So the tax I’m paying on this partial conversion is circa 28% (not great) but better than the top cap gains rate. Thank you! Just the hassle of submitting the paperwork for each conversion, (Apologies, I accidentally originally posted this within one of the existing comment threads, so reposting here as hopefully a new comment). If one contributes (or converts) to a Roth while they are in the 39.6% tax bracket and then retires into the 15% tax bracket, they made a poor decision. You’re creating a Roth contribution, even though you’re not eligible. Is the conversion basis calculation based upon the outstanding IRA basis at the time of conversion or at the end of the same tax year? If you're planning to roll over all your assets from a traditional individual retirement account to a Roth version, you might want to tap the brakes. You can’t withdraw say, $10,000 and declare that it’s all after-tax contributions. What if any are the number of times one can convert a traditional ira to a roth ira each year? Do the pro-rata rules apply? I am ready to fund my 2016 Traditional IRA and immediately convert to a Roth IRA. I already spoke to Washington concerning this vital matter in 2015. Hi Mick – It sounds like the two are the same, you’re moving money from one account trustee directly to another, so there’s no tax difference. Is there any tax difference >. But if you have the money available in other sources, you can rollover the entire 100k distribution, then pay the tax liability out of your other sources. If you're planning to roll over all your assets from a traditional individual retirement account to a Roth version, you might want to tap the brakes. Great article and very informative. 4) Any withdrawals taken before age 59.5 would be subject to the 10% penalty, as well as income tax on investment earnings since the conversion. And if so, I would think the taxes I’ve paid over the years on my ROTH contributions would be refundable. Total value is $30,000 with total contributions of $7,000. If you do request clarification, please get back to us with the determination. Hi Chris – Yes, the Roth conversion will apply to 2017, not 2016. Wouldn’t it be better then to have your money in a traditional 401k? Second, on the $13,000 contribution to the traditional IRA, it looks like $6500 from you and your wife. As you can see, you have to be careful when initiating conversion. Thanks so much! While Roth IRAs grow tax-free and withdrawals The answer: Maybe. 2) You’ve opened up a bit of a can of worms with this question. When should you retire? If so, the RMD portion would not be eligible for the Roth conversion. Jeff – do the same pro rata rules apply to employeer traditional 401Ks? Then, in two years, once my tax bracket is lower, I would like to transfer these funds to a Roth IRA and pay the taxes due at the time of the conversion at the lower tax bracket. This is a great article! During those four or five years I will be living off of my rental income which I am still depreciating and therefore the rent doesn’t show up as much income on my taxes. Oops! So the question is this: if this is your 1st time ever to do a backdoor Roth, will it be tax-free *even though* you have assets in other traditional IRAs, SEPs, etc.? But there’s a Part B to this strategy that’s equally important. This would have worked better if you’d left the money in the 401k rather than rolling it over into a traditional IRA, or directly into a Roth IRA. Thanks so much for your help! @ Sue That is correct. Many 401lk plans have very limited investment options. However, you may have to pay taxes and penalties on earnings in your Roth IRA. Quick question: What if when you retire, you end up being in a lower tax bracket than you’re currently in right now. We are thinking we should. On the 8606 it states traditional IRA, SEP IRA, and simple IRAs but does not mention Rollover IRAs. My interpretation may be wrong, or there may be an X factor in your situation that changes the whole outcome. Both myself and my wife have contributed to IRA in 2015 and converted it to ROTH IRA in 2015. Jan 5, 2017 – make a $5k non-deductible contribution to IRA account. Check with your employer to confirm. I understand that the IRA distribution is taxable for Income taxes. Roth contributions are the same as they are for traditional IRAs, at $5,500, but $6,500 if you’re 50 or older. I now want to roll over the Roth 401k dollars from my former firm’s plan into an IRA. Talk to them about how they will show the distribution. Is that allowed and is there a limit on how much i can convert? Hi Harold – since both IRA accounts were funded with nondeductible contributions, you are correct that only the gains on those accounts will be taxable. In Jan 2020 I rolled over from my workplace 401K Fidelity Pre-87 and Post-86 the funds to a Fidelity Rollover IRA (pre-tax) and Roth IRA (after-tax), respectively. Have you wanted to get a Roth IRA started but you think that your annual contribution is not enough to get you to the