Talk me out of a ROTH conversion
Call me Ishmael. No! Call me a pessimist. I believe that tax rates will only increase in the future. I'm currently in a salaried position with a company that offers a profit sharing program. I would like to leave them this year and pull everything out of my 401(K) and profit sharing next year - and by pull everything out I mean do a direct rollover to a traditional IRA to avoid the 20% mandatory withholding and deal with a 60 day rollover situation.
I'm also working a second job this year which could potentially put the final number for my taxable wages at over $42K at year's end in my current job. If I find new employment where I hope then that number could be even higher. I've thought about dumping some cash into a traditional IRA to reduce my tax burden in either of these scenarios.
I've read that the funds converted in a ROTH are counted toward the total taxable income. I'm just wondering at what point does it no longer become lucrative to convert tax-deferred funds? Has anyone done this? I'd love to hear about your experience.
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I have done analysis for numerous people as to whether it makes sense to covert or not... easiest way I can think of is to direct you to large IRA providers like Vanguard or Fidelity... I know their websites have conversion tools that will walk you through the analysis and then make a very realistic argument for or against. Best thing about them is 1-they are free, but more importantly, they will make you think about all of the inputs that drive the decision,
Your milage may vary, but for what you are talking, that is what I would suggest...
I was in a simular situation earlier this year. I had 2 401k's(current company and previous) and an IRA(Thrivant) and just met with my IRA advisor recently to roll the previous companies 401k to my IRA. His advise to me was that since at my age I can only contribute $5000 to my IRA and am currently contributing $2400 a year to it that if I was to increase my contributions by 100% I might as well start a roth and then begin rolling over my traditional IRA into the roth. The problem with that though, is that when you do that the money you roll over into that roth from the traditional IRA now counts as income(he informed me that I would recieve a 1090 from this transaction) and can bump you into the next tax bracket if you aren't careful.
His advice to me which might be helpful to you was that since I had plenty of time (I'm only 29), when I was ready to start a roth I could start rolling over my traditional slowly so it wouldn't hammer me come tax season. Now I don't know how long you are planning on working and how close you are to the top of your tax bracket, because those two factors IMO would effect your decison.
One other point- every time we get a new congress laws change. That includes tax law. Fact.
Above the (more than likely) disadvantages of converting, assuming tax laws will never change is dangerous.
The Roth (for those VERY few that make sense) is really "too good of a deal" for the gubmint to keep their grubbies off it the future if you ask me.