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Old 03-03-2012, 06:37 AM   #41
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"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).
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Old 03-03-2012, 09:59 AM   #42
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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!]

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Old 03-03-2012, 10:26 AM   #43
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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.

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Old 03-03-2012, 11:48 AM   #44
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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
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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.

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+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.
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Old 03-03-2012, 11:52 AM   #45
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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!
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Old 03-03-2012, 12:11 PM   #46
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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.
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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...
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Old 03-03-2012, 01:12 PM   #47
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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.

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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.
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Old 03-03-2012, 01:25 PM   #48
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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?)
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Old 03-03-2012, 01:27 PM   #49
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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.
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Old 03-03-2012, 01:58 PM   #50
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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.
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Old 03-03-2012, 02:11 PM   #51
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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.
It's true post-tax dollars won't be taxed if left in a tIRA, but their earnings will upon withdrawal. Conversely earnings on those same dollars in a Roth won't be taxed.

Someone might quickly look at their $100k tIRA and decide not to convert to Roth because they think the whole $100k will be taxed upon conversion. But if half of that tIRA was non-deductable contribs (i.e. post-tax dollars), then only $50k will be subject to tax upon converting to Roth. Such conversion releases the post-tax half to grow tax-free, which over time can more than offset any tax paid for converting the pre-tax half.
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Old 03-03-2012, 02:32 PM   #52
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It's true post-tax dollars won't be taxed if left in a tIRA, but their earnings will upon withdrawal. Conversely earnings on those same dollars in a Roth won't be taxed.

Someone might quickly look at their $100k tIRA and decide not to convert to Roth because they think the whole $100k will be taxed upon conversion. But if half of that tIRA was non-deductable contribs (i.e. post-tax dollars), then only $50k will be subject to tax upon converting to Roth. Such conversion releases the post-tax half to grow tax-free, which over time can more than offset any tax paid for converting the pre-tax half.
If your tax rates don't change then it doesn't matter if you convert now or later.

In your example suppose you are in the 25% tax bracket. If you convert now you pay $10k in taxes and the remaining $40k grows tax free.

Suppose it doubles in value before you withdraw it - you get $80k

If you don't convert it, the $50k will still double in value, to $100k, and you pay 25% tax when you withdraw it, leaving you with $80k
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Old 03-03-2012, 02:47 PM   #53
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Hmm, well, my calcs say the Roth comes out ahead. Example $100k tIRA, half post-tax contribs, 25% tax rate:

1) Don't convert to Roth, $100k doubles over time to $200k, of which $150,000 is taxable @ 25%. That's $37,500 in tax, reducing the tIRA to $162,500 after tax.

2) Or, convert to Roth now, pay 25% tax on $50k pre-tax portion, which is $12,500, leaving $87,500 to double over time to $175,000 after tax in the Roth.

Option 2 calculates as if the tax was paid with IRA dollars. Option 2's Roth conversion comes out even further ahead if the tax is paid with non-IRA dollars.
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Old 03-03-2012, 03:01 PM   #54
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Hmm, well, my calcs say the Roth comes out ahead. Example $100k tIRA, half post-tax contribs, 25% tax rate:

1) Don't convert to Roth, $100k doubles over time to $200k, of which $150,000 is taxable @ 25%. That's $37,500 in tax, reducing the tIRA to $162,500 after tax.

2) Or, convert to Roth now, pay 25% tax on $50k pre-tax portion, which is $12,500, leaving $87,500 to double over time to $175,000 after tax in the Roth.

Option 2 calculates as if the tax was paid with IRA dollars. Option 2's Roth conversion comes out even further ahead if the tax is paid with non-IRA dollars.
I agree that your calculation shows that the Roth conversion is better even if the tax rates stay the same. Thanks.

Makes me pleased that I converted the whole of my tIRA to a Roth in 2010. I now only have the Rollover IRA from my 401k in 2011 left to worry about.
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