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Old 08-05-2015, 12:36 PM   #21
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I'm 55, I have about 800K in a couple of IRAs. I basically thought I could not touch them until I'm 59 1/2 without paying a 10% penalty plus getting hit with a tax bill so I'm just trying to figure out how risking all that would be advantageous.

I plan on retiring at 56 but I do have enough savings to use until I hit 62,

I don't understand the tax savings for doing it at all.
To be honest, I can't really think of any tax savings for doing Roth conversions while you're still working (unless you got a pay cut or something dropping you into a lower tax bracket). I can understand why someone with a large tax deferred balance and no taxable savings would like to do so for early retirement.

Here's an example:
Say someone is age 45 and would like to retire at age 50. He has $1M in a traditional 401k (all tax deferred) but no other savings. If he converts part of that $1M to Roth, he'll be able to withdraw the conversion amount (but not earnings) tax and penalty free when he hits age 50.

Since you're already 55, though, I don't think this strategy's going to work for you. You could, however, do a 72t/SEPP if you need to spend IRA money before 59 1/2. Traditional IRA to Roth IRA conversions, you can do at any age penalty-free (as long as it's done properly).

72t Distribution Rule: How to Retire Early (Calculation Methods)
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Old 08-05-2015, 12:46 PM   #22
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Originally Posted by bclover View Post
Actually my question was basically why do it? either now while I'm working or later when I retire.

I was watchng Ed Slott on PBS and I may have heard him incorrectly, but I thought he was advising folks to transfer their regular IRA's into roth's and I could not understand why. He's got a book called "parlay your ira into a family fortune" that I may pick up to read.


I'm 55, I have about 800K in a couple of IRAs. I basically thought I could not touch them until I'm 59 1/2 without paying a 10% penalty plus getting hit with a tax bill so I'm just trying to figure out how risking all that would be advantageous.

I plan on retiring at 56 but I do have enough savings to use until I hit 62,

I don't understand the tax savings for doing it at all.
So from when you retire at 56 to you get to 62, you can convert if you want to. Presumably, your income before Roth conversions will be minimal since you'll be living from savings, so your income would likely just be dividends, interest and capital gains on taxable accounts. When you convert, the 10% penalty does not apply because you are not really getting the money... just shifting it from a tax-deferred account to a tax-free account. But any amount converted is pension income (which is ordinary income).

