Conversion to Roth IRA post-retirement?

[PERSonalTime]

What do you thing about converting retirement assets (traditional IRA, 401k, 403b, etc.) to a Roth IRA after retirement. I don't really need to use those assets in the near future and expect to be in the same tax bracket for the foreseeable future. I don't see much benefit in rushing to do conversions. Am I wrong?

What are your thoughts, considering these fact?


Sent from my iPad using Early Retirement Forum

 

[Whisper66]

Everyone's situation may be different. I use I-ORP to look at whether doing Roth Conversions seems to make sense or not. Where they seem to make sense, I use I-ORP's value for conversion as a rough number to start with. Then I use Taxcaster to fine tune how much I want to convert. This is the start of my second year of retirement and for me a Roth conversion made sense.

 

[rodi]

The issue you may not see is whether RMDs will push you into a much higher tax bracket at age 70.

I haven't started roth converting, but plan to this year. Turns out that in retirement I'm in a lower tax bracket than when working. So my plan is to convert up to the PPACA income limits. (For a family of 4 - the premium tax credits are significant.)

Everyone's situation is different. Some folks may not get hit with the RMD tax explosion. You'll have to do the analysis yourself.

 

[pb4uski]

What do you thing about converting retirement assets (traditional IRA, 401k, 403b, etc.) to a Roth IRA after retirement. I don't really need to use those assets in the near future and expect to be in the same tax bracket for the foreseeable future. I don't see much benefit in rushing to do conversions. Am I wrong?

What are your thoughts, considering these fact?....

I guess to me it depends and there is not enough to go on. At a minimum you would want to do Roth conversions if your income is less than your deductions and exemptions since the tax on those conversions would be zero. After that it depends on your current and future tax brackets, whether RMDs will either increase your taxable SS or push you into a higher tax bracket, etc.

 

[jazz4cash]

I am probably in the same situation as you are,OP. I plan to monitor and convert conservatively to diversify tax-wise, increase flexibility and reduce RMDs. I do have a bit of my portfolio in a Roth 401k and one question I have is whether the 5 yr clock for Roth IRA is unique from the 401k. It probably makes sense to convert a small bit asap to get the clock started.


Sent from my iPhone using Early Retirement Forum

 

[Looking4Ward]

I was going to do just that for 2015, my first full tax year of retirement. Moved $11K from my tIRA to a Roth IRA.

Then, after end of year capital gains distributions and total year dividends (qualified and regular) in my taxable accounts were totaled up the tax bill was over $2K. Removing the $11K of Roth conversion dropped the tax due to around $400.

I sent in the paperwork to re-characterize (undo) the Roth conversions.

So in my case it doesn't make sense because my taxable portfolio is larger than my tax deferred and provides a sufficient income stream via dividends and CG distributions to cover expenses. It also doesn't give me much if any headroom for Roth conversions.

 

[user5027]

Echoing several previous posts; One size does not fit all.

Our portfolio breaks down:
5% tax free includes a 2015 conversion, some will be recharacterized to stay in 15% bracket
14% taxable
81% tax deferred, sheltered while in the 25 and 28% brackets

I'm retired 57, wife works 61.

Wife has health insurance through work so we get zero ACA subsidy. I am eligible on her work but buy on the exchange for less cost.

My goal is to defer SS and reduce RMD's with annual partial conversions. I shot high to be sure to fill the 15% bracket in 2015 and will due a partial recharacterization after figuring taxes to stay below the 25% bracket.

 

[PERSonalTime]

Everyone's situation may be different. I use I-ORP to look at whether doing Roth Conversions seems to make sense or not. Where they seem to make sense, I use I-ORP's value for conversion as a rough number to start with. Then I use Taxcaster to fine tune how much I want to convert. This is the start of my second year of retirement and for me a Roth conversion made sense.

What is I-ORP and where do I get it? Also, how much do you intend to convert as a percentage of your overall retirement portfolio. Btw, thanks for your response.


Sent from my iPad using Early Retirement Forum

 

[PERSonalTime]

I guess to me it depends and there is not enough to go on. At a minimum you would want to do Roth conversions if your income is less than your deductions and exemptions since the tax on those conversions would be zero. After that it depends on your current and future tax brackets, whether RMDs will either increase your taxable SS or push you into a higher tax bracket, etc.

Income already exposes me to maximum taxation of SS benefits, I.e., 85% of SS subject to taxation. Also, while I'm 10 years away from the RMD issue, I think that I'd be in the same tax bracket, but who knows. I'm leaning toward holding off and leaving the money that I would use to pay the tax fully invested for 10 more years.


