Non-Deductible IRA Option
I have a client that is still employed at age 69. He will turn 70 in October. He will retire at that point and begin taking his Social Security benefits. He has a TIRA with a balance of $120k which includes non-deductible contributions of $60k. His existing 401k has a balance of $300k. He wants to rollover his 401k as soon as he is separated from service. Current and future taxes are a much bigger issue than current income. Am I correct that right now only approximately 50% ($60k/$120k) withdrawn from the TIRA is taxable? If so, am I also correct if the $300k is rolled over the taxable percentage is increased to approximately 85% ($360k/$420k)? Does it make sense for him to do a Roth Conversion from his TIRA prior to rolling over his 401k account? Are there other issues that I am missing?
Thanks.
Permalink Submitted by Alan - IRA critic on Tue, 2013-03-19 18:57
The bar is lower for a Roth conversion to be beneficial if client will only be taxed on 50% of the conversion. You are correct that this opportunity will disappear once the 401k is rolled over to a TIRA. If the additional taxable income of 60k on a 120k conversion puts him into a higher bracket, he could always convert less than the total amount. Another option is to leave the 401k in place until Jan, 2015. That will allow him to avoid additional taxable income in 2013 by postponing the conversion to 2014 when his taxable income is likely to be lower. He can also delay his first 401k RMD until 2015.