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Rolling over traditional IRA to Roth while in school

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  • Rolling over traditional IRA to Roth while in school

    Hi all,

    I'm currently an M2 considering rolling my traditional IRA into a Roth to take advantage of the low tax rate while I am in school. The IRA has about $21k in it and was rolled over from a 401k when I started school. Is this a good idea? Am I missing anything?

  • #2




    Hi all,

    I’m currently an M2 considering rolling my traditional IRA into a Roth to take advantage of the low tax rate while I am in school. The IRA has about $21k in it and was rolled over from a 401k when I started school. Is this a good idea? Am I missing anything?
    Click to expand...


    It sounds like it, but difficult to offer specific advice without a more complete financial profile. In general, you want to convert and/or add to your taxable income with other reasonable choices while you are in a low tax bracket rather than pushing off to when you are in a much higher tax bracket. At that point, you are not going to be inspired to pay taxes at a 40% tax bracket and you're much more likely to never take the conversion plunge.
    Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

    Comment


    • #3
      I did this in med school too - it was fantastic! I wasn't making any money so didn't end up paying any taxes on the conversion. Much better than the one I did last year on an attending salary....

      Comment


      • #4







        Hi all,

        I’m currently an M2 considering rolling my traditional IRA into a Roth to take advantage of the low tax rate while I am in school. The IRA has about $21k in it and was rolled over from a 401k when I started school. Is this a good idea? Am I missing anything?
        Click to expand…


        It sounds like it, but difficult to offer specific advice without a more complete financial profile. In general, you want to convert and/or add to your taxable income with other reasonable choices while you are in a low tax bracket rather than pushing off to when you are in a much higher tax bracket. At that point, you are not going to be inspired to pay taxes at a 40% tax bracket and you’re much more likely to never take the conversion plunge.
        Click to expand...


        Thanks! That's what I thought. Besides the IRA, my financial profile is pretty typical for a student. $50k debt so far and very little real income (probably less than $1000 this year). One last question I'm having trouble finding an answer on: can I convert only $5,500 per year, or could I do all $21k at once?

        Comment


        • #5
          You can do it all at once. The $5,500 limitation is for annual contributions; what you can convert each year is limited only by the balance in your retirement accounts.

          I've got even better news, given what you've told me so far: if you owe any taxes as a result, contributions to your Roth IRA should give you a Retirement Saver's credit and wipe out your taxes.
          Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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          • #6
            Agree - convert all of it while you are a student.  If you decide to change your mind you can recharacterize (undo) if needed.

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            • #7
              Why did you have Trad IRA in the first place?  Roth is (almost) always better unless the tax deduction now is better than it drawing it tax-free later, which is unlikely unless you're in a very high tax bracket.

              As said earlier by the accountant, doing it with a $0 income means that you'll pay minimal taxes on it, since Roth contributions are made with post-tax money and you didn't pay taxes on the Trad contributions.  However, with your exemption for yourself and the standard deduction (totaling $9,300 if single), your "taxable income" for the $21k conversion would be about $12,000, which in the 10% bracket would be $1200 in taxes.  What I would ask the accountant (Johanna, could you answer this?) is, could he just convert an amount each year equal to his exemptions plus standard deduction in order not to pay any tax on it at all?

              The RSCC (formerly known as Early Saver's Credit) will give you 10-50% of what you put into retirement accounts, up to $1000 if single of $2000 if married, but you are not eligible for it if you were a full-time student.

              Comment


              • #8


                The RSCC (formerly known as Early Saver’s Credit) will give you 10-50% of what you put into retirement accounts, up to $1000 if single of $2000 if married, but you are not eligible for it if you were a full-time student.
                Click to expand...


                You absolutely caught me on this one, blew right past the student issue. I guess (s)he could wait until residency.

