Deductions greater than Income : Traditional IRA to Roth Conversion?
"Yes. A most emphatic yes.  I suggest you look at your 2014 return and project what 2015 will look like. I'd convert enough to ""top off"" the 15% bracket. Note, if you overshoot it, and in April 2016, see that you are say $5K into the 25% rate, you can just recharacterize the amount you went over and nail the bracket to the dollar.  If you have the time and patience, you can convert into 2 different Roth accounts. One account for one asset class, say large cap stocks/funds, the other, cash/bonds. In April, keep the account that outperformed, and only recharacterize the lagger. Roth Roulette is my name for this strategy. It's risk free, and has the potential to boost the value of your conversions.  Edit - To be clear, you are permitted to recharacterize (undo) any or all of the converted amount. You actually have until tax time (4/15 or so) plus the 6 month extension. You can recharacterize for any reason - A personal anecdote - I manage my mother in law's money. She is well under the 25% bracket cutoff. Each year I convert, and each April, recharacterize just enough to be at the top of the 15% bracket. Over $100K has been shifted from Traditional IRA to Roth by now. Taxed at 15% so her daughters will 'not' pay 25% when they withdraw. $10K in tax saved from uncle sam, for my effort of filling out paper twice a year for 12 years now. Well worth my effort." Answering for just the US part, yes, you should be able to do this and it's a good strategy. The only additional gotcha I can think of is that if you've made after-tax contributions to your traditional IRA, you need to prorate the conversion, you can't just convert all the pre-tax or all the after-tax. I'm not familiar with Oregon personal income tax so there may be additional gotchas there.
I'm concerned about your extreme focus on Roth. In today's dollars it would take nearly $2 million to produce enough of an annual withdrawal to fill the 15% bracket. If you are able to fund both 401(k)s and 2 IRAs (total $43K) you're clearly in the 25% bracket or higher. If you retire 100% with Roth savings, and little to no pretax money, you miss the opportunity to receive withdrawals at zero(1), 10, and 15% brackets. Missing this isn't much better than having too much pretax and being in a higher bracket at retirement.  One factor often overlooked is that few people manage a working life with no gaps. During times when income is lower for whatever reason, it's a great time to convert a bit to Roth.  (1)by zero bracket, I mean the combined standard deduction and exemptions. For two people this is currently (for 2017) $20,800 total. And it goes up a bit most years. Assuming you max-out your Roth IRA with $5000 in inflation-adjusted contributions every year from 25-65, your balance at age 65 will depend on the post-inflation return you get in the account.  Assuming you withdraw 4% per year after that, here is what your income will be: (All numbers are in inflation-adjusted 2011 dollars.)   If your post-inflation return is zero - if you buy treasury bonds, money-market accounts, or something like that - you'll have a simple $5000 * 40 = $200,000, which will give you an income of around $8000 per year. If you get a 3% post-inflation return - e.g. fairly safe Muni bonds, corporate bonds, and boring stocks - you'll approximately double your money to around $393,000, giving you an income of over $15,000 per year. If you get a 6% return - e.g. more aggressive stocks and more risk-taking - you'll approximately double your money again to over $825,000.  A 4% withdrawal rate will give you an income of around $33,000 per year. Stocks have historically returned around inflation + 8% - that will get you over $1.4 million - and an annual income of over $56,000 per year. So, yes, it is feasible to retire on nothing but a maxed-out Roth IRA. I respectfully disagree with Eric.  If you invest from day one in a Roth, where, exactly will taxable income come from to put you in a higher bracket at retirement? I agree, maybe for other reasons than you list, that early on, post-tax is the way to go, because I'll assume that one starts work in a lower bracket. There's probably a majority who start work in the 15% bracket, but over time work their way to 25%. As they grow to 25%, using the pretax 401(k) and IRA can keep them at 15% for some number of years. In any year of low income, for whatever reason, they can convert the pretax money to Roth to top off the 15% bracket.  To bring the point home, if you went post tax the whole way, imagine retiring with $2M in the Roth, but no pretax money. You now have a standard deduction, exemption, and the full 10% bracket each and every year gone to waste. Money you paid 25% tax when you could be paying zero on some of it. The deduction and exemption add to $9750 in 2012, and the 10% rate applies to the first $8700 of taxable income. If you do the math, this is $17,500, and if you plan a 4% withdrawal rate, you'd need 437,500 pretax money to give you the 17500 each year. Last, all three factors (standard deduction, exemption, and bracket limits) all rise a bit each year. An increase of $200 is another $5000 to save pretax.  Edit - 2013 brought the ability to convert within one's 401(k) from the traditional pretax side to the Roth side. This makes possible turning 100% of one's 401(k) money to Roth, and retiring without the benefite of the standard deduction, exemptions, etc. You have two questions - first - no, if you are above the deduction limit, then you still have a traditional IRA deposit but with post tax money, tracked via form 8606.  Second - If I read this right, if you cannot take the deduction, but can do the Roth, by all means, this is the 'no-brainer' decision. Makes no sense to deposit non-deducted to a traditional IRA if you can do Roth.  