Converting 401k $ to a Roth IRA?

[Anonymous]

I'm 51. HHI is about $150. I have $1.5 M in retirement accounts (about $500k in a Roth IRA and $1M spread across two 401Ks). Looking to retire at 65. I will not have a pension.

My question: Is it worth converting some of the 401K money into the Roth? (We will be full pay for my kid's college, so any conversion will not impact financial aid calculations.)

[Anonymous]

I assuming you are accounting for the taxes that will be due? So you have enough cash to cover it, or will you need to sell some of the holdings to cover the taxes?

[Anonymous]

If I had the money to pay the taxes, I would covert everything to Roth. No brainer.

[Anonymous]

Convert after you retire before RMD kicks in.

[Anonymous]

Anonymous wrote:I assuming you are accounting for the taxes that will be due? So you have enough cash to cover it, or will you need to sell some of the holdings to cover the taxes?

My understanding is you can’t sell the holdings to cover the taxes. You need that cash on hand. Am I wrong?

[Anonymous]

Op here. I'd have to liquidate some of a separate brokerage account to cover the taxes, but maybe it's worth it in the long run to get the money into the Roth where it could grow tax free? Anybody know of a calculator that would allow me to compare different scenarios?

[Anonymous]

I don't think you have enough to make it worthwhile to convert, especially as you already have a good split between Roth and traditional.

On the one hand, the calculation of whether it is worthwhile is very simple conceptually-- will you be in a higher tax bracket when you are withdrawing or when you are converting? On the other hand it can get very complicated very quickly.

Boldin and Pralana are the software I've seen most often recommended if you want to do a deep dive on this, but you might also want to look around Bogleheads and maybe post there.

[Anonymous]

Anonymous wrote:Convert after you retire before RMD kicks in.

If you are going to convert you certainly should wait until you aren't earning $150k.

[Anonymous]

Anonymous wrote:

Anonymous wrote:I assuming you are accounting for the taxes that will be due? So you have enough cash to cover it, or will you need to sell some of the holdings to cover the taxes?

My understanding is you can’t sell the holdings to cover the taxes. You need that cash on hand. Am I wrong?

Ah yeah of course you will have to pay early withdrawal penalty if you do that, so that would be another 10% lost on anything withdrawn.

[Anonymous]

Do not do that while you are working. You are likely making the most money of your career and at your highest ever marginal rate - you do not want to prepay tax at the highest possible rate.

Let’s say you are in the 200k-400k taxable income range. Your federal tax rate is 24% on every extra dollar, so every dollar you convert is taxable at 24% now (plus state tax, ignoring any early withdrawal penalties), then tax free in retirement.

If you leave it in your 401k, assuming this will be your primary source of income, when you take it out you will have a lower effective tax rate as you will have graduated tax rates - first 24k at 10%, next 75k at 12%, next 100k at 22%, then only the amounts over 200k at 24%.

This means if you take out 200k/year in retirement your effective rate is 16.75%, if you take 150k/year you are at 15%. Why pay 9% more in tax?

[Anonymous]

MD let's you deduct some of the 401k income from taxes, but not IRA withdrawals. I didn't know this before I converted my 401k to an IRA.

[Anonymous]

Anonymous wrote:Do not do that while you are working. You are likely making the most money of your career and at your highest ever marginal rate - you do not want to prepay tax at the highest possible rate.

Let’s say you are in the 200k-400k taxable income range. Your federal tax rate is 24% on every extra dollar, so every dollar you convert is taxable at 24% now (plus state tax, ignoring any early withdrawal penalties), then tax free in retirement.

If you leave it in your 401k, assuming this will be your primary source of income, when you take it out you will have a lower effective tax rate as you will have graduated tax rates - first 24k at 10%, next 75k at 12%, next 100k at 22%, then only the amounts over 200k at 24%.

This means if you take out 200k/year in retirement your effective rate is 16.75%, if you take 150k/year you are at 15%. Why pay 9% more in tax?

The problem here is that you are assuming that tax rates — currently at historic lows — will remain unchanged 20 years from now. I am not confident in that, and am considering doing some conversions in 2026 — despite working and likely being in some of our highest income years — just to lock in some of these tax rates (also factoring in the restored SALT tax deduction, which will further minimize taxes in 2026).

[Anonymous]

Anonymous wrote:

Anonymous wrote:Do not do that while you are working. You are likely making the most money of your career and at your highest ever marginal rate - you do not want to prepay tax at the highest possible rate.

Let’s say you are in the 200k-400k taxable income range. Your federal tax rate is 24% on every extra dollar, so every dollar you convert is taxable at 24% now (plus state tax, ignoring any early withdrawal penalties), then tax free in retirement.

If you leave it in your 401k, assuming this will be your primary source of income, when you take it out you will have a lower effective tax rate as you will have graduated tax rates - first 24k at 10%, next 75k at 12%, next 100k at 22%, then only the amounts over 200k at 24%.

This means if you take out 200k/year in retirement your effective rate is 16.75%, if you take 150k/year you are at 15%. Why pay 9% more in tax?

The problem here is that you are assuming that tax rates — currently at historic lows — will remain unchanged 20 years from now. I am not confident in that, and am considering doing some conversions in 2026 — despite working and likely being in some of our highest income years — just to lock in some of these tax rates (also factoring in the restored SALT tax deduction, which will further minimize taxes in 2026).

Personally I think that’s foolish but I am no expert.

Dp

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:I assuming you are accounting for the taxes that will be due? So you have enough cash to cover it, or will you need to sell some of the holdings to cover the taxes?

My understanding is you can’t sell the holdings to cover the taxes. You need that cash on hand. Am I wrong?

Ah yeah of course you will have to pay early withdrawal penalty if you do that, so that would be another 10% lost on anything withdrawn.

Look up Roth Conversion ladder to try to do this tax-wise. No need to do it all at once.

[Anonymous]

I never converted my IRAs to Roth because I hate paying taxes when I don’t have to. Also, I didn’t take anything out until the RMD kicked in and I donate much of it to charity. I’m not sure if the math really works but I get to use pre-tax dollars and get the full deduction.