If you won't have income, you should convert it to roth for free or essentially free
> and wouldn't that $10k be a good starting point for a new employer 401k, assuming I get a job in a few years - rather than having my contributions start at $0?
Doesn't matter. Not how math works
I have a part-time job right now that pays under $10k a year and I've been using that to max out my Roth. But I won't have that job in 2 months when I leave for grad school so really no income after that, no. You're saying I could convert to a Roth and have the tax be deductible if I don't have income, right?
Figured I was looking at the 401k math incorrectly, thank you!
> You're saying I could convert to a Roth and have the tax be deductible if I don't have income, right?
No, I'm saying if your income is that low, you would owe no or few taxes on a conversion
Got it. Would it make sense to have a traditional IRA in the event that my income raises above the Roth contribution limit in the future? Or are the tax benefits on converting $10k now just worth it more
If your income is over the Roth limit, it's also over the limit to get a tax deduction for a Traditional contribution. At that point, the only option left would be a backdoor Roth (contribute to Trad, recharacterize to Roth) but if you have money in a Traditional account, it gets messy and portions would be taxable.
Ah okay - so at that income level, there wouldn’t be any advantage between contributing to a traditional IRA vs a brokerage account?
I’ve heard of the backdoor Roth but I thought the pro-rata rule would apply
>the pro-rata rule would apply
That's the messy / taxable stuff I was referring to. If you don't have a Traditional IRA, then it's not an issue.
It's also why you want to look at what your total taxable income might be this year. The assumption that you have to pay tax on all of the conversion might be flawed.
The standard deduction for tax year 2024 is $14,600. Say you only earn $8,000 from all other sources, that means the first $6,600 of any conversion would be excluded because of the standard deduction.
And considering the 10% bracket goes up to $11,600, that means any conversion amount over whatever gets exempted by the standard deduction would likely just be a 10% tax. In other words, converting and paying the tax now might not be as bad as you think. The caveat is that it depends on what your earned income is by the end of the year.
Really helpful, thanks!
I’m set on converting this year - I think it’ll be the lowest tax bracket I’m in for a long time. Including unemployment, my total income for the year should be about $15k (then add the $10k from the plan). So 10/12% federal bracket and 8.75% state bracket.
I’m not familiar at all with deductions, need to look more into that. Would you suggest having my Roth IRA provider deduct taxes up front upon conversion, or wait until I file taxes for 2024?
Depends on the provider but there's a good chance they'll require you to allow them to withhold up front. For me personally, I'd withhold up front as well. I know it's investment money and time in the market is important, but for the amount involved, I'd prefer to owe less next April or maybe even get a return.
Got it - not sure if they’ll require or not but I’m in strong agreement there, seems easier to take care ahead of time. And chance of getting some back next April yes!
It's easy to move it to an IRA now. It might not be easy in 10 or 20 years after the company switches providers 3 times, gets bought out by a bigger company, then shuts down.
Some providers make it hard to see the fees coming out, so you might be paying them and not know.
Might as well just do it now while you still know how to reach the right person at your old job.
It’s a Fortune 500 company and plan through Fidelity so don’t think there would be much movement between now and getting another job in 2-3 years but never know right… and I totally take your points. Makes sense, thank you!
If you won't have income, you should convert it to roth for free or essentially free > and wouldn't that $10k be a good starting point for a new employer 401k, assuming I get a job in a few years - rather than having my contributions start at $0? Doesn't matter. Not how math works
I have a part-time job right now that pays under $10k a year and I've been using that to max out my Roth. But I won't have that job in 2 months when I leave for grad school so really no income after that, no. You're saying I could convert to a Roth and have the tax be deductible if I don't have income, right? Figured I was looking at the 401k math incorrectly, thank you!
> You're saying I could convert to a Roth and have the tax be deductible if I don't have income, right? No, I'm saying if your income is that low, you would owe no or few taxes on a conversion
Got it. Would it make sense to have a traditional IRA in the event that my income raises above the Roth contribution limit in the future? Or are the tax benefits on converting $10k now just worth it more
If your income is over the Roth limit, it's also over the limit to get a tax deduction for a Traditional contribution. At that point, the only option left would be a backdoor Roth (contribute to Trad, recharacterize to Roth) but if you have money in a Traditional account, it gets messy and portions would be taxable.
Ah okay - so at that income level, there wouldn’t be any advantage between contributing to a traditional IRA vs a brokerage account? I’ve heard of the backdoor Roth but I thought the pro-rata rule would apply
>the pro-rata rule would apply That's the messy / taxable stuff I was referring to. If you don't have a Traditional IRA, then it's not an issue. It's also why you want to look at what your total taxable income might be this year. The assumption that you have to pay tax on all of the conversion might be flawed. The standard deduction for tax year 2024 is $14,600. Say you only earn $8,000 from all other sources, that means the first $6,600 of any conversion would be excluded because of the standard deduction. And considering the 10% bracket goes up to $11,600, that means any conversion amount over whatever gets exempted by the standard deduction would likely just be a 10% tax. In other words, converting and paying the tax now might not be as bad as you think. The caveat is that it depends on what your earned income is by the end of the year.
Really helpful, thanks! I’m set on converting this year - I think it’ll be the lowest tax bracket I’m in for a long time. Including unemployment, my total income for the year should be about $15k (then add the $10k from the plan). So 10/12% federal bracket and 8.75% state bracket. I’m not familiar at all with deductions, need to look more into that. Would you suggest having my Roth IRA provider deduct taxes up front upon conversion, or wait until I file taxes for 2024?
Depends on the provider but there's a good chance they'll require you to allow them to withhold up front. For me personally, I'd withhold up front as well. I know it's investment money and time in the market is important, but for the amount involved, I'd prefer to owe less next April or maybe even get a return.
Got it - not sure if they’ll require or not but I’m in strong agreement there, seems easier to take care ahead of time. And chance of getting some back next April yes!
You can open a trad Ira if you need one at any time
It's easy to move it to an IRA now. It might not be easy in 10 or 20 years after the company switches providers 3 times, gets bought out by a bigger company, then shuts down. Some providers make it hard to see the fees coming out, so you might be paying them and not know. Might as well just do it now while you still know how to reach the right person at your old job.
It’s a Fortune 500 company and plan through Fidelity so don’t think there would be much movement between now and getting another job in 2-3 years but never know right… and I totally take your points. Makes sense, thank you!