Age-old "To Roth or Not to Roth (Convert)?"

[nachos31]

I always planned on converting my residency 403b and 457 accounts to Roth IRAs in the year I graduated (this year!) to help bolster the Roth component moving forward since an overwhelming majority of future retirement contributions will be in tax-deferred accounts. However, now I'm not so sure.

Each account has only ~$12,500 (I didn't know the difference intern year and decided to split down the middle and then just left it as such for the rest of residency).

For 2016, my marginal tax rate (fed + state) will be 35.85%. I'll have taxable money to pay the taxes on the conversion (~$9000) so as not to diminish the amount converted.

In my mind this boils down to a judgment on what matters more: 1) having larger Roth component (which will already be much smaller than tax-deferred come retirement time + time to compound now) vs 2) likely paying less for the conversion leading up to/after retirement before having to take Social Security.

I imagine I'll retire around mid-50s. I'd hope to have set up some other passive income stream by then (something entrepreneurial maybe). Would it make more sense to wait until I'm peri-retirement and do conversions before I take SS?

[jfoxcpacfp]

First of all, have you double-checked your state? Many states (such as KY) do not tax retirement income and a Roth conversion counts.

If you are going to invest the $9k in the same diversified equity portfolio that you would the Roth IRAs, I might advise waiting. But in almost all cases, I would advise converting either now or in the next bear market.

[soundbyte]

Similar situation to me. I ran some numbers and decided it was essentially a wash as to whether or not to convert to a Roth. I elected not to. I anticipate having less income at the time I would be withdrawing funds, though. If I was smarter, I would have converted in December of my final year of residency, as to take advantage of our resident income. But like you, I didnt, and even with only 6 months or so of attendingship this  year, my marginal rate in 32+%.

I'd invest the 9K you had set aside to pay the taxes, and would do a back door roth as well. Doesn't hurt to have some Roth accounts and some non-Roth accounts

[nachos31]

Johanna: My brief Google search suggests that Minnesota is sadly not as magnanimous as Kentucky

Soundbyte: Didn't have the option to convert by last December as you can't do that unless you leave the employer, no?

 

Random other question: If I had contributed $3000 to my residency 403b this year and convert the entire 403b balance (including prior years' contributions) to Roth this year, I can still only contribute $15,000 to my new employer's 401k, correct?

[jfoxcpacfp]

nachos31 wrote:

Didn’t have the option to convert by last December as you can’t do that unless you leave the employer, no?

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Depends on if your employer plan allows or not.

nachos31 wrote:

Random other question: If I had contributed $3000 to my residency 403b this year and convert the entire 403b balance (including prior years’ contributions) to Roth this year, I can still only contribute $15,000 to my new employer’s 401k, correct?

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Correct. It is up to you to monitor so you do not overcontribute as new employer is not privy to contributions at your prior employer.