– 2). That’s actually what the backdoor Roth is. I plan on retiring early just before I turn 61 years old. I recently began a new job and my employer offers a ROTH 401k and ROTH TSP with 5% matching into each (for a total of 10% matching). If you are at least 59.5 the penalty will be waived, but you’ll still have to pay the regular tax. For more information, please check out our, Advertiser Disclosure (How We Make Money). I just did my 2016 taxes and realized I exceeded the income limits for a Roth IRA but I had already contributed $5500. I would like to convert both the dividends and the shares to a Roth IRA, as I feel that the longer it is in a traditional IRA the larger the tax bite will be when I am forced to take RMDs in approximately 6 years from now. Thanks, Sid. Thanks! However, I waited until last minute for the 2016 year to make the contribution. Is it perhaps just a glitch in his software system? I will be 59 1/2 in April. Hi Chris – Yes and no. I have a question about establishing the tax basis for your Roth conversion. Not sure about the four year spread on paying the tax on the conversion, and think it’s not likely. Think of a Roth conversion as a strategy to prepay your retirement income taxes. I DCA’d into a brokerage, did tax loss harvesting (TLH) along the way, and converted the brokerage to cash so my only tax bill was due to Roth conversions. Can I roll over a partial amount from my 401K into my Roth? I know… we all feel like we’re being taxed to death. I do not have any other tax deferred account anywhere. Based on the numbers above, we have $40,000 total after-tax contributions to non-Roth IRA’s. Again, thanks for your help. Just what I was looking for! I’d like to max my bracket falling just short of the 22% bracket. Even Billionaires pay the lower taxes in the lower brackets and only pay higher tax amounts on their taxable income in the higher brackets. And our incoming President has indicated a desire to lower rates even further. If I move $75k will i be paying 10% up to $18,650 and 15% between $18,651 and $75k – that’s it? Hi Kevin – I’m not going to make investment recommendations, since I don’t know you. Is the Irs ok with this? If you are over 65 and are paying for Medicare Part B, a conversion could inflate your income and subject you to much higher Medicare premiums. Can she convert to a Roth without tax or do they take into account my traditional IRA as well since we are married and charge tax accordingly on the total IRA balances between us? Oops! Or it doesn’t matter, as I can convert IRA to Roth for any amount, any time and any number of time regardless of tax year? You would have to be within the top 1% of income earners, then drop to the 10% bracket-only (in retirement) for a Traditional IRA to outweigh the tax benefits of the Roth upon withdrawal. Is it wise to leave the 401K as is or move it to the already existing Traditional IRA? For state income tax filing, do I report zero to Arizona or do I report 2/3 of the conversion amount to Arizona? If you were under 59 1/2, you’d need to follow the advice Nathan provided below. Love it. Thanks Greg. Will I be able to withdraw part of that original $50K to pay the tax bill without penalty? You should work with a CPA to see what options you have. You may as well pay the tax out of the Roth funds, since you’ll have to pay the tax either way. This is probably an excellent time for you to do the conversion for that very reason. Hi Mia – You’ll only have to pay the tax due on the converted balance based on your income in the year of conversion. I could not read all these comments to see if it came up, and I congratulate you on a good article! That is, if you convert, that’a an increase in AGI, and must be reported in MAGI which can kill your hopes of qualifying for marketplace insurance. Current 401k: Plans out maxing it out for the rest of his working years. When should you retire? If it then passes to your daughter, she will have to begin taking distributions from the plan based either on a five year payout, or a payout over her expected lifetime. I am now non resident and living in UK and have no USA income as of this year. it’s very informative. If he’d been faithfully filing IRS form 8606 with his returns, he would have a basis of non-deductible contributions to offset/preserve the non-taxability. After reading your article, I realize I can portion of convert my traditional IRA to Roth. If you’re going to use a Roth IRA conversion ladder to fund your early retirement years, you have to make sure there’ll be plenty of retirement assets left by the time you reach 59 ½. If you do both in the same year, the converted balance will apply to the pro-rata calculation as well. Roth conversions are popular topic and one of the most popular times to use them is before required minimum distributions kick in a t 70 1/2. Thanks. Can this be done? Thanks. You’ve got a lot going on right how, so proceed with caution! @Steve I know a lot of people that do that exact strategy. Regarding Conventional-to-Roth conversions, My wife and I both max out our employer 401ks and our combined incomes exceed the Roth contribution limits. Thank you for your help. I file taxes as unmarried with no dependents. © 2021 Good Financial Cents®. Also, I converted an IRA to a Roth somewhere around 2001 and was allowed to spread the taxes over four years. Does an inheritance IRA inherited from a non-spouse relative count against me in the pro-rata calculation or can I consider myself as having no IRAs if all I have is the inheritance IRA? My plan this tax year is to save up my IRA money in a separate savings account until I have the $6000 and then deposit it all into the Traditional at once, wait till it clears, and then convert all the cash into my Roth. Can I create two seperate ROTH IRA accounts with my broker, and rollover each different stock into each of the seperate ROTH accounts (one stock on one account, and the other stock in the other account)? In the above conversion, (if done properly) would I be subject to a 10% early withdrawal penalty? It will create taxable income which we will pay from savings. Then rollover the $80K IRA into my 401K in June 2015 and convert my non-deductible $5500 cash traditional IRA into Roth IRA in July 2015. If the conversion is done properly, you will not be subject to a 10% early withdrawal penalty.’