Not much point in Roth conversions?

S

stepford

Thinks s/he gets paid by the post
Joined
Sep 11, 2013
Messages
1,438
Location
Ventura County
I have a disproportionately large fraction of my assets (about 60%) in traditional IRAs/401Ks. I've been pretty consistently in the 22% income bracket since ER at 55 and have been dutifully doing Roth conversions ever since, but not always to the top of the 22% bracket. Anyway, halfway from retirement to RMD time my Roth is still less than 10% the size of of the IRA and I'm starting to think Roth conversions aren't really worth the effort for me.

Once the SS/RMD tax torpedo hits in my early 70s I'll be just as consistently in the 24% tax bracket, so it looks like I'm really only saving a couple percent in tax on the money I convert early. 2% of a few $100K is about a $10K difference between doing all the recommended Roth conversions over 18 years and doing nothing at all.

Am I missing something or am I in the window where Roth conversions just won't do much?

PS. I know I'm neglecting potential future changes in the tax code, but when it comes to predictions about the future I'm a follower of Yogi.
 
If you'll be in the 24% tax bracket later (possibly the reverted 28% bracket), then you haven't been doing large enough Roth conversions now.
The idea is to do large enough Roth conversions in early years to levelize your AGI, allowing for inflation.

Then when SS starts at 70 you decrease your conversions by around that amount.
When RMDs start at 73/5, then maybe stop conversions or just do a token amount.

In this manner, there is no tax torpedo.
And you have better chance of avoiding higher IRMAA tiers...
 
I've mentioned before that converting and paying the taxes from already-taxed funds increases the "value" of the Roth over the tIRA by the amount of the taxes paid. That extra value goes on growing and is never taxed (under current law.)

There are also some inheritance advantages (to your heirs.) YMMV as always.
 
stepford said:
I have a disproportionately large fraction of my assets (about 60%) in traditional IRAs/401Ks. I've been pretty consistently in the 22% income bracket since ER at 55 and have been dutifully doing Roth conversions ever since, but not always to the top of the 22% bracket. Anyway, halfway from retirement to RMD time my Roth is still less than 10% the size of of the IRA and I'm starting to think Roth conversions aren't really worth the effort for me.

Once the SS/RMD tax torpedo hits in my early 70s I'll be just as consistently in the 24% tax bracket, so it looks like I'm really only saving a couple percent in tax on the money I convert early. 2% of a few $100K is about a $10K difference between doing all the recommended Roth conversions over 18 years and doing nothing at all.

Am I missing something or am I in the window where Roth conversions just won't do much?

PS. I know I'm neglecting potential future changes in the tax code, but when it comes to predictions about the future I'm a follower of Yogi.
Click to expand...
Saving thousands of dollars for something that can be done online in about 10 seconds doesn’t seem like a difficult decision.
 
like anything, it depends, however keep in mind you only need to take out the minimum distribution, so by converting now and paying tax, you may be paying tax on money you won't have to down the road. try to avoid paying more in taxes, and also try to avoid adding more headaches to yourself :)
 
Atlas FC said:
like anything, it depends, however keep in mind you only need to take out the minimum distribution, so by converting now and paying tax, you may be paying tax on money you won't have to down the road. try to avoid paying more in taxes, and also try to avoid adding more headaches to yourself :)
Click to expand...

That's the way I look at my Roths. No more headaches. Maybe they didn't save me money in the long run (ask me on my death bed) but they do save me headaches now that I'm still on the right side of the grass. YMMV
 
Atlas FC said:
keep in mind you only need to take out the minimum distribution, so by converting now and paying tax, you may be paying tax on money you won't have to down the road.
Click to expand...
I'm not understanding what you are saying here. Do you mean you won't have the money you paid in taxes down the road as a result of doing the conversion now?
 
TheWizard said:
If you'll be in the 24% tax bracket later (possibly the reverted 28% bracket), then you haven't been doing large enough Roth conversions now.
The idea is to do large enough Roth conversions in early years to levelize your AGI, allowing for inflation.

Then when SS starts at 70 you decrease your conversions by around that amount.
When RMDs start at 73/5, then maybe stop conversions or just do a token amount.

In this manner, there is no tax torpedo.
And you have better chance of avoiding higher IRMAA tiers...
Click to expand...
How does one go about estimating how much Roth conversion is large enough? Is there a rule of thumb? I think I'm in a similar situation as the OP, and the same question the OP asked has been on my mind.
 
