Should we move 401K into Roth IRA this year? (funds, pay, taxes) - Personal Finance -debt, loans, credit cards, banks, insurance... - City-Data Forum

Ellwood · 07-22-2010, 06:13 AM

My spouse and I are retired and both have separate 401K accounts from our working years, amounting to approximately $900K.

When we turn 70.5 years old we will be required to start taking withdrawals and paying the tax, as the money is pre-tax.

This year I did some consulting and have earned approximately $100K (also have pension, military pension and social security).

My question is: with the lower tax rate this year, should we withdraw all or part of our 401K's and move them into a Roth IRA therefore taking tax burden because of this year's two year rule on paying the tax?

Suggestions?

mathjak107 · 07-22-2010, 06:16 AM

i was going to move some this year but i think the bulk ill wait on.

our plan is to pay back social security at 69, refile at almost double the rate.. take the income deduction of 100k plus and use that to offest a roth conversion and get it almost tax free.....

Charles · 07-22-2010, 07:03 AM

I am pretty sure there are online calculators out there which can help you crunch the numbers and perform "what if" calculations. I used one at Fidelity several years ago.

should I convert 401(k) roth - Google Search

mathjak107 · 07-22-2010, 08:10 AM

the numbers are hard to crunch because no one knows future taxes.....

reality is most of us will probley not be in a higher tax bracket with no pay check then we are with a paycheck and possibly 2 pay checks coming in while working.

the real value in roths is not if your going to be a few points higher or lower in tax rate... its in wealth passing ability......

a well invested roth can be passed on tax free and as long as your kids earn more then the withdrawls they have to take that money can go on for over 100 years with no taxes due

cdelena · 07-22-2010, 10:55 AM

We have made a few conversions over the years but now that I am withdrawing IRA funds to live on we have decided to hold our tax bill down by eliminating conversions.

I can start SS early and look at paying it back later to re-file for higher benefits and using the conversion at that time to fund the payback, use the tax deduction, and go into our 70's with more control of disbursements and taxes. But am still unsure of the strategy because it is hard to know future conditions...

- Clearly taxes will be higher but we don't know how they will be structured
- We don't know what conversions will be permitted in the future
- We can only hope the feds won't arbitrarily change the SS payback rule (it would affect a small enough segment they may not be afraid to do it... just ask Chrysler bond holders)

- The advantage to paying back SS with cheaper dollars to get higher benefits is great and getting a 'free' deduction to do it could easily be a loophole some in congress would like to close.

mathjak107 · 07-22-2010, 11:04 AM

highly unlikely congress will close the loophole.. they will probley utilize it themselves the same way they use life insurance to pass wealth tax free.......

a poll showed congress uses life insurance and roths for estate planning.... thats safe too lol

Charles · 07-22-2010, 11:17 AM

Quote:

Originally Posted by mathjak107

the numbers are hard to crunch because no one knows future taxes.....

reality is most of us will probley not be in a higher tax bracket with no pay check then we are with a paycheck and possibly 2 pay checks coming in while working.

A person could run several scenarios with assumptions of taxes (stay the same, increase) and see if both results would drive the same action.

Also, we as 40 somethings with one income with four kids and mortgage interest and 401(k) deductions and property tax write offs and health expense write offs are in a pretty low tax bracket as it is. Twenty+ years from now, no mortgage deduction, maybe downsized housing (less prop tax write off), no kids, possibly no 401(k) deduction, possibly increased salary, possible spouse transition from SAHM to earned income producer, increased size of taxable investment accounts throwing off taxable interest, dividends, and cap gains, mandatory IRA withdrawals - tax bracket could be same or higher.

mathjak107 · 07-22-2010, 11:39 AM

for most of america they will still be lower with no paychecks.....

most of america has ss and not alot of savings if those statistics they write about all the time are correct...

i think they said the average 401k is around 60k

everyone one has to guess as to how they will fare though...

Ellwood · 07-22-2010, 12:23 PM

Quote:

Originally Posted by mathjak107

i was going to move some this year but i think the bulk ill wait on.

our plan is to pay back social security at 69, refile at almost double the rate.. take the income deduction of 100k plus and use that to offest a roth conversion and get it almost tax free.....

Could you be a little more explicit regarding the income deduction of 100K plus. What is the income deduction related to? Paying SS back? Forgive my ignorance.

mathjak107 · 07-22-2010, 12:54 PM

yes.. a little know rule lets you pay back social security and refile at the higher payment... you can then deduct that off the years income.....

normally its such a high amount it leaves you with negative income for the year. since you cant do much with it usually its a waste...

discovered quite by accident was the fact if you do a roth conversion in that year all that normally wasted negative income can go against the roth conversion..... its almost a free conversion in alot of cases..