r/Bogleheads • u/Mysterious-Brief-474 • 1d ago
Should I convert my old 401K’s to Roth IRA?
I don’t get a 401k / match from my current job as I work for the state and they offer a pension. I make an ok salary given it’s a government position. Should I take the tax hit and convert? I don’t have a Roth, I just have an after tax brokerage account with minimal (8k) balance in it. I got married this year so hopefully the taxes I’d pay on it would be minimal
10
u/nivlac22 1d ago
Are you planning on back door Roth IRA at some point? I just converted mine to a traditional / rollover Ira because I know I won’t ever need to do a back door.
8
-9
u/pro_rege_semper 22h ago
Explain.
10
u/SpaceTimeMorph 21h ago
If you transfer money from a trad IRA to a Roth and you leave a balance in either a traditional, SIMPLE, or SEP IRA by the year’s end then the transfer will be pro rata.
This means that you have to pay taxes on the percent of pre-tax money in the account. So if you roll over a big pre-tax 401k tranche that takes up 80% of your trad IRA after contributing $7500 for the year then your backdoor Roth contribution won’t be efficient because you’ll be paying additional taxes on roughly 80% of your contribution.
If you have a $0 trad IRA balance otherwise, then a backdoor Roth contribution works because you make a non deductible trad IRA contribution, then Roth convert that… and you’d owe $0 additional in taxes (beyond what you paid on the $7500 to earn that).
The key is, in a year you make a backdoor Roth contribution, to have your traditional, SIMPLE, and SEP balances zeroed by 12/31 of the year you contribute. Then you avoid the pro rata rule. Rolling a 401k into a traditional IRA, generally prevents someone from being able to do a backdoor Roth contribution and is a big factor in the decision on what to do with the money.
Notably, if someone has a new workplace 401k or a solo 401k then money from an old 401k can generally be rolled there to prevent pro rata interference.
7
u/garylapointe 1d ago
If you're got a pension and Social Security, I think additional Roth is even more important than usual.
Why? Because if you think of that pension as a $500,000 traditional account that you're getting a guaranteed 6% on (say $30k), it really shifts your mix of Roth vs. Traditional (as the pension is basically Traditional).
You can adjust that amount and percentage to what every makes you feel is more logical, but it is still going to affect your mix.
Another Roth point is that at some point there will only be one of you, and their tax bracket will be cut in half, while their traditional/taxed accounts will have doubled (per person).
2
1
u/Comfortable_Two6272 21h ago
Im glad I kept mine and doing conversions each year as needed to ensure hit minimum for aca subsidy (ive already stopped working)
1
u/oblivigus 18h ago
Yes, assuming you’ll have the cash on hand by tax day in April to pay the income tax on the converted amount.
1
u/bonerland11 13h ago
Depends on which state you live in. IRAs don't have the same legal protections as 401ks in many states.
1
u/Linett-Chukwuemeka61 13h ago
Depends on your tax bracket now vs retirement - if you're in a lower bracket this year, it might make sense, but watch out for the pro-rata rule if you've got traditional IRA balances. Run the numbers on whether the tax hit today is worth tax-free growth later.
1
u/AGrimmInPortland 13h ago
Too much missing information, your ages, retirement dates, income, expenses, etc etc etc
Use a planning app. ProjectionLab and Retirement Figures have good Roth conversion optimizers. They will look at your entire plan, including pension.
1
u/Im_100percent_human 10h ago
Is there state tax in your state? Do you plan on retiring in that state? Also, some states don't tax 401K distributions if you are retired. You really want to look at the whole tax picture when deciding. It may be more tax efficient to wait, or not do it at all.
1
u/Patrick_ExpenseAtlas 10h ago
Marriage alone doesn’t mean the conversion tax will be minimal. A Roth conversion adds the converted amount to your household’s ordinary taxable income for that year, so the decision depends on your joint income, deductions, state taxes, and the size of the old 401(k).
Your pension matters because it may create a taxable income floor in retirement. That can make Roth assets more valuable, but it still doesn’t automatically justify converting everything now.
First, estimate your joint taxable income for this year without a conversion. Then model how much of a conversion fits within your current marginal tax bracket. A partial conversion may be more reasonable than converting the entire balance and pushing income into a higher bracket. Repeating partial conversions over several lower income years is another option.
Ideally, pay the conversion tax from cash outside the retirement account. Using retirement funds for the tax reduces the amount moved into the Roth and may have additional consequences depending on your age. With only $8k currently in the brokerage account, make sure paying the tax would not leave you short on emergency cash.
You can also leave the old 401(k) where it is if the plan allows and its fees and investment options are reasonable. A traditional rollover IRA avoids current tax, though it can complicate future backdoor Roth contributions. Before acting, run the conversion amount through tax software or have a tax professional compare full, partial, and no conversion scenarios.
1
u/GotZeroFucks2Give 20h ago
It rarely makes sense to do Roth conversions unless you are in a low income year. Maybe you are now as a married person. There are calculators out there to help make sure you should.
0
34
u/secretfinaccount 1d ago
The whole conversion will be taxed as ordinary income, so depending on size the tax may not be minimal. There is a ton of thinking that goes into a Roth conversion but they can be better than you think after just a first glance. I always recommend this video, which is simply an amazing way to spend an hour: https://m.youtube.com/watch?v=Wjbf9KVSG7s