Fido Adviser Doesn't Think I Should Do Roth Conversions/ (huh?)

[Midpack]

Lots of views here, did anyone remind OP that when you do a conversion from tIRA to Roth that you have to take into account all IRAs not just this one, for taxes. If you have deductable and non deductable, say 90K deductable and 10K non, then you pay taxes on 90% of withdrawls or conversions.

I'm going to have to look into this. We have two large deductible rollover IRA's from 401k's and two non-deductible TIRA's (both with only non-deductible contributions, but gains taxable on withdrawal). I was assuming I might one day convert the latter if not all four to Roth IRAs during years with no/low income. Maybe I'm mistaken on my options...

 

[Aeowyn]

In trying to figure out what to do with my $385k FIDO 401K, I met with one of their reps today about possibly moving the 401K to an IRA. There are many good reasons to do this, but my primary one was to take advantage of the next few years when I'll be living off savings and have no income other than a few thousand in dividends. It seemed like the perfect opportunity to do some ROTH conversions with little to no taxes due.

I was shocked that the adviser didn't think it was worth my time to convert. She also seemed to think I'm too focused on the "little" things like expense ratios and keeping taxes low. I said I wanted to do a spreadsheet to compare the expense ratios of the available 401k funds vs. IRA funds and she gave me a look like I was out of my ever lovin' mind.

Please tell me I'm not crazy! (Or if I am, I guess I should know that, too).

I certainly don't think tax considerations are a little thing when talking about a Roth conversion especially if you think you'll be in a zero to 15% bracket now and a higher bracket latter.

However I might understand the comment in general about being too concerned with taxes (especially in regards to taxable accounts and funds to put there which is different than the 401K vs. Roth IRA conversion) and expense ratios. The tax efficiency (if in a taxable account) and expense ratio are something I look at when determining which funds to invest in - but not the only ones. My first priorities in looking for funds is to ensure my overall diversification is what I'm looking for. Then I look at overall return (net of expenses and taxes) for a fund compared to benchmarks and other funds in the same category. I also look at risk/reward history for the fund - if the fund is volatile - was the long term return worth it?

 

[Alan]

and therefore if you do have a TIRA that is mostly non deductable it should be converted to the roth before the 401K is rolled to a TIRA so you dont have to pay as much tax on that conversion.

This is exactly what I did. The year I ER'ed I converted my tIRA (that was completely funded with after tax money). The following year I did the 401k rollover

I'm going to have to look into this. We have two large rollover IRA's from 401k's and two non-deductible TIRA's (both with only non-deductible contributions, but gains taxable on withdrawal). I was assuming I might one day convert the latter to Roth IRAs during years with no/low income. Maybe I'm mistaken on my options...

The rollover IRA's are included in the calculation when doing a rollover. you can't choose which one.

 

[heirloom]

have you ever been sued? and if so, were you protected by ERISA or whatever it is called?

No, but I do remember the attorney at our retirement seminar mentioning this, plus 100% of your 401K is safe vs 100K in an IRA, even from creditors...though most of us don't have to worry about creditors.

Is a Retirement Plan Safe From a Law Suit? | eHow.com

 

[teejayevans]

I'm going to have to look into this. We have two large deductible rollover IRA's from 401k's and two non-deductible TIRA's (both with only non-deductible contributions, but gains taxable on withdrawal). I was assuming I might one day convert the latter if not all four to Roth IRAs during years with no/low income. Maybe I'm mistaken on my options...

Original poster is correct, IRS treats all your IRAs is one. I believe pub 590 is where to look.
TJ

 

[Zantastic]

Thanks for all of your replies! It's good to know that I'm not fundamentally crazy. Figuring out the best plan for me is giving me a stomach ache though.

What's the feminine version of the word "wuss"? I should change my username to whatever that is.

 

[Alan]

What's the feminine version of the word "wuss"? I should change my username to whatever that is.

La_wuss ?

