IRA to Roth 401

[LawrenceNtim]

How to contribute using money from IRA to Roth IRA

A few years ago, I left an Organization that I was participating in their retirement 401k. When I left, I took my money and invested it by myself in an etrade 401k so I did not have to pay the expenses for participating as an ex-employee. After investing for a few years, the original money that I invested was $80K and now it is $190K after 8 years of investing.

I did a similar thing for my wife also and her original money that I invested after she left her old employer

(was $70K and now it is worth 190K).

We both have etrade Roth IRA account and would like to move some of that money from the 401k account into the Roth IRA account. Turbo Tax is saying that my wife can contribute $4400 into an IRA and I can contribute $5700 for 2022 Tax Year. (I have contributed $1300 and she contributed $2600 into our Roth IRA respectively into Roth etrade accounts this tax year.

My question is that, I would like to contribute the “$4400 for my wife and the $5700” for myself from our IRA account into the Roth IRA account .

I do have and participate in a Retirement at work but my wife has not had a work retirement plan for about 10 years. So I am looking at ways to Maximize her Roth IRA account.

How do I go about doing that in Turbo Tax? What will be the TAX IMPLICATION if any for next Year? Is it possible to do?

Please advice your humble – Turbo Tax user

[ThomasM125]

What you are talking about doing is a ROTH IRA conversion. When you do that, the funds withdrawn from the 401-K fund are taxable. For the year you do the conversion you will receive a form 1099-R which you enter in the Wages and Income section of TurboTax, then Retirement Plans and Social Security, then IRA, 401(k), Pension Plan Withdrawals (1099-R). There will be codes in box 7 and questions about what you did with the money to insure that the distribution is treated properly in TurboTax.

[LawrenceNtim]

Thank your response very much appreciated. Just to clarify ?

So I can call e-trade and move $ 4400 for my wife and $5700 for myself from the "roll-over IRA" account respectively into an IRA account to get the TAX break for this year. And then move the money from the IRA into the "Roth-IRA" ?  (Our Combined MAGI is $146000) so I think I have a lot room.

1)The move can be done before April 15th, 2023 but I will only have to pay Taxes and file the 1099R  the following year Taxes?       

Thank you in advance for the clarification.

[ThomasM125]

It is true you can take a distribution from the retirement account in 2023 and treated it as a distribution in 2023, so it won't be taxable on your 2022 tax return. Assuming you can make a deductible IRA contibution for 2022, you can do that by April 18, 2023 and that will provide a deduction on your 2022 tax return. If you then move that money to a ROTH IRA account, you will have another distribution that is taxable in the year you do that.

In 2023, you will have to pay tax on the distribution from your retirement account and a penalty if the distribution was an early distribution.

So, at best you will be creating a timing difference between when you pay tax on the distribution, you will not be coming out ahead from a tax standpoint over the next couple of years, but your money will grow tax free in the ROTH IRA account so there are long-term benefits to doing the ROTH IRA conversion.

[LawrenceNtim]

It's making more sense to me now, I think. Just so it's clear as mud before i go ahead and do this.....

The roll-over IRA is with etrade and the Roth-IRA is also with etrade. 

So I can move $ 4400 for my wife and $5700 for myself from the "roll-over IRA"  into the etrade Roth-IRA account respectively. Please see attached screen-shot from Turbo Tax so we are on the same page.

But what you are saying is that, I will pay 10% Tax on the total $10,100. (which will roughly be $1010 when I file my 2023 taxes next year) ? and my Income will increase by $10,100 in 2023 Tax Year ?

(Our Combined MAGI this year 2022 Tax year is $146000) 

Can I choose to do let's say a $20,200 of IRA to  Roth conversion if I can meet the Tax obligations ?

However, I think I will spread it over two years, to avoid having to pay all the Taxes in a single year.

Our  total taxable income in 2023 will still be between the $83,500 - $ 178,150 tax bracket of 22%.

1)The move can be done before April 18th, 2023 but I will only have to pay Taxes and file the 1099R  the following year Taxes?     

These final questions will help clarify things for me. Thank you so much.

Humble Turbo Tax user.
(screenshot removed) 

[LawrenceNtim]

Please delete the screen-shot after you have reviewed it. Thank You.

[SteamTrain]

(Edited) Removed...I am major confused about what you are doing...so I need to exit this entirely.

[ThomasM125 · Accepted solution]

Yes, you will pay tax on the amount coverted from your traditional IRA to a ROTH IRA in the year that you make the conversion. 

Assuming you have the funds without having to take it out of your retirement account, it would be best to simply make a contribution to traditional IRA's for 2022, $5,700 for you and $4,700 for your spouse, in order to get the tax deduction in 2022. You can do that by April 18, 2023. Then, starting in 2023 you can do ROTH IRA conversions to transfer funds to your ROTH IRA accounts from the traditional IRA accounts in the amounts allowed and desired by you. There would not be a penalty for doing this, it is not considered an early distribution. You would be taxed at ordinary income tax rates on the amount converted.

Please delete the screen shot you posted, I cannot delete it from here!