Roth conversions- How much is worth it

[Glorified Carpenter]

Finished residency and starting fellowship. Residency salary was about 62k and fellowship salary is 55k. My wife dropped down to PRN last year. I’m doing some Roth conversions with retirement account rollovers for my wife and I since we are going to be in a relatively low tax bracket. I have a 403b with ~14k. She has multiple 401ks from prior employers. She has 4 total. Values are roughly 11k, 20k, 40k and 70k. I rolled over the 14k, 11k, and 20k accounts. I’m not sure if I’m able to roll the 40k account over since she is still employed (but not receiving benefits)? I’m racking up a large (for a fellow) tax bill with the conversions. Is it worth doing the largest account as well? I do have the funds available to pay the taxes on it but not sure if it is wise ? Thoughts?

[jacoavlu]

you have to define “worth it”

what is your marginal tax rate federal plus state?

[Tim]

While still employed, she will not be able to rollover.
The rest is math, calculate the taxable income and the top marginal brackets this year and next. It will not be getting better for a long time.

[Glorified Carpenter]

State income tax: 3.326% or 3.802% depending on how much my wife ultimately works in her prn job.
federal marginal tax rate will either be 12% or 22%.
Let’s say most likely 3.8% state and 22% federal marginal tax bracket.

[jacoavlu]

State income tax: 3.326% or 3.802% depending on how much my wife ultimately works in her prn job.
federal marginal tax rate will either be 12% or 22%.
Let’s say most likely 3.8% state and 22% federal marginal tax bracket.

so, if it is a 26% tax cost for me personally that’s right on the borderline. Maybe. No one knows the future.

if fed rate were 12% then I would say for sure do it as long as I didn’t need the money and I would be comfortable with the decision.

[Glorified Carpenter]

Does the amount of the pretax money that I have previously rolled over this year from 403b and 401k and converted to Roth account count towards my taxable income for the year? I.e. if my wife and I’s taxable earned income was below 83,550 for 2022 would we pay 12% federal tax on all of the money we rolled over in 2022 from the retirement accounts and converted to Roth or does the money we rolled over count as income and carry us into the next tax bracket?

[Glorified Carpenter]

It looks like from online that it would count as taxable income and probably move me into the next marginal tax bracket at 22% with the money that I have converted.

[Tim]

It looks like from online that it would count as taxable income and probably move me into the next marginal tax bracket at 22% with the money that I have converted.

Total income, but the graduated tax is by bracket.
Not all income is taxed at the highest rate.

[jacoavlu]

Total income, but the graduated tax is by bracket.
Not all income is taxed at the highest rate.

sure, but that’s the point of knowing your marginal rate. What is the tax cost of decision X? What is my tax rate in $1 of income added on top of everything else?

it’s a helpful concept to understand in these types of decisions.

[altadoc]

Your income + Roth conversion will be your taxable income (minus standard deduction, etc.). So yes, your Roth conversions this year will count towards your total earned income.

The 24% federal rate for married couples makes Roth conversions even more attractive in the current tax climate. You can convert a significant amount into a Roth (up to $329K in income) before bumping up to the 32% federal bracket. If you have the free cash reserves to pay taxes on the conversion, it's an excellent time to consider.

As others said, your wife's current 401(k) cannot be rolled into an IRA and converted.

[StarTrekDoc]

Is it worth it? Retirement wise, yes.

HUrt the cash flow sheet? I wouldn't convert if you can't cash flow or impacts your savings rate

[99mkw]

Is it worth it? Retirement wise, yes.

HUrt the cash flow sheet? I wouldn't convert if you can't cash flow or impacts your savings rate

This is an excellent point that must be considered. Remember that you've got limited tax-advantaged space each year, and any that isn't used in gone forever. I know it's too late for the money you've already converted but you should only consider Roth conversions after you max out your current tax-advantaged opportunities. For sure this includes current 401k/403b and (front door) Roth IRA contributions. If you subscribe to the notion of HSAs as a triple-tax advantaged "stealth Roth" then that might apply as well.

I would assume that if you feel it's worth converting old pre-tax 401ks then you should be making Roth 401k/403b contributions if your plans allow, though maybe I am thinking about that the wrong way. If money is going to be tight because of the conversions, I would consider making traditional 401k contributions so you don't forfeit that tax-advantaged space.

[Kennyt7]

At your age and bracket CONVERT ALL in to the Total Stock Mkt Index Fund and don't look at it for 30yrs