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I have about $3600 in a rollover IRA and I'm thinking about converting it to Roth. For tax year 2007, I'll be in the 18% (approx) tax bracket.

What would be the best plan of action for me?

Also, what if I added an additional $11K from another 401K to the Rollover before converting?

I appreciate any ideas. Thanks.
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I have about $3600 in a rollover IRA and I'm thinking about converting it to Roth. For tax year 2007, I'll be in the 18% (approx) tax bracket.

What would be the best plan of action for me?


I'm not sure whether you're aksing "How do I?" or "Should I?" Could you elaborate a little?

Also, what if I added an additional $11K from another 401K to the Rollover before converting?

In a year in which you qualify for Roth conversion, you are free to convert as much or as little of your traditional IRA as you like. Thus, it really doesn't matter which accounts you have your traditional funds in.

Phil
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Phil,

I was asking if I should convert to Roth now or later. I am going to fund this account fully every year (I hope), so if I decide to convert later, I will have to pay more taxes on it, as I understand it.

Thanks.
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I was asking if I should convert to Roth now or later. I am going to fund this account fully every year (I hope), so if I decide to convert later, I will have to pay more taxes on it, as I understand it.

Let's talk about a few basic rules. Contributions and conversions are completely separate. Thus, if you qualify for Roth contributions you can do that based on current (and even 2006 through 4/17/2007) earnings regardless of any conversions.

Second, there's no "all or nothing" rule about Roth conversions. As long as your income (without the Roth conversion income) is under $100,000 and you don't file married, filing separately you can convert $1.00 or every penny in your traditional IRA accounts, including rollovers.

In your original post you said you were in the 18% bracket. Does that include state? If not, you really should nail things down. The Federal brackets now go from 15% to 25% with no intermediate point.

I mention this because I think it would be good to convert as much of your traditional IRA to Roth that would take you to the top of the 15% bracket. This assumes that you have the cash outside retirement accounts to pay the taxes. If you're in the 25% or above Federal bracket, conversion is much more of a crap shoot. It involves a lot of crystal ball gazing to look at your compared current vs. retirement tax rates.

Phil
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Phil,

I understand that the conversion and contribution is different. But, if I add $4000 (from 2007 limit) to this rollover IRA, and I decide to convert this to ROTH later on, doesn't that mean that I'd pay taxes on $7600 instead of on just $3600? Or would I only pay taxes on the $3600 since this was pre-tax?

I hope I'm not being more confusing!

Thanks again.
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I understand that the conversion and contribution is different. But, if I add $4000 (from 2007 limit) to this rollover IRA, and I decide to convert this to ROTH later on, doesn't that mean that I'd pay taxes on $7600 instead of on just $3600?

Why not make your 2007 contribution to a Roth IRA and eliminate the middle man?

Phil
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I've thought about that, but I'd like to beef up the single fund (Vanguard Ret2050) in this IRA.

I guess I should just convert now then add the $4K to it.

Thanks very much, I appreciate it.
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I'd like to beef up the single fund (Vanguard Ret2050) in this IRA.

I hate to be a nag, but why limit yourself to that IRA? You could open a Roth IRA at Vanguard and invest in the same fund.

Phil
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I thought opening a Roth for the same fund would be redundant... Are you saying that there are no good reasons to convert this IRA to Roth?

By the way, you're not being a nag in any sense. Thanks.
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I thought opening a Roth for the same fund would be redundant...

We may be getting closer. Investing in the same fund in a Roth is no more redundant than investing in the same fund in a traditional IRA. Just to make sure, you do realize that you can hold more than one investment in one IRA account, right? When you look at your allocation reatios you need to look at your entire holdings, so from a diversification standpoint Roth vs. traditional is irrelevant.

Are you saying that there are no good reasons to convert this IRA to Roth?

No, I'm not saying that. What I'm saying is that the decision to convert or not, and how much, is based in no way on what you intend to invest in.

Phil
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I promise not to ask another question on this topic after this! I've put in $1400 (deductible for 2006) towards rollover IRA and if I were to convert this into ROTH, I'd only pay taxes on $2200, which is from the 401K, correct?

Thank you again!
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I've put in $1400 (deductible for 2006) towards rollover IRA and if I were to convert this into ROTH, I'd only pay taxes on $2200, which is from the 401K, correct?

Probably not, but I'm lost. Let's get everything in one place. Please respond with the following. If this is too much financial information for your comfort in a public forum, feel free to respond by e-mail instead. (See the check boxes below the place where you type your response.)

1. Total value of all traditional IRAs as of 1/1/2006. If you have more than one traditional IRA account, label them A, B, etc. and for everything following identify which account was invovled unless I'm asking for a "total."

2. Total of all nondeductible contributions to traditional IRAs before 2006 (if any).

3. All additions to your traditional IRAs in 2006, including the amount, listed separately and identified as rollover or contribution.

5. Value of the specific account immediately after you made each contribution. (Ignore rollovers).

4. Total value of all your traditional IRA accounts today, listed separately.

5. I'm assuming that you have no existing Roth IRA accounts. Correct that, with similar information as above, if I'm wrong.

We'll nail this sucker yet.

Phil
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