Laid off - planning on coverting 401K to IRA to Roth, have questions o

[Guest xxpaulcpxx]

I was recently laid off (This was perfect timing - my daughter was just born and I was planning on quitting and staying home being "Mr. Dad"! YIPEE!) and will eventually have to get my 401K into and IRA, then into a Roth IRA. Here are my specs:

-Wife and I are 33, with newborn (1 month).

-Married, file jointly.

-Her AGI was 25K last year, will probably be near 30K this year. My AGI will likely be close to 20K this year (only worked part of year). Our total AGI last year was 102K.

-I have 35K in my 401(k) plan ready to convert to IRA.

Question 1: After I convert my 401(k) to an IRA, should I immediatly convert it into a Roth, or should I wait until next tax year and convert it then?

Question 2: Assuming we are at the 28% tax rate this year, and the 15% rate next year (the cutoff being AGI +43K), would the tax for converting to Roth would be $9800 this year, $5250 next year?

Question 3: Do I have to snort all that tax money out my nose at once?

[John G]

It is always difficult to project income for the next year. Circumstances can change. Someone could make an consulting job offer you couldn't refuse, you could inherit money, etc. The new child is going to change your life in unpredictable ways. No one could ever definitively tell you if conversion is right or wrong.

One clearcut advantage of a 2001 conversion is that you probably have a better sense for the outcome after logging four months. There is always a slight chance that Congress will modify either tax rates or Roth rules. Right now, it looks like you might see a modest tax cut. Possible Roth changes do not appear to the aimed at your situation... atleast for the moment.

Conversions are not an all or nothing proposition. You can do a partial conversion this year and a partial conversion next year. One advantage of partial conversions is that you can convert up to the point where you would get a tax bracket bump. For example, you might want to convert in three installments. Note, the non-converted IRA is likely to grow so you might pay more in taxes, but not immediately. If you make one big conversion, then you may need to make estimate tax payments. Conversion rules and regs and the planning and projections that justify the action are complicated, so plan on consulting an accountant or tax pro before taking action.

If you can not pay the taxes with funds outside of the IRA, then conversion is not likely to be a great idea.

Best wishes with the new family. You might want to look into educational IRAs for the baby.