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View Poll Results: Are You Doing or Planning a Roth Conversion?
Yes, I have started converting. 42 37.50%
No, but I am considering it and may do conversions. 32 28.57%
No, I have not converted any tax deferred accounts and do not plan to make conversions. 38 33.93%
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Old 09-28-2010, 12:24 PM   #21
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Interesting - I thought one had to convert the VC before retirement. Congratulations on your retirement!


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There is a window after retirement and before the retirement is finalized in which to do the withdrawal. Since OPM took a full 6 months to finalize my retirement that window was much larger than I would have imagined. I sent the check for deposit into the VCA along with the withdrawal papers in the same envelope. OPM cashed the check, funded the VCA and then 2-3 weeks later returned the money via a check to my CU where the IRA was established. The CU manager called me the day it came to ask what I wanted to do with it as absolutely no information came with the check from OPM. I went to my CU the next day to take care of the paperwork.
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Old 09-28-2010, 12:25 PM   #22
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Guess I've thought of myself as one of the stronger proponents of this tax-planning gambit. I've been doing it since I retired nearly 5 years ago (in 2 days - woohoo!) The obvious motivations to me are three fold. (1) I want to reduce future RMDs which limit tax flexibility and also, (2) I'm convinced that taxes can only go up in the future and (3) using taxable funds to pay the taxes "steps up" the value of the future tax-free growth within the Roth.

But dang!! I DO hate paying the taxes - especially the state taxes since I deferred 4% state taxes and pay 8 % by virtue of changing states. I salve my tax-paying conscience by recalling that my state-change did away with taxes on pension and SS (again, woohoo!) Since I've been converting considerably more TIRA funds than pension/SS, I still come out the loser on the deal sometimes, but, se la vie. Just one more cost of paradise, I guess.

Actually doing the deed (converting) has tended to be a hassle, because of the dribs and drabs of TIRAs I've converted. This has especially been true when I've also moved custodians (e.g., TIRA at Bankers Life to Vanguard w/subsequent conversion to Roth.) I know, it's really not that difficult, but everyone has different rules (can you spell "signature guarantee"?). No custodian is in a hurry to let you take your funds out, so they drag their feet as much as possible. Most of my conversions have ended up with me receiving a check from one custodian and then sending the funds to the new custodian. Not a big deal, but is fraught with danger, depending upon the 60 day rule. I know you're supposed to send the funds directly, but it's actually simpler to do it with non-direct transfers (if you get the job done in time!)

I'll pass this on for free and folks (still w*rking) can take it for what they paid for it. Looking back, I would not have used tax deferral vehicles - e.g. TIRA, 401(k) etc. knowing what I know now. (Exception, of course, is taking the matching employer funds up to the limit of 6% in my case.)

I'll admit that the "forced, automatic" savings can be a good idea, but I could have accomplished that in other, more flexible ways. (Saving was never a problem to me - only investing.) I'm now saddled to a bucking tax-bronco and can't get off without at least dislocating an IRA-hip or tax shoulder.

My suggestion is that you really sharpen the pencil and see if it makes sense to YOU and your situation to continue using tax-deferred vehicles in your FI planning. One whole piece of the puzzle (future tax rates) is a complete unknown. Yes, you could get lucky and be in a lower tax bracket when you withdraw deferred funds, but it hasn't worked out that way for me (and thats the bad news as well as the good news!) My deferred accounts grew more than I expected, so it's sort of a win/lose proposition. As always, YMMV, so use your pencil and not mine.
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Old 09-28-2010, 12:34 PM   #23
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I converted a good amount over 6 years. It comes in handy when making a big purchase or keeping me below a tax trigger point. All my assets are now in tax protected accounts so every withdrawal is a taxable event.

I'm glad I did the conversions.
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Old 09-28-2010, 12:37 PM   #24
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I converted a good amount over 6 years. It comes in handy when making a big purchase or keeping me below a tax trigger point. All my assets are now in tax protected accounts so every withdrawal is a taxable event.

I'm glad I did the conversions.
Do you mean all your non-Roth assets are in tax protected accounts, or do I misunderstand?

Ha
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Old 09-28-2010, 12:51 PM   #25
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I've rolled over lots without having to pay any tax on it at all. It seems too good to be true.

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I hope you will come on and explain more. I may just not know how to achieve something like this.

Ha
I know Al said his daughter was in college and the education credit gave him more room for conversions. Maybe he'll explain it in more detail.
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Old 09-28-2010, 02:19 PM   #26
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How'd you manage that? It does seem too good to be true!
Well, for example in 2009 we had essentially no income since we are getting our money from our taxable accounts. We did a $10,000 conversion, and after subtracting a $3,000 HSA contribution, the standard deduction, and exemptions, our taxable income was zero.

I could have converted more for free. This year I will work harder on maximizing it.

The year before I converted $33,000, and still stayed in the 15% marginal bracket.
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Old 09-28-2010, 03:54 PM   #27
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I converted one, and plan to convert another this year is tax situation doesn't cause a change of mind.
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Old 09-28-2010, 06:32 PM   #28
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Do you mean all your non-Roth assets are in tax protected accounts, or do I misunderstand?

