What is Foolsaurus?

It's a glossary of investing terms edited and maintained by our analysts, writers and YOU, our Foolish community. Get Started Now!


How to Calculate How Much of a 401(k) to Roth Rollover

Original post by Mark Kennan of Demand Media

When you roll money from a 401(k) plan to a Roth IRA, you have to add the amount of the conversion to your taxable income for the year. Making the conversion is particularly beneficial if you fall in a lower income tax bracket than you expect to pay at retirement. However, if you convert too much of your 401(k) plan to a Roth IRA, you could end up pushing your income into a higher income tax bracket, which may negate the benefits of the conversion.

Step 1

Figure your gross income by adding all of your taxable sources of income -- including wages, salaries, interest and self-employment income.

Step 2

Subtract any deductions and personal exemptions you will claim to find your total taxable income. For example, if your gross income equals $48,000 and you have $11,000 in deductions, your taxable income equals $37,000.

Step 3

Use the income tax tables in IRS Publication 17 to find your income tax bracket based on your filing status. Using the 2010 tables, if you have a taxable income of $37,000 and are married filing jointly, you fall in the 15 percent tax bracket, which goes up to $68,000.

Step 4

Subtract your taxable income from the upper limit of your tax bracket to find how much of your 401(k) plan you can roll over to a Roth IRA without going into a higher tax bracket. In this example, subtract $37,000 from $68,000 to find that you could roll over $31,000 without going into the 25 percent tax bracket.

                   

Tips & Warnings

  • If you do go into the higher tax bracket, only the amount of income that falls in the higher bracket will be taxed at the higher rate. In the example, if you converted $32,000 instead of $31,000, only the last $1,000 would be taxed at the higher rate.

Things Needed

  • IRS Publication 15

References

About the Author

Mark Kennan is a freelance writer specializing in finance-related articles. He has worked as a sports editor for "Ring-Tum Phi" and published articles on a number of online outlets. Kennan holds a Bachelor of Arts in history and politics from Washington and Lee University.

Advertisement