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?

iarwain <> writes:

> When I retire, can I rollover/convert my 401k into my Roth IRA? Is

Yes, if current law remains unchanged.

> there any limit on the amount of money I can convert?

No, if current law remains unchanged.

> What kind of tax percentage can I expect to be taken out of the 401k
> when it is converted?

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

> And then once converted, I should never have to pay tax on any of it
> again, right?

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by having earnings become taxable with withdrawn.

--
Rich Carreiro rlc-

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?

Rich Carreiro <rlc-> writes:

> 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.

This seems likely. As do some other possibilities which
will effectively start to make SS a bit more means-tested.

> * Roth IRA distributions treated as an AMT preference item.

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.

> * Roth IRAs effectively turned into non-deductible trad IRAs
> by having earnings become taxable with withdrawn.

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).

--
David S. Meyers, CFP(R)
http://www.MeyersMoney.com

writes:

> Rich Carreiro <rlc-> writes:
>
>> 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.
>
> This seems likely. As do some other possibilities which
> will effectively start to make SS a bit more means-tested.

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.

>> * Roth IRA distributions treated as an AMT preference item.
>
> 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.

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 .

>> * Roth IRAs effectively turned into non-deductible trad IRAs
>> by having earnings become taxable with withdrawn.
>
> 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.

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.)

> 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

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.

--
Rich Carreiro rlc-

On Jun 16, 7:31*pm, iarwain <iarwai...@hotmail.com> wrote:
> 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?

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.

> Is there any limit on the amount of money I can convert?

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.

> 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%.

> And then once converted, I should never have to pay tax on any of it
> again, right?

Right. And it should be your last source of funds for your living
expenses.

--
Ron

[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 <http://stump.algebra.com/~mifp/rejected/threads.html>
and let me know if your post was in there. --David]

>From JoeTaxpayer:

On 6/21/11 11:41 AM, Ron Peterson wrote:

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--


--
David S. Meyers, CFP(R)
http://www.MeyersMoney.com

Rich Carreiro <rlc-> writes:
> writes:
[picking up an older thread]

>> 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
>
> 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),

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.

> 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.

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.

> 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.

I know a lot of folks doing just that.


--
David S. Meyers, CFP(R)
http://www.MeyersMoney.com

On 7/14/11 2:17 PM, David S. Meyers CFP wrote:

> 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.

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....

JoeTaxpayer <> writes:

> On 7/14/11 2:17 PM, David S. Meyers CFP wrote:
>
>> 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.
>
> 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....

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:
http://www.benefitplans.com/retireme...conduitIRA.asp

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.

--
David S. Meyers, CFP(R)
http://www.MeyersMoney.com