months, even less tax per share!

[sniper97]

Part of the equation is future tax rates, which we don't know.
If you are in a 22% bracket now, is the Roth better? It seems like most calculators start the monthly contribution as the same for both Roth and traditional 401K. For example, $100/mo going into each. When really the Roth contribution should reflect the taxes paid now, 22% bracket = $78. My guess is that they are very close to each other (Benefit of Roth vs Traditional 401K).

[Siress]

You're definitely young enough to be putting as much into Roth accounts as you can afford - but only when you've maxed out the lower (cost/benefit) options. I generally like this flowchart from Reddit: Personal Finance Prime Directive. First and foremost, make sure you have a stable financial foundation (budget, family planning, emergency fund, health care, future earnings, minimum debt payments made). After that, if you can simplify the problem to annualized rates ([incentive rate + est. return rate - expense rate] for investment accounts, or just the APR for debts owed), then you can focus on tackling each account in full based entirely on which has the highest rate. Almost always, that results in following the flowchart above: invest to get employer matching, pay down debts with APR >~4%... and only then...consider the IRA. Like I said, it's not even a question of if you should be skewing toward Roth over Trad... it's a question of if you can really afford it.

And yes, I do agree with having 3 to 6 months of family expenses stashed in savings. All of these people fretting over 20% losses this year, and I'm barely even aware of it happening because I know two things: 1) in the ~200 years of using the stock market, these recessions have occurred numerous times yet the aggregate rate of return over alternative investments remains vastly superior. 2) I can weather the storm. These dips have taken <5 years to blow over, and I have enough savings and earning potential to sustain us through reasonably expected financial hardships during that time without touching investment accounts. The sad reality is that - even with all of that prep, our financial well-being is still dependent on employer provided healthcare. Without it, we'd go broke in a couple of years. We are still wage slaves. It's just less about wages and more about privatized, capitalist healthcare.

[sniper97]

https://hylinewealth.com/blog/sequence-of-investing-where-should-you-invest-your-money-first

Worth reading