Rollover 401k to roth while on Workers Compensation
I have a 401k plan through the company I work for. I am on Workers Compensation and reporting NO income since my bi-weekly payments are not taxable. Would it be wise to rollover to a Roth 401k or Roth IRA while on Workers Compensation to pay less taxes since no income is reported? I am 57 years old and not sure if my employer would allow it.
Permalink Submitted by Alan - IRA critic on Mon, 2015-09-28 18:58
There are two options to consider. If your 401k plan includes a Roth option and offers IRRs (in plan Roth rollovers) you can roll over an amount allowed by the plan to the designated Roth. But you have to be very careful with these rollovers because they cannot be recharacterized (reversed) for any reason. You might also be able to roll over certain amounts that do NOT include your elective deferrals to a Roth IRA. This direct rollover to a Roth IRA can be recharacterized later if need be. Of course, unless you have no taxable earnings for a long period, your marginal rates might not be reduced this year. You should crunch some numbers before acting and you have about two more months to do that.
Permalink Submitted by John Fiore on Mon, 2015-09-28 20:22
Hi Alan, Thanks for your info. I am not sure I understand “Of course, unless you have no taxable earnings for a long period, your marginal rates might not be reduced this year.” I have had no income for this year at all. What are my “marginal rates”? Also, would it be wise to rollover if I start taking distributions at 60 years old or since it is only 3 years away? Would make no sense to rollover to a Roth vehicle?
Permalink Submitted by Alan - IRA critic on Mon, 2015-09-28 22:26
Sounds like your total taxable income for this year will be very small. Therefore, you can convert to a Roth IRA (or Roth 401k) up to the total of your personal exeption and standard deduction (or itemized) tax free. You could also convert up to the top of your 10% bracket for very little. Converting more than that would result in paying 15% (plus any state tax) and these are your marginal rates. You should not be converting at a marginal rate that is higher than what you expect your marginal rate to be in retirement. Your rate in retirement depends on your income (pensions, SS, investments, IRA or 401k RMDs or other distributions etc), so you would have to estimate how much income you would have and what the marginal rate would be on that income.