Advise Requested: Roth Conversion to 0%, 10% or 15% Bracket?

Due to taking time off work to build some IP and also a few business expenses, I expect to have little to no taxable income in 2017. As always in year with little to no income, I plan to do a Roth IRA conversion up to the standard deduction/personal exemption limits - roughly $10k.

My long-term plan has always been to retire early and perform a Roth IRA conversion ladder, whereby I convert from my 401k, up to the “free” limit each year. In essence, all of the money I put into the 401k was tax-deferred when I put it in, and I planned to take it out tax-free, as long as I only took out $10k per year (via the Roth Conversion method).

However, a lot can change over time, and it may not be possible to get the whole 401k out tax-free, because maybe I wind up working longer than expected and my 401k grows so large that $10k a year won’t even touch the “principal” – although one trick is to put the riskier assets into the Roth so the expected return of the 401k is lower.

I am now wondering whether I want to stick with this plan or possibly convert up to the 10% tax bracket maximum, or maybe even the 15% bracket maximum. While the goal of getting the money out of the 401k for completely zero tax is better than paying 10%, there may be a time over the next 30 years where I want a large distribution from the 401k, and the marginal tax bracket for the large distribution might be 25% or more at that time. So if I can take it out now at 10% that might be better in the long-term.

It looks like the 10% bracket caps out at $9300 in 2017, which means I could do a ~$19k conversion and only pay ~$900 in taxes.

Let’s ignore the savers credit because if I don’t have enough business income in 2017, I can’t contribute to an IRA, so it will depend on how much business income I have by Dec 31. Of course, I would contribute into the 15% bracket up to the limit of the savers credit, if I am eligible. That’s a no brainer.

The question is - is it worth paying 10% to convert money into a Roth IRA in my situation? How about 15%?


I think converting through the 10% brackets and 25% brackets are worth it. Then again, that could depend on if you’re steadily employed in the 25%+ brackets for the foreseeable future (knock on wood).

I think you need a crystal ball to know your future tax rates.


Future tax rates are relatively immaterial in my situation, which is why I went into greater detail. Suppose you had $XXX in a 401k and enough to retire on comfortably if you lived frugally. Depending on that $XXX, you might never have to pay taxes on it, ever, because you can convert $10k/year tax-free into a Roth, and spend it out of the Roth after the 5 year seasoning period.

My specific scenario is that with the current XXX in my 401k, I feel confident that given the next 20 to 30 years, I can take $10k a year out via Roth Conversion, and drain it down to $0, never paying taxes on it.

But, there’s a chance I might work more, make the 401k larger, in which case I will be taxed on the 401k. It’s reasonably certain to say that future tax rates will be >= 10%, so converting up to the 10% bracket would make sense for me, but only if I think I’ll eventually have taxable 401k distributions.

As-is, I plan to have zero taxable 401k distributions through the point of draining it to zero. And if that happens, I am wasting money paying even 10% to convert a little more each year.


This is state dependent. Before using this as a reason to make this a factor in your decision, check it out for your state.

(Obviously not directed to the poster, but rather to those reading the post).


I think you have to go with expectations. If you think now you’ll never pay tax converting incrementally on the 0% bracket, I sure wouldn’t rush to convert more. Yes, you’d need to model your investment returns to see if you’ll really be able to take it all out eventually or if the growth will compound faster than the CPI-linked tax brackets, but I’m sure you can check that.

Also, I wouldn’t rush to make a decision now. The current tax landscape is all up in the air right now, and depending on the changes, may be good for you if you look poor - a bigger standard deduction helps a lot on the low end, especially without kids (although the credits proposed for them are also good there).

In short, I’d adopt a wait and see approach. There’s no rush to make the wrong decision now when you can wait until you know the tax rules better, you know if you do decide to start a meaningful job again, etc.

here’s one last thought - if you start a new job in 5 years, do you really think converting starting then up to the max of the 10% bracket for the rest of your life wouldn’t get the whole of your retirement money converted? If you think now you can get it all done at 0%, it would seem a big difference to say you would no longer be able to get it all done even at 10% and would push into 15% if you started converting then without using the intervening couple years. So it’s likely a question of - probably 0% now and 0% later, but maybe one of 10% now vs 10% later. If it’s the latter, just go with 10% later in that case.