. My husband and I both make over the Roth limits – we file married filing jointly. Some other countries have similar accounts, but they aren’t officially “Roths” or “IRAs” as defined by US tax code. Thank you in advance for time. I have used it to roll over funds from 401K from my previous employer. I’m somehow doubting the IRS will consider the separation without applying the pro-rata rules. That means that you can let the stock continue to grow for the rest of your life without being forced to liquidate it at any time. Or can I also convert an external, traditional,, non delectable IRA to a Roth. Many people believe it doesn’t make sense to convert a traditional IRA to a Roth IRA late in life. So maybe it isn’t such a good idea to assume that TAXABLE income will rise with age. You might contact the Roth IRA trustee to get an explanation, that way you’ll know what to do and what to expect going forward. I have 3 questions: 1. I am under the impression that a Traditional-to-Roth conversion starts a 5-year clock before income can be distributed from the account tax free. Check with your divorce attorney. Hi Eugene – 1. A Roth conversion cannot be used to circumvent the 10% early withdrawal penalty. In the example above, the total amount of retirement capital used for the Roth IRA conversion ladder is $400,000. This combination would keep me within 15% bracket. Sorry my question was confusing… perhaps just a reflection of my inner state! I have several old employer 401ks (pre-tax contributions), a traditional IRA (nearly all made with post-tax contributions) and a current 401k (pre-tax contributions) I’d like to convert some of my traditional IRA to a Roth IRA, but does the pro rata rule look at my old employer 401ks too? 3) Would I receive a 1099R from institution making the transfer from IRA to Roth IRA? just an idea to simplify the annual conversion…. Hi Scott – When it comes to retirement accounts, you and your wife are completely separate people. ie: Is the Conversion value set/ taxed on values at the Time of the Conversion or at Year End? Or does the backdoor Roth IRA have to create a new Roth account? Richard. If it’s rolled over into a Roth, taxes would apply. And based on what you’re saying, you probably won’t. A Roth IRA is funded with after-tax dollars, and qualified withdrawals are entirely tax-free. Each year I have to recharacterize some or all of my yearly contributions to a Traditional IRA. An option around that is to split the conversions into two (or even more years). Can I convert to Roth now, or should I wait to file a Form 8606 in April 2018 for tax year 2017 to avoid double taxation? Therefore, if you were to make a … But discuss it with your tax preparer. Specific to withdrawals from an IRA or Pension, correctly rolled into a ROTH – – only the part of the withdrawal (as regular income) that gets bumped into the next bracket incurs the higher bracket’s tax rate. I will be 49 at the end of this year. I also have an external Roth account that I backed into by doing the non deductible IRA conversion thing once income limitations went away. Started year with $0 balance T-IRA. All of the money in that account is from this one time non-deductle contribution. If you … I have a very siumilar situation, except for 2016 tax year. I also recently rolled over my 401k. I’ve decided to stop contributing to my IRAs and instead contribute to the 401k and TSP. How can I pay the taxes before the end of the year (who do I pay, IRS form?) Thank you so much for this article. We plan to file income tax jointly next this year. Good strategy you’re working out! This article does answer some of my questions very well.I still have few questions. Hi Jeff, I will be 74 in 3 months, and I am working. And no I don’t see a problem with reporting gains. I plan to contribute $5500 to a traditional IRA, then have it converted to a Roth asap so no (or minimal) dividends would be earned. In order to do it, you have to reverse the conversion as if it never happened. I know the tax is paid first. Let’s say that you have $100,000 in your IRA, of which $40,000 is after-tax contributions, and $60,000 is pre-tax contributions, plus tax deferred investment income. Invested $5500 non-deductible, then shortly converted to R-IRA But then later a former employer terminated their T-401K plan, so rolled it over into the T-IRA. 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. This isn’t a recharacterization as I’ve never had anything but a ROTH. Fortunately, the 401k balances won’t figure into the equation. Thanks in advance for your advice. I received a 1099-R for $11000, distribution code 2, taxable amount $11,000. Is this allowed? Research everything you can about Roth IRA conversions and alternative ways to save more for retirement, and make sure any decision you make is an informed one. I have a traditional IRA, portions of which I have converted to a ROTH IRA over the last three years. The trustee is going to have to report this the way it exists, and that probably can’t be changed after 12 years. I believe I would have to wait until Yr 2021 for the workplace rollover; to avoid the pro-rata rule applying again? A better strategy though is to roll the full 50k into the Roth, and pay the tax out of non-tax sheltered resources. It also is calculating estimated quarterly tax payments that would be due each quarter in 2018. trigger the IRA rollover containing my 2017 contributions to my Roth account. The other thing you have to look out for is whether or not your current account holders charge some sort of exit fees or surrender charges. Hi Matthew – Of course, we’re past the April 18 deadline, and out of the calendar year. Hello, My wife and I are 66, retired, and in the process of converting traditional IRA money to Roth accounts. Our MAGI is above the income limits to contribute directly to a Roth and also above the limits for any tax benefits for a traditional. Thank you and Seasons Greeting. I plan to withdraw from my traditional IRA, all pre-taxed, to live on. Hi Dave – I’m not familiar with how the transfer of securities work, at least in regard to bond values. Hi Tee – If disability (I’m assuming Social Security Disability Insurance, or SSDI) is all the income you have, then you probably won’t have any tax liability at all. I really appreciate if you can give answers or point me the right place to start. 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. You’ll have to pay tax one way or the other, but the rollover to a Roth will provide you with more options later. Would I pay income tax on that SIMPLE IRA to ROTH IRA conversion, Same Trustee Transfer transfer if it was done properly? Hi Lafille – You can. Or if I convert it will it count as a 2017 contribution? 1) You don’t need to open a new Roth IRA account to do a backdoor IRA. And yes, that should help to lower the tax rate. But if I read your last sentence right, you can’t convert money received from required minimum distributions (RMD’s) – which I think is what you meant by “past 71”. Hi Steve – According to the IRS you can’t make regular contributions to a traditional IRA in the year you reach 70½ and older. 3. Check them out. 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