Converting 401k to Roth IRA

I have a Roth IRA and a 401k (actually it's a 457 because it's with
the government but let's just call it a 401k) - not a Roth 401k, just
a regular 401k.
When I retire, can I rollover/convert my 401k into my Roth IRA? Is
there any limit on the amount of money I can convert?
What kind of tax percentage can I expect to be taken out of the 401k
when it is converted?
And then once converted, I should never have to pay tax on any of it
again, right?
Reply to
iarwain
iarwain writes:
Yes, if current law remains unchanged.
No, if current law remains unchanged.
It depends. The amount converted will be added to your adjusted gross income. In addition to that amount being directly taxable, it could cause more of your SS benefits to be taxable that year and could reduce various itemized deductions (like the medical expenses deduction), further increasing the tax on the conversion. But what that tax is will depend on your overall situation.
For example, if not counting the conversion you're already in the 25% bracket, you can be sure that the extra tax caused by the conversion will be AT LEAST 25% of the amount converted, and probably rather more.
The only real way to tell is to do a return without including the conversion and then put in the proposed conversion (and try different amounts) and see how the tax changes. Obviously, this is most easily done using a tax program rather than on paper :)
Yes, if current law remains unchanged. But who knows? I certainly won't be shocked if down the road any or all of the following happen as the government becomes desperate for cash to try to prevent its financial collapse: * Roth IRA distributions treated as income for purpose of computing taxable portion of SS benefits. * Roth IRA distributions treated as an AMT preference item. * Roth IRAs effectively turned into non-deductible trad IRAs by having earnings become taxable with withdrawn.
Reply to
Rich Carreiro
Thanks Rich, I hadn't realized the converted amount would be added to my adjusted gross income. That alone kind of puts me off of the idea.
If they change to laws to make you pay taxes (again) on the Roth distributions, it kind of defeats the purpose, doesn't it?
Reply to
iarwain
Rich Carreiro writes:
This seems likely. As do some other possibilities which will effectively start to make SS a bit more means-tested.
This one seems pretty unlikely, but I could certainly be way off. It would be pretty outrageous. Basically it would make Roth distributions taxable outright.
I can see, more likely than that, some kind of "surtax" on Roth distributions, kind of like how they're currently planning on imposing that new 3.8% medicare tax on investment income which previously was not so taxed.
That would be ugly. Especially for anyone who could have had a traditional deductible IRA, that would make, retroactively, the Roth to be very much worse than the traditional would have been.
But overall, at this point, since we can't know what's going to happen, I do still like the idea that folks should have some tax diversification in their investments - some in traditional IRAs (or equiv), some in Roth accounts and some in taxable accounts.
I like the idea of making Roth conversions opportunistically - say you have a low-income year when between jobs - to take best advantage of low-tax times. But not to rush into the conversions if you are in a high tax bracket right now unless you have really worked the numbers and plan. (For example, for very high net worth people who expect their estates to be hit big with estate taxes, Roth conversions can be quite valuable).
Reply to
mifp
snipped-for-privacy@meyersmoney.com writes:
Though I think that they'd only count for that calculation the portion of the distribution allocable to earning. I don't think they'd be able to get away with subjecting the part of the distribution that represents a return of contributions to any tax, even an indirect one like the SS taxability calculation. (At least not until the desperation level gets really, really high.)
Though I wouldn't be surprised if hand-in-hand with this the distribution ordering rules are changed so that they are in line with trad IRAs -- distributions are pro-rata a return of contributions and a distribution of earnings, rather than the current rules where contributions/conversions come out first and only when they've all been recovered are earnings deemed to come out.
Well, see above. I think the only part that would be the preference item would be the portion of the distribution allocable to earnings, not the whole distribution. (At least until the fecal matter really strikes the rotary air distribution unit :).
Well, this could be done piecemeal. The value of all your Roth IRAs as of the date of enactment of the proposed law could be grandfathered, but any earnings after the enactment of the law would be taxable on distribution.
I also expect that even if Roth IRAs are never subject to any additional tax, RMDs will eventually be applied to them to force the money back into the regular, taxable world, rather than letting them be stretched out for decades via young beneficiaries (I know beneficiaries are subject to MRDs on inherited Roths, but the withdrawal rate is generally going to be a lot lower than it would have been to the decedent if MRDs applied to Roth owners.)
Another trick to consider if you have a high trad IRA balance with significant embedded non-deductible contributions and access to a 401(k), either a typical 401(k) with your employer or a "solo" 401(k), that accepts roll-ins from trad IRAs, is to roll only the pre-tax trad IRA money (deductible contributions and earnings) into the 401(k), leaving the after-tax money behind in the trad IRA. Then convert the trad IRA to a Roth at little or no tax cost. This is a nice way to get non-ded trad IRA contributions into a Roth.
And yes, this can actually be done, believe it or not. I guess it hasn't been written about in the WSJ enough for the IRS to seek to wipe it out yet 1/2 :). But there is some subtlety and red tape. I believe Kaye Thomas and Ed Slott have written about what you need to do.