TheWizard said:
If you'll be in the 24% tax bracket later (possibly the reverted 28% bracket), then you haven't been doing large enough Roth conversions now.
The idea is to do large enough Roth conversions in early years to levelize your AGI, allowing for inflation.

Then when SS starts at 70 you decrease your conversions by around that amount.
When RMDs start at 73/5, then maybe stop conversions or just do a token amount.

In this manner, there is no tax torpedo.
And you have better chance of avoiding higher IRMAA tiers...
Click to expand...
I agree, the OP is not doing enough large annual conversions. We're at the very bottom of the 24% bracket on pensions, social security, and modest fixed income/cash. We've been doing conversions since we retired at 59.5, and at that point we had zero in Roth and all in TDA. After 10 years of conversions generally up to the top of the 24% (even with high IRMAA for one of us), 55% of our tax advantaged account funds (excluding HSAs and grandparent 529s) is now in Roth. We were able to convert all of my wife's TDAs to Roth a few years ago-- I'm the straggling one!) We've been converting an average of $140K annually; for many years, this is less than the level of growth in the TDAs. We'll always be struck in tier 2 or 3, IRMAA, with or without conversions, and that's also likely when RMDs hit me. We don't need to access our tax advantaged accounts for living expenses -- so they are targeted to our heirs, who are all in equal or higher tax brackets than us and their income trend lines are upward.

We're not planning to convert after I hit RMD age in 2 years -- we'll likely just gift the RMD income stream to the children up to the gift tax reporting exclusion.
 
Filing married now vs single later life is something to look at too. Did not see the OP Filing status.
 
SevenUp said:
See Whether, when, and how much to convert. Does that help?
Click to expand...
That’s a good resource. For those who didn’t open the link, Roth conversions can be highly beneficial, depends on your tax rates before, during and after Soc Sec, RMDs factoring in IRMAA, NIIT, inheritance, etc.

You need to do the math in detail IMO.

We would have enjoyed a 12% marginal rate for 7 years, but then found ourselves trapped in a 25% tax bracket for the rest of our lives once Soc Sec and RMDs kick in, if we had not started large conversions years ago. So I’m paying at 22% marginal for 7 years and 15% thereafter, projected 23 years. Yes, I know we can’t predict future tax rates but I don’t believe they’re going to trend lower over the 25+ years.
 

Attachments

  • IMG_2964.jpeg
    IMG_2964.jpeg
    118.1 KB · Views: 44
Last edited:
It is a complicated calculation, particularly if the OP has to pay taxes for the conversion from tIRA funds, or even taxable funds with a lot of CGs. We have been in a higher bracket for a long time and made some large conversions, but it still feels like a leap of faith.
 
donheff said:
It is a complicated calculation, particularly if the OP has to pay taxes for the conversion from tIRA funds, or even taxable funds with a lot of CGs. We have been in a higher bracket for a long time and made some large conversions, but it still feels like a leap of faith.
Click to expand...
Definitely, no way around it. We can’t know longevity, future tax brackets or rules, or other variables. We make our best assumptions and hope for the best, but that’s preferable to throwing up your hands like some do IMO.
 
MdaPetralia said:
I'm not understanding what you are saying here. Do you mean you won't have the money you paid in taxes down the road as a result of doing the conversion now?
Click to expand...
no, I mean that, when you're at the age of having to take money out of a retirement account, that amount is calculated based on age/other factors, and since you do not know what those amounts are in the future, you may be converting more money than you should, therefore paying taxes now on money you may never have to take. Does that help clarify my previous comment?
 
I never did a Roth. Now at age 72, I truly wish that I had.

I too have always been in a high income bracket (and still am) and by the time I considered it my accountant ran some numbers and decided that I was better staying in my tIRA. In fact, it'd set me back long term.
 
I believe, didn't see it mention here or I just moved over it, that another consideration in doing a Roth conversation you should think about is the tax problem the surviving spouse will have. You really never know when your number is called.
 
I am ambivalent as to whether we will ever do ROTH conversions. We have never been eligible to contribute to ROTH IRA while we were working. Now that we are already in the beginning of 24% tax bracket due to RMD, SS, annuities and interests/dividends, I find it difficult to hand over money in my taxable account to pay taxes for the conversion. Moreover, our beneficiary will get a nice step-up in cost basis on my somewhat large taxable account. If we were to do ROTH conversion now, it means that we also have to pay capital gains tax on liquidating some positions to pay for the taxes owed due to conversion. I am in the status quo/inertia mode.
 
RetiredHappy said:
I am ambivalent as to whether we will ever do ROTH conversions. We have never been eligible to contribute to ROTH IRA while we were working. Now that we are already in the beginning of 24% tax bracket due to RMD, SS, annuities and interests/dividends, I find it difficult to hand over money in my taxable account to pay taxes for the conversion. Moreover, our beneficiary will get a nice step-up in cost basis on my somewhat large taxable account. If we were to do ROTH conversion now, it means that we also have to pay capital gains tax on liquidating some positions to pay for the taxes owed due to conversion. I am in the status quo/inertia mode.
Click to expand...
Ambivalent? It's too late to consider Roth conversions once all your (passive) income sources have kicked in, you don't need any calculations or accountants to advise (meant for other posters in this thread). If you have a significant TIRA, for many the ideal time to convert is between the year you retire (marginal tax bracket drops) and the year Soc Sec and subsequently RMDs start (tax bracket increases). Those lower tax bracket years in between are the time to consider Roth conversions. e.g. I retired at age 57, and will take Soc Sec at 70, RMDs at 73. After 70 the Roth conversion window is closed for me for all practical purposes. Thank goodness I've been converting aggressively before age 70.
 
Last edited:
Midpack said:
Ambivalent? It's too late to consider Roth conversions once all your (passive) income sources have kicked in, you don't need any calculations or accountants to advise (meant for other posters in this thread). If you have a significant TIRA, for many the ideal time to convert is between the year you retire (marginal tax bracket drops) and the year Soc Sec and subsequently RMDs start (tax bracket increases). Those lower tax bracket years in between are the time to consider Roth conversions. e.g. I retired at age 57, and will take Soc Sec at 70, RMDs at 73. After 70 the Roth conversion window is closed for me for all practical purposes. Thank goodness I've been converting aggressively before age 70.
Click to expand...
Pretty much... we didn't have much of a window of opportunity to do ROTH conversions. I retired at 53 but turned my IRA into deferred income annuities that started payout at 60. My spouse was 67 at retirement and started SS at 70 and RMD at 70.5. I have not started SS but it doesn't really matter.
 
RetiredHappy said:
Pretty much... we didn't have much of a window of opportunity to do ROTH conversions. I retired at 53 but turned my IRA into deferred income annuities that started payout at 60. My spouse was 67 at retirement and started SS at 70 and RMD at 70.5. I have not started SS but it doesn't really matter.
Click to expand...
Midpack is pretty much right.
Though if you turned your entire tIRA into deferred income annuities, why would you be doing Roth conversions; there's no tax-deferred money left.

Best thing to do now is just enjoy being a higher income retiree...
 
TheWizard said:
Midpack is pretty much right.
Though if you turned your entire tIRA into deferred income annuities, why would you be doing Roth conversions; there's no tax-deferred money left.

Best thing to do now is just enjoy being a higher income retiree...
Click to expand...
My spouse's IRA still has low 7 digits in it.
 
Atlas FC said:
I mean that, when you're at the age of having to take money out of a retirement account, that amount is calculated based on age/other factors, and since you do not know what those amounts are in the future, you may be converting more money than you should, therefore paying taxes now on money you may never have to take. Does that help clarify my previous comment?
Click to expand...
Yes, I understand your point now.

Atlas FC said:
since you do not know what those amounts are in the future
Click to expand...
We can estimate what our expected RMD's might be based on projections and assumptions using today's rules.

Atlas FC said:
therefore paying taxes now on money you may never have to take.
Click to expand...
Well, either you, or your beneficiary(ies) will eventually have to take it and pay the taxes.
 
You must log in or register to reply here.

Similar threads

F
Rethinking my yearly Roth conversions
3 4 5
Replies
108
Views
8K
teej1985
T
G
Next-year Roth conversion?
Replies
22
Views
2K
Echard
E
H
Question regarding my first Roth conversion in retirement
Replies
13
Views
1K
pb4uski
pb4uski
FiveDriver
Calculator for Estimating Roth Conversions?
Replies
16
Views
1K
Exchme
E
A
Roth IRA conversion
Replies
1
Views
577
cathy63
C

Latest posts

Back
Top Bottom