Tax Considerations for Retirement Portfolio Adjustments
Hello, everyone!
I’m currently adjusting my retirement portfolio and have some questions about numbers and dates. I’d appreciate any insights to ensure I’m on the right path.
Background:
My Age: 47 (employed)
Wife’s Age: 39 (homemaker)
Son’s Age: 8.5 years
Years Until Retirement: 15
Fidelity Portfolio:
Traditional 401(k): $130,000
Rollover IRA (from previous employer): $18,722
My Roth IRA: $7,275 ($7,000 was invested in 2023)
Wife’s Roth IRA: $7,275 ($7,000 was invested in 2023)
Financial Details:
My salary is $133,250 per annum. The top of the 12% tax bracket for Married Filing Jointly is $94,300 taxable income. Standard deduction for MFJ is $29,200. Which means an Adjusted Gross Income of $123,500. Our medical insurance is taken out of the paycheck, which is $364, i.e. $9,464 yearly. [This is all I found by reading some forums, so by no mean these numbers are perfect. I will need your expert opinion on this]
My Goals:
1- Switch from Traditional 401(k) to Roth 401(k) for this year and 2025.
2- Max out my 401(k) contributions for 2024 and continue maximizing for 2025.
3- Convert my Rollover IRA to a Roth IRA.
4- Keep my tax liability low for the Roth accounts and remain in the 12% tax bracket.
My Plan:
1- Change to Roth 401(k): I will call Fidelity on Monday to initiate this change. My next paycheck is on 10/25/2024 to close, so I anticipate the change will take effect on 11/08/2024. By 10/25, my total 401(k) deduction will be $15,477 pretax. After the change, I’ll need to contribute an additional $7,523 over 4 paychecks, resulting in a deduction of $1,880 per paycheck instead of the current $820.
2- Convert Rollover IRA to Roth IRA: Convert $15,447 from Rollover IRA to Roth IRA. If I convert $15,447 of that amount to Roth IRA, that’s the exact equivalent of NOT touching my Rollover IRA and contributed to Roth 401(k) at work from the beginning of this year.
3- Increase Tax Withholding: I’ll increase my withholding to account for the Roth conversion. This will amount to approximately $1,857 (12% of $15,477). I plan to increase withholding by an additional $464 per paycheck over the next 4 pay periods starting 11/08. It would result in a slight liability that I can pay off next year. Indirectly I will convert my taxable account into Roth account with no further tax liability.
4- Max Out Roth IRAs: I’ll contribute $7,000 to both my Roth IRA and my wife’s Roth IRA for 2024. While this won’t affect my tax liability, it’s part of my investment strategy.
Questions:
1- Are these numbers making sense? Am I missing anything important related to dates?
2- After making these changes, will I remain in the 12% tax bracket, or do you recommend any adjustments?
Please advice. Thank you for your help!
Permalink Submitted by Alan - IRA critic on Sat, 2024-10-12 13:00
Looks like your taxable income might have entered the 22% federal bracket. Is the salary stated your gross salary or the expected Box 1 of your W-2 amount? Note that pre tax 401k contributions and pre tax health insurance deductions are not included in Box 1.
Have you considered an HSA contribution? Those are tax deductible and tax free when used for qualified medical expenses, so can be more valuable than even a Roth IRA. Or perhaps a 529 plan for son?
Do you have any other income such as interest or dividends? Or is your salary the only taxable income you have?
Do you expect any significant inheritance or does employer provide a defined benefit pension plan?
Bottom line is that if you are already in the 22% bracket, and because your retirement plan balance is quite low which indicates very modest RMDs at age 75, unless the answers to the above questions indicate additional future income, you should continue the pre tax 401k contributions. Roth conversions are questionable as well pending further info.