Modeling payment of the taxes from the 401k money converted to Roth

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Last Post by Emilio Ramos 5 years ago

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Emilio Ramos

(@emilioramos)

New Member Customer

Joined: 5 years ago

Posts: 2

Topic starter March 5, 2022 8:48 pm

I recently retired and have started to use but not a power user yet of Pralana Gold.

I have been researching the blogs and the manual to see if there is anything on modeling the payment of the taxes due from a Roth conversion from the 401k money converted. For example, converting $50K with tax of $11K, which leaves $39K as total converted.

It is not an ideal situation, but I will probably be faced with paying the Roth conversion taxes from a portion of the original amount. The Roth Conversion modeling of Pralana is very good and shows the taxes as part of the expenses. This is well and good if I have enough taxable/tax-free non-qualified funds to cover the taxes due.

Again, this is not ideal as but as most of my assets are in 401k and any cash that I have I want to save for any immediate or emergency use.

If it is in the manual, please direct me and if not, can someone provide some guidance please?

Thank you very much in advance,

Emilio

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Roth Conversion Tax Payme

Stuart Matthews

(@smatthews51)

Member Admin

Joined: 6 years ago

Posts: 618

March 7, 2022 1:12 pm

Emilio,

I don't think the manually specifically addresses this question, so I'll try to explain how it works here. The Roth conversion algorithm takes money from a tax-deferred account and deposits 100% of that into the Roth account. In the course of doing that, the conversion amount is included as ordinary income in the AGI for the corresponding year. The taxes on the converted amount aren't treated separately from your other taxes in that year, and they simply roll into your total expenses for that year. Expenses are subtracted from your income in that year to determine your annual cash flow. If it's negative, then the deficit spending will be covered by your cash account if it has enough funds and, if not, by your other accounts based on the withdrawal order specified on the Financial Assets > Management page. If there are insufficient funds in your cash account and your regular taxable account, it's possible that the taxes on the conversion could result in further withdrawals from your tax-deferred account, or your Roth account. So, if you don't want those taxes to be paid from your cash account, regular taxable account or with further withdrawals from your tax-deferred account, I'd recommend setting the Roth account at top priority in the Withdrawal Order table on the Financial Assets > Management page. This will, in effect, take the taxes out of the stream of money being converted from tax-deferred to Roth.

Stuart

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Emilio Ramos

(@emilioramos)

New Member Customer

Joined: 5 years ago

Posts: 2

Topic starter March 7, 2022 11:55 pm

Thanks, Stuart - will definitely try it out.

Emilio

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