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IRA to ROTH IRA Conversion?
Old 04-08-2012, 03:52 AM   #1
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IRA to ROTH IRA Conversion?

Is it a good idea to pay 25% Tax & convert IRA to ROTH IRA? I am 63yr old.
Thanks
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Old 04-08-2012, 08:40 AM   #2
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In most cases, NO. If you wait and convert over time after you retire, assuming that your are in a lower tax bracket, you will be better off.

I was in the 28% bracket last year when I was working, and will be converting amounts as needed to fill the 15% tax bracket over the next few years and paying ~10% of the amounts converted.
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Old 04-08-2012, 09:27 AM   #3
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For a comparison, you might see what happens when you have to start
taking RMDs from your TIRAs and qualified plans.
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Old 04-08-2012, 11:03 AM   #4
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You haven't provided enough information for anyone to answer. The main information needed is what tax bracket you'll be in during retirement, including RMDs. Then it becomes a fairly simple answer. There's no sense in converting at 25% if you'll be paying 15% or less in retirement, though of course no one knows for sure what the tax rates will be in the future.
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Old 04-08-2012, 11:56 AM   #5
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Originally Posted by pb4uski View Post
In most cases, NO. If you wait and convert over time after you retire, assuming that your are in a lower tax bracket, you will be better off.

I was in the 28% bracket last year when I was working, and will be converting amounts as needed to fill the 15% tax bracket over the next few years and paying ~10% of the amounts converted.
+1

This assumes you can live for a while, and pay the conversion taxes, using taxable account funds.
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Old 04-08-2012, 12:01 PM   #6
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This is difficult to answer for anyone. Some say you diversify as in investment choices and do some conversions and some left as traditional. This way if the tax situation changes you have both covered. If you are retired and not getting a lot of income now might be a good to to start being aware of not pushing yourself into the next bracket. You definitely want to convert some I would think to avoid the RMD at 70 1/2 putting you in a higher bracket and also with SS being taxed it makes that more likely. Good luck with whatever path you take. It is better to take some action then none I would think.
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Old 04-08-2012, 12:16 PM   #7
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25%? Probably not. When you ran the calculator at Optimal Retirement Calculator and Retirement Decision Support System what did it say? Did you confirm the result with your run of TurboTax?
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Old 04-08-2012, 01:02 PM   #8
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Further Details

I am 63 year old.
I am retired.
I am taking soc sec + I am withdrawing from my IRA funds to top 15% tax bracket.
Now the question is---For a 63 yr old individual, is it better to convert some money to ROTH IRA every year, paying 25% Federal Tax or will it be better to keep money in IRA until 70 & pay RMD when I turn 70&1/2?
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Old 04-08-2012, 01:16 PM   #9
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With that new information, my answer remains exactly the same.
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Old 04-08-2012, 01:58 PM   #10
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Once you start taking RMD's what will your tax rate be? (assuming current tax rates)

Also, will the RMDs be causing your SS to be taxable? and if so, how does it affect the tax rate on your RMDs?

If it were me, I would model out each alternative because the interaction of current/future tax rates and SS being taxable make it difficult to know what would be best without modeling it.
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Old 04-08-2012, 02:29 PM   #11
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I agree with LOL! about running through the calculator. Since you are already 63 I doubt you'll gain too much by converting, unless you will get pushed into a much higher bracket when forced to take RMDs. The only other reason I can see for doing the conversion is if you think you will have a lot of money to leave to heirs. It would benefit them if much of the money was in a Roth IRA vs a tIRA.
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Old 04-08-2012, 02:42 PM   #12
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Quote:
Originally Posted by rsingh6675 View Post
I am 63 year old.
I am retired.
I am taking soc sec + I am withdrawing from my IRA funds to top 15% tax bracket.
Now the question is---For a 63 yr old individual, is it better to convert some money to ROTH IRA every year, paying 25% Federal Tax or will it be better to keep money in IRA until 70 & pay RMD when I turn 70&1/2?
I think you have been given good council so far from other forum members. I'll throw in a couple of tangential things which might help you decide what to do AFTER you have followed the other suggestions (i.e., determined what the tax effects will be for the long term.)

I would suggest (not advise) that IF your guestimated tax rate AFTER you begin RMDs will be 25%, then there are at least 3 possible "tipping" issues which might make you lean toward conversion NOW at 25%.

1. If you have non tax-deferred money to pay the taxes, conversion to a Roth actually increases the amount of money you have within your Roth. Think of it this way: If you have a tIRA worth $100K and you are (or will be) in the 25% tax bracket, the tIRA is really only worth $75K. BUT, if you "add" $25K to your tIRA in the conversion process of paying the taxes with outside money, now you have a ROTH which is actually worth $100K. It gets to continue growing tax FREE from then on. There are obviously arguments against this which have been covered elsewhere and you SHOULD come to your own conclusion about this.

