Traditional to Roth IRA conversion

[jaydoc24]

Been following WCI for quite awhile and this website really opened my eyes to the importance of financial fitness as a physician. In that light I had a question I was hoping some of you could help me with.

I'm in my 3rd year of residency and my wife stays at home with three children. I worked prior to starting medical school and have retirement accounts at Vanguard. I have a traditional IRA and a Roth IRA. My wife has a traditional IRA only. My question is should I (or even can I) convert the traditional IRA to a Roth IRA? And if so, do I need to do it $5500 per year until each balance is fully converted? Thanks for your help.

[Hatton]

You can convert some or all of it.  On a conversion there is no yearly limit.  Contributions have a yearly limit.  If you decide to convert you have to pay the tax.  If you have the funds in another account it probably makes sense to do it now and never pay tax on the money again.  The problem is depending on the size of the account it may bump you to a higher bracket. You are probably at a low point for earnings so you need to look at the numbers and see how much the tax is. Depending how long your residency goes you could do some over several years. The blog go curry cracker has several good posts on this topic.

[PhysicianOnFIRE]

You can convert it all at once, but be prepared to pay the tax bill. Do it in residency if you can, while you're in a lower tax bracket.

I converted over $300,000 at once as an attending (chronicled here). The tax bite was six-figures.

 

[Hatton]

PhysicianOnFIRE wrote:

You can convert it all at once, but be prepared to pay the tax bill. Do it in residency if you can, while you’re in a lower tax bracket.

I converted over $300,000 at once as an attending (chronicled here). The tax bite was six-figures.

 

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At least it is done.  Congrats.  I baby stepped 36500 on brexit.

[jaydoc24]

That's great to hear, and kind of what I thought about having to pay the tax but I'd rather do it now when I'm in a lower talk bracket. Plus the benefit of letting the money grow tax free from then on.

The accounts are not that large. Only about 15k per account. I am an anesthesia resident so I have two years left plus fellowship. I guess I need to really figure out what the taxes will amount to to decide how much to convert.

My ultimate plan is setting myself up for backdoor conversions when my pay increases to attending level.

[Ivy]

Should you convert?  That's up to you.  https://investor.vanguard.com/ira/roth-conversion

You have to pay regular income taxes on the conversion.  At your (presumed) age and tax rate, I would, but only if you can afford to pay the taxes on it.  If you have two or more years left in your residency, you might split the conversions over those years to spread out the tax hit.  Another consideration, that probably doesn't apply, is if your modified adjusted gross income is over $184k (2016 married, filing jointly) you won't be able to contribute directly to your existing Roth IRA.  In that case you can do a 'backdoor' IRA.  Please note; the $184k limit includes the conversion, which is treated as ordinary income.

If your traditional IRA and Roth IRA are both at Vanguard, it's really easy to do the conversion.

 

[jaydoc24]

I was having this conversation with my tax preparer (sounds more official than my grandpa) and gave him the links to the WCI conversion instructions. He had a question that I could not answer so I was hoping to get some advice from you all on this site. I think more context may help answer his question more accurately so I'll provide that.

Here is how our assets currently sit.

My RIRA is worth about $1500. My TIRA is worth almost $15K. My wife only has a TIRA worth around $16K. She does not have a RIRA at this point.

When we ran the numbers, it appears I can convert about $6000 this year from the TIRA to the RIRA while not taking a big hit on my taxes. The question he had is does it matter how the conversion is done? He was asking if it matters that we are married filing jointly? I presume the answer is no it does not. In that regard, once I complete a total conversion for myself or my wife, can I make a contribution via the backdoor if the other party still has TIRA money or does that put my on the hook for the pro-rata rule?

With that being said, I was curious how you all would recommend making this conversion or if it really matters at all? I could open a RIRA for my wife and just do a $6000 conversion for her. I could also do a $6000 conversion from my TIRA to my existing RIRA. Since Vanguard requires a $3000 minimum to purchase shares in a mutual fund, I am invested in multiple funds but all are over $3000 so when I do the conversion I am not real sure how to do that. Should I just take two funds for example and essentially move them into Roth space? It seems like that would be easiest, but it could generate a small tax-burden based on my situation. Sorry for some likely elementary questions, but as stated earlier, I really want to get this done before I finish my anesthesia residency in 2018.

[jaydoc24]

Anybody with more knowledge care to share some advice? I'd really appreciate it.

[WealthyDoc]

To convert or not to convert is an individual decision.  It depends both on your current circumstances and your opinions about what will happen in the future.  I converted all that I was able to convert.  I believe that was the right decision.  I don't regret it as POF apparently did.  I paid a smaller percentage on a smaller amount rather than a larger percent of a larger amount later.  There isn't a right or wrong and it largely depends on future marginal tax rates that are currently unknown.  Based on my understanding of macroeconomics and the U.S. dollar, our national debt etc I'm not expecting much lower tax rates in the future.  That is my crystal ball for what it is worth.  I ran some numbers and I will likely save $250K because of the conversion (over the course of my lifetime assuming all of my assumptions and predictions are true).

 

[Son of a Doctor]

jaydoc24 wrote:

I was having this conversation with my tax preparer (sounds more official than my grandpa) and gave him the links to the WCI conversion instructions. He had a question that I could not answer so I was hoping to get some advice from you all on this site. I think more context may help answer his question more accurately so I’ll provide that.

Here is how our assets currently sit.

My RIRA is worth about $1500. My TIRA is worth almost $15K. My wife only has a TIRA worth around $16K. She does not have a RIRA at this point.

When we ran the numbers, it appears I can convert about $6000 this year from the TIRA to the RIRA while not taking a big hit on my taxes. The question he had is does it matter how the conversion is done? He was asking if it matters that we are married filing jointly? I presume the answer is no it does not. In that regard, once I complete a total conversion for myself or my wife, can I make a contribution via the backdoor if the other party still has TIRA money or does that put my on the hook for the pro-rata rule?

With that being said, I was curious how you all would recommend making this conversion or if it really matters at all? I could open a RIRA for my wife and just do a $6000 conversion for her. I could also do a $6000 conversion from my TIRA to my existing RIRA. Since Vanguard requires a $3000 minimum to purchase shares in a mutual fund, I am invested in multiple funds but all are over $3000 so when I do the conversion I am not real sure how to do that. Should I just take two funds for example and essentially move them into Roth space? It seems like that would be easiest, but it could generate a small tax-burden based on my situation. Sorry for some likely elementary questions, but as stated earlier, I really want to get this done before I finish my anesthesia residency in 2018.

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Each spouse is treated separately for purposes of eligibility for backdoor Roth conversions.  You can roll all of your wife's TIRA money into a Roth one year, pay the tax, and then in year 2 your wife makes Roth contributions or backdoor contributions depending on AGI while you roll all of your TIRA money into a Roth.  Then, in year 3 both of you can make Roth contributions or backdoor Roth contributions.  I am not necessarily advocating for that order or strategy as much as provide an example to help answer your question.  Here is an article with two other strategies: http://sonofadoctor.com/backdoor-roth-ira-strategies/

Here's another article on backdoor Roth IRAs and conversions that is not mine: https://www.kitces.com/blog/how-to-do-a-backdoor-roth-ira-contribution-while-avoiding-the-ira-aggregation-rule-and-the-step-transaction-doctrine/

-Richard

[jaydoc24]

Thank you for your guys' input on this topic.