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Message
Thoughts on converting to a Roth IRA
Posted on 4/21/14 at 8:23 pm
Posted on 4/21/14 at 8:23 pm
Quick history and future projections:
My wife has a state retirement account with a little more than $12,000 (non-vested) in it. We are moving to another state where she will probably accumulate about $15,000 in their state retirement system before we move back to our current state (at this point, the chances of her working upon us moving back is pretty slim). Upon moving back to our current state, I will have had a very significant salary jump that would exclude us (married filing jointly) from contributing to a Roth.
Here are my thoughts and questions:
1. By converting right now, we are in the lowest tax bracket we will ever be in. This would minimize taxes paid on this money. We would then be able to let the money sit in a Roth for the next 30 years (probably have minimal contributions after this).
2. She will accumulate the 15,000 retirement in the new system, but I am not sure if I will be able to roll this over to the Roth. She would not be able to roll over the funds until 90 days after quitting the job which would put us approximately September before we could do anything to the new retirement funds. There is a good chance by the end of that year, I would have exceeded the income cap to contribute to a Roth. Is it possible to backdate Roth contributions that late in the year?
3. I know a lot of people like Vanguard Roth IRAs, but what IRA would you recommend for a moderately aggressive to aggressive investment strategy for this situation?
Thanks for all of the help, and sorry for all of the words.
My wife has a state retirement account with a little more than $12,000 (non-vested) in it. We are moving to another state where she will probably accumulate about $15,000 in their state retirement system before we move back to our current state (at this point, the chances of her working upon us moving back is pretty slim). Upon moving back to our current state, I will have had a very significant salary jump that would exclude us (married filing jointly) from contributing to a Roth.
Here are my thoughts and questions:
1. By converting right now, we are in the lowest tax bracket we will ever be in. This would minimize taxes paid on this money. We would then be able to let the money sit in a Roth for the next 30 years (probably have minimal contributions after this).
2. She will accumulate the 15,000 retirement in the new system, but I am not sure if I will be able to roll this over to the Roth. She would not be able to roll over the funds until 90 days after quitting the job which would put us approximately September before we could do anything to the new retirement funds. There is a good chance by the end of that year, I would have exceeded the income cap to contribute to a Roth. Is it possible to backdate Roth contributions that late in the year?
3. I know a lot of people like Vanguard Roth IRAs, but what IRA would you recommend for a moderately aggressive to aggressive investment strategy for this situation?
Thanks for all of the help, and sorry for all of the words.
4
Posted on 4/22/14 at 4:12 am to GeauxTigers777
quote:
3. I know a lot of people like Vanguard Roth IRAs, but what IRA would you recommend for a moderately aggressive to aggressive investment strategy for this situation?
A Roth is just a tax wrapper.
What you meant to say is that a lot of people like Vanguard's mutual funds, and you are asking what would people recommend for a moderately aggressive investment strategy.
For the layman, I would say STAR
Just pour it in there and forget it exists until retirement.
This post was edited on 4/22/14 at 4:13 am
Posted on 4/22/14 at 6:55 am to GeauxTigers777
quote:
3. I know a lot of people like Vanguard Roth IRAs, but what IRA would you recommend for a moderately aggressive to aggressive investment strategy for this situation?
As Volvagia points out, a Roth IRA is a Roth IRA pretty much wherever you have the account. Most of us do like Vanguard's index funds but you can have them in any kind of account. For example, I have some invested in Vanguard funds in my regular brokerage and Roth IRA's at Schwab.
If you know you're going to have mostly Vanguard funds (as opposed to some other fund family) there's a slight cost advantage to having your account at Vanguard b/c they'll give you a slightly better deal, but it's a small difference. Unless you're talking about much larger amounts of money it doesn't make sense to worry about that.
Posted on 4/22/14 at 7:15 am to Volvagia
Thanks for both replies. Any comments on my situation and what you think the best action would be?
Posted on 4/22/14 at 12:23 pm to GeauxTigers777
quote:
Any comments on my situation and what you think the best action would be?
I'd roll her balance over into a new traditional IRA account (and not commingle the funds with any other assets you have) and then convert the traditional IRA to a Roth IRA.
Also, not sure what income thresholds you are at, but if you max out your 401k contributions, it lowers your income on the 1040;if you are on the line between being able to contribute or not contribute to either a traditional IRA or Roth IRA, maxing out 401k contributions could lower your income enough to allow you to contribute to one type of IRA.
Posted on 4/22/14 at 12:32 pm to GeauxTigers777
quote:
the lowest tax bracket we will ever be in.
