401k Rollover to IRA to Roth
I want to ensure I understand this correctly before making a mistake.
I left my company and executed a 401k rollover from my company account to an IRA account at Fidelity. My understanding is this account is now treated as a Traditional IRA, meaning if I desired I could do a Roth conversion with this ex 401k money.
Is this correct?
Also, I don’t want to pay taxes on the whole thing all at once so is there any limits I need to know about around conversion? I couldn’t find any. What I mean is, if I have $500k in this IRA rollover account, could I convert $50k this year, $100k next year and so on for as many years as necessary until all $500k of the ex 401k/IRA rollover account has been converted?
I am thinking with tax rates as low as they will likely ever go, this might be a good time to consider this. Any rebuttal to this thinking?
Anything else I should consider before making this move?
Permalink Submitted by Alan - IRA critic on Tue, 2019-02-05 22:49
Yes, you can convert as much of your TIRA as you wish, but converting too much in a single year will spike your marginal tax rate. The main strategy for conversions is to compare your rate for the conversion, which is easy to do with your expected marginal rate in retirement, which is not so easy to determine, because retirement can be a long period of time with changing taxable income and deductions from year to year. Be careful not to overconvert because conversions can no longer be recharacterized, so once you execute a conversion you will increase your tax bill in April, and increase it alot if your conversion is large. The higher rate you pay for a conversion, the more likely it may be more than what you will pay in retirement. Generally, if the chance exists a good time to convert incremental amounts are the years between retirement and the start of RMDs, SS, and pensions if you have such a window. That is a good time because you have little other income and will be in a low bracket, but you should have enough other funds to pay the taxes on your conversion, rather than withholding from the TIRA distribution.