Monday, January 20, 2014

Rollover 401k with $40k into IRA : Tax Implications?

Over at Reddit we read the following discussion, 
all 10 comments
[–]United StatesNothingKing 5 points  ago
What will the tax hit be like? Will the whole $40k be taxed at 28%?
Most likely, unless you have enough deductions to drop you down to the next tax bracket.
If so, can we convert half for the 2013 return, and half next year?
Yes. You can drag it out as long as you like.
Any reason to wait on the conversion?
I would wait until your tax bracket is lower. If that means retirement, then that is what I would wait for.
Different ideas altogether?
If you expect your incomes to increase in the next few years, that will put you over the income limit to contribute to a Roth IRA normally, you will not want to have a t-IRA. You can either do the conversion and pay the taxes on it, or roll it into an existing 401k if the plan allows it.
[–]consolidate123[S] 1 point  ago
Good info, thanks for the response. I think stretching it out over a few years makes the most sense (maybe wait for when we have kids and have more tax deductions). The ~$11k hit would be rough at one time.
One more question: my IRA is a Roth. Does it make sense for my wife's to be a t-IRA for tax-diversification reasons? I guess this would be a bit of a hedge in case we are in a lower tax bracket at retirement. Thoughts on that?
[–]United StatesNothingKing 1 point  ago
Does it make sense for my wife's to be a t-IRA for tax-diversification reasons?
No, because at your income level, you don't qualify for a tax deduction on a t-IRA, so you should be doing Roth if you are doing an IRA. At your income level, you would probably benefit more to be contributing more to a pre-tax 401k, to reduce your taxable income, before doing a Roth IRA.
[–]Zagor64 3 points  ago
Why do you want to convert it to a Roth IRA? Roll it over to a traditional IRA at Vanguard (not a taxable event). There is no need to convert to Roth IRA unless you are sure that you will be in a higher tax bracket at retirement than you currently are.
[–]consolidate123[S] 1 point  ago
That's why I want to convert. I think we're likely to be in a higher tax bracket by retirement.
[–]Zagor64 1 point  ago
Why do you think that? Do you plan on working while in retirement? Are you really going to need more than 150k a year in retirement? I guess you really plan on living it up.
[–]consolidate123[S] 1 point  ago
I guess I was thinking of the tax bracket at retirement vs. during retirement.


Post a Comment