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Author: MikeMiser Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121351  
Subject: Rollover IRA - Conversion to Roth? Date: 12/20/2010 12:41 PM
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I have a question about conversions and taxes. I am telling you what I am thinking of doing and what I think the tax consequences are. Please double check me.

I have a Rollover IRA in mutual funds that came from a previous employers 401K. The 401K was all before tax - ( payroll deductions ) on my part. My employer did a match and of course there were gains in the 401K. I Rolled the entire 401K into this Rollover IRA in 2008. No additional funds were added since.

I was looking at converting a percentage of this Rollover IRA to a Roth Conversion. I was looking to move about 50K into this new Roth. I plan to split the taxes between 2011 and 2012. So the way I figure it that means my income for tax purposes will increase 25K in years 2011 and 2012.
2010 taxes will not be affected Am I correct in this thinking?

I am staying at the 50K , 25K per year because if I do more it moves me into the next tax bracket.

Other factors that I do not think come into play but maybe I missed something.

I have another 401K at my present employer. It also has only before tax payroll deductions in it.

I also have another Roth IRA that I funded over the last several years with all After Tax money. I have already made my $6000 contribution for 2010. This is at a separate institution.

I do not have any other IRA accounts.

Have I missed or misread anything.

Thanks,

Mike
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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 111693 of 121351
Subject: Re: Rollover IRA - Conversion to Roth? Date: 12/20/2010 2:31 PM
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So the way I figure it that means my income for tax purposes will increase 25K in years 2011 and 2012.
2010 taxes will not be affected Am I correct in this thinking?


You are correct.

I am staying at the 50K , 25K per year because if I do more it moves me into the next tax bracket.

Good reasoning, if you ask me.

Other factors that I do not think come into play but maybe I missed something.

All are immaterial to your proposed conversion from IRA to Roth.

But in terms of retirement planning, I often suggest keeping some retirement money in three places: tax-deferred accounts (traditional IRA or 401k), Roth accounts (Roth IRA or Roth 401k), and in taxable accounts. This gives you the most flexibility in retirement to choose from where to take your money so as to take best advantage of the future tax situation. It sort of hedges your bets. If we could predict perfectly what taxes would look like when you retire, you could just put all of your money in the one choice that would minimize your tax burden. But since we can't predict perfectly, the next best thing is to diversify your sources of retirement money so that you can pick and choose the best source for you when you need that money.

--Peter

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Author: MikeMiser Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 111694 of 121351
Subject: Re: Rollover IRA - Conversion to Roth? Date: 12/20/2010 3:22 PM
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Peter,
Thanks for the reply. We are of the same mind. I also want multiple account types so I can decide where to withdraw down the road.
Will have 15% in 401K , 40% in IRA , 25% in Roth's and 20% taxable accounts, after this conversion.
Also a pension check and SS ( maybe).
mid 50's , planned to work 4-5 more years but industry pressures where I am could reduce that to 1-2 years.
DW was victim to budget slashes early in 2010 and is not working. Doing the conversion now as I don't believe things will turn around in 2011. Maybe by 2012. I also made a bit less each year for the last 2. - I see that trend continuing unless there is a dramatic economic change in 2011.

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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 111695 of 121351
Subject: Re: Rollover IRA - Conversion to Roth? Date: 12/20/2010 3:29 PM
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planned to work 4-5 more years but industry pressures where I am could reduce that to 1-2 years.
DW was victim to budget slashes early in 2010 and is not working.


I'd give some serious thought to foregoing a conversion now.

If things go badly and you are forced out, you might be in a position where neither you nor your wife are working. That would give you a chance to convert some of the IRA/401k money at that time at very low rates. (I am assuming that your wages are still a significant portion of your total income.)

And if you do retire as planned, you'll have a couple of years before SS kicks in (yes, your benefits will be fine, for now) that could also give you a chance to convert at lower rates.

--Peter

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Author: MikeMiser Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 111696 of 121351
Subject: Re: Rollover IRA - Conversion to Roth? Date: 12/20/2010 4:10 PM
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Peter,
Have thought about that also. All a gamble, If I had a crystal ball it would be easy.

Thanks,

Have a great Holiday.

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