The tax savings are twofold. First, you deferred while you were working and I'm guessing avoided 25% or more on those tax-deferred savings. If you convert between 56 and 62 to the top of the 15% bracket, you'll likely pay somewhere between 5-10%, so you'll have saves 15-20% compared to having taken the income while you were working. Also, if you don't convert, you'll have to take those monies later as RMDs and once you factor in SS income and any pensions, you might well be in a 15% or higher tax bracket so it is better to pay 5-10% now than 15% or more later.
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Old 08-05-2015, 01:45 PM   #23
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When you transfer money from tax deferred to Roth it needs to be a direct transfer if you're under 59.5. You can't make a withdrawal and put it in your checking then a couple months later put it in a Roth. .....................
aaron..........why ?? You can do indirect rollover to another TIRA as long as you redeposit within 60 days and then subsequently do the Roth conversion there......so why can't you do the Roth conversion "on the fly" bypassing the 2nd TIRA? You'd want to request no withholding and want to be aware of the one rollover every 12 mos so direct transfer would be preferable but not really necessary?
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Old 08-05-2015, 02:28 PM   #24
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aaron..........why ?? You can do indirect rollover to another TIRA as long as you redeposit within 60 days and then subsequently do the Roth conversion there......so why can't you do the Roth conversion "on the fly" bypassing the 2nd TIRA? You'd want to request no withholding and want to be aware of the one rollover every 12 mos so direct transfer would be preferable but not really necessary?
I'm not entirely sure about the rules on that. I thought it couldn't touch your hands. I thought it had to go from one account direct to another but that may not be the case.
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Old 08-05-2015, 07:09 PM   #25
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I always mention one more advantage of Roth conversion - assuming you can pay the taxes from already taxed savings: If you have a TIRA of $1000, what is it actually worth? It's worth $1000 MINUS whatever taxes you will eventually pay. If you have a Roth of $1000 it's worth $1000 since you don't have to pay taxes on it. What if you could "magically" change your TIRA to a Roth? You would now have a MORE VALUABLE asset. The "magic" is to pay the taxes with already taxed savings. (So the magic is not free.) But once you have done so, your Roth has been upgraded in value by the amount you paid in taxes. That EXTRA value gets to grow in the Roth TAX FREE until you eventually cash it in. SO... By paying some taxes, you get a "larger" Roth than you used to have as a TIRA. If you don't follow this, read the book. I'm sure they explain it MUCH better than I have. YMMV
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Old 08-06-2015, 09:34 AM   #26
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I always mention one more advantage of Roth conversion - assuming you can pay the taxes from already taxed savings: If you have a TIRA of $1000, what is it actually worth? It's worth $1000 MINUS whatever taxes you will eventually pay. If you have a Roth of $1000 it's worth $1000 since you don't have to pay taxes on it. What if you could "magically" change your TIRA to a Roth? You would now have a MORE VALUABLE asset. The "magic" is to pay the taxes with already taxed savings. (So the magic is not free.) But once you have done so, your Roth has been upgraded in value by the amount you paid in taxes. That EXTRA value gets to grow in the Roth TAX FREE until you eventually cash it in. SO... By paying some taxes, you get a "larger" Roth than you used to have as a TIRA. If you don't follow this, read the book. I'm sure they explain it MUCH better than I have. YMMV
True but one thing to keep in mind is there is such a thing as standard deductions and exemptions. In 2015, for married filing jointly under 65, you're allowed $20,000 in income at 0% tax. LTCG and qualified dividends are also taxed at 0% if you're in the 0-15% marginal tax bracket. It'll be a waste to convert everything to Roth and not take advantage of that 0% with no tax prepayment or anything as is the case with Roth.
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Old 08-08-2015, 06:40 AM   #27
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I just went through the same mental hurdle with the Roths, ie - why convert?

After doing some reading, my plan after I retire is to convert maybe 50,000 each year and pay the taxes on it then.

There is some advantage tax-wise to having your already-taxed and not-yet-taxed assets a bit more balanced. Like you, I have ~$1MM in 401ks and IRAs. If someone changes the tax laws and I don't do anything, then I don't have much wiggle room when I hit RMD. Pay some tax each year.

I set up a spreadsheet and ROUGHLY calculated the impact. I am not a financial planner and there are likely errors in my calcs, this is "back-of-the-envelope" stuff.

- $1mm in IRA
- Start at age 57
- tax rates same as today
- Assume 5% investment return
- Assume no withdrawals


-No conversions - total tax on IRAs lifetime = $374k
-$30k conversion each year, total tax = $356k
-$60k conversion each year, total tax = $230k
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Old 08-08-2015, 07:24 AM   #28
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...-No conversions - total tax on IRAs lifetime = $374k
-$30k conversion each year, total tax = $356k
-$60k conversion each year, total tax = $230k
My savings are order of magnitude similar if I don't inflate tax brackets, but with tax brackets that increase due to inflation my savings are half of what they are if I don't inflate tax brackets.
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Old 08-08-2015, 09:08 AM   #29
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Originally Posted by Turn_the_Page View Post
- $1mm in IRA
- Start at age 57
- tax rates same as today
- Assume 5% investment return
- Assume no withdrawals


-No conversions - total tax on IRAs lifetime = $374k
-$30k conversion each year, total tax = $356k
-$60k conversion each year, total tax = $230k
Here are the numbers if I assume a 2% annual increase in the tax levels

- No conversions - $371k
- 30K conversion annually - $315k
- 60k conversion annually - 231k
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