Hey guys, Did any of you convert your IRA / 401(k) to Roth IRA during long periods of no income, i.e. graduate school, business school or unemployment? I’m wondering if there are any reasons *not* to roll all my other retirement funds to Roth IRA this year. The only months of ordinary income I’m making is during my internship – three months – since I don’t work during the rest of the school year. Everything else is capital gains (or losses, hopefully not too much though). I expect that my taxes will be lower this year than in other years, but I’m just wondering if I’m overlooking anything obvious.
Regular IRA - Untaxed money going in, removed money taxed at marginal rate Roth IRA - Taxed money going in, removed money coming out tax-free It doesn’t have anything to do with how much money you’re making right now. It should depend on if you think paying the taxes now (roll it into a ROTH) to remove your money later tax-free is worth it. If you plan on retiring in the next 5-8 years it may not be worth it. If you plan to pass it along to an inheritent tax free or work for a while longer then it may be worth it. It’s also going to come down to how much money your IRA may make. Because Roth gains are not taxed under the regular (because you already paid for them), but the regular IRA gains will. So if you think the market is going bull next few years do it. If you think you’ll get minimal returns don’t. Really you should consult a tax accountant and look at hard numbers. Without more information it’s difficult for anyone to suggest.
No real reason not to do it. Just remember that you will be on the hook for paying taxes on that as ordinary income in the year that you roll over.
Can you roll a regular IRA into a Roth? Plus, I think Numi will be priced out of the Roth IRA pretty quickly. I believe it’s under 150k for individuals.
There is a limitation to the amount you can contribute to a ROTH that phases out for high income. Sounds correct. You can roll it though.
Related question to the tax experts: Can you have both a Roth and a regular IRA and put the max in both ? I understand that the max for a Roth is 16500 this year and about 6000 for an IRA, can we have both deducted ?
Max for the Roth is $5000 per year
You can contribute to both, but you can only deduct the traditional IRA, and you have to pay tax on anything that is rolled (you are essentially paying back the tax you deducted earlier when you initially contributed to the traditional). Numi, if you are planning to make a lot in the future, then it makes sense to roll as much of your traditional to a Roth in a year when you are making little, because 1) you’ll be in a lower tax bracket, and 2) you might not get to do it when you are raking in the bux. So if you aren’t employed during your MBA, that’s a good time to do it.
mo34 Wrote: ------------------------------------------------------- > Related question to the tax experts: > > Can you have both a Roth and a regular IRA and put > the max in both ? No, under current tax code there’s a max total for both > I understand that the max for a > Roth is 16500 this year and about 6000 for an IRA, > can we have both deducted ? $16,500 is the max for Roth 401(k) and elective deferral cap. That’s different from a Roth IRA.
bchadwick Wrote: ------------------------------------------------------- > > Numi, if you are planning to make a lot in the > future, then it makes sense to roll as much of > your traditional to a Roth in a year when you are > making little, because 1) you’ll be in a lower tax > bracket, and 2) you might not get to do it when > you are raking in the bux. So if you aren’t > employed during your MBA, that’s a good time to do > it. Thanks bchadwick. This answers exactly my question as stated. I appreciate the clarity.
numi Wrote: ------------------------------------------------------- > mo34 Wrote: > -------------------------------------------------- > ----- > > Related question to the tax experts: > > > > Can you have both a Roth and a regular IRA and > put > > the max in both ? > > No, under current tax code there’s a max total for > both > > > I understand that the max for a > > Roth is 16500 this year and about 6000 for an > IRA, > > can we have both deducted ? > > $16,500 is the max for Roth 401(k) and elective > deferral cap. That’s different from a Roth IRA. Oh yeah … right … so the max for 401(k) is 16500 ( that’s pre-tax). Anything else you can add to this (pre-tax) ?
^HSA contributions are tax deductible. That is another 2,650 for single or 6,100 for family I believe.
In pretty much every case it makes sense to convert to a Roth IF you can afford the tax liability. If you would have done it last year, you could have spread out the expense over two years. I believe this year you have to pay the whole thing come April. And, one of those things that’s so obvious people forget…you get taxed on the whole amount. I have a couple buddies that were so used to thinking in terms of cap gains they were surprised when they were on the hook for the entire amount.
If you are younger than 54.5 years old (10% penalty on distribution if converted account is held less than 5 years) and you can afford to pay the tax liability with funds outside of your IRA, it’s worth it. Paying the tax liability by tapping into the IRA is just dumb. Also, here are no RMD’s with a Roth, so your children/grandchildren may greately benefit from it as well.
Thanks for the thoughts guys. Sweep the Leg, thanks for the reminder. Realizing this is the general rule, are there certain states that don’t charge you state tax when rolling over to Roth IRA or do you have to pay taxes wherever you live?
This is on a federal level.
What about rolling a Roth 401k into a Roth IRA? Are there any limits? And is the cap on this raised if you’re leaving your employer and thus basically forced to roll-over?