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$10k/year withdrawal rate is pretty low. If the account returns an average of 7% per year and has at least $154k in it, then growth rate would exactly match the withdrawal rate and you could never drain the account. $100k in the account would take 16 years to drain. So, given the size of the IRA would have to be in order to drain it, it would be relatively small (compared to the amount of savings required to retire early and enjoy retirement), it probably doesn’t matter.

There is a big jump from 15% to 25%. Every other tax bracket has a delta of 5% or less. The 15% bucket is also relatively huge. The top end of the 15% bracket is 4x more than the bottom end.

I would use the entire 15% bracket. Then, when earning taxable income again I would max out 401k or SEP-401k if self employed to rebuild the pre-taxed savings to rinse and repeat. This effectively shifts your 25%+ taxed income from one year down to 15%.


Don’t forget to include the inflation adjustment of the $10k bracket, so the 7% returns might only be 4% real / net of inflation. Still, it’s a good point and if you have reasonable expected returns in excess of inflation, more than a few $100k becomes self sustaining in terms of producing more appreciation than you can siphon off at 0%.

Does conversions to roth add to taxable earned income, ie. lets you contribute to an IRA?

Also - there are plans out there that allow IRA to 401k rollover. And I won’t be surprised to see 401k plans that allow traditional to roth conversions.

No, earned income is basically wages and net Sch C SE income, so interest, capital gains, IRA conversions, etc, don’t give you income to contribute to an IRA. You can piggyback off your spouse if they have income and you don’t (“spousal IRA”).

Yes, there are 401k plans that allow “in plan” Roth conversions, although you can’t undo those like you can (currently, tax bill TBD) for IRA Roth conversions.


To much guess work for me to even try the math but keep in mind that any tax paid now will be money that you no longer have invested and compounding anywhere for the xx years.

I’d be inclined to stick with the 0%

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Thanks for confirming what I didn’t verify yet.

Conversions to the 0% threshold (10,400) is a no brainier, and 10% (+9320) is pretty much a sure bet. (2017 numbers). That’s almost 20k, or treading water on a 285k plan at 7%. To 15% would bring it to 48,350, or 690k at 7%.

Don’t forget state taxes. Unless you can somehow escape that, which is actually not too unlikely.

Interesting. I might want to do this too. If I understand this correctly, when rolling over 401k to Roth IRA it will be taxed as normal income. A single person’s standard deduction/personal exemption is about $10K, so the first $10k of income is tax free. Do I understand this correctly?
So, I’m 61 and currently living off of savings. In 2017 I have about $1k in business income and a few hundred in dividend income. I have a TRPrice 401k from a past job and a TDAmeritrade Roth IRA. I would like to move some money from the 401k to the Roth.
Won’t the TRPrice 401k withhold 20% income tax when rolling to the Roth IRA?

Yes, so if you have $1k of other income, you could convert $9k for free that year.

Only if you tell them to when you do the rollover paperwork.


Thank you to the original poster for the excellent idea. This worked out for me.

TRPrice insisted on withholding taxes. I asked for $10k to be transferred from my 401k to my Roth IRA. As it turned out, $9k went to my Roth, and $1k went to withholding. Then I got a tax refund for the $1k that they withheld.

If my IRA custodian insisted on withholding taxes for a conversion, I’d insist on moving all of my money to a different IRA custodian.

It’s the 401k traditional withdrawal that requires withholding. He would have been free to make an additional $1k deposit into the IRA to complete the full conversion. Doesn’t sound like the IRA custodian had anything to do with that part. Usually people don’t get to pick their 401k custodians, their employer does.

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Bend3r. Your comments are spot on. BTW, is that a Fatwallet hat that you are wearing? I miss FW.