 

[TrvlBug]

Original poster is correct, IRS treats all your IRAs is one. I believe pub 590 is where to look.
TJ

Inherited IRAs excepted. For some reason these are not included in the tax calculations. I was able to convert my TIRA (after taxes) to Roth w/o incurring taxes as my other IRA is an inherited IRA and not subject to the conversion calcs.

 

[Alan]

Inherited IRAs excepted. For some reason these are not included in the tax calculations. I was able to convert my TIRA (after taxes) to Roth w/o incurring taxes as my other IRA is an inherited IRA and not subject to the conversion calcs.

I didn't know that

Presumably that is because you have to take RMD's on inherited IRA's if you are not the spouse of the deceased. Or does this rule also apply to a spouse that has inherited an IRA and treats it as their own?

 

[Aeowyn]

I'm guessing the exception for inherited IRAs is due to the fact that you are not allowed to convert them to Roth IRAs.

 

[MichaelB]

I'm guessing the exception for inherited IRAs is due to the fact that you are not allowed to convert them to Roth IRAs.

+1

Or roll them over into any other IRA.

 

[TrvlBug]

I didn't know that

Presumably that is because you have to take RMD's on inherited IRA's if you are not the spouse of the deceased. Or does this rule also apply to a spouse that has inherited an IRA and treats it as their own?

I inherited the IRA from my father and have to take RMD's based on my age (feels really weird!). I don't know how it would apply to spouse.

 

[Alan]

I inherited the IRA from my father and have to take RMD's based on my age (feels really weird!). I don't know how it would apply to spouse.

Thanks for the clarification.

If you inherit an IRA from your spouse you have the option to roll it over into your own IRA. Michael is most probably correct that inherited IRA's cannot be converted to a ROTH.

Inherited IRA | IRA Distributions | Strecth IRA | IRA Rules
http://www.irs.gov/pub/irs-pdf/p590.pdf

 

[sheehs1]

I set up a non-deductible IRA several years ago with the thought of converting it to a Roth, since I had no other avenue to get a Roth. Have not done a conversion yet. Tax rate is too high. At some point the tax rate should be low enough for me to reconsider if things are structured right. Still..as others have said, one has to include all the monies in all IRA's and come up with a percentage of the dollars converted which are then taxed. Had I known this at the time, not sure I would have set up the non-deductible IRA since it was already funded with after tax money. Oh well...at least perhaps I'll have some options going forward. One year at a time.

 

[Dennis]

"Have you talked with a tax person? Our CPA told us converting is not a good idea because of our tax bracket. That advice may change once we both stop working"

DITTO! On a Smaller Scale? Coverting my Little $25k IRA $ into my Roth? Would cost me 25% taxes = $6,000 For what? Nottin Honey! And It making 7% yr? How long to make that $6k back on that balanced of $19k? almost 4.5 yrs !
Throw in min. 3% Inflation and now it will take how long to get back to my $25k making 7% Yr in the IRA?

Actually? Am Glad I focused on Putting my Savings into a ROTH all these Yrs and Not a IRA..
I knew IRA's were a Bait and Switch Deal and a Conspiracy..
And of course MFunds Want people to Use IRA's and Roths! They don't move the $ around in them or In/Out as Much and they can Make More $ on them in Expenses..!

 

[Aeowyn]

"Have you talked with a tax person? Our CPA told us converting is not a good idea because of our tax bracket. That advice may change once we both stop working"

DITTO! On a Smaller Scale? Coverting my Little $25k IRA $ into my Roth? Would cost me 25% taxes = $6,000 For what? Nottin Honey! And It making 7% yr? How long to make that $6k back on that balanced of $19k? almost 4.5 yrs !
Throw in min. 3% Inflation and now it will take how long to get back to my $25k making 7% Yr in the IRA?

The OP states that they plan to have no earned income for the next few years and are living off of savings (implied taxable savings) with only income from dividends. Clearly sounds like they are in the zero-15% marginal tax bracket.

