401 ( k ) Conversion | Ed Slott and Company, LLC

401 ( k ) Conversion

We have a client that is retiring with a TSP valued at $ 175,000.00. He is being given the option of paying the taxes on the "Traditional" part of plan and transferring it all to a Roth IRA. He currently has a Traditional IRA valued at $ 250,000.00 with us along with a Roth IRA. Will having an existing IRA have any implications on his ability to convert the TSP?

  • No. However, it may not be wise to convert (actually it's called a qualified rollover contribution) the entire pre tax TSP value in a single year because it will probably increase his marginal rate. If we assume he has no after tax contributions in the TSP or in his TIRA, he should do a direct rollover of the entire non Roth TSP to his TIRA, and then convert the incremental amount he wants to from the TIRA. And because he is retiring this year, his 2021 taxable income may be lower than 2020 and therefore 2021 might support a higher conversion amount than 2020.
  • However, if he has a large enough TIRA basis now, please advise since there is a way to convert that amount tax free by rolling the TIRA pre tax amount to the TSP, converting the IRA basis tax free, then doing the TSP rollover in 2021.
 

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