Thinking about doing a partial 457 to Roth Conversion

[Bonny]

We're expecting a pretty good drop in income this year due to the drop in oil royalties. If we don't sell our AZ house this year I'm thinking it might be a good year to do a partial conversion of my 457 to a Roth.

Towards that end I have a couple of questions.

I am separated from service. Does the money need to stay in the Roth for a minimum period of time? I'm 53 and will turn 54 later this year.

Does it have to be a one-time transfer or can I spread it out over several months?

Any other pearls of wisdom?

Many thanks for your help!

[Deleted]

I don't have any pearls of wisdom . . . pearls make my skin look too pinkish--but I'm interested in the answers.

I transferred $4000 this year and am terrified about the tax consequences. Lol. But that's because DH just handed me his $28,000 social security statement, all of which has no taxes paid on it.

This should at least keep your post at the top.

[mwcpa]

if the goal is to not incur a large tax and move the most money possible to the Roth it is best to do it at a point when values are down. Spreading it over time in a market that is rising will increase tax costs.  One never want to try to time the market, but moving value when things are down is a better tax move, especially if you are in for the long haul.

moneys in a roth (other than the principal / basis / amount or post tax funding) must remain for 5 years / 59 1/2 to be provided the full tax benefit.

Given your stated age, if you need to withdraw moneys now (or in the short run) it may not be the best move to convert now, unless you expect large increases to your income over the next few years.  If I need withdraw $10,000 from my IRA/Roth to live and I have no other taxable income why would I convert 50,000-60,000 today to Roth and now incur a tax when if I left it as taxable I would not have a tax now or next year.  I would suggest rolling over what an amount to not incur a tax and only to the extent you will not touch it (baring an emergency) for a long time and get the benefit of the plan, which is tax free growth of the income.

[Bonny]

Thanks mwcpa. In the back of my head I thought there was a 5 year rule or in my case more like a six year rule.

We don't currently have a high tax burden because this year we'll see about $50k of oil royalties, just under 30k of dividends (about 20k of qualified dividends) and about 10k of LT cap gains. We have A LOT of carry forwards from our four rental properties over the last 10 years.

Since we're expecting that $50k of royalties to be more like $25k for 2015 I thought it may be a good time to explore the Roth option. While I don't necessarily need the money this year because we have enough in savings I certainly see your point about the benefit being for the long term.

When we originally did our retirement planning in 2010 we were budgeting on $24k of oil royalties and that we would bridge our income gap by cashing in my 457 over a six year period of time. We were very fortunate to have both much higher royalties but also a few new lease payments. We kept the 457 invested and between the market bounce and earnings it's done well.

Thank you for giving me something to think about. I appreciate it!