But - for sake of the full picture - if above the Roth limit, you still should make the post tax deposit (to the traditional.) If you have no pretax IRA at all, you can convert immediately. If you have a mix, you have the option to convert piecemeal paying the tax on the pro-rated amount the pretax represents. "From your description, it seems that you should have $75k of ""basis"" (i.e. after-tax amount) in your Traditional IRA. (As others have mentioned in comments, you might have had to report this in the year it was rolled over. I will assume that you will have figured this out.) Having after-tax amounts in a Traditional IRA is tricky as you usually can't choose to take out only the after-tax portion. Withdrawals as well as conversions to Roth IRA must be ""pro-rata"", which means that the amount of pre-tax and post-tax money in the withdrawal or conversion follows the same proportion as in the IRA overall. So say 7.5% of your Traditional IRA is after-tax, and the other 92.5% is pre-tax, that means any withdrawal will consist of pre-tax and post-tax in those proportions. So e.g. if you withdraw or convert $1000, $75 will be post-tax and $925 will be pre-tax. So any withdrawal or conversion will consist overwhelmingly of pre-tax amounts, which will be taxed, and you may not want that at this time. There is one way to separate the pre-tax and post-tax amounts in a Traditional IRA, but it involves having an active 401(k) (which I doubt you have at this point as you're retired). Some 401(k) plans allow people to rollover funds from Traditional IRA into it. If they allow this, then you can use it to ""siphon"" only pre-tax money from the Traditional IRA, as IRS does not allow rollover of post-tax money into a 401(k). This way you can rollover the entire pre-tax amount of the Traditional IRA into the Traditional 401(k), leaving behind only after-tax money in the Traditional IRA, which you can immediately convert to Roth IRA with no tax." Using the default values for age and retirement and only making the changes you specified in the question. assumed ROR: 6%, current tax rate: 25%, retirement tax rate: 15%,   married, have an employer retirement plan. The results from the two calculators are: Traditional IRA: 631,341 IRA before taxes 536,640 IRA after taxes. Roth IRA: 631,341 Roth IRA 450,207 Taxable Savings where: Total taxable savings       The total amount you would have accumulated by retirement in a taxable savings account. your question: The (Traditional) IRA After Taxes value is 6.3% higher than the (Roth)   Taxable Savings amount. (Both had an equal gross amount.) Does that mean I should put my money in a tIRA instead of a Roth? My percentages don't match your percentages because you didn't specify the numbers you used. In any case the 450K number shows you what you would have if the money was not invested in an IRA or 401K. To decide between a Roth and a traditional IRA ignore the taxable savings number, that only shows what  happens if you decide not not use a retirement account. "There's a bit of confusion here.  Michael's article you linked is focused on the issue of post-tax 401(k) deposits. For those new to this, it sounds like we are talking about Roth 401(k) money. Not so. The Roth IRA was introduced in 1998, and the Roth 401(k) in 2006. Before '06, people had the ability to deposit more to their 401(k) than the pretax limit of $15,000 into the account as ""after tax"" deposits. My understanding is that these funds were analogous to the non-deducted IRA deposits for those outside the income limits.  Michael goes on the point out that now, with the addition of Roth 401(k) and Roth IRAs, there are folk with pre and post Tax 401(k) funds and trying to crack them for transfer to Traditional IRA and Roth IRA may be problematic.  Aside from a recent thread here, there are separate accounts for the Roth 401(k) and Traditional 401(k), and it's possible for the traditional to contain post tax money, which, given the recent introduction of the Roth 401(k) conversion, should be easily addressable." From the IRS: You do not include in your gross income qualified distributions or distributions that are a return of your regular contributions from your Roth IRA(s). It's not just that the particular money you take from the IRA isn't taxable.  It's not counted as part of your income at all, so it won't have any effect on the taxation of other income. "Assuming my math is correct and that I'm not missing something about Roth investments, it appears to me that either option will work out exactly the same if you will be in the same tax bracket in retirement. This is true only if your average tax rate in retirement is the same as your current marginal rate. I'm surprised none of the answers mention this since it is the crux of your question!  