Tax Law (Questions About Taxes)/retirement account rollover
I'm trying to decide my best option when I take my final distributions from two retirement accounts. I left my job to return to life as a graduate student, so I expect my taxable income to significantly decrease. However, I don't expect to fall to a lower tax bracket as I'm MFJ and my wife's income will keep us steady.
With my previous company, I have a 401(k) which I was contributing to post-tax. I was under the impression that was a Roth, but learned today that's not the case. Additionally, I have what they call a wealth builder plan, which is a pre-tax retirement account.
I think my end game is to get both accounts to my already established Roth IRA with my discount broker. I've thought about converting both to an IRA and then converting that to a Roth IRA next year (I worked half the year this year, and will not work at all next year), if my taxable income will drop enough to move me to a lower tax bracket. I don't think we will drop that low next year.
Is there anything I'm missing or not considering in that thought process?
If you are and always will be an employee, then I can't (nobody can) give you a great solution as an .
Here are the base facts:
1. That tax differed retirement plans provide no net taxable benefit in most cases.
(The math only works if you assume that your need for income decreases at retirement.)
(you need to ignore inflation and enjoy your retirement by having some money to spend.)
(you are also locked into an unstable long term investment model)
2. A ROTH does provide a possible tax benefit.
(as long as you can be constantly successful in the unstable long term investment model)
(as long as inflation doesn't happen)
3. Tax differed retirement plans with an employer incentive provide a benefit only equal to the incentive.
(taking advantage of funds matching from an employer is comparable to a raise that you cannot get any other way.)
4. (And this is the important one) since you are in the business of investing, you would be better served doing that investment like all the most successful businesses do.
Once we look at the landscape from new vista, the lay of the land changes entirely.
In a ROTH you are hoping that your gains won't be taxed, but you are paying all the tax possible on the initial investment.
Whereas reducing the taxes on the original investment amount and reducing the taxes on the gains results in a higher net return.
If you are focused on conventional retirement planning recommendations, then yes going through all these cycles of action will get your money into a ROTH IRA.
I don't know your numbers, but there are limits as to how much you can contribute each year without paying additional penalties.
Government retirement plans were never designed to allow you to be successful at retirement, they are designed to make you work for it.