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Financial Freedom => Taxes => Topic started by: Smurfy FIRE on November 02, 2018, 02:52:38 PM

Title: IRA vs 401k conversion to Roth and taxes
Post by: Smurfy FIRE on November 02, 2018, 02:52:38 PM
I have been reading about IRA conversions to a Roth and am a little unclear on the conclusions about what I have read. My understanding is that if you convert an IRA to a Roth IRA that you must convert everything in your traditional IRA to the Roth IRA and pay the taxes due on it for the year you converted. I don't think you can convert only part of the account, but please correct me if I'm wrong.

However, if you have a 401k does this also apply? Do you have to convert every 401k account if you had more than one employer , thus more than one 401k ?

What about if you have an IRA and a 401k , must you convert both to a Roth...can you just convert one and which one is more beneficial if you didn't take into consideration the fund selections in the accounts?

Title: Re: IRA vs 401k conversion to Roth and taxes
Post by: numbers on November 03, 2018, 05:27:17 AM
Generally, you can convert any portion of an IRA or 401k/403b to a Roth and pay taxes on the amount converted.
I am doing partial Roth conversions now, to reduce RMD's in the future.
Title: Re: IRA vs 401k conversion to Roth and taxes
Post by: Dami on November 03, 2018, 02:39:08 PM
Depends. I had a Roth 401k converted to a Roth IRA very recently. Some folks have traditional 401ks and move that into a traditional IRA.
Title: Re: IRA vs 401k conversion to Roth and taxes
Post by: jpcpa14 on November 09, 2018, 09:03:08 AM
You can do partial conversions of traditional to ROTH. A lot of people I see are doing this thanks to the lower rates under the TCJA. Watch though as you may be thrown into a higher tax bracket if you convert a large portion. Also, older individuals receiving Medicare could see premiums go up if they convert to much as it is increasing their taxable income.
Title: Re: IRA vs 401k conversion to Roth and taxes
Post by: Money Ronin on November 09, 2018, 10:22:27 AM
I've been researching this topic for several years now, so unless something has changed recently here is the rule:

1. A 401K must first be rolled over to an IRA before converting to a Roth IRA (if your company offers a Roth 401K, consult your company)
2. You can convert all or a % of your IRAs to Roth IRAs.
3. If you choose to convert a % of your IRAs, you cannot selectively convert IRA A and B, but not IRA C.  You must convert the same % from IRAs A, B and C.
4. If you have multiple 401Ks, you can rollover any number of 401Ks, in its entirety or a %.
5. Only balances sitting in IRAs are eligible for and subject to the Roth Conversion rules.
Title: Re: IRA vs 401k conversion to Roth and taxes
Post by: david123 on November 29, 2018, 05:44:37 AM
Be careful with partial conversions.  There are some tax implications on the gains, not just from the part you convert, but as a whole.  I had an IRA (401K rolled into an IRA) and wanted to do yearly backdoor ROTH IRA contributions, but it got messy.  Instead I rolled the whole IRA into a 401K (so I have no IRAs), then did backdoor ROTH IRAs.  The backdoor ROTH is where you contribute after tax money to an IRA (the max is low, $5,500 a year in 2018), then soon after convert it to a ROTH to avoid the income limits in contributing directly to a ROTH.  There are minimal tax implications of doing the conversion, because it is only on the gain.
Title: Re: IRA vs 401k conversion to Roth and taxes
Post by: Smurfy FIRE on January 05, 2019, 01:33:38 PM
Thanks everyone for your input! I have a lot to think about now...