Conversion from Traditional to Roth usually only makes sense if you have the money to pay the taxes from a source external to the IRA (sounds like the OP does). And if you think you may be in a tax bracket higher than 25% when you retire if you keep all your retirement savings in Traditional accounts - it may make sense to convert now even at 25% rate (again assume you have funds external to IRA for payment of taxes on the conversion).

 

[audreyh1]

Interesting!

When I got my annual call from my Fidelity Advisor for the annual portfolio "review/chat" in 2011 he strongly encouraged looking at Roth conversion since there was no longer an income limit. He pointed me to some very fancy Fidelity on-line tools for tax evaluation. I kind of went cross-eyed after a while!

But the real issue for me is AMT. Most years I pay AMT = 26% on most of the ordinary income. So I would be looking at 26% on any converted amount. Our average tax rate in 2011 was under 15% (13.9%, I think) because most of our income was capital gains and qualified dividends. But any Roth conversion would be taxed at ordinary income rates, which for us = AMT rates.

That, combined with the fact that our IRAs are only 10% of our retirement funds - the rest is in taxable - we are strongly inclined to let it be even though I don't see our tax situation being any better than it is today.

We are still >10 years from RMDs, but 26% is a lot to overcome, even with a longish time period! By the time we get to RMD age, if our taxes are "too high" we'll likely be turning RMDs into charitable contributions! We have no descendent heirs - only siblings to whom we'll be gifting as much as we can while we are all still alive.

We would also have the opportunity, if we wished, to reduce our income from our taxable accounts to "make room" for the RMDs. This probably means staying higher in equity allocation in taxable accounts in spite of the higher volatility.

But for those who are seeing low ordinary income rates today - especially 10% or less - I would be converting whatever I could! Especially if it were part of a legacy I hoped to pass on.

It's going to be very interesting managing the income going forward. We are coming to a close of what has been historically a super-low tax situation for those of us with low ordinary income and high capital gains/qualified dividends. I tried to take advantage of the party while I could! Now to batten down the hatches.......

[I also have trouble psychologically paying more in taxes today in hope of lower taxes tomorrow. If we get into a situation after age 70 where one of us has high health-care/long-term care bills, that could lower our AGI considerably and thus change the entire tax situation. You just never know what is going to happen!]

Audrey

 

[rescueme]

I also have trouble psychologically paying more in taxes today in hope of lower taxes tomorrow. If we get into a situation after age 70 where one of us has high health-care/long-term care bills, that could lower our AGI considerably and thus change the entire tax situation. You just never know what is going to happen!

Audrey

I/DW are with you on your observation, as to the "unknowns" of the future, beyond tax rates.

As for us, we would rather err on the side of not paying taxes today and let our tax deferred investments "ride" (e.g. increase in value). If tax rates go up (radically) in the future? Then the scenerio you describe may also be in play, and will result in no impact overall.

Isn't life fun? ...

 

[Alan]

I also have trouble psychologically paying more in taxes today in hope of lower taxes tomorrow. If we get into a situation after age 70 where one of us has high health-care/long-term care bills, that could lower our AGI considerably and thus change the entire tax situation. You just never know what is going to happen!

Audrey

I/DW are with you on your observation, as to the "unknowns" of the future, beyond tax rates.

As for us, we would rather err on the side of not paying taxes today and let our tax deferred investments "ride" (e.g. increase in value). If tax rates go up (radically) in the future? Then the scenerio you describe may also be in play, and will result in no impact overall.

Isn't life fun? ...

+1

We are in the situation where we do have a lot of money in tax deferred accounts so RMD's are a factor for us in 13 years time, but the tax code could change a lot between now and then.

i-ORP is telling me to do ROTH conversions well into the 25% bracket, but i-ORP makes no guesses on future tax policy as it assumes the sunset of the current low rates since that is the law at present.

