Should I Do a Roth Conversion?

Updated : Aug 28, 2019 in Articles

Should I Do a Roth Conversion?


welcome to the Jill on money call of the
week if you’ve got a financial question oh my gosh this is the place for you all
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who is on the line today we have Matt who is calling from Maryland
hello Matt what can I do for you hi thank you so much for taking my call of
course I am a teacher in Maryland and Maryland has a teachers pension system
and I have been teaching for seven years and I’m planning to leave the district
and the profession at the end of this year know what about my pension I’m
sorry I know you’re just you’re blowing out you’re done right okay well yeah
several reasons I’m really proud of the work I’ve done but it’s time for a
change and about a month before I was hired they changed the vestment period
from ten years to five so I won’t be vested when I leave so I’m wondering you
know what to do with that chunk of change so there’s money that you put in
but you don’t get the money that they put in is that correct right okay we put
in about seven percent of our pay and that’s the money did you know those are
my contributions at all have access to and how much is that that’s about twenty
eight thousand okay and that’s pre-tax that that went in there and what are you
doing going forward like what’s your new what’s your new career job we’d be
making more money after being a teacher what I assume you make more money but
you lose the pension what’s the story there
well not necessarily so I’m taking the opportunity to explore some passions
that I’ve had that probably initially won’t pay as much now my husband will be
experiencing a large pay jump I love that husband of yours he sounds gorgeous
yeah but here so you know that from a family standpoint you know we’ll have
that security and then obviously my hope is that
within a relatively short amount of time I will be making at least what I have
been as a teacher okay um but it’s less motivated by pay and more by just
passions that I have to pursue alright that sounds good so when are you
planning on leaving the teaching job um July July okay will you have zero income
coming in are you gonna do something on the side something on the side yes ma’am
all right and there’s the main question what to do with the 28 grand right
because I have a Roth IRA that I could roll it into and then I would hate I
guess income tax on that amount yes because losses after tax but I also the
district offers 403 B plans that I could set up before leaving so I have a place
to kind of roll it over and then I wouldn’t do that
that’s not necessary there’s to it I mean look so there’s two big choices one
is you can just roll it over into a regular IRA right a traditional IRA and
the money goes the 28,000 will come in as cash and you invest on okay no biggie
no need to do the whole 403 B thing now that said do you have savings that
you’re not telling me about mm-hmm well so not much I sort of like had some
wilderness years of my 20s and had seasonal workers and and as an outdoor
facilitator and I kind of just recently got my financial house in order a few
years ago so I had fun savings but just to give you an idea so we together my
husband and I have an emergency fund that we’re currently building it’s at
about fifteen thousand right now we have short-term savings that sort of flows in
and out right now it’s at about six thousand and then you know in my Roth
IRA I have about fifteen thousand there as well and I put in five hundred a
month okay so I mean I wouldn’t want you to drain your emergency reserve fund to
make the Roth IRA contribution to I mean there’s so there’s two things here one
is you guys are married filing jointly for tax purposes
that’s a good question so he’s we’ve got to look at that because he has a lot of
medical school debt and there’s a program where if you work and uh mmm-hmm
non-for-profit hospital system you can get it forgiven after 10 years so we
want to be paying the lowest we we have to on that and since that’s determined
by income we might file separately you should check into that I bet that
it’s not going to be a big difference for you what do you what really so
you’re gonna be you’re only gonna earn money for half of 2019 so what will your
total earnings be for 19 and what will his earnings be in 2019 hmm good
question so mine will prop so if I make this transition in July and go to
something maybe part-time mine will probably be in the vicinity of 40,000
okay and what about him so he’ll be jumping up so his will probably be in
the vicinity of 90,000 okay because he just changed and his salary happens
midway through the year okay so I mean look I’m gonna make you
crazy right now there would be a very good case if you were single and again
this is predicated on this really making sense for you I don’t know if it will
that if your income if you’re filing single okay your income bracket your
income tax bracket would be probably most of your income tax at 12 percent
and so in that case if you were to take that $28,000 and pay the tax that’s due
on it you know you might not be paying such a high rate you might be a me maybe
it pop up into the twenty two percent but again the problem I have with that
is essentially I worry that you guys are going to deplete your emergency reserves
I just I mean I I could make a financial case for why it’s so smart for you to
pay taxes on that twenty eight thousand dollars at low rates today however it’s
really hard for me to justify getting what especially when you’re in a time of
transition to take some of that fifteen thousand dollars in your savings account
it would be very very hard for me to justify that you would spend that so
here’s I think what you’re gonna do I think number one you take the 28 grand
and you roll where’s your Roth IRA held right now Vanguard okay open up a IRA at
Vanguard roll the $28,000 into the traditional when you’re done working
okay okay okay that’s that’s the easiest way to do it okay okay and just be
careful and when he if he’s going to do a loan forgiveness program be very
careful about it the rules are tricky and make sure that he makes those
minimum payments because you know the the Department of Education has really
like put some weird messaging out about that program saying that they might get
rid of it so I think it’s better to investigate that sooner rather than
later and get that process started in terms of your you know kind of like your
your game plan going forward just remember that during this time of
transition cash is your friend you really want to make sure that you know
as much as possible as your you guys are transitioning to making more money you
know sort of for a minute maybe not making so much money for you but as a
couple being able to do that that you don’t get suckered into doing something
dumb like oh you know in the middle of all of this what we’re gonna do is we’re
gonna buy a massive house don’t do that someone will give you someone will give
you money to buy a house don’t do it okay
okay and let me just finish up here by just saying to you that how old are you
you said 34 you know what you’re still young you’ve got money saved make this
transition don’t let it go on forever don’t plow through all of your savings
to do this find yourself then find a job and make sure that you don’t make any
huge decisions while you’re in transition okay
okay makes sense yeah that’s great advice okay my pleasure breathe deep and
and let me know if there’s anything else we can do for you take care bye bye
that’s it for the bonus call of the week if you’d like to get on the air with us
just send us an email ask Jill at Jill on money.com
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