Convert IRA into ROTH IRA?

Sotiria · #1 10-10-2007, 05:47 PM

I have roughly 4k in a 401k from a previous employer that I'm thinking about rolling over into a ROTH IRA through ING. I believe this means I have to pay taxes on that 4k (since it came out of my paycheck pre-tax) but I think it makes more sense to do this since A.) I expect my tax bracket to be higher in retirement and B.) Since I'm young, it makes more sense to not get taxed when I pull this money out after it has matured, than to save a few beans and not have to pay taxes on 4k.

Am I correct in this line of thinking? Also, at what rate will I be taxed on the 4k, and is this something that I need to pay immediately, or is my income just considered 4k higher for the year?

Many thanks in advance.

prohornblower · #2 10-10-2007, 08:08 PM

Not sure of all the inner workings of the conversion but IMO if you can pay the taxes now without noticing the hit, then I think it is good to go ahead and convert to Roth.

I will be leaving my job around next Febuary and will be converting like $15K...which will mean around $3K in taxes [img]/images/graemlins/ooo.gif[/img] But I can pay it and it would be nice to get an additional $15K into my Roth at such an early age.

Sorry I'm rambling, but I believe that if you do the Conversion in say 2008, you don't owe the taxes until April 2009, so you have time to save the $1K or so you'll need to pay.

I'd steer clear of ING and just send your money to a Vanguard Rollover IRA, then from there switch it to a Roth IRA and just throw it into Target Retirement 2045 Index fund or whatever.

wdcbooks · #3 10-10-2007, 10:36 PM

You are correct in your thinking. The key is that you expect to be in a higher tax bracket upon withdrawal. A Roth isn't 'better' than pre-tax investment, for people who are underfunded for retirement they may be an unwise choice.

As far as taxes go, the Roth conversion will add the 4k to your taxable income in the year you do the conversion. So it will be taxed at your marginal tax rate. To do the conversion you must be otherwise eligible to contribute to the Roth.

Ray Zee · #4 10-10-2007, 11:24 PM

you never know what your income will be when you retire. and how the tax rates will be. you might have all capital gain income and it might not be taxed at all in the future or taxed alot. what if we change to a sales tax for federal income tax. who knows
basically for most folks its best to be in what you can put the most away. for me i like what i can put the most away tax free now. ill worry about taxes when i retire. i dont know what they will be like and deal with them then.
but overall in life save at least 10% of what you make, and spend on things that go up in value over time.