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Traditional to Roth Rollover

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SCEngineer
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Traditional to Roth Rollover  Reply with quote  

So doing some reading today and I'm kicking around this idea.

I'm 30 years old. I've got 100k in a Traditional IRA (rolled over from previous employer). I'm currently in the 28% tax bracket.

So if I understand this correctly I can roll up to $5,000/year from the Traditional to the Roth IRA. This would let me pay the taxes now and give me 30+ years of tax free growth. To do that I'll have to pay 28% tax on the $5000 that I roll over (so $1,400). I'm figuring that it's better to pay $1,400 now rather than $32,049 when I withdrawl 30 years from now, net savings of $30,649.

I wanted to make sure that it worked the way I thought it did. Let me know if there really is that $5k/year cap, if there's no additional penalty for the move from Traditional to Roth, if I'm just crazy for considering this.

Thank in advance.

P.S. I've got an employer match at my current job that goes into a Traditional 401k. As such I'm still figuring I'll be in the 28% bracket range when I retire assuming taxes don't increase.
Post Tue Apr 12, 2016 11:36 pm
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oldguy
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No $5000 limit that I know of, you can roll the entire $100k if you want to.

But why do you want to roll to a Roth? And pay 28% (probably more depending on what your marginal bracket will be on extra income). Rather than get hit with 28% or 35% now (during your working years) why not wait until you are 70 1/2 and take out ~4% /yr and pay 15%?

Re the $32,000 savings - think %, not absolute value. Remember, that extra $32,000 is growth that you wouldn't have in a Roth - look at "net". (the Roth will have $32k less in it than the TIRA).
Post Wed Apr 13, 2016 3:34 am
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littleroc02us
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I agree with Oldguy in this situation. The only question I'd have is what pre-tax investments (Roth IRA's) do you currently have? If not I'd start maxing out Roth IRA's in addition to your 401k investing, it gives you diversification for retirement. My only worry about post tax retirement, is that you can never trust the government wanting to raise the rates someday from 15% too let's say 50%. I would want to prepare for the Bernie Sanders of the world. Smile

Risk comes from not knowing what you're doing. (Warren Buffet)
Post Wed Apr 13, 2016 2:59 pm
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SCEngineer
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I've got 50k in Roth IRA now. I'm adding 6% to Roth as the company adds 10% to Traditional 401k. I'm also arguing with myself between paying off debt and funding the Roth IRA which led me to the question above.

Based on my calculations, I'm going to be withdrawing from the Traditional accounts and paying 28% due to the generous company donations and what I've already saved. I was just temped to pay 28% now instead of later. I'm realizing it's a wash and I have to be careful to make sure it doesn't slip to 35% now.

If I understand correctly it would also let me bypass the RMD by moving more to the Roth. It's also something of a hedge against raising tax rates, though there's nothing to say they don't add a sales tax and hit my Roth on the back end anyways.

Thanks for the thoughts, I'm probably going to leave it alone for now and see what the future brings.
Post Wed Apr 20, 2016 11:33 pm
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oldguy
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quote:
To do that I'll have to pay 28% tax on the $5000 that I roll over (so $1,400). I'm figuring that it's better to pay $1,400 now


But then there will be only $3600 left to put in the Roth. In 3 years that will be $82,800 (tax free..

If you keep the $5000, it will be $115,000 in 30 yrs. And you'll pay $32,049 in taxes (leaving $82,800 net). But hopefully, your RMD at age 70 1/2 will be about $5000/yr, taxed at about 15%. Ie, you'll be able to take some out every year and stay well under $32,000, maybe pay under $20,000. A much better net to you than settling for $82,800.

It's probably best to use all 3 account-types - pretax, posttax, and taxable. The IRS Code is a work in progress, it CANNOT be predicted 30 years in advance. So if you diversify across the 3 tax treatments, you can't end up 100% at age 65.

IRAs, Roths, 401ks, matching, were invented beginning about 1982. Since that time, most younger investors have completely forgotten the 'taxable account' - they have a purpose, they grow tax-deferred and get the preferred capital gains tax rate if/when you sell some. Or, if you leave it to heirs, it will be tax-free. It is a convenient Fall-back EF, the money is immediately available at any age, any time - so t allows you to lower your EF drastically.

Eg, if you have an extended period out-of-work - layoff, serious accident - you might need $50,000 to support a family for several months, a 6-figure taxable account can do that. Conversely, a $5000 EF (dead money) is plenty for a washer/dryer failure, a fridge, an auto trans in the car, yada.
Post Thu Apr 21, 2016 12:35 am
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