If you can deduct an IRA against your income taxes, it is almost always better option than the Roth equivalent. Marginal rates should not be compared to average rates or you will form all sorts of inaccurate conclusions. ""If you are in a lower tax rate in retirement traditional is better"" really means, ""if your average tax rate in retirement is lower than your current marginal rate, traditional is better"" - which for the overwhelming majority of Americans is the case. Consider the following. Let's say your intend to contribute $1000 in one year (making $2k) and withdraw it the next that is your only income in that year. Your tax brackets look like: This is quite simplified but for this purpose will illustrate precisely why comparisons like you are making are very misleading. In this case you can put $1000 in and pay no income tax at all (because you deduct it). You then withdraw $1000 the next year. The first $500 you withdraw you pay no taxes on and the next $500 has a tax rate of 15%, for a total tax of of $75. However - this is a tax against your entire withdrawal of $1000, so your average tax rate (this is important! average is different than marginal) is only 7.5% and you are left with $925. In this case you can only contribute $850 to the IRA because you are taxed against the money at your marginal rate (15%). When you withdraw it, you don't pay any taxes and are left with the entire $850 $850. This is less than the above, because you are taxed the whole amount at your previous marginal rate. If however your tax rate in retirement was 30% for everything above $500, only then are the two scenarios equal. Your marginal tax rate in retirement has to be very high relative to your current tax rate for the Roth to ever catch up and be better. If you are able to deduct an IRA contribution, it will almost always be the best option. The average federal income tax rate on middle class families has not changed dramatically enough over the past 50 years to be above normal marginal tax rates - even at the 15% federal tax bracket, your marginal rate is still higher than the highest average tax rate for the past 50 years by at least 3% and normally significantly so. The reason I make this point about middle class marginal rates is that the majority of ""taxes might be higher in retirement!"" is very unlikely to be the case in a meaningful way given the past 50 years. However if you are in the top tax rate you are paying historic low tax rates (by a factor of nearly 3), but also observe you can't do either IRA since you must make $400k/year. The difference for middle class is no where near as noticeable. Keep in mind if you can't deduct, there is no reason to not contribute to the Roth. There are other factors contributing to the traditional/Roth decision. This answer only addresses the specifics in your question." Yes, eligibility for contributing to a Roth IRA is determined by your Modified Adjusted Gross Income (MAGI) which is based on your Adjusted Gross Income (AGI). Now, AGI includes the net capital gains from your transactions and MAGI adds back in things that were subtracted off (e.g. tuition deductions, foreign earned income exclusion) in arriving at the AGI. There is a worksheet in Publication 590 that has the details. You are always entitled to contribute to a Traditional IRA. The MAGI affects how much of your contribution is tax-deductible on that year's tax return, but not your eligibility to contribute.  Both the above paragraphs assume that you have enough compensation (wages, salary, self-employment income) to contribute to an IRA: the contribution limit is $5500 or total compensation, whichever is smaller. (If you earned only $2K as wages, you can contribute all of it; not just your take-home pay which is what is left after Social Security and Medicare taxes, Federal taxes etc have been withheld from that $2K). If your entire income is from capital gains and stock dividends, you cannot contribute to any kind of IRA at all. If you made a contribution to a Traditional IRA for Year X (whether made during Year X or made in Year X+1 before the due date of your tax return for Year X), then you can withdraw the contribution and any gains on that contribution  by the due date of your tax return. If the contribution was deductible, then of course you must not take a deduction for it in on your tax return for Year X (or any other year for that matter). As for the gains (if any) that were withdrawn, they are taxable income to you for Year X (not X+1, even if the withdrawal occurred in Year X+1). Publication 590a says You generally can make a tax-free withdrawal of contributions if you do it before the due date for filing your tax return for the year in which you made them. This means that, even if you are under age 59-1/2, the 10% additional tax may not apply. and later in the same Publication If you have an extension of time to file your return, you can withdraw them tax free by the extended due date. You can do this if, for each contribution you withdraw, both of the following conditions apply.   -  You did not take a deduction for the contribution.   - You withdraw any interest or other income earned on the contribution. You can take into account any loss on the contribution while it was in the IRA when calculating the amount that must be withdrawn.    If there was a loss, the net income earned on the contribution may be a negative amount. Later, the document says You must include in income any earnings on the contributions you withdraw. Include the earnings in income for the year in which you made the contributions, not the year in which you withdraw them. and The 10% additional tax on distributions made before you reach age 59-1/2 does not apply to these tax-free withdrawals of your contributions. However, the distribution of interest or other income must be reported on Form 5329 and, unless the distribution qualifies as an exception to the age 59-1/2 rule, it will be subject to this tax. Since you have a loss on the contributions that you are withdrawing, there is no interest or other income that needs to be reported. "To answer your question point by point - I'd focus on the last point. The back of my business card -  Let's focus on Single. The standard deduction and exemption add to over $10K. I look at this as ""I can have $250K in my IRA, and my $10K (4%) annual withdrawal will be tax free. It takes another $36,900 to fill the 10 and 15% brackets. $922K saved pretax to have that withdrawn each year, or $1.17M total.  