Traditional IRA transfer to Roth

[Frenchy1011]

Hey all, quick question.

 

My financial advisor (that I am no longer working with) converted my residency 401k Match that I had into a Traditional IRA. I currently have that account, as well as my personal Roth and a Spousal Roth. My question is if I can transfer my Traditional IRA into my Roth IRA, and if that is a good idea to do. If I do transfer that money into my Roth, does it count against the $5500 I can put into my Roth yearly? Or can I transfer the money into the Roth and also add $5500 contribution into it in the same year. Thoughts on whether or not I should keep that Traditional IRA and just let it grow, or transfer it into my Roth? Thanks for the help!

[DMFA]

Conversions are not contributions. Therefore they don't count against the $5,500 limit.

You will pay taxes on the conversion at usual income tax rates. Hence it's better to do when you're in a low tax bracket such as during residency.

Is your married joint AGI over $184,000? If so, you can't make full Roth contributions each year, and you're better off with backdoor Roth (a non-deductible traditional contribution followed by a Roth conversion), meaning you should either convert what you've got in trad to Roth and pay the taxes, or if you have 1099 income start an indie 401(k) and roll the trad IRA into that since the pro rata rule will penalize you if you have any trad/SEP/SIMPLE IRA balance at year's end.

[Frenchy1011]

Thanks for the help.

DMFA wrote:

Is your married joint AGI over $184,000?

Click to expand...

And yes our AGI is less than 184K so we're ok for now with this. I also was asked if I wanted money help from the transfer from traditional IRA to the Roth (by Vanguard) or I can not hold anything, and pay the taxes when I do the taxes in March/April. Does that sound right? Vanguard stated that they recommended not holding any funds and just paying the taxes when I file. Would you agree? Thanks!

 

[DMFA]

Frenchy1011 wrote:

Thanks for the help.

DMFA wrote:

Is your married joint AGI over $184,000? 

Click to expand…

And yes our AGI is less than 184K so we’re ok for now with this. I also was asked if I wanted money help from the transfer from traditional IRA to the Roth (by Vanguard) or I can not hold anything, and pay the taxes when I do the taxes in March/April. Does that sound right? Vanguard stated that they recommended not holding any funds and just paying the taxes when I file. Would you agree? Thanks!

 

Click to expand...

If you convert in 2017, then the conversion is included in your AGI for 2017 (the amount on Form 8606 Line 18 of Form 8606 goes on Form 1040 Line 15b as income).  So, if it's a high amount, not only will you have more tax to pay on it, but a higher AGI that might reduce the amount of or disqualify you from direct Roth contributions (if you're close) or push you into a higher bracket.  You may have to be a bit creative and split conversions between years if that's the case.

However, if you're still making direct contributions, then you don't need to worry about eliminating your TIRA holdings for the sake of the backdoor Roth, just to get the taxes on the low amount out of the way and let them grow and be drawn tax-free.  In that case, there's no rush, but you do want to convert them in a lower bracket than you will be in future years, since the 25% or less tax deduction on today's small amount is probably not worth giving up tax-free withdrawal of a much higher amount in the future.