Any advantage to opening up a ROTH in retirement?

[Cattusbabe]

A friend of mine is suggesting that I open up a ROTH IRA this year prior to 4/15 as a future tax hedge. I have already FIRED and am currently in the 15% tax bracket. I do not see the advantage? A large part of portfolio is in Munis and dividend paying equities. I also have a traditional IRA (which I am not contributing to at this point ) as well as a variable annuity which are hold overs from my previous employment. Am I missing something?

 

[d]

if there's a prospect of your tax bracket increasing, perhaps due to future required minimum distributions, there's an advantage.

 

[MasterBlaster]

If I recall correctly, you need earned income to fund a ROTH in any given year. If you just retired then you are probably covered. You can still fund a 2006 ROTH through April 15 (or is it the 17th this year) .

However if you don't have any earned income (from this year or last) then a ROTH isn't available.

 

[jdw_fire]

I have already FIRED and am currently in the 15% tax bracket.

If you have no earned income the only way to put money into the Roth is to convert some or all of your TIRA. So when it come to the conversion, you have to decide if paying 15% (or more) income taxes on your TIRA now is better than paying whatever the rate will be in the future.

 

[Cattusbabe]

if there's a prospect of your tax bracket increasing, perhaps due to future required minimum distributions, there's an advantage.

Hummmm. That will happen at age 70 when I plan on taking SS and RMD from my traditional IRA and annuity. This looks like a one time thing since I FIRED last May and I would be able to put in 5000 for me and 5000 for DH. Still don't see the advantage.

 

[shiny]

Well, the advantage is that the gains on that 10k invested will never be taxed - it will grow tax free then be taken out tax free (under Roth rules).

 

[Nords]

Still don't see the advantage.

Here's a summary of reasons to convert to a Roth. For all the gory details you can search the dozen or so threads of reciprocated diatribes & political rants thoughtful analysis under keywords like Roth and conversion.

- Your early FIRE years (after paychecks and before RMDs) may be the lowest tax bracket you'll ever see.
- RMDs may shove you into a higher tax bracket than you're in right now.
- RMDs may subject most of your Social Security to taxation.
- You may not really want as much RMD as you think you'll have to take.
- Converting to a Roth and paying the conversion taxes out of taxable funds has the effet of boosting your Roth by the amount of the tax paid. You reduce the amount of your taxable assets, too.
- You can avoid 72(t) by being able to withdraw your Roth contributions at any time and by being able to withdraw some of the profits under some special situations.

Of course there are also reasons you might not want to convert to a Roth...

 

[JohnEyles]

Your early FIRE years (after paychecks and before RMDs) may be the lowest tax bracket you'll ever see.

Yes, and thus a really optimal time to contribute to a Roth. Only problem is,
you're retired (duh) so you have no "compensation income" to qualify you
for making a contribution. Anyone have any bright ideas, loopholes, scams
(legal ones, that is) for managing to have some compensation income ?

'Course, what's good for the goose is good for the gander, and this low tax
bracket is also a good time to do IRA conversions.

 

[Sundance Kid]

This just popped into my head while reading this post. So don't beat me up

Could a Roth conversion be done, using a working spouse's income. Like a spousal ira? But, since no Roth IRA has been established yet, this probably wouldn't work.

I also assumed, there was a working spouse.

 

[FIRE'd@51]

Of course there are also reasons you might not want to convert to a Roth...

Yes, and these are what I am wrestling with. Let me list a few:

- My general distrust of the benefit of paying taxes early

- The small but finite chance of major tax reform, e.g. some type of consumption tax or a flat tax with a lower rate than I would pay on my RMD's

- The possibility of means testing Roth withdrawals - as we know this is being done with SS and Medicare

- The possibility of making IRA withdrawals more attractive from a tax point of view - this could be done in order to take pressure off SS and Medicare - a recent example of this was the increase of the RMD divisor to 27.4. A more recent is allowing a direct contribution from an IRA to a charity count as your RMD.

