Roth Conversion

Investing
#1

My wife has 45,000 in a SIMPLE IRA from a previous employer that no longer receives contributions. Her current employer does not have a retirement plan so we opened a ROTH for her two years ago and have been making the max contribution (6K) to her ROTH. She will probably stay at this employer until she retires in 15-20 years. She is currently 43.

My question is this. I was thinking about converting her 45K IRA to the ROTH but I keep getting hung up on the numbers. I think I’m at the point where I’m overthinking things so I’m looking for a little help. I’ve used multiple conversion calculators, even those from Vanguard, Fidelity and Schwab, which is where her accounts are. According to my calculations if I convert all of the 45K to the ROTH I’ll pay about 10K in taxes which we have the cash to pay. Then we’ll have approximately 300K +/- in her ROTH, tax free of course in 15-20 years. If we don’t convert we’ll have 200K +/- in the ROTH and approximately 120K in her IRA, which again will have no contributions and we’ll let it ride. Then, of course, when we do receive distribution of the IRA we’ll have to pay taxes on the 120K at 22% (probably). So, do we convert or stay as-is with letting the IRA ride and keep maxing out her ROTH for another 15-20 years. I used a 7% rate on all my calculations.

Am I missing something? What would you do? I feel like I’m overcomplicating things. Thank you in advance for your help.

#2

Hi there, I got a little confused and re-read your post several times, I feel I see what you are trying to do.

First thing (and you might know this) is that the SimpleIRA can be moved to a Traditional IRA as a rollover, to not only not pay the taxes and possible penalties, but to have better investing options such as what you have with the ROTH IRA.

Second, from the little I know, you don’t have to convert all the $45K from the SIMPLE IRA in one shot, possibly planning it out depending on your yearly income and tax obligations maybe you can spread the move in a couple of years that way lessening the tax burden?

As an added “bonus” if I’m correct, and you convert to Traditional IRA and since your wife doesn’t have a retirement plan currently at work, she could contribute $6K yearly to each , Traditional IRA and ROTH IRA, double-wammy !!!

HTH

#3

Good stuff! I didn’t think about a rollover to a Traditional IRA. Honestly, not being educated enough and after hours and hours of research I get overwhelmed with so many options available. Rolling over and keeping her ROTH would allow us to have the double whammy you mentioned. Plus, it gives us a little tax break if we use rollover to a Traditional IRA. Thank you for the input.

1 Like
#4

Did some research on the Traditional IRA; We don’t have a way to make pre-tax contributions to my wife’s Traditional IRA since she doesn’t have a employer sponsored retirement plan. We would have to make post-tax contributions and not receive a tax break. So, we would essentially be contributing 6K to her ROTH and 6K to her Traditional IRA. My question after researching is this, I don’t want to be taxed twice on her Traditional IRA since we already will have paid taxes on her Traditional IRA contributions. The IRS form 8606 basically tells the IRS that portions of her Traditional IRA have taxed contributions in it. Does this mean her Traditional IRA will have two buckets? In the future when we make distributions to her Traditional IRA how do we know what is coming from her old pre-tax contributions and from her newer post tax contributions. Again, how are we assured we are not taxed twice?

#5

Hi , I would talk to a CPA to get an accurate answer, since TAX laws are confusing to say the least :stuck_out_tongue: