Roth Conversion at age 22

[love4all55]

So I have a question if this would be smart or not.

I recently left my first job and will be starting a new one shortly. I’m 22 at the moment and have about 3k in the 401k from old employer.

My Roth IRA contributions were a little less (due to tickets and other surprises) at around 1.5k thus far for 2023 & 2024. I have an individual acct w/ 2.5k.

Would it be advisable to do a Roth conversion by rolling over the 401k then converting it? I know it’ll add to my tax bracket, but my income for this year will be about 60-65k. so I’m guessing I’d still be in the same bracket.

The reason why I’m considering this is due to the tax-free growth in IRA accounts. Would taking a little hit in the present, be advisable to grow the money tax-free? Rather than getting taxed on growth when I distribute from the 401k.

I’m partially also thinking about this in case I want to pull out IRA funds for a first home purchase.

I don’t know too many people who could help me understand and navigate this, so if y’all have any input that’d be greatly appreciated, thank you!

 

[alexburke]

@love4all55

1. Do not pull from an IRA to buy a house, or anything. You will never get those dollars back and will be robbing yourself.
2. You are better off maxing out your current Roth IRA rather than converting old 401k dollars. Roth conversions are generally saved until the waining years of working or early retirement years where you can legally manipulate how much income you show in order to convert dollars at the lowest rates (0, 10%, 12%).
3. You can roll your old 401k into a traditional IRA if you want less accounts to manage or you can leave it in your old employers plans. There are downsides for higher income earners (140k a year single, 220k married) with having traditional IRAs and then trying to make Roth contributions, but at present this isn't a concern for you.

 

[stevenwrighthan]

@alexburke To build on point #2. OP you are in then 22% tax bracket (starts at $47k, after standard deduction of ~$14k that brings you down to $46-51k based on you listed income). So most or the full amount would be taxed at 22%.

When you pull pretax money out in retirement you are filling up the standard deduction and lower tax buckets first.

If I were you I would just focus on doing Roth contributions going forward instead of paying 22% on $3k when there is a good chance you won’t pay that same tax rate in retirement?

 

[love4all55]

@stevenwrighthan That is a good point and indeed something to consider with all this. I still haven’t made any final decisions but do appreciate the input here, it does truly help because I’m not the most well versed in all this, yet at least.

 

[mimzpink]

@alexburke Speaking of robbing yourself, improve your driving so you don't get so many tickets. What a useless drain of OP's wealth.