I too agree that it’s not good to take money from your 401K to pay taxes to move to ROTH. I know you love your financial guy, but you may want to consider a second opinion.
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Your “estate”? Please explain.
[quote]IF you have more money and have to pay taxes, you still have more money.[\quote]
The opposite(?) is also true about tax deduction. You can deduct mortgage interest but you still pay more in interest than you save from the deduction.
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Most people have to have a mortgage especially people in HCOL areas. I love or loath how people brag about paying off their mortgage because they hate debt. Try to buy a house in our hood without taking a mortgage and you will wait forever.
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People don’t take a mortgage so they can deduct interest. They take a mortgage because most people can’t shell out the big bucks and need to pay for it over time. With the tax law changes, you have to have a pretty good size mortgage to even deduct it anymore.
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Some do. We did this intentionally. We actually decided to keep a small mortgage to have some write offs. The money has earned far more invested than our current mortgage rate.
We also did change houses in 2019 with the idea to pay less in property taxes ( among other reasons). The law was changing and we were paying almost 3x the max for property tax( a total waste IMO unless kids were going to that school). Our current home has increased in value so we are now going to run into not being able to write off some part of the property tax. Unless, they change the 10K limit. Not going to worry about it.
One can do what they can given their income, possible leveraging moves to use their mortgage as best they can. Sometimes a move can make a big difference as reducing property taxes by 2/3rds. Sometimes folks have to live in a particular area for job commute/family reasons.
Others, have noted that in some HCOL areas, one has to carry a large mortgage in order to have a home close to their work. We did this for years. No regrets. The property taxes were high but the value of the public education was also high. I don’t think we are alone in our thinking. Many friends of ours moved when their kids went to college. Many have kept small mortgages ( as we have for financial flexibility). We only know about close friends. Some also had Helocs but changed to a mortgage when the Heloc laws changed and one could no longer use a Heloc as a tax write off unless it was for home improvement.
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I can’t deduct anything anymore, I’m on standard deduction now. But if I’m a one person household, which could happen when you in the age range, anything over 70 is a bonus in my thinking, then It will be helpful. We have very high property tax too.
But a lot of our daughter’s friends from church or her friends parents, all moved to Las Vegas from SoCal.
I’m betting you didn’t get the highest interest rate you could find because you wanted to deduct the maximum amount of interest. 
We also took a mortgage when we didn’t really need to, because we didn’t want to cash out of the stock market. If the interest rates had been very high, we wouldn’t have taken the loan. We still have a mortgage (though hopefully will be paying it off in the next few years) because it’s low interest and we still don’t want to cash out. I think we could possibly scrounge up a bunch of money outside of investments and pay it off, but then we would be really cash poor. I like having a pad of spendable money, especially since we retired. But this could be the first year in a long time where we are unable to deduct the interest and file the standard deduction.
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I agree. Anything that can be deducted should be considered. High property taxes can be huge. We paid a huge amount on our last house. When I heard the law was changing, it was one more reason to sell.
Same goes for lots of people moving to lower cost states, or states with better estate taxes. People definitely consider this stuff. I’ve had a couple of clients of mine move to FL because they have more than 5 million and don’t want to leave it in MA. Seems logical.
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Haha. We’re pretty savvy. My spouse has had a mortgage broker since forever. When we were in our 30’s we even had a LIBOR mortgage once. We paid so much down. I think interest rates were about 7% at the time and we were paying around 2% all to principal. We knocked off a lot of the principal in just 2 years.
We’re not retired, in our 50’s, so have lots of flexibility. We have a fixed mortgage, very low interest, not the very bottom but close. It’s very small so no worries around it. If I thought we’d gain from paying it off, I would. But financially it’s not a plus to pay it off, esp with high inflation.
We usually have lots of write offs as business owners. They can add up. I’ve grown accustomed to going through my mental list then checking what’s new in the tax code. Our CPA is fantastic. He did a couple of things that were superb over the last few years. I think he’d advise if we missed something. I’m pretty good about finding things. I’m frugal as my kids will tell you. There is no money being wasted. I am a bargain shopper in all things.
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Haha my kids laugh at me now for being frugal now, I must admit I enjoy playing the game, not out of necessity, I have more money than ever, however, I was a spendthrift when I was younger, making up for lost time.
there are some folks who take out/keep a mortgage as an arbitrage: they believe that their investments will make more than 3% (or whatever the mortgage rate). But to me, that’s a poor analysis, as the mortgage should be compared to bond earnings, not equity earnings (Finance 1a.)
OTOH, keeping a low mortgage – as opposed to paying it off – in high inflationary times is good finance.
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Well one part of being frugal was always putting money in my 401K even in my 20’s. Same for my spouse. We stopped putting in at 48 per advice of our financial guy. We might put a bit in this year as inflation has reared it’s ugly head and returns aren’t good. But we’re still in the range to retire as planned. It’s likely we won’t retire super early but it’s more about having the choice.
One our last vacation in 2019 we spent one night in Santorini ( per the kids request). They could not believe that I had booked a hotel for 1K per night. So unlike me to spend that kind of $ on a hotel. Then I told them it was usually 1,600 a night. So I got a “deal” We love to travel and eat well so I see no need to spend on things we don’t enjoy ( like cable tv). We lost the pay version years ago. I know people that buy cars for a 100K or even more. Not me. My spouse has been trying to get me to buy a new vehicle since 2019. I’m excited for the odometer to reach 200K, I hope I’m driving it and not one of the kids.