It's also nice because if your situation is such that you're ineligible to make deductible trad IRA contributions and ineligible to make Roth IRA contributions due to AGI, then once you've cleared away your trad IRAs, you can effectively make Roth contributions by making a non-ded contrib to the trad IRA and immediately converting it to the Roth.
Reply to
Rich Carreiro
You can convert the 401k into a regular IRA. Then you can convert the regular IRA in full or in part to your Roth IRA.
You will have to pay a tax on the conversion. So limit the amount you convert to stay in a lower tax bracket. Also pay the taxes out of your regular funds to maximize the amount that will go into your Roth IRA.
It will be at your marginal tax rate which ranges from 10% to 35%.
Right. And it should be your last source of funds for your living expenses.
-- Ron
Reply to
Ron Peterson
[The following was posted by JoeTaxpayer - caught by the filters. If anyone posts anything and it doesn't show up, please take a look at and let me know if your post was in there. --David]
What kind of tax percentage can I expect to be taken out of the 401k when it is converted?
It will be at your marginal tax rate which ranges from 10% to 35%.
If this is done while OP is retired, the extra income can be the trigger to make his Social Security taxable and the 25% bracket range can have an effective 46.25% rate. Once SS is fully taxed, he's back to his rate. And some have such a nice pension and/or high RMD, they blow through that range anyway. It's just another thing to be aware of.
--snip--
Reply to
mifp
Doesn't your note about 'nice pension and/or high RMD' also apply to nice annuity payouts and/or high periodic withdrawls? What do you think about the strategy put forth here:
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on avoidingthe 'tax torpedo'?
======================================= MODERATOR'S COMMENT: Please remember to leave in a little context
Reply to
Otis
I wrote "If this (A coversion from IRA or 401(k) to Roth) is done while OP is retired, the extra income can be the trigger
to make his Social Security taxable and the 25% bracket range can have an effective 46.25% rate. Once SS is fully taxed, he's back to his rate. And some have such a nice pension and/or high RMD, they blow through that range anyway."
Doesn't your note about 'nice pension and/or high RMD' also apply to nice annuity payouts and/or high periodic withdrawals?
What do you think about the strategy put forth here:
formatting link
on avoiding the 'tax torpedo'? The article discusses strategies to delay, and thereby increase Social Security payouts. I liked the article, as it provided some good ideas. The best is a strategy I advocate, converting to Roth to fill the 25% (or even 28% bracket) during the pre-Social Security period. Thanks for that link.
/JoeTaxpayer
Reply to
JoeTaxpayer
Rich Carreiro writes:
[picking up an older thread]
The trick with that is that not all of the pre-tax money can be rolled into a new employer-based plan like a 401(k) (solo or not). Only money which had been rolled into the IRA from a previous employer (and the growth attributable to it) may be so rolled.
If you have, say, $100,000 of rollover money, plus $20,000 of non-deductible contributions, plus $20,000 of deductible contributions (and I'm going to ignore all growth here for the moment, but that makes it messier), then you may only roll the $100,000 into the new 401(k). You still then have an IRA with $40,000 and $20,000 basis -- which is vastly better than a $140,000 IRA with a $20,000 basis (for the sake of conversions). But still, even after doing the 401k trick, you have to pay taxes on half the money you convert.
As far as I know, it's as simple as rolling employer-based IRA balances into the new employer-based plans. And to keep this simple, I strongly recommend that folks never rollover employer-based plan money into an IRA account which also holds directly contributed amounts. It used to be that if the money got entangled, you were never allowed in the future to roll it back into an employer plan. Now, one is allowed to, but the one is subject to figuring out the proportion which is attributable to the employer-plan rollover and which is not.
I know a lot of folks doing just that.
Reply to
David S. Meyers CFP
I know this requirement (for a "rollover IRA") has been eliminated. No need to keep 401(k) separate from Tradition IRAs to transfer into new 401(k). Finding a citation is another story....
Reply to
JoeTaxpayer
JoeTaxpayer writes:
I'm pretty sure it was part of 2001's EGTRRA. I am certain that EGTRRA cleaned up some other rollover provisions (ie. roll form 401(k)->IRA->403(b) became possible when before it had not).
This page also puts it on EGTRRA:
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Nevertheless, just because something is permitted doesn't mean it's necessarily a good idea.
I generally recommend that folks do *not* commingle their contributory IRAs and their Rollover accounts. Why make any of this more complicated than necessary? Other than getting two statements instead of one (and, I suppose, potentially making rebalancing a little messier), I see no major downside to keeping conduit/rollover IRAs separate from contributory IRAs. No reason not to mix multiple employer plans into one rollover IRA, though.
Reply to
David S. Meyers CFP
Can a PDF from the IRS be used as a citation? Try this link; the rules changed on this several years ago and rollovers are now more liberal:
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-Tad
Reply to
Tad Borek
"David S. Meyers CFP" writes:
One potential reason not to commingle is the bankruptcy exemption. If my memory serves correctly, IRA accounts funded entirely from QRP rollovers are entitled to an unlimited bankruptcy exemption. IRA accounts that contain even $1 of contributory funds are "only" entitled to a $1,000,000 exemption.
Reply to
Rich Carreiro

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