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Deciding Against Roth Conversion
Old 09-20-2015, 02:15 PM   #1
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Deciding Against Roth Conversion

I made what I now consider a mistake - in the last years at BIG JOB I made non-deductible contributions to a tIRA. I wish I had saved in a taxable account instead. I'll have to pay full price for ACA health insurance until I turn 65 because I have to withdraw tIRA funds above the Cliff for living expenses. So now I come to FI and have little taxable savings, small ROTH savings and BIG tax deferred tIRA savings. Though I would love to have more in ROTH investments, I would need to convert and pay the taxes from the tIRA withdrawal and my marginal tax rate is likely to be 25%. Do you agree that I should just let sleeping dogs lie? I figure I'll not touch the ROTH accounts, keep the taxable account for emergency expenses and tap the tIRA for expenses. Comments welcome.
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Old 09-20-2015, 03:46 PM   #2
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IF you only have non-deductible contributions in your t-IRA (I hope you were filing form 8606 with each year's tax return to keep track of the basis) you would only pay taxes on the proportional share of the earnings. Same would apply for conversion of the t-IRA to Roth.

BUT, you must treat ALL your t-IRAs as if they were all in the same account when withdrawing or converting. If you have other deductible t-IRAs, then a higher percentage of the withdrawen/converted amount would be taxable.

Hope this makes sense to you.
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Old 09-20-2015, 04:39 PM   #3
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Roth conversions won't make a lot of sense if you don't also have funds in a taxable account that you can live on and pay the conversion taxes from. A tIRA with only non-deductible contributions might actually work for that if you have a substantial amount in there that can come out with low taxes.

Your main strategy should be to smooth your tIRA withdrawals so that you always take advantage of the tax brackets below 25% and try to stay out of tax brackets above 25%.

For example, even if you find you could make it through a year without any tIRA withdrawals, you should still withdraw enough to fill out the 10% and 15% brackets. And similarly, you may want to take a little extra out each year while still in the 25% bracket in order to build up a taxable account (and possible Roth conversion aid) to supplement your Roth accounts for when you unexpectedly (or expectedly) need extra cash for any one year. Using the Roth or accumulated taxable funds instead of tIRA withdrawals can keep you from exceeding the 25% tax bracket for a high expense year.

When I'm done with Roth conversions, my RMD and SS will fit within the 15% tax bracket (that's the plan at least), and I'll be able to make Roth withdrawals to cover the rest of my expenses.
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Old 09-20-2015, 09:05 PM   #4
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I did file the 8606 form for each year I made non -deductible tIRA deposits. But I neglected to do a Roth conversion before moving my 401k to the IRA. So now the non -deductible portion is about 1.5% of the total tIRA portfolio - hardly worth taking the time to fill out the withdrawal form for the tax exemption. I like the idea of withdrawing more than I need from the traditional to build up a taxable account being careful to stay within the 25% tax bracket. Thanks for thinking with me!


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Old 09-21-2015, 06:18 AM   #5
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. I'll have to pay full price for ACA health insurance until I turn 65 because I have to withdraw tIRA funds above the Cliff for living expenses.
I know it's heresy to mention this on this forum but I know of more than one person who's taken a HELOC to cover expenses and stay under the ACA cliff.

If you can save $10K on ACA with a few $K of interest for a few years it might be worth considering. Take your WD's up to the cliff's edge and supplement with a low interest loan.
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Old 09-21-2015, 07:02 AM   #6
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Another question: For ACA purposes is a married couple a family of two or one if one of the couple is on Medicare and the other is younger than 65? In other words is the FPL based on one person or two?
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Old 09-21-2015, 07:09 AM   #7
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Another question: For ACA purposes is a married couple a family of two or one if one of the couple is on Medicare and the other is younger than 65? In other words is the FPL based on one person or two?
For ACA calculations the entire household is always considered. So, the FPL would be based on two people.
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Old 09-21-2015, 07:50 AM   #8
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Lem1955, if you are still working you can consider a trustee to trustee transfer of your pre tax contributions and earnings to a 401k. By rule only pretax may be transferred, this leaves a 401k with after tax money only with which you do a Roth conversion. As my name suggests I'm a big fan of Roths one of the benefits is to allow you to manage tax bracket or qualification for ACA subsidy. It's always good to have diversity of savings, tIRA, Roth, Taxable so you can adjust to the need.


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Old 09-21-2015, 08:46 AM   #9
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I did file the 8606 form for each year I made non -deductible tIRA deposits. But I neglected to do a Roth conversion before moving my 401k to the IRA. So now the non -deductible portion is about 1.5% of the total tIRA portfolio

Ouch, that is the primary reason my 401k hasn't been moved to an IRA yet, and won't be moved until I'm done doing conversions.....likely when RMDs start and I won't have any room left in 15% bracket.
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