These are just a few I can think of at the moment. Nords has made some very good arguments in favor of converting. For me this is a conundrum.

 

[jdw_fire]

Could a Roth conversion be done, using a working spouse's income.

A Roth conversion is funded from a traditional IRA not earned income.

 

[unclemick]

Goggle up the ORP calculator and try some retirement scenario's : mine(single) has me spend mine early and let the trad ride - no nest egg, spend last dollar.

I did some anyway(7%) to take advantage of low tax (2005 - Katrina losses).

heh heh heh - I croak at 85 on this one's default setting. Lot's of fun.

 

[gindie]

I'll provide the ORP link, as I have it bookmarked:

http://www.i-orp.com/TaxCutForm.html

 

[cute fuzzy bunny]

I figured to just keep it split 50/50 between a traditional IRA and a Roth. Then whatever happens, we're straddling.

We went into ER with the traditional IRA and we're funding the Roths from my wifes part time income as we go along.

Should we keep the current tax situation, the Roth could be very advantageous to draw from to avoid taking capital gains when we're in our 60's+. Should we move to a flat tax or national sales tax, we didnt throw the baby out with the bath water by converting everything to a Roth.

 

[lazygood4nothinbum]

i'm moving the tira to a roth yearly up to the 15% tax bracket. could i also (somebody hold me, i think i'm going to faint) w*rk a part time job, but only w*rking, of course, enough to earn the maximum roth contribution for that year and add that to the rollover money if i thought i'd like to have some more money for my later retired years? my concern is most of my tira money can not be rolled over as that is an inherited ira and for some odd reason (i think it might just be fashion sense) i feel like i should have more in a roth than i'll have otherwise.

 

[Nords]

Anyone have any bright ideas, loopholes, scams
(legal ones, that is) for managing to have some compensation income ?

Well, you could always go get a job.

But I've enjoyed great success with the "working spouse" option. Of course when she gets home from a hard day at the office I express my appreciation with dinner on the table, a clean kitchen, and whatever else she wants.

Could a Roth conversion be done, using a working spouse's income. Like a spousal ira? But, since no Roth IRA has been established yet, this probably wouldn't work.

We file a joint return with alternating partial conversions up to the top of the 15% bracket, no matter who earned the income. Last year we converted part of my IRA to a Roth, and this year it'll be her turn to convert part of her IRA to a Roth.

The real fun is when the IRA gains more than we convert. We don't have to struggle with that problem very often, and it's not really much of a problem...

 

[Cattusbabe]

Thanks for all of the responded. Now I get it (I'm slow but I get there by and by.) I will make the conversion to a ROTH prior to 4/17/2007. I ran the suggested calculations. Better to pay the tax on funds while I am at 15% tax rate than later when I may be much higher. Again thanks to all who gave such sound advice.

 

[Nords]

I will make the conversion to a ROTH prior to 4/17/2007.

Uhm, no.

While you can make a 2006 contribution to a conventional IRA or a Roth IRA by the filing deadline (17 Apr 2007), you have to convert before the end of the calendar year. The deadline for 2006 was 31 Dec. But you can do a conversion in 2007 anytime before 31 Dec 07-- subject, of course, to the AGI limits and all the other rules. See page 27 of Pub 590.

 

[Cattusbabe]

A little red faced re. my last post. Thanks for the link. we ended up contributing to a ROTH and left the other alone.

 

[JohnEyles]

While you can make a 2006 contribution to a conventional IRA or a Roth IRA by the filing deadline (17 Apr 2007), you have to convert before the end of the calendar year.

That's weird, isn't it ? Kinda a PITA if you're RE'ed and trying to be sure to
max out your low tax brackets with IRA conversions, since it means accurately
pre-computing your taxes, in the few days in between when dividends
come out and when the year ends, all when you're busy with holiday cheer.

I guess the work-around is to convert an upper bound of what you think you'll
wish you had, and then re-characterize (from Roth back to TIRA) once you know
for sure what your taxable income is. Re-chars can be done up 'til filing deadline,
no ?