Converting a 401K to a Roth IRA

Chad has about $40,000 in a 401K he had with his old company, and since he’s probably not going to be returning to them, I started pondering what we should do with this account.  I started thinking about whether or not it might be beneficial to convert it into a Roth IRA.

Pros

+ If Chad remains unemployed this year, our income will be abnormally low, which means lower taxes.  Bush’s tax cuts are also set to expire after this year, so this might be our last chance.
+ We could probably handle most to all of the additional tax burden through my normal federal withholdings – I’ve been witholding extra from my paychecks since we weren’t sure when Chad would find work or how much it would pay.
+ The market isn’t doing so hot right now, which means less money being rolled over, although by the time we’d get around to converting, who knows?
+ Roth IRAs are awesome.

Cons

– Who knows what our taxes will be when we retire? I suspect they will go up, but if we live frugally & make small withdrawals, who’s to say we couldn’t be in a low tax bracket?
– If Chad does start working soon, we might exceed the phase-out limits for some things, like our student loans interest.  Not the end of the world, of course, but something to think about.
– We’ll owe about $9,000 more in taxes for 2010, which doesn’t make me happy while we’re on one income.
– I was also considering opening a deductible IRA for Chad this year & putting the full $5,000 in.  However, with paying the additional taxes and the fact that I was planning on maxing out both of our Roth IRAs this year, I feel like we’d be overloading retirement accounts at the expense of cash savings.

I’ve run the numbers through a couple of online calculators, and it looks like the conversion would be a good move… unless my predictions of the future are wrong.  Of course, I’ll have no idea if this is a good idea or a bad idea until approximately 30 years from now.  Dammit.

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