That said, I think that depositing to Roth in any year that one is in the 15% bracket or lower can make sense. I also like the Roth Roulette concept, if only for the fact that I am Google's first search result for that phrase.  Roth Roulette is systematically converting and recharacterizing each year the portion of the converted assets that have fallen or not risen as far in relative terms. A quick example. You own 3 volatile stocks, and convert them to 3 Roth accounts. A year later, they are (a) down 20%, (b) up 10%, (c) up 50%. You recharacterize the first two, but keep the 3rd in the Roth. You have a tax bill on say $10K, but have $15K in that Roth." "my taxable income was roughly $230,000 in 2012. Indeed it is relevant. The highest AGI limit for deductible IRA contributions is 112K. So no, IRA contribution will not help you reducing your tax bill this year. The deduction phases out starting from AGI limits of $10K in certain cases (for married filing separately), and phases out entirely for anyone at AGI of 112K (for 2012). The table linked describes the various deduction phase-out parameters depending on your filing status, and will probably be updated yearly by the IRS. However this is only relevant if your company provides a retirement plan, as Joe mentioned. If your company doesn't provide a retirement plan but your spouse's does - then the AGI phase-out limit is $178K. If neither you nor your spouse (if you have one) is covered - then there's no AGI limit, and you can indeed make an IRA contribution before April 15th that would be attributed to the previous year and reduce your tax bill. Note that ""provides"" means the plan is available, even if you don't participate in it, any time during the year." "Yes, you can deduct up to your Adjusted Gross Income (AGI) or your contribution limit, whichever is lower. Note that this reduces your taxable income, not your taxes.  This is self-employment income, which is included as compensation for IRA purposes.   You still have to pay self-employment taxes (Social Security and Medicare) though.  You pay those before calculating AGI.  So this won't entirely shield your 1099 income from taxes, just from income taxes.   Note that if you have both W-2 and 1099-MISC income, you don't get to pick which gets ""shielded"" from taxes.  It all gets mixed together in the same bucket.  There may be additional limitations if you are covered by a retirement plan at work." tl;dr: Please please please do the conversion first. JoeTaxpayer's answer is correct, but I am of the opposite opinion. First, there's just about no reason to have post-tax dollars in a Traditional IRA.  You'll eventually have to pay tax on the earnings those dollars generate, so it's essentially the same as having that money in a regular taxable account.  Meanwhile, if you roll those dollars into a Roth IRA, you get to earn tax-free money on them for the rest of your life (and even after your death)! Second, even if you did have some reason for keeping those post-tax dollars where they are, the last thing you ever want to do is mix them with pre-tax dollars (from, say, your 401k).  As soon as you mix them, all the dollars become subject to pro-rata taxation (as Joe mentioned), so any future decision you were planning to make about what to do with just your post-tax dollars is moot -- you have given away your right to think separately about your pre- and post-tax dollars. As an example, let's say the accounts you want to combine look like this: In the future you decide you want to move $2,000 from the above account into a Roth.  Because you mixed the money, the IRS insists that your rollover consists of: So now you owe tax (and it's regular income tax, I believe, not even capital gains tax) on $1,500.  That was money that you socked away specifically to avoid taxes, and now you've gone and paid taxes on it!  Now, there are valid arguments for intentionally moving pre-tax dollars from a Traditional to a Roth like this, but the point is that you shouldn't even have to be having that argument -- you have post-tax dollars in your Traditional IRA that almost certainly belong in a Roth.  By mixing your 401k into your Traditional IRA, you can no longer do anything with just the post-tax dollars.  The IRS will forever insist that you do these pro-rated calculations. Say in the future you suddenly realize that a Roth is much better for your financial situation than a Traditional IRA.  (Or you might still prefer a Traditional IRA, but as explained in the next sentence it's not available to you.)  Unfortunately, because you're covered by a (new) 401k -- or maybe because you earn too much money to contribute pre-tax dollars to either a Traditional or Roth IRA -- you're out of luck.  You're simply not allowed to contribute to a Roth. Most people in this situation can make use of what's called a back-door Roth.  They contribute up to the maximum amount per year ($5,500 or whatever it is now) post-tax to a Traditional IRA and then immediately roll it over to their Roth.  You can still try this, but guess what?  Yep, because you're mixing these new post-tax dollars with pre-tax money in your Traditional IRA, every year your rollover will be tainted with that pre-tax money, diluting the whole point of the back-door Roth.  You'll be paying taxes on money you never wanted to pay taxes on, and you'll be leaving post-tax money behind in your traditional IRA. (If it sounds like I'm annoyed about this situation from personal experience, it's because I am. :) By doing the conversion first, you never mix pre- and post-tax money, and your money goes where you want it. Of course, assuming you eventually do roll over your 401(k) into a Traditional IRA, the Really Annoying Consequence above will still plague you, but at least you'll have cleanly converted that first post-tax amount.