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%?