Roth IRA conversion from 401(k)?
July 11, 2011 7:29 PM Subscribe
Should I roll over my 401(k) and then convert it immediately to a Roth IRA?
posted by anonymous to Work & Money (6 answers total) 5 users marked this as a favorite
I am 36 years old, and I have approximately $180k in 401(k) plans from (previous) employers. Almost all of the 401(k) money is invested in Vanguard index funds (mostly VINIX, which tracks the S&P 500 and has a 0.05% expense ratio).
I’m about to start a new job, and because I’ve had a lot of downtime between the old job and the new job, my income this year is going to be significantly lower than it was in previous years -- probably around $70k in AGI.
I am considering rolling over some of the 401(k) funds into a traditional IRA and then immediately converting that into a Roth IRA. And I would hold Vanguard index funds in the converted Roth.
Right now my inclination is that a rollover/Roth conversion to take my AGI up to $139,350 makes sense, because ordinary income over that amount would be taxed by the federal government at 28% (as opposed to 25%). So converting this year as opposed to later would save me a couple thousand dollars in taxes.
As I see it, the downside of that conversion is that I’d have to come up with the money to pay taxes on the converted IRA, which would greatly decrease my liquidity. (I’d have to sell some non-tax-advantaged investments to cover the tax.) Besides weighing the liquidity hit and the need to speculate about what my retirement-age tax bracket is going to be, am I missing anything here?
YANMFP, etc. Using a sock puppet because, well, this is pretty specific personal finance info.