Author Topic: Why not always rollover 401k to Roth IRA?  (Read 1482 times)

M

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Why not always rollover 401k to Roth IRA?
« on: July 03, 2021, 04:21:39 PM »
Hello! Still trying to learn! I cant seem to find any rules or restrictions on being able to rollover 401k to Roth IRAs, no matter the age. The Roth ladder and 72T Sepp are options for when under 59.5 years old. But whats stopping us from continuing to rollover the money into the Roth IRA after that age until the 401k balance is zeroed? Between ages 59.5 and 72 when RMDs will start, we were thinking we should be maximizing rollovers within ACA and tax considerations, and it seems rolling into our Roth IRAs would be better than straight withdrawals to our savings. That way the money could grow tax free in the Roth IRA, instead of us having to pay taxes on interest or dividends in savings or taxable accounts. Plus isnt a Roth IRA a better vehicle when leaving to heirs (which we dont have) or leaving our money to charity? What am I missing? Thank you!
M
« Last Edit: August 30, 2022, 06:27:40 PM by M »

gocurrycracker

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Re: Why not always rollover TSP/401k to Roth IRA?
« Reply #1 on: July 03, 2021, 09:06:13 PM »
You can do roth conversions after age 59.5
(correcting your phrasing - there is no rollover from a TSP to a Roth IRA)

Roth conversions are taxable events - paying tax now might be more expensive than paying tax later


The RMD probably isn't as big of a deal as you might be thinking - it starts with withdrawals of less than 4%. Half of all taxes paid from RMDs occur after age 90


A Roth IRA isn't a better vehicle for inheritance or charitable contributions more times than not - you can contribute an entire RMD to a charity with zero tax (google QCD), but if you did a Roth conversion first (and pay taxes) the charity gets less $

M

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Re: Why not always rollover TSP/401k to Roth IRA?
« Reply #2 on: July 29, 2021, 06:41:26 AM »
Thank you for these answers. I think Im so driven to get money out of the 401k and save money in the Roth IRA because its been emphasized so much elsewhere to save the Roth IRA until last. We know well have to pay taxes but I think your approach of not rushing makes sense for us.

Youve helped me in another post to back off early conversions to stay below ACA limits - we landed on targeting 200% FPL so we can meet our income needs while we should be able to get a good plan. This will put us in the 10% income tax bracket. Once pensions and then later SS starts, well be in the 12% income tax bracket (hopefully). We should still have space to max out that bracket. We should max that bracket out with the conversions, correct?

With QCDs, is the main idea for our application that we essentially give the money away to charity and dont have to count it as income? So if with our pensions and SS well be in the 12% bracket and I max out that bracket with conversions that count as income (which we will use to live), and if our RMDs are more than that then we give it to charity without taxes? And if we need that money to live then well just have to pay the higher taxes on it?

I think Im catching on, hopefully! Thank you again for making this easier to understand!
« Last Edit: August 30, 2022, 06:28:57 PM by M »

gocurrycracker

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Re: Why not always rollover TSP/401k to Roth IRA?
« Reply #3 on: July 30, 2021, 01:54:22 AM »
With QCDs, is the main idea for our application that we essentially give the money away to charity and dont have to count it as income? So if with our pensions and SS well be in the 12% bracket and I max out that bracket with conversions that count as income (which we will use to live), and if our RMDs are more than that then we give it to charity without taxes? And if we need that money to live then well just have to pay the higher taxes on it?
Yes

Youve helped me in another post to back off early conversions to stay below ACA limits - we landed on targeting 200% FPL so we can meet our income needs while we should be able to get a good plan. This will put us in the 10% income tax bracket. Once pensions and then later SS starts, well be in the 12% income tax bracket (hopefully). We should still have space to max out that bracket. We should max that bracket out with the conversions, correct?

Whether maxing out the 12% bracket later in life is beneficial is unclear. If you are on the ACA then you need to figure in the ACA tax - let's say that is 15%, so now your combined marginal rate is 27%. You need income of more than $350k/year to pay that level of federal tax once you are on Medicare, and then only on the margin. (24% tax bracket for MFJ ends at ~$350k income.)
https://www.gocurrycracker.com/federal-income-tax-brackets/

Will RMDs add $250k+/year to your income? If your IRA is more than $5 million at age 80 it might happen for a few years. Maybe.


M

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Re: Why not always rollover TSP/401k to Roth IRA?
« Reply #4 on: August 01, 2021, 08:02:22 AM »
This helps me refine the scenario better! In the years from ages 62-65 when were collecting pensions, they will push us into a higher FPL. During those years well plan not to do any conversions no matter what tax bracket we land in so we dont further reduce the ACA subsidies. From ages 65-67 when were just receiving pensions but have Medicare (not ACA), if we land in the 10% bracket, wed just stay there. But it is likely we will land in the 12% bracket with just our pensions and then once SS is added at ages 67 we will be. At the point when were not on ACA and weve reached a higher income tax bracket (in this example 12%) from pensions and SS, thats when it would be to our advantage to max out that bracket, right?

gocurrycracker

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Re: Why not always rollover TSP/401k to Roth IRA?
« Reply #5 on: August 01, 2021, 11:40:41 PM »
That would work as a plan, yes.

If you want to refine it, try thinking about it in terms of the tax rate you are paying vs absolutes of "I won't reduce ACA subsidies no matter what." It can be quantified.

Before age 62 with planned income of 200% FPL (~$34.5k family of 2), if you do a $1000 Roth conversion you will pay ~$150 extra in ACA premiums for the year, $100 in Federal income tax, and maybe $x in State income tax. So $250/year plus state for an effective tax rate on the conversion of 25%+ (250/1000.)

It is perfectly OK to reduce ACA subsidies if the alternative is paying more than 25% on IRA withdrawals / Roth conversions / RMDs later.


From 65-67 - Say you are in the 12% bracket. 12% is less than 25% by a significant amount.
You could fill the <= 12% bracket(s) and the 22% bracket and still come out ahead vs the 25% tax rate from previous years. That is ~$200k of AGI for MFJ. In theory you could even fill the 24% tax bracket (AGI of ~$350k) and come out ahead, although this will impact Medicare premiums (also acting like a tax, albeit not as severe as the ACA impact.)

From 67+ with SS, you will be in the 12% bracket but still have some headroom. Small-ish Roth conversions will be taxed at 12%.


A few larger Roth conversions for 3 years (65-67) will go a long way towards not having a $5 million IRA at age 80.
Those could be 60k-ish in size to fill the 12% bracket or 160k-ish size to fill the 22% bracket. Decide at that time based on how big your IRAs have grown -> bigger IRA means do a bigger Roth conversion.

Then 4 more years of small-ish Roth conversions (30k +/-) until RMD starts at 72. Can do some Roth conversions still if RMD doesn't fill the 12% bracket.

For the duration, enjoy life. If you do pay more tax later at age 80+ it is because the markets have done well for you and you haven't had to worry about money at all for decades. I'd pay that happy tax every chance I got.