goal you have in mind? Even if you’re married filing jointly, you and your wife have totally separate accounts. I quit work at 40 years of age and have been living off of savings. However, when I retire, I guess the MAGI limitations go away, and I will begin converting. Can I do it then? Just a high altitude guess here, but I’m willing to bet the recommendation will be to wait until retirement, when income is presumably lower. You cannot make contributions to any kind of retirement plan unless you have earned income. Is it wise to leave the 401K as is or move it to the already existing Traditional IRA? I have a defined benefit plan, and expect to retire with $60,000 pension. When it comes to a Roth Individual Retirement Account (Roth IRA), the answer could be yes. Traditional IRA: Consists entirely of after-tax contributions. Do you know of such a calculation? That’s an excellent strategy Ed, I’d even say it’s an example of the best example since you’re minimizing the tax bite. If you use a tax preparer, they should have a similar capability. You mentioned in this article that there are low fee options for opening accounts. There are also plenty of personal situations where a Roth IRA conversion would likely go against a person’s long-term goals. Is the pro-rata rule execution retroactive for the whole year? I am 89 yrs, and have a IRA at Vanguard for many years and want o know the difference between a Transfer to Transfer and a Same Transfer. My wife just retired from the same company I work for and we have the “new” (and not improved) cash balance pensions which grow at 3-4% a year so we plan to defer those along with SS to 70, opening the Roth conversion window. without running afoul of the pro-rata IRS rule? Maybe you could make four quarterly estimates, then make the conversion in the forth quarter, so you’ll be ahead of liability? If the answer is at the end of the tax year (regardless when i convert during the year), then i will have to wait one year before i convert 401K into new IRA # 2 as i don’t want to mix the two basis pools. That comes from $340,000 in existing IRAs plus the $6,500 current year non-deductibe IRA contribution. In reality, many retirees have a longer life expectancy than you might expect. You say it’s a way to go around Roth IRA contribution limit based on income, by making a contribution to a Traditional IRA, then converting it to Roth IRA within 60 days. But if you’re going to rollover the traditional IRA to a Roth, you may as well direct rollover the 401k to the Roth to avoid a double step. I’m wanting to isolate those nondeductible contributions and move them to a ROTH to tidy things up. Does it matter from whose traditional IRA we convert funds to our Roths? Is this allowed or will she be penalized due to income limits? trigger the IRA rollover containing my 2017 contributions to my Roth account. Here is my situation. He has a 250k IRA and received first RMD $8549. ??? But you can still do another conversion in 2017 since there are no limits on conversionss. Also note that, before you do anything drastic or begin a conversion, it can be smart to speak with a tax advisor or financial planner with tax expertise. Pretty good informative article. I converted an IRA to a Roth IRA and paid taxes last year on the amount of the converstion. It’s not earned income, and no FICA tax is taken out on it, so it won’t have any effect on your social security benefit. Ask the financial institution, but I think not. My sticking point is that a myth was inadvertently supported – that is, that the Taxable Income that dictates your tax bracket will affect all of your taxable income (“If he is in the 28% income tax bracket, he will owe $33,600 in income taxes, or $120,000 X .28″). That means two conversions in 2016. @James You can’t do a “Roth SEP IRA” but you could setup a Roth Solo 401k. For the stocks, the taxable amount was the closing price on the day before the transaction, which seems fair. Is the SEP balance considered when calculating the taxes (just as a simple Ira would be) for converting the non-deductible Ira and therefore will result in at least some tax consequence? Thanks, Dan. Thank you. I currently work over seas and claim the FEIE. FICA taxes are due on earned income only. Are there any pitfalls I need to be aware of? In prior years Ive done $20k roth conversions. In fact it’s a great strategy. Will I incur taxes converting from a Traditional IRA (after-tax dollars) to a Roth IRA (after-tax-dollars). You could execute the … This would effectively allow me to make $5,500 in Roth IRA contributions every year to an existing (key point here) Roth IRA account. This rollover/transfer was done ~6 months ago between institutions: Edward Jones to Vanguard. Not all employers allow this. You don’t sleep much do you!!! Here’s where the IRS pro-rata rule applies. Or can I also convert an external, traditional,, non delectable IRA to a Roth. Can the stocks be moved to a ROTH IRA? 3) The 10% penalty does not apply on the conversion