Also this is never a guarantee. I had a well to do distant relative (was a millionaire) who was let go from his job and could soon be bankrupt.
Never know what medical emergency or job loss (for reasons out of your control) could happen.
Also pure income determines whether or not you can contribute to an IRA or Roth IRA, but you could have dependents/deductions (college tuition you pay directly, medical expense) that put you in a lower tax bracket.
A couple of years ago when the IRA conversion rules were set to expire I rushed to convert a rollover 401k to a Roth IRA and squarely put myself in a high tax bracket. The next year between deductions and increased 401k contributions I was in a lower bracket and would have paid 3% less tax on those assets had I waited a year to convert a portion of them (or even a few months).
Not to be negative but just to keep in mind
Posted on 4/22/14 at 12:46 pm to GeauxTigers777
quote:
Any comments on my situation and what you think the best action would be?
I don't know the details of how one "rolls over" funds from a state retirement account to a Roth, or even if it is possible. But assuming you can do that then it makes sense. Worry about specific investment choices after that.
Posted on 4/22/14 at 12:53 pm to meldawg399
One thing to consider.
If you're going to be at an income level leaving you ineligible for a Roth, you may want to avoid funding an IRA.
Once you pass the income threashold, you can look into the "back door" Roth funding process. However, if you have existing tax deferred IRA's you are required to pay taxes on all those accounts at that time.
As the OP stated, it may be worth taking the tax hit now and let that Roth start earning. The back door funding will allow you to add to this account in later years.
I'm not CPA but that is my understanding of this process.
If you're going to be at an income level leaving you ineligible for a Roth, you may want to avoid funding an IRA.
Once you pass the income threashold, you can look into the "back door" Roth funding process. However, if you have existing tax deferred IRA's you are required to pay taxes on all those accounts at that time.
As the OP stated, it may be worth taking the tax hit now and let that Roth start earning. The back door funding will allow you to add to this account in later years.
I'm not CPA but that is my understanding of this process.
Posted on 4/22/14 at 1:04 pm to Oenophile Brah
quote:
it may be worth taking the tax hit now and let that Roth start earning.
I think I was getting at the same idea. Roll the current assets into a traditional IRA, then convert the traditional IRA to a Roth, and thus paying taxes on it now.
I was just saying in the future when his income is higher, his only vehicle to fund any type of IRA is to max out 401k contributions to the limit, and if he can contribute to an IRA (either type) at that time go for it.
I wouldn't make any new IRA contributions until December of the tax year (or Q1 of the following year), because I'd want to make sure I was eligible. I made the mistake once of funding to a traditional IRA when I was ineligible and the IRS nailed me on it.
This post was edited on 4/22/14 at 1:06 pm
Posted on 4/22/14 at 3:48 pm to meldawg399
All great advice and I greatly appreciate it. The reason I can say with certainty that I will never be in a lower tax bracket is because I quite honestly cannot go lower. With 26,000 a year in school tuition knocking down a teacher's salary, I am about as low as I can get. Therefore my tax contributions are minimal for possibly the last time in my life.
In terms of being able to contribute later, I am fine with never adding or touching this money again if I can get the full 9 years of retirement into it. It would allow for a sizeable nest egg that we are not necessarily counting on. Thanks again, and any more suggestions would be appreciated.
In terms of being able to contribute later, I am fine with never adding or touching this money again if I can get the full 9 years of retirement into it. It would allow for a sizeable nest egg that we are not necessarily counting on. Thanks again, and any more suggestions would be appreciated.
Posted on 4/25/14 at 10:32 am to GeauxTigers777
quote:
My wife has a state retirement account with a little more than $12,000 (non-vested) in it
Your wife would forfeit any non-vested funds and any growth thereon in her retirement account upon a rollover and would only be entitled to rollover her contributions and the growth on that portion of the account.
personally not a big fan of conversion from traditional to roth; leave traditional in traditional and start investing in a roth.
1. big current tax hit with conversion, marginal tax rate can be effected. Whole amount converted will be taxed on top of annual income at your highest marginal rate.
2. larger investment pot (all things being equal, ie: time period and same investment funds) will yield a much larger final pot.
3. from personal experience, we have been very successful with my parents in realizing little to no taxation on withdrawals (including mandatory) from IRA(s). Additionally, have also taken advantage of several tax holidays for seniors to take substantial ($150K+) of capital gains with no taxation.
4.find and engage competent financial counsel it is well worth the investment (not talking about salesmen; ie: stockbroker/investment advisors etc.)
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