I can't bring myself to do conversions anywhere near the level i-ORP advises, and if we end up with RMD's that mean we pay higher taxes than we would today then so be it.

 

[Gotadimple]

I can't bring myself to do conversions anywhere near the level i-ORP advises, and if we end up with RMD's that mean we pay higher taxes than we would today then so be it.

Ditto!

 

[Midpack]

Lots of views here, did anyone remind OP that when you do a conversion from tIRA to Roth that you have to take into account all IRAs not just this one, for taxes.

The rollover IRA's are included in the calculation when doing a rollover. you can't choose which one.

Thanks, I hadn't picked up on this before! I thought I could convert our two 100% non-deductible contribution TIRAs (paying taxes on gains only) and had run through calcs on that basis. I was waiting for work income to subside, and the lower tax bracket, to start conversion to Roth IRAs.

But we have two larger deductible rollover IRAs from work 401k's. When I put it all together, we lose big even trying to convert to Roth IRA's. So all I can do now is manage distributions and taxes from 4 TIRA's in the years ahead. It looks to me like we'll be drawing from taxable and TIRA's simultaneously to manage taxes (vs taxable first as some recommend). But that can't begin for many years (penalties, no way), so I have time to get smarter about it. Thanks again...

 

[Nords]

But for those who are seeing low ordinary income rates today - especially 10% or less - I would be converting whatever I could!
[I also have trouble psychologically paying more in taxes today in hope of lower taxes tomorrow.
You just never know what is going to happen!]

The problem is when we sit here in our comfy 15% income tax bracket and know that in 2022 we'll be paying 25%.

I would love to finish our conversions and then, in 2021, learn that conventional IRA RMDs and taxes have been canceled. I'd complain happily for the rest of my life. But I can't spend the next 10 years hoping for it to happen and then realize that I've run out of time.

But we have two larger deductible rollover IRAs from work 401k's. When I put it all together, we lose big even trying to convert to Roth IRA's. So all I can do now is manage distributions and taxes from 4 TIRA's in the years ahead. It looks to me like we'll be drawing from taxable and TIRA's simultaneously to manage taxes (vs taxable first as some recommend). But that can't begin for many years (penalties, no way), so I have time to get smarter about it. Thanks again...

Everyone in the 15% tax bracket has room to convert a little bit of conventional IRA every year until they're forced to start taking RMDs. It doesn't have to be a binary decision.

 

[samclem]

So all I can do now is manage distributions and taxes from 4 TIRA's in the years ahead. It looks to me like we'll be drawing from taxable and TIRA's simultaneously to manage taxes (vs taxable first as some recommend). But that can't begin for many years (penalties, no way), so I have time to get smarter about it. Thanks again...

Would it make sense for you to start 72(t) withdrawals from the TIRAs right now? No penalties, and it would reduce the size of the TIRAs and therefore the size of your RMDs from them in the outyears. You could re-invest the money now somewhere else that gives you more tax flexibility later when you need it (into a Roth, up to the 15% line? Into taxable investments that would build CG but less realized income each year?)

 

[GrayHare]

Sometimes overlooked: if you have post-tax $ in a tIRA, those dollars won't be taxed in a Roth conversion, thus making Roth more attractive.

With hindsight, I'm glad I converted all tIRAs to Roth in 2010. The special 2-year rule then means I still have not had to pay any tax on the conversion, meanwhile I've invested the money owed to the IRS and earned enough to offset most of the tax eventually due, and it was soon enough to avoid the scheduled 2013 tax rate increase.

 

[Alan]

Sometimes overlooked: if you have post-tax $ in a tIRA, those dollars won't be taxed in a Roth conversion, thus making Roth more attractive.

Not sure what you are getting at here. The post-tax $ in a tIRA are not taxed even if you don't convert to a Roth. The post-tax $'s is called the 'basis', and is recorded each year on form 8606 (line 14). When you make withdrawals from the tIRA's the $'s coming from the basis are not taxed.