Comments on: 401(k) to Roth IRA: You can do it!

By: Dan Serra

Dan Serra — Thu, 08 May 2008 14:16:31 +0000

Yes, the lower brackets probably shouldn’t be concerned. This is more of an issue for those who plan equal of higher income in retirement that will keep them in that danger zone of tinkering with tax brackets.

By: joetaxpayer

joetaxpayer — Thu, 08 May 2008 04:39:19 +0000

Granted, the future is unknown. Can you count on a Standard deduction and an exemption? This creates a zero tax rate on the first $8950 in 2008. So, if you are agreeing with the 4% rule (initial starting withdrawal of 4% of retirement funds) , this means you can have $224K in pretax money and have it come out at zero rate. Same exercise can be applied to the 10% rate. Does anyone think a tax hike will affect that bracket? I can’t say, but I suspectthe tinkering will occur at the higher brackets, the working poor will be left alone or helped out. Recent articles I’ve read suggest that only 25% of retireees have more than $25K in retirement savings. Some fraction of those people are above $100k, of course. So while you are on target, your concern (of higher taxes upon retirement) may only impact a select few, 10% or less of retirees.
Joe

By: Dan Serra

Dan Serra — Tue, 06 May 2008 17:34:43 +0000

Good point Joe, but the big unknown is what will the tax brackets be at retirement. Chances are they will be higher than the historically low ones we have now. So an argument being made by some is to pay the tax now at the lower bracket. Of course, it’s all a bet, we don’t know for sure how much taxes will go up, or even go down! A good strategy is to just convert some IRAs to Roth to lock in rates now in case they go up and leave the rest as a hedge in case they go down or your retirement bracket is lower.

By: joetaxpayer

joetaxpayer — Tue, 06 May 2008 01:09:58 +0000

Unless one has an excellent pension plan, odds are they will be in a lower tax bracket at retirement than while they are working. And of course, the conversion is taxed as ordinary income, so converting all of a 401(k) can easily bring you into the next tax bracket. Roth conversions, if any, should be done very carefully. It’s too easy to pay 28% converting, and then realize you are in the 15% bracket at retirement.
Joe