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Sometimes being frugal is just habit. And not a bad one, unless you’re missing out on things that are important to you.
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IDK what you mean by calling our 401k a ‘tax deferred account’ outside of yes, it was tax deferred when we put the money in and yes the money grows, but gets taxable with disbursement. When we turn 72, we will have RMDs - and so the tax strategy is to pay the taxes on the low income years for having more in Roth IRAs. The federal gov’t doesn’t care if I pay the taxes out of 401k money or our cash on hand. But it does make a difference to me.
Yes we could have paid the taxes out of our current cash account - but our most accessible cash account is our checking and we didn’t want that lowered.
As DH and I are over 59 1/2, no penalty. When funds are moved from 401k that are not into another IRA or another 401k (so essentially considered a taxable withdrawal and no penalty).
The money (I wasn’t specific in my earlier post), based on our overall financial position, we had go into Roth IRA was $25,000, and the 20% tax withdrawal was $5,000 - so $30,000 out of 401k - and it went out evenly across our 4 investments in 401k (transaction will take place Monday and payments issued Tuesday).
In the past, the 401k fund has required a 20% withholding - meaning we could not get the $25K w/o having the 20% federal government withdrawal also taking place. The person we talked to - initially we were going to have 10% for federal, but when we found out it would need to be 20% (and the $25,000 check would have been reduced by the other 10% or $2500). This individual had to put us on hold, so obviously had to ‘check’ with someone higher up. A little aggravating. I will ask our financial advisor some details at our next 6 month meeting.
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[quote=“SOSConcern, post:4282, topic:2795805”]
so the tax strategy is to pay the taxes on the low income years for having more in Roth IRAs. [/quote]
Yes, I understand, adn is something I have recommended several times up thread. But, by paying the tax out of your 401k distribution, you have less in your Roth to grow tax free. For example, if your marginal tax rate today is 20%, and you take the taxes out of the 401k conversion, you now have only 80% remaining in your Roth to grow tax-free. If you pay the tax out of your cash-checking account, you would have 100% of the 401k moved to a Roth and that amount would grow now tax free. (But, yes, your checking account would be that much lighter!)
“In the past, the 401k fund has required a 20% withholding…”
I’m really surprised that you can’t waive the tax with-holding on the conversion, and if you can’t, I’d start to wonder about their technical abilities.
I didn’t ask him specifics on where to pay the tax, but based on the tax withdrawal based on what our 401k required in the past - the federal tax withholding had to go at the same time as the withdrawal we wanted (in this case the fund withdrawal to go into Roth IRA. I can drill down a little more about that with info from 401k – which since April 1, 2022 Empower (Great-West Life and Annuity Company - GWLA - the parent company of Empower) – acquired the full service retirement business of Prudential Retirement. We call the same phone number and have the same electronic access as before Empower.
Hey when you fund Roth IRA, that is always after tax money.
You may be thinking that we will want the 401k money for later in retirement, IDK. We are retired, we have funds coming to us from annuities and social security, and we are moving funds from 401k to Roth IRA in a low income year because we will have to spend a portion of our funds with RMDs at age 72 (we are both 66 this year). We are not spending the 401k in any other way at this point in time.
Our 401k has grown really substantially in the years (equity group accounts), and in recent dozen of years - a few low return annual (Jan - Dec) but then the great uptick years. We have spread our risk with purchase of selective annuities when the time is ‘right’ on the annuity and our situation. We both have no pensions.
Our 401k earned its highest return years in 2019 (34.41%) and 2020 (34.85%). 2021 was 15.2% – ha, ha, wish we had something close this year. After the ‘hit’ Jan 2022, we decided to ‘ride out the storm’. It remains to be seen how long we will have to recover our financial position we had at the end of 2021 in the 401k (less any withdrawals).
One thing we did in July 2021 was move $250,000 from 401k to purchase an annuity that had good numbers and is doing well for us. No taxes on that move. Looking now, can reflect that it was a good move, as were all our annuity purchases out of 401k and IRAs to balance our risk.
The average S & P bear market duration is 11 months, median is 10 months, and current duration is 6+ months.
Always better to take money out at ‘higher point’ if the move makes sense. Our money move now is with 401k at a low but a good tax move for us.
The tax money was paid out of 401k, not the Roth IRA. $25,000 went into Roth IRA.
The 401k as part of a group may have the stipulation about the federal tax withholding. We had no choice in the past - if it was a taxable occurrence they withheld 20% federal.
correct. I apologize if I’m unclear. But to use your numbers:
To get $25k net into the Roth after paying the 20% tax withholding, you would have had to convert a total of $31,250. What I’m suggesting is to convert the same amount ($31,250), and move it 100% into the Roth, while paying the $6250 of tax out of your cash/checking account. That way you have $31,250 growing tax free, instead of $25k. And if you don’t need it for future expenses, your heirs will be appreciative.
fwiw: I do conversions online in Vanguard every year and they have a check-box to waive the withholding.
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