Say a person had been out of work since January and upon leaving their previous post rolled a $50,000 401 (k) into a bog-standard IRA. Having only chalked up a month’s work and pay this year as a whole, there’s the option of moving toward a Roth IRA instead of the traditional IRA. The question is – can a person do this second rollover in the same year as the first?
Well, having only earned for a single month of the year it’s pretty much a given that the person in question’s tax bracket would be a low one. As such, this technically makes it a great time to think about a Roth conversation. There’s really no reason why carrying out a Roth conversion during the same year as an initial IRA conversion should pose a real problem.
There is a warning to heed though – low tax bracket or otherwise the person making the conversion would still be liable for tax payments on the conversion itself. As such, it would be vital to have enough money on hand to cover this bill by the fed. There is the option of using the IRA money itself to meet the tax bill, but this would be subject to an early withdraw penalty fee of 10% for anyone not over 59 and a half years of age.
There is also the second option of going about a conversion only in part which could ensure that the person involved doesn’t go up a tax bracket. This would involve converting as much as possible without crossing the threshold into a higher tax category, then riding it out until next year before converting the remaining balance.Advertisement