Married filing jointly (58 her/52 him) $400k in Roth IRAs (200 each), $1,000,000 in Traditional plus 401k (mostly him)
You’d think we are doing great but we are OLD parents and our kids will enter college in 3-5 years. We’ve told each they have $100k for College.
We know we should be converting more of the 401k and Trad IRA to Roth but with 3 teenagers we don’t have the cash flow to pay the taxes as we basically invest only the match on our employers 401k after saving big time when we had no kids. AND we max the HSA spending account.
OK, LOL, good problem to have but we’d like to retire in 5 years and not have to move to a 3rd world country.
How do I convert more TRAD to ROTH when I don’t have cash to pay the tax man. I will not pay a 10% penalty just to make it happen.
FWIW I am currently putting all 401k contributions into Roth 401k, but it pains me that I have $1M in tax-infested retirement accounts that will cost me 12-35% in taxes.
Any advice is appreciated. thank you!
If you retire at 55 or later, you can take penalty-free distributions from the 401K of the employer you retired from.
You can not do this with the 401K’s of previous employers.
Do not be in a big rush to convert. I started doing conversions in 2010 and did our last conversion this year. A little but every year.
I used outside cash almost exclusively for taxes.
Does that help you?
All holdings and some statistics on my Fool profile page
I’d tread carefully here. You don’t want to spend a dollar to save 50 cents. But this is a good financial planning problem.
You don’t mention your marginal tax rate (Fed + State), but multiplying this rate times your Roth conversion amount will be the cost of the conversion. The easiest way to figure this out if you do your own taxes with software like TurboTax, H&R Block or other, is to go back to last years finished return and insert $100 of ordinary income, such as increase your 1099-INT amount by $100 and see what the tax increase is for Fed and State. The dollar value of the increase will = the tax rate on the withdrawal.
Compare this to simply taking a withdrawal from your TIRA in 3 years or whenever your oldest enters college. Add this amount to your most recent year’s tax return and see what the increase in taxes are. Keep in mind that TIRA withdrawals used to pay qualifying higher ed costs for children is not subject to the 10% early withdrawal penalty, but there are some rules that must be followed. Suggest you read the applicable section of Pub 590b that describes the exception to the 10% early withdrawal penalty (prior to age 59.5) for qualifying hi-ed expenses.
What may make the most sense is to withdraw first from your TIRA up until you hit the next tax bracket (the point of a sharp jump up in tax) and then pay the remaining amount from your Roth. Because you’re not yet 59.5 when doing this, the Roth withdrawal will come from contribution basis first, so no tax. But if using the Roth of the one who has attained 59.5…and thats age 59 + 6 months…then the withdrawal will be qualified and no tax.
Probably the easiest way to pay tax on the withdrawal from the TIRA is to figure the tax on the withdrawal and have that amount of the withdrawal kept by the IRA custodian and sent to the IRS as a withholding and take the additional amount for the higher ed from the Roth.
The easiest way to visualize all this is to build an Excel SS, but you’d need to have basic proficiency in Excel