                And, yes, (s)he could roll over enough each year to avoid any taxes. But that should be counterbalanced with the need to begin tax-free growth sooner rather than later. Taxes should not be the sole driver of a decision - 10% tax on a small amount of the balance is a reasonable price to pay, imo.
                Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

                Comment


                • #9




                  Why did you have Trad IRA in the first place?  Roth is (almost) always better unless the tax deduction now is better than it drawing it tax-free later, which is unlikely unless you’re in a very high tax bracket.

                  As said earlier by the accountant, doing it with a $0 income means that you’ll pay minimal taxes on it, since Roth contributions are made with post-tax money and you didn’t pay taxes on the Trad contributions.  However, with your exemption for yourself and the standard deduction (totaling $9,300 if single), your “taxable income” for the $21k conversion would be about $12,000, which in the 10% bracket would be $1200 in taxes.  What I would ask the accountant (Johanna, could you answer this?) is, could he just convert an amount each year equal to his exemptions plus standard deduction in order not to pay any tax on it at all?

                  The RSCC (formerly known as Early Saver’s Credit) will give you 10-50% of what you put into retirement accounts, up to $1000 if single of $2000 if married, but you are not eligible for it if you were a full-time student.
                  Click to expand...


                  I rolled it into a traditional IRA when I left my job because I still had a decent income and would have paid taxes on it. I think what I'll end up doing is what you suggested, converting it in smaller chunks.

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                  • #10
                    You must have been a pretty high earner. A tax deduction in the lower brackets usually isn't worth it if you're retiring into a higher bracket...but sometimes there are other good reasons to do it.

                    Johanna the CPA/CFP says it's better to convert it all now; she's the expert, so I'd follow that advice.

                    Fwiw I was off on my math (I used 3k as the exemption instead of 4K), so I was off on the tax bill by $100. Meh

                    Comment


                    • #11
                      If I convert it all now can I use funds in the Roth to pay the taxes? Or will I have to pay the $1,200 out of pocket?

                      Comment


                      • #12




                        If I convert it all now can I use funds in the Roth to pay the taxes? Or will I have to pay the $1,200 out of pocket?
                        Click to expand...


                        You should pay the taxes out of pocket (you have until 4/15/17). If you take the $1,200 out of the converted account, you will be subject to the 5-year rule, i.e. will owe a 10% penalty. The pro-rata rule may come into play, but I have not been able to find a definitive answer.
                        Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

                        Comment


                        • #13







                          If I convert it all now can I use funds in the Roth to pay the taxes? Or will I have to pay the $1,200 out of pocket?
                          Click to expand…


                          You should pay the taxes out of pocket (you have until 4/15/17). If you take the $1,200 out of the converted account, you will be subject to the 5-year rule, i.e. will owe a 10% penalty. The pro-rata rule may come into play, but I have not been able to find a definitive answer.
                          Click to expand...


                          So the problem is at this point I would have to use loans to pay that tax, which is why I was thinking of converting <$9,300 per year until it was all converted. Is that a bad idea?

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                          • #14
                            MS3 here. Been planning on rolling my 401k to a RothIRA this year as well, though it's only about $6K. I have a wife and kids and for tax purposes our income is $0 (just living off loans). I'm just curious does the rollover turn this into "income" for the year? Since we literally make no money, will we end up paying any taxes at all in the rollover? (I'm asking so I can get my wife onboard) I just don't want surprises, the rollover is happening no matter what, it's more just a question of when.

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                            • #15




                              MS3 here. Been planning on rolling my 401k to a RothIRA this year as well, though it’s only about $6K. I have a wife and kids and for tax purposes our income is $0 (just living off loans). I’m just curious does the rollover turn this into “income” for the year? Since we literally make no money, will we end up paying any taxes at all in the rollover? (I’m asking so I can get my wife onboard) I just don’t want surprises, the rollover is happening no matter what, it’s more just a question of when.
                              Click to expand...


                              You will owe no tax, given your circumstances, so you are in a perfect position to convert to a Roth IRA.
                              Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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