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If your traditional IRA contrbutions are after tax, Roth conversion makes sense. You should only be taxed on the profits in the account. So if gains are small at this point, conversion to a Roth has the advantage of no further income taxes when you take distributions in retirement. Of course, this can be expensive if your gains are large. So be sure you can do the conversion at lower income tax rates before you begin.

BEFORE rolling over the 401k, evaluate doing the Roth conversion. You need to determine the impact of any gains. You may want to wait until the next tax year to do the roll over of the 401k. For tax purposes you need to consider all money in (traditional) IRAs for Roth conversions, not just the account that you want to convert. If you do the roll over of the 401k first, you would have before- and after-tax money in traditional IRAs. You will then pay tax on the proportion of before-tax money (including gains) which will then complicate the Roth conversion.

Not sure if I'm explaining it clearly so let me try to illustrate with numbers. Suppose you have $75,000 in 401k and $25,000 in trad. IRA with $15,000 of those being contributions with after-tax money. If you roll over the 401k and then convert $25,000 into Roth, you would owe taxes on $21,250 which is 85% of $25,000 (total IRAs = $100,000, before-tax = $85,000, proportion of before-tax money = 85/100) not just on the $10,000 in gains you had in the trad. IRA before the roll over. On the other hand, doing the conversion first would allow you to pay taxes on the gain only. This could work to your advantage if you had losses in the trad. IRA.

- zol
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