Two Plus Two Newer Archives  

Go Back   Two Plus Two Newer Archives > Other Topics > Business, Finance, and Investing

Reply
 
Thread Tools Display Modes
  #11  
Old 03-25-2007, 12:30 PM
Big TR Big TR is offline
Senior Member
 
Join Date: Nov 2003
Location: Chicago, IL
Posts: 464
Default Re: Contributing to both the Roth IRA and 401(k)

Yes, your personal money helps. You asked if you were missing anything. That was just one thing I could think of.

Also, you need to have cash sitting around to pay the taxes on the conversion. Let's say you have taxable income of $75k and convert $30k of the IRA to a Roth. This is taxed at the 28% rate. You will have to come up with $8,400 for the Feds, plus X% to the state, to cover the additional taxes you will owe on the conversion.

You must then consider if you will be in a lower tax bracket than 28% upon retirement.

There are a lot of things to factor in when converting to a Roth that not everybody takes into account.
Reply With Quote
  #12  
Old 03-25-2007, 12:50 PM
MrBlue MrBlue is offline
Senior Member
 
Join Date: Sep 2003
Posts: 287
Default Re: Contributing to both the Roth IRA and 401(k)

This is absolutely correct.

One strategy that a friend is planning on using is to do the conversion when he goes back to school for an advanced degree. He knows he's going to quit his job and go back to school. While in school, his income will be 0. He'll be using those 2 years to convert the bulk of his retirement accounts into Roth IRA to take advantage of the lower tax bracket.

There are other strategies such as starting your own business. In the first couple of years, you may not have much income thus not draw much of a salary from your business. You can then use this time to convert any retirement accounts at a lower tax bracket.

If you're going to do any of these things, you should probably consult your accountant to verify that they do work.

edit:
I'm also going to add here that I believe taxes will only go up from here. The Bush tax cuts won't last past 2010. With all the talk about the huge national debt, I think it's unlikely we see any significant tax cuts. But it's hard to predict 30 years in the future. By that time, congress could pass a law that says we need to tax Roths! Now that would suck.
Reply With Quote
  #13  
Old 03-25-2007, 01:03 PM
MrBlue MrBlue is offline
Senior Member
 
Join Date: Sep 2003
Posts: 287
Default Re: Contributing to both the Roth IRA and 401(k)

I'm not a CPA, but I've been reading up on this stuff.

As I understand it, you can do the conversion today but there is an income limit. If you're looking at these laws, chances are you're already past that limit. Not only is there an income limit, there is also an early distribution penalty of 10%. The law we're refering to eliminates the penalty and also lifts the income limit.

If you quit your job today, you can roll your 401k into an IRA which can then be rolled into a Roth IRA at another time. Some taxes and penalties along the way. I've never done it myself so I can't say from personal experience. But if by 2010 you can't changed jobs yet, then you might be out of luck.

Again, I'm not a CPA. I think it might be wise to spend a few bucks to potentially save thousands. Don't want to mis-plan and screw the whole thing up.
Reply With Quote
  #14  
Old 03-25-2007, 01:09 PM
ski ski is offline
Senior Member
 
Join Date: Feb 2006
Location: Leaving Thailand soon.
Posts: 2,810
Default Re: Contributing to both the Roth IRA and 401(k)

Thx for the response blue,

One more quick question. I'm filing as a pro gambler right now, if I throw $12K into a SEP-IRA can I still move that over to a Roth IRA, can I move the whole thing or just $4K? (per year)?

Would it matter if I am no longer self employed?
Reply With Quote
  #15  
Old 03-25-2007, 01:11 PM
MrBlue MrBlue is offline
Senior Member
 
Join Date: Sep 2003
Posts: 287
Default Re: Contributing to both the Roth IRA and 401(k)

Sorry, I have no idea.

All the texts I've read refer only to Traditional IRA -> Roth Ira.
Reply With Quote
  #16  
Old 03-25-2007, 02:16 PM
cbloom cbloom is offline
Senior Member
 
Join Date: Jul 2003
Location: communist
Posts: 8,940
Default Re: Contributing to both the Roth IRA and 401(k)

[ QUOTE ]

If you quit your job today, you can roll your 401k into an IRA which can then be rolled into a Roth IRA at another time. Some taxes and penalties along the way.


[/ QUOTE ]

Rolling a 401k to a regular (rollover) IRA is free when you leave a job. (no taxes or penalties)

Rolling a regular IRA to a Roth IRA, you have to pay taxes like income. There are no penalties as long as you do it legally.

Obviously this is only true if you do it right and keep the money in retirement accounts; don't cash out of an IRA and re-deposit it. If you're actually going to do this with a lot of money talk to a CPA or a retirement investment advisor to make sure it's done right.
Reply With Quote
  #17  
Old 03-25-2007, 03:35 PM
Big TR Big TR is offline
Senior Member
 
Join Date: Nov 2003
Location: Chicago, IL
Posts: 464
Default Re: Contributing to both the Roth IRA and 401(k)

You last point about changing the taxation rules related to a Roth is an important one. Initially, I believe social security income was exempt from taxes, since you had already paid the income tax on those funds. Then they changed it so you are taxed on these benefits based on your income level.

I do a couple of tax returns for people each year. One is a retired grandma who earns SS and about $18k in interest, dividend and annuity income. She was taxed on about 50% of her SS earnings this year because of her income levels. It's not like she is living the good life.

This will delve into politics, but I'll go there anyway. The way I see it playing out, sometime down the road politicians will say that they are going to make Roth distributions taxable, but only to the rich. Then the thresholds will slowly be reduced over time, making more and more people subject to taxation, much like they have done with SS.
Reply With Quote
  #18  
Old 03-25-2007, 07:39 PM
BradleyT BradleyT is offline
Senior Member
 
Join Date: Dec 2003
Location: Vote Ron Paul 08
Posts: 7,087
Default Re: Contributing to both the Roth IRA and 401(k)

Heh
[ QUOTE ]
Social Security benefits are the foundation on which to build a financially secure retirement.

[/ QUOTE ]

That brilliant quote shows up after you submit http://www.ssa.gov/OACT/quickcalc/index.html
Reply With Quote
Reply

Thread Tools
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off

Forum Jump


All times are GMT -4. The time now is 02:39 PM.


Powered by vBulletin® Version 3.8.11
Copyright ©2000 - 2024, vBulletin Solutions Inc.