Sent from my iPad using Early Retirement Forum

 

[2017ish]

What is I-ORP and where do I get it? Also, how much do you intend to convert as a percentage of your overall retirement portfolio. Btw, thanks for your response.


Sent from my iPad using Early Retirement Forum

Optimal Retirement Planner - Parameter Form

 

[N02L84ER]

At a minimum you would want to do Roth conversions if your income is less than your deductions and exemptions since the tax on those conversions would be zero. After that it depends on your current and future tax brackets, whether RMDs will either increase your taxable SS or push you into a higher tax bracket, etc.

+1

 

[Options]

I did roth conversions for the first time this year, and will do recharacterizations in December of this year. Got the idea and am copying this strategy from this BH thread:

https://www.bogleheads.org/forum/viewtopic.php?f=1&t=178614&newpost=2704499

Michael Kitces also discusses it here:

https://www.kitces.com/blog/using-systematic-partial-roth-ira-conversions-and-recharacterizations-to-fill-the-lower-tax-bracket-buckets/

I will be using this strategy while in a lower tax bracket before age 70 when RMD's and delayed SS begin. My intention is to stay in the 15% tax bracket during the conversions/recharacterizations. I modeled taxes in this strategy until the end of my plan (age 95) based on projections of reduced tax-deferred accounts as a result of having done roth conversions for about ten years.


I used this RMD calculator for projections: RMD Calculator | Required Minimum Distributions | Charles Schwab. I only assumed a 4% rate of return on tax-deferred until end of plan. If ROR turns out to be higher it may mean more taxes but my PF will be higher so I don't consider that a bad problem to have.

 

[hnzw_rui]

Assuming everything goes according to plan, pension will put me squarely in the 25% bracket (the bar is pretty low for single tax filing status). Unless I get really lucky with returns, I don't think RMDs will be such a huge issue. That said, I do plan on converting a small amount every year (to the top of 25% bracket at most) for tax smoothing.

@jazz4cash
Roth 401k's have a separate 5-year clock from Roth IRA. However, if you rollover Roth 401k to Roth IRA, your Roth 401k contributions (but not earnings) will be treated the same as Roth IRA contributions (meaning you can withdraw any time tax free and penalty free).

The Roth IRA account age is the one that takes precedence when doing a rollover from Roth 401k to Roth IRA. If you've had your Roth IRA account open for 5 years, great. The Roth 401k rollover will be treated as having been open 5 years. If, however, your Roth IRA is only 1-2 years old while the Roth 401k has been open for 5 years, then not so great. You'll lose the 5-year clock on the Roth 401k and it will take the 1-2 year age from the Roth IRA. Doesn't matter if only withdrawing contributions but assuming you're already 59.5, you're gonna have to wait until the Roth IRA is 5 years old to withdraw earnings tax and penalty free.

Another thing to keep in mind, while Roth IRAs are not subject to RMDs, Roth 401k's and other designated Roth accounts are.

 

[pb4uski]

Income already exposes me to maximum taxation of SS benefits, I.e., 85% of SS subject to taxation. Also, while I'm 10 years away from the RMD issue, I think that I'd be in the same tax bracket, but who knows. I'm leaning toward holding off and leaving the money that I would use to pay the tax fully invested for 10 more years. ...

If you converted $10k what would the increase in your taxes be? For the last few years we have converted to the top of the 15% tax bracket and our tax has been about 9% of the amount converted. Given I avoided 28% or more when I deferred the income and I expect to pay 15% or more once my pension, SS and RMDs start I'm happy to only pay 9%.

 

[bizlady]

So question, for those converting- are you paying the tax with after tax money or from the deferred accounts?
We are inclined to start converting to the top of 15% this year, but would have to use money from the deferred accounts to do so. Projections indicate we will be in the 25% bracket in 10 years when we have to take RMD- but I am still not sure if this is a good idea for us.

 

[harley]

In my case, I'm using after tax money. We're not living at the top of our budget, and I figure converting to the Roth to the top of the 15% tax bracket is a good investment. There's not many other investments where I can make 10% automatically, since I was in the 25% bracket most of when I was contributing the tIRA.

 

[PERSonalTime]

If you converted $10k what would the increase in your taxes be? For the last few years we have converted to the top of the 15% tax bracket and our tax has been about 9% of the amount converted. Given I avoided 28% or more when I deferred the income and I expect to pay 15% or more once my pension, SS and RMDs start I'm happy to only pay 9%.

I'm not sure. Guess I'll have to run the numbers to find out. Btw, conversions would be made from traditional IRAs funded with non-deductible monies. Do you think this would make a stronger case for converting? Btw, already in the 25% tax bracket.


