Does it ever make sense to go from ROTH to Traditional?

Question

Hello All,

I have been having good results with investing in buy-n-hold rentals using my ROTH SDIRA, SOLO401K and regular 'cash' investing.

To me they each have their place when looking at goals; a combination of some current supplemental income, some taxable retirement income to pull flexible amounts from to manage tax brackets, and some tax free income for additional needs.

I have some funds in my regular ROTH that are basically the original contributions (basis) that is not currently invested in real estate also. I have 10 - 15 years to go until retirement, and from my rough calculations using the amazing Rental Property Calculator here at BP and retirement planning software, I project that SSI and returns from my cash and ROTH SDIRA properties will give us a comfortable living without touching principal. So the Traditionally IRA properties would not need to be touched most likely and could be 'back up' if needed.

I am considering moving some of my ROTH IRA funds into my SOLO401K for current tax savings. The thought  is if I were to move say 50K from ROTH to Traditional IRA, I would save about 20K in taxes (I am self employed, so fed, state, and both halves of SSI). I would then have 70K to invest instead of 50K.

This seems backwards from all the advice I hear. What am I missing? Please feel free to tear apart my theory :-)

Thanks, Dan Dietz

Justin Windham · Answer

@Daniel Dietz

@Carl Fischer makes good points in his comments.  Another issue is that contributions to the Solo 401k have to come from self-employment earnings. The Roth IRA distributions would not count.

Carl Fischer · Answer

@Daniel Dietz

I don't think it makes sense because you loose the taxfree earnings going forward or trade for a potential 1year gain of tax savings. Its hard to even think about this question. I don't see a scenario where it makes sense.

The other point I want to make is that your traditional money will have to be withdrawn after you are 70.5 years old and no more contributions to the traditional Ira are allowed. Roth you can  continue to make contributions and not be forced to take required minimum distribution's.

Justin Windham · Answer

@Daniel Dietz

@Dmitriy Fomichenko is correct. Roth IRAs are restricted such that they cannot be transferred to other account types. Once you have a Roth IRA, it has to stay a Roth IRA (until distribution). This is true despite the fact that your Solo 401k can have a Roth component, accept new Roth contributions and allow for in-plan Roth conversions. Roth 401k and other Roth qualified plan funds can be transferred to a Solo 401k. The Roth IRA, sadly, cannot and I think this is the major downside to Roth IRAs.

Dmitriy Fomichenko · Answer

Dan,

you can't rollover Roth IRA into Roth Solo 401k. And you can't move Roth IRA into Traditional IRA either, unless you recently did a Roth conversion and just want to undo it.

Daniel Dietz · Answer

@Carl Fischer you make some good points. A lot to think about. I do see what you are saying. Just to clarify for others reading this too, I would still have both rental properties and stocks in ROTH accounts - I would only be doing this with a portion of my funds, exactly for the reasons Carl points out.

Part of my thought was to use the RMDs to manage withdrawals up a tax bracket point and then use ROTH withdrawals or cash out refis for some extra non taxable funds if needed.

I guess what got me thinking about this - even though I realize that it is not 'the normal approach - is that being self employed I am currently in a relatively high tax bracket; 25%fed +5% state + both halves of SSI @ 15% + the change in ACA premiums of about 10% depending on income. So at a minimum of 45%. I have been doing a lot of reading about managing for taxes in retirement and think I can easily cut that in half.

In my head, the math locks like this

• 50K now in ROTH @ 10% for 15 years = about 200K of non taxable assets.
• 50K withdrawn from ROTH and added to SOLO401k (over 2 years) + the added tax savings of 20K invested @10% for 15 years = about 280K of taxable assets. 
• 280K of taxable assets taxed at 20% as withdrawn = 225K after taxes

It seems like I am 25K ahead, but I am sure there are some catches. Not disagreeing on the advice I have gotten, just trying to look at all angles.

Also I use the 10% as a conservative value. I expect more like 15% (what we are doing now) which would make the 'surplus' even larger it seems like.

Thanks for the patience and help!

Dan Dietz

Daniel Dietz · Answer

@Dmitriy Fomichenko & @Justin Windham, I might not of explained it as well as I should have.

What I  was thinking, IF my understanding is correct, is that I AM allowed to withdraw the contributions tax and penalty free. I have made over the years since they were 'post tax', but NOT the earnings. I HAVE had the account for about 15 years.

So I was thinking of only taking out a portion of those contributions but NOT any earnings, and then use those (which I am assuming are just like cash on hand or regular earnings) and put that into the SOLO401.

So really not a 'roll over' of any kind - just withdrawing from one account and using it to put into another.

Does that make more sense?

Thanks, Dan Dietz

Does it ever make sense to go from ROTH to Traditional?

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