401K Roth Conversions
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Anonymous
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DCUM experts, please educate me.
So, my company is offering two new features in the company sponsored 401k plan - Roth after tax contributions and Roth in plan conversions. I currently have about 320k (160k contribution and 160K earnings). If I sign up for the in-plan conversion, what is the tax implications? Do I have to pay the tax (all of it) next April? What do you see it as pros and cons of conversion? I'd like to convert but not sure if I can pay lump sum tax bill next year. How does this work? TIA |
Anonymous
| How old are you |
Anonymous
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How old are you?
What is the rest of your financial picture? |
Anonymous
42 HHI slightly over 300k (mine 130, spouse 160k, other income 20 or so) |
Anonymous
| What's the importance of age to this situation? |
Anonymous
| Anyone?? |
Anonymous
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You pay the tax for the year of he conversion. If you spread out the conversion over several years then you spread out the tax burden too.
http://www.forbes.com/sites/ashleaebeling/2014/01/03/the-in-plan-401k-roth-conversion-strategy/#4b83dd37119b |
Anonymous
| So, in OP's case, how much would she pay in tax? |
Anonymous
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Also consider whether you expect to leave an inheritance. There's no tax on earnings on inherited Roth IRAs, so your heirs will also get a time period with tax free earnings if a Roth is part of the inheritance.
http://www.schwab.com/public/schwab/investing/retirement_and_planning/understanding_iras/inherited_ira/withdrawal_rules |
Anonymous
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Why would you want to pay tax now when you are in your prime earning years? Do you plan to draw the same amount in retirement?
You have to remember - this conversion would take place at your current marginal rate (your highest rate at which each additional dollar is taxed), while in retirement (if the current sty stem is still around) your traditional 401k/IRA withdrawals will benefit from a lower effective rate (lower rates in the lower tax brackets). Even if you want to think about your heirs - their rates will likely not be higher than your current one. Why choose to pay the tax at the highest possible rate? I would do all traditional 401k and then do a backdoor roth. |