Sent from my iPad using Early Retirement Forum

 

[PERSonalTime]

Optimal Retirement Planner - Parameter Form

Thanks for the information 2017ish! I'll definitely check it out


Sent from my iPad using Early Retirement Forum

 

[jabbahop]

Dumb question on rate of return on tax advantaged accounts and RMDs. Are tax brackets indexed for inflation? If so should my return on those accounts really be only the real return in terms of what tax bracket my RMDs put me in?


Sent from my iPad using Tapatalk

 

[gauss]

Under current tax laws, we will be in the 25% tax bracket from here on out. We have begun to convert 401ks to Roth IRAs this year.

One of the main reasons that I am starting now is that we have the benefit of filing a joint return with the associated higher deductions/exemptions and breakpoints before higher tax rates kick in compared to a single filer. My hope is to file jointly for the rest of our lives, but we cannot predetermine the date of our demise. I would not want to be mourning the loss of a spouse and then realize I was sitting on a large untaxed 401k and then have to convert it as a single filer, at the much larger rates, after not taking advantage of the chance to do it while married-jointly.

Also, we are putting off Social Security draws until age 70. As such we are looking to finish our conversions before age 70 and thus avoid RMDs.

Some have suggested that Roths may become taxable one day. My response is that this may be true, however higher general tax rates, which would effect money in a 401k, are also perhaps even more likely.

We am planning to convert over the next 20 years and thus spread the risk over time as another diversification strategy.

I paid the five-figure additional taxes from the conversion this year from after tax funds.

FWIW we are a dual career couple and both have DB pension income as well as SS awaiting us also.

-gauss

 

[gauss]

Dumb question on rate of return on tax advantaged accounts and RMDs. Are tax brackets indexed for inflation? If so should my return on those accounts really be only the real return in terms of what tax bracket my RMDs put me in?

Tax bracket breakpoints, exemptions, standard deductions, indeed, are all indexed to inflation under current law.

-gauss

 

[Winemaker]

Does it make sense to fill the Roth up to 15% bracket with tira conversions and supplement pension income from Roth (Roth ladder), or just supplement with tira withdrawals? I feel I'm going around in circles.

 

[braumeister]

Are tax brackets indexed for inflation?

Alas, they are whatever the legislature decides they will be. No guarantees.

 

[pb4uski]

So question, for those converting- are you paying the tax with after tax money or from the deferred accounts?
We are inclined to start converting to the top of 15% this year, but would have to use money from the deferred accounts to do so. Projections indicate we will be in the 25% bracket in 10 years when we have to take RMD- but I am still not sure if this is a good idea for us.

We are using taxable account money to pay the taxes but I think that the 10%+ savings in taxes (15% vs 25%) are significant enough to make it preferable even if you are using pre-tax money.

I'm not sure. Guess I'll have to run the numbers to find out. Btw, conversions would be made from traditional IRAs funded with non-deductible monies. Do you think this would make a stronger case for converting? Btw, already in the 25% tax bracket. ...

If you are already in the 25% tax bracket then converting is probably less attractive but it would be worth crunching a few numbers to find out. In our case the jump from 15% to 25% is attractive.... from 25% to 28% is less so but the other thing to consider for a couple is the jump in tax brackets once one spouse dies.

 

[jazz4cash]

@jazz4cash
Roth 401k's have a separate 5-year clock from Roth IRA. However, if you rollover Roth 401k to Roth IRA, your Roth 401k contributions (but not earnings) will be treated the same as Roth IRA contributions (meaning you can withdraw any time tax free and penalty free).

The Roth IRA account age is the one that takes precedence when doing a rollover from Roth 401k to Roth IRA. If you've had your Roth IRA account open for 5 years, great. The Roth 401k rollover will be treated as having been open 5 years. If, however, your Roth IRA is only 1-2 years old while the Roth 401k has been open for 5 years, then not so great. You'll lose the 5-year clock on the Roth 401k and it will take the 1-2 year age from the Roth IRA. Doesn't matter if only withdrawing contributions but assuming you're already 59.5, you're gonna have to wait until the Roth IRA is 5 years old to withdraw earnings tax and penalty free.

Another thing to keep in mind, while Roth IRAs are not subject to RMDs, Roth 401k's and other designated Roth accounts are.

Thank you for addressing my concern. If I understand correctly, the Roth IRA clock starts with the first Roth IRA account but can be used for any subsequent accounts. Therefore it makes sense to at least establish a <small> Roth IRA to get the clock started, although it's too late for me. My Roth 401k is 5 yrs old but I have not started any conversions which will likely come from traditional deferred accounts.