2. There are some real advantages for estate planning with Roth IRAs. You need to also read up on these to make your own decision. I always suggest the Fairmark site at Fairmark.com

3. Finally, even if your calculations show that you will be in a certain tax bracket when you turn 70 1/2, that's a long time to trust Congress not to change the rules. If they DO change the rules, I always ask the question "Do you think tax rates will go up or down or stay the same for you?" The answer to that question may help answer your conversion question when everything else seems "equal".

AND to answer your question (about converting at 25%), yes, I have done some of that and may again. I'm going to pay the money and visit my tax guy to go through the numbers one more time. The calculation we do will determine whether I convert any more tIRA (and 401(k)) money to Roths.

I'm becoming the local cheerleader for Roths on the forum, so don't let my enthusiasm for them cloud your judgement. YOU will be responsible for what you decide, so be certain to base your decision on facts and appropriate calculations as well as educated guesses about what the future holds. So, in short, I am not an expert on Roth conversion - or any other tax issues. IOW, YOUR MILEAGE MAY VARY. Best of luck with this important decision.
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Old 04-08-2012, 02:47 PM   #13
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For my case, and with the assumptions I made about the future, I seem to come out ahead by converting what I can below the 25% bracket. If I really fine-tune my conversions, I can gain a little by converting some in the 25% bracket and reducing RMDs. After that it becomes better to leave it in the IRA and go ahead and let the RMD push into the 28% bracket. That assumes the Bush tax cuts are not extended past 2012. And really, my difference is pretty small between converting at 25% now and RMDing out at 28% in the future. But remember that some of that RMD comes out at lower tax rates, so don't convert so much that you don't fill up the lower tax bracket with your RMD after all the conversions are done. Ideally, you fill that lower bracket throughout retirement.
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Old 04-08-2012, 03:22 PM   #14
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I still figure that if you don't care about the estate you leave behind, RMDs are irrelevant.
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Old 04-08-2012, 05:16 PM   #15
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I still figure that if you don't care about the estate you leave behind, RMDs are irrelevant.
T-Al, I guess I don't understand what you mean. Yes, Roths have some estate advantages, but I would think the main question about whether to Roth or not would be whether you ultimately have more dollars to keep (as opposed to giving them to the IRS). My single biggest hang-up with RMDs is that they are inflexible and they also cause some inflexibility in how you manage your taxable income. I can think of scenarios where your RMDs would be hit very hard by taxes. Sorry I have apparently missed your point (could be the meds - Wait! I haven't had mine yet.)
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Old 04-08-2012, 05:52 PM   #16
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My thinking is that if you aren't planning on leaving money behind, you will want to spend it before you die. So, leaving it in the retirement account at that stage of your life is probably not a good idea anyway, even if you take a tax hit.

RMD stands for: warning, you are not spending your money fast enough, stop being so cheap!

Also remember that although you must withdraw the RMD, you are not required to spend it.
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Old 04-08-2012, 06:17 PM   #17
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Also remember that although you must withdraw the RMD, you are not required to spend it.
Absolutely true, but you ARE required to include RMDs in your taxable income. If you had been able to "game" the system (one possible game is to "Roth" some of your tIRA/401(k)) you might end up with a lower life-time tax bill. True, it might not turn out the way you planned, but if your plan works, you could save a significant amount of taxes. I'm only suggesting that you need to at least consider playing the game. If you decide not to (or you think it''s a wash), so be it. But, we have been given this "gift" of the Roth. It's not perfect and playing the game is fraught with dangers and pitfalls, but it's the best game in town for many of us, IMHO of course. And yes, YMMV.
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Old 04-08-2012, 06:41 PM   #18
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Beware the hidden 30% tax bracket. When you push income (incl roth conversion), LTCG and dividends (less deductions and exemptions) above the 15% bracket, you start owing a 15% tax on LTCG and dividends. This means that for every extra dollar you convert, you pay 15% tax for the conversion (the first 8700 is in the 10% bracket), and 15% on the LTCG/div you pushed above the bar, which was 0% when it was below the bar. Model it on your tax program and see it, or just check out the Qualified Dividends and Capital Gain Tax Worksheet.
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Old 04-08-2012, 06:58 PM   #19
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After putting my Roth conversion situation through models, both online and spreadsheet, I determined that it would be MUCH better to simply make my domicile in a non income tax state. I don't want to get the thread off topic, but just want to put things in perspective. Pay now at known tax rates, pay later at unknown tax rates... there's a lot of 'play' in that analysis.
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Old 04-08-2012, 09:37 PM   #20
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After putting my Roth conversion situation through models, both online and spreadsheet, I determined that it would be MUCH better to simply make my domicile in a non income tax state. I don't want to get the thread off topic, but just want to put things in perspective. Pay now at known tax rates, pay later at unknown tax rates... there's a lot of 'play' in that analysis.
But I can Roth convert more when I deduct my state taxes!
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