Transfering money from IRA to ROTH IRA, is it smart in our case?

Question

My husband and I at our income level are not able to contribute to ROTH IRA. If I understand correctly if you make more then 100k you can not even transfer from IRA to ROTH IRA until 2010 ( they singned some bill in august this year that will allow everybody to transfer in that year)

We are ~ 28% tax bracket.

I currently have old 401k that I am planning to transfer to IRA = 35k, and planning to put max in IRA for both of us from now on = 4000k per person per year.

Now the question :)

Would it be smart for us to transfer all our IRA to ROTH IRA in 2010. We would have to pay tax, how much tax would that be? What is taxable when you transfer? Considering that we are in 28% tax bracket now, and probably will be in much lower tax bracket when we retire, is it smart to pay tax on it now and transfer to ROTH iRA or is it smarter to just pay lower tax on regular IRA when we retire?

Please help, i am completely new to whole finance world, but i am trying to learn.

By the way we are both 35 years old.

My husband and i together make more then 160,000 so we can not put money into ROTH. If i am correct, there is a limit to convert money too, if you make more then 100,000 you can not convert money either.
THey signed bill in August that they will allow everybody to transfer their funds from IRA to ROTH IRA in 2010 ( one time) .

So if we don't transfer funds in 2010 in ROTH IRA we will not be able to open one or transfer from then on , unless they change the law.

We both have new 401ks at our jobs. We are 35 years old and hope :) to retire ~55 , 20 years from now.

With all of that in mind, is it better to pay 10k in taxes now, and never have to pay taxes on that money again, or let it grow in IRA for 20 years and pay taxes on all of it then.

THanks

Answer 1

I dont know if I would do it that way. As it stands now, you will pay nearly $10k in taxes just to do the transfer ($35k X 28%=$9800). In essence, you lose almost a third of your savings. Hopefully, your account value goes up, but then that is even more tax.

Answer 2

You cannot convert "from" a Roth IRA to an IRA (unless you undo an IRA to Roth IRA conversion with a recharacterization the same year as the conversion). So I suspect you originally had a traditional IRA and converted it to a Roth IRA. Look at something about the account and see what type of account it currently is. If you did convert from IRA to Roth IRA you would have to pay income tax on the amount converted the year it was converted. If you withdraw a converted amount before 5 years pass, you would get hit with 10% penalty. If you made Roth IRA contributions, contributions can be withdrawn at any time (without penalty) and come out of a Roth IRA first. But if the whole thing was an IRA to Roth conversion you cannot do that without a penalty until 5 years after the conversion. It is all explained in IRS Publication 590.

Answer 3

It may make sense to convert to a Roth in 2010, but you'd pay taxes on the entire amount at your income tax rate which means you'd lost about 1/3 to taxes.

If you currently participate in a 401k you can contribute to a Traditional IRA but you can't take the deduction.

In your case I'd probably recommend NOT doing the conversion. I'd also probably not recommend putting money into the TIRA (if you have a 401k) since you can't get the deduction.

Instead, consider opening a taxable brokerage account and investing in tax managed mutual funds. These funds limit distributions so you won't have to pay much in taxes and the long term capital gains tax rate is only 15% which is nice.

I would also not lock into the idea that you will be in a lower tax bracket when you retire. It partially depends on how old are you, but in my opinion there is a very good chance that if you're young there's a good chance that when you retire you'll be in a higher bracket than you are now.

Good luck!
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Answer 4

It depends how many years until your retirement you have left. Basically if you believe that your tax bracket will be less when you retire than there is no sense in trasnfering money to ROTH.
Now as far as the limits go:
Generally, you can contribute to a Roth IRA if you have taxable compensation and your adjusted gross income is less than:

$160,000 for married filing jointly or qualifying widow(er),

But, I personally believe it does not make sense to have ALL retirement funds in ROTH. Since, income tax is applied progressively, say the first 30,000 per year are hardly taxable at all for a married couple. So, I would structure my retirement savings in such way that I would be taking say half out of regular IRA or 401K and half out of ROTH. This way you will deffer taxes at least on some of your contributions today, and probably will not pay any taxes or pay very little later when you withdraw.
Anyway, making long story shorter, the answer is No, I wouldn't move any money into ROTH, but perhaps all new contributions could be made into ROTH or half and half, depending on how many years you have to go. Unfortuanately is it very difficult to predict what the tax code will be in the future, but I would use todays tax code as starting point assuming that everything will simply be adjusted to inflation.
But check your limits, the fact that you make 100,000K does not disqualify you from making ROTH contributions. Also, please note that you Adjusted Gross Income has to be under 160,000 that is after your health insurance deductions, flex spending etc.

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Additional info after your correction. If you're both 35, just leave thatt money alone, why are you in such hurry to pay those taxes. Just deposit maximum into your 401Ks. As a matter a fact starting in 2006 the government allowed ROTH 401K, talk to your employer and see if they are planning to offer it to you. Mine just started it. The ROTH 401K has the same limits as regular one 15,500 per year contribution and no income restrictions. You are doing the right thing, but say by the time you retire you have 500,000 in regular IRA and another 1,000,000 in ROTH. Well when you start withdrawing, you withdraw from your regular IRA the amount that is not taxable that year, and the rest from your ROTH IRA or ROTH 401K. This way effectively ALL funds you have will be tax free and yet you never paid that 10K tax to convert. Don't rush, you are on the right treck, and ROTH is an excellent vehicle, but you shouldn't use only one tool when planning for retirement. I have a feeling that if not this year definetly the next year, your employer will offer a ROTH 401K, so instead of paying that tax for converting just invest extra 10K into ROTH 401K at that time.

Answer 5

Leave it as it is and start a ROTH in 2010 with new money and just contribute to that from then on.

You'd not want to take the tax hit and possibly loose all the gains you'd made in the next few years.

You don't know what your tax situation will be when you retire so it will be wiser to have some money that's tax free and taxable at withdrawl.

Answer 6

I am not a financial analsyt.

But I think it would be a bad idea. Your 401k would be taxed to death and all that money gone. Remember you get taxed an extra 10% just for taking out the money. If you can afford it they so it.

Eventually you can do a catch up roth ira. Where you will be able to put more than 4K. I beleive the are uping the contributions in the coming years.

Good luck.

I would call Fidelity and get their opinions.

Answer 7

Roth conversions are taxed at your marginal tax rate.

I bit the bullet and converted mine a few years ago. I probably would not do it now that my IRA has grown and I'm in a higher bracket. Even though it might make financial sense for you to convert it now, losing that $9,800 in taxes right now is a high price to pay.

Keep in mind that it is not an all-or-nothing decision. You can always convert a portion.