Conversion from 401K to Roth

[Guest cooter]

Hi-

I'm new to this board and haven't been able to find the exact infomation I've been looking for.

I am drawing very little income in 2005 and, therefore, will be in the lowest tax bracket. I live in Texas. I am 58 and married, wife is also retired and without income.

I have about $500,000 in a mostly pre-tax 401K. How do I determine if it is a good idea tax wise to convert this money to a Roth? Can I even do it?

Thanks,

Tony

[BPickerCPA]

You would need to first convert the 401k to a traditional IRA, in order to then convert all or part of that IRA to a Roth.

There is not enough information to make a determination as to the advisability of doing the conversion.

[mbozek]

If you convert from a 401k to a Roth you should use other funds to pay your fed taxes and not use the 401k amounts. The amount of taxes is a lost opportunity cost over your life expectancy since you will lose the ability to invest the amounts used to pay taxes. The primary advantage of a Roth account is its ability to generate tax free income until you die. At your age this could be 20-25 years or longer if your spouse is your beneficiary. If you plan on using the Roth for your retirement it will not be a good idea to convert to a Roth because of the amount of taxes that will be paid on the conversion. You need to consult with a tax professional or financial planner to see it makes sense to convert to a roth and not take any distribution during your life time.

[John G]

Are you planning to move? I think Texas still has no income tax. If you were planning to move to another state that did have an income tax, converting now might be beneficial.

Second point, often a partial conversion provides some advantage as you are less likely to trigger a higher bracket in the conversion year but to get some of the benefits... such as no fixed distribution schedule.

However, I agree with the above - conversion economics are not easy to determine. You must make a number of assumptions about future tax rates, you health and lifespan. As you provided very little information about your retirement income/assets - I suggest that you consult with a local accountant or tax advisor that has experience in this area. Roth conversion is not a simple call, there are offsetting factors that most folks do not understand.

[Guest BruceCM]

Another advantage of a Roth Conversion is that you will not be subject to Required Minimum Distributions at age 70.5.

Partial conversions are a good idea if you have 'headroom' in the 15% tax bracket. For example, if you're married filing jointly and your TAXABLE income (or your adjusted gross income minus your expemptions and itemized/standard deductions) (line 42 of form 1040) is $30,000, then you have $29,400 that you could convert and be subject only to the 15% Fed Tax Rate ($59,400 of taxable income for 2005). And if your taxable income is under $14,600. then you would have 'headroom' for using the 10% tax rate. But as mentioned earlier, you need to make sure you have the spare $$ to pay the tax for the conversion.

The only restriction to a Roth conversion (from a TIRA) is your modified AGI cannot exceed $100,000, which does not sound like a 'problem' with you.

BruceM