itself. Hi Jehan – The IRA and 401k are separate considerations. The Roth IRA also has an income contribution limit, after which you cannot make a direct contribution at all. My wife has an IRA that has about 150K with about $25k non-deductible contributions. I assume that RIRA means rollover IRA? So, the conversion (which, as already mentioned, is actually a distribution) will not be reported on tax year 2016. I plan on retiring early just before I turn 61 years old. There are probably special provisions that will affect the outcome one way or another. Hi Natalie – You may want to see about getting the Roth contribution reclassified for 2016. I would like your thoughts on my issue: a) I have a Traditional IRA of $8,000 (all funded by non-deductible funds in 2016). No early withdrawal penalty either. You can Sebastian. is this possible? Did you notice the curveball I threw in there? First, make sure you open a Roth IRA with one of the top brokerage firms. I have 457 (Deferred Plan) at work, with all the contributions pre-tax. Somehow I don’t think it will involve getting a refund on the taxes you paid on the Roth contributions. Should I just pay an excise tax for the amount over what I was allowed to contribute, or can I just withdraw the overage? There are 3 background notes before the question: (1) Form 8606, in the instructions for line 2, reads: “Generally, if this is the first year you are required to file Form 8606, enter -0-.”. ROTH conversions can be a great strategy but you need to be careful. In an effort to try to correct this situation, I want to do a “Roth Conversion” rolling over this “Rollover IRA” into a Roth IRA, paying taxes on the $650 income on my 2017 income tax return (I assume I will file IRS Form 8606). Even though it’s good to have a few early retirement strategies up your sleeve, the more I looked into a Backdoor Roth Ladder, the more I realized that this technique really does have some pretty significant advantages over a 72t. I also have a company 401K & pension (100% pretax contribution). It means you can convert the full amount of the rollover. In the above conversion, (if done properly) would I be subject to a 10% early withdrawal penalty? Hi Georgr – That’s a good plan, paying the tax liability with non-retirement funds. EA’s aren’t CPA’s but from a tax prep standpoint they’re just as good. The year 2020, extraordinary in many ways, appears to be an optimal year for Roth conversions. In March of 2014 I did a Roth conversion of my non-deductible IRA’s which were the only IRA’s I had at the time and later in the year I rolled over a large 401k into an IRA and I was wondering if I can exclude my rollover when determining the tax impact of the conversion since it was done subsequent to the conversion or do I need to aggregate the IRA’s as of 12/31/14 to determine what percentage of the conversion is taxable? For retirement plan-to-Roth IRA conversions, a special rule in IRS Notice 2014-54 allows an investor to select how the pretax amount is allocated when the withdrawal is sent to multiple destinations. It doesn’t look like it but perhaps there’s something I haven’t thought of about it. That is simply not accurate. But you’ll have to see if your employer plan will accept funds from the SEP IRA. There are two problems even with that; if you are in the top 1%, you are ineligible to contribute. Basically, is prorata chronological or does it look at your average annual basis? It doesn’t look like there’s much wiggle room here either, which is highly unusual with IRS regulations. Is there any advantage in doing a Roth conversion this year? any tax form I need to file when I convert my traditional IRA to Roth IRA? You will have to allocate at least some of the conversion balance to tax-deductible contributions, plus the investment earnings in the plan. 2001 was 16 years ago, so the rules may have been changed. Thanks! Hi Jeff, I am 61 and retires and my wife 57 and works very little. Just understand that any Roth conversion for the year must be completed by Dec 31, and will apply to that calendar/tax year. I want to save more. Hi Jeff, awesome article. Is that right? In this scenario, I thought we would end up paying taxes on $325 (250k – my wife’s + $75k conversion). Thanks. Hi Bob – My response assumes that the Con Edison stock is in a traditional IRA. She makes about 40k and I make 65k annually. If you’ve seen confusion claims in this post or in the comments, we’ve recently clarified the rules on Roth conversions. But once again, consult a CPA. Is there a limit on how many conversions from a traditional IRA into a Roth I can do in a lifetime? If so, could I get around that by transferring funds out of the Roth 457(b) into my existing Roth IRA account that has been open for more than 5 years? Anthony it ’ s Roth IRA free even without an extended period of post-conversion.! Without any taxes due, i.e administrator ), it ’ s always helpful to demonstrate the,... 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