Ha
All (non- Roth) invested assets are in traditional IRA's. Maybe I should have said "tax deferred" instead of "protected". Sorry for the confusion.
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Old 09-28-2010, 08:15 PM   #29
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Well, for example in 2009 we had essentially no income since we are getting our money from our taxable accounts. We did a $10,000 conversion, and after subtracting a $3,000 HSA contribution, the standard deduction, and exemptions, our taxable income was zero.

.

Don't you still have to pay taxes on Capital gains & dividends on your taxable accounts ? So I'm not sure how you got to no income .
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Old 09-28-2010, 08:51 PM   #30
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Don't you still have to pay taxes on Capital gains & dividends on your taxable accounts ? So I'm not sure how you got to no income .
I guess not if you have no dividends or net realized gains. I have never understood this method. It seems that a prerequisite is losses.

Ha
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Old 09-28-2010, 09:11 PM   #31
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I started last year by doing a conversion up to the $100K limit, but because of a mistake in my AGI number I had to recharacterize. I'm planning to convert again this year, at least up to my 15% bracket. I may go all the way to the top of the 25% bracket. I would still come out ahead, as most of the money was deferred while I was in the 28% or higher bracket. And I don't expect to stay in the 15% bracket for long. Like Al, I'm living on cash, carrying over losses from 2008, my MFs are still not paying out capital gains, and I have a hefty mortgage deduction. If it wasn't for a REIT I get dividends from I could probably be in the 0% bracket too. For a year or two anyway.
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Old 09-28-2010, 10:50 PM   #32
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I am older than most of you, so I am staring at MRDs and SS payments as an income booster. Also, I don't believe I have been in a bracket less than 25% for years. It may get lower I suppose, but it more likely will get higher. So my conversions have to be done at 25% but I still think they will pay.

Somewhere on this board there is an eye opening analysis by a Wall Streeter named Maurice. If you can find it, I heartily recommend reading it.

His insight is that for an investor who follows a very tax efficient buy and hold methodology in his taxable acount and who will pay the conversion tax with non-IRA funds, the key comparison is what to do with that proforma conversion tax. Pay it, and do the conversion, or keep it invested. The assumptions are that ROR in all accounts is the same.

If one is less tax efficient in his taxable account, the bar for conversions is lower yet.

As I remember, his findings are that the conversion makes sense if FutureTaxRate>PresentTaxRate(1-FutureCapitalGainsRate). But look it up, and work through the rationale and the algebra. With the spredsheet I made, it is extremely unlikely to come out ahead if you convert at 25%, and your marginal rate should fall to 15%. However, if marginal ordinary rates should fall to 20%, capital gains rates of 20% would be a go, but any lower and it would be better to not convert. If one's marginal ordinary rate stayed at 25%, conversion wins as long as future capital gains rates are above 0%, which I think we can count on.

I have used marginal rates, but actually I believe that the analysis would need to be divided into tranches, or a blended rate created, since if a lot might be converted at 15% but the last bit at 25%, it is more a 15% conversion than a 25%.

Ha
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Old 09-29-2010, 06:49 AM   #33
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As I remember, his findings are that the conversion makes sense if FutureTaxRate>PresentTaxRate(1-FutureCapitalGainsRate). But look it up, and work through the rationale and the algebra. With the spredsheet I made, it is extremely unlikely to come out ahead if you convert at 25%, and your marginal rate should fall to 15%. However, if marginal ordinary rates should fall to 20%, capital gains rates of 20% would be a go, but any lower and it would be better to not convert. If one's marginal ordinary rate stayed at 25%, conversion wins as long as future capital gains rates are above 0%, which I think we can count on.
I agree, when you work the math Roth conversions look like a winner in most instances. The ability to pay the tax bill due on conversion out of after-tax money and increase the tax free amount of money in your tax advantaged accounts makes it an even better deal than the above math suggests.

But this isn't a "risk free" arbitrage, even if future tax rates definitely go up. For older people it is probably a safer bet than for younger people. The chances of having the rules changed on these accounts over the next several decades might be pretty high. And any changes are impossible to predict.

So does it make sense for someone in their 30's and 40's to do a conversion? The math says 'yes.' But in order to play this game you have to pay the government in advance and hope they don't screw you somehow over the next 30-60 years. I have a hard time reading that last sentence without chuckling.
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Old 09-29-2010, 07:32 AM   #34
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This year we're still in a high enough tax bracket for it not to make sense. We'll have to see how things shape up next year, but doing a conversion seems like it should be a good idea.

I have to admit, though, that I have a strong aversion to doing something that is going to increase my immediate tax bill and won't yield any benefits for another 30 years or so. 30 years is a long time for things to change on you . . . national sales tax, alien invasion, the rapture, whatever.
That's where I am. Plus I think I can maybe manage redemptions and other income to minimize taxes. Who knows?

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Old 09-29-2010, 09:05 AM   #35
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I was doing them when I could stay in the 15% bracket. Maybe I should continue into the 25% bracket, but I just have not been motivated to do so. At present, due to education credits and whatever credit-du-jour the Feds come up with, I find I have a very, very steep slope between 15% and 25% levels.

Also, DW is still working, so a chunk of her income goes to a Roth 403B and that earned income also allows us to max out our standard Roths, so we are feeding our Roth accounts other ways at present.

Advice: Unless your tax situation is very predictable, convert more than you anticipate and just plan on a conversion after you've done your taxes. I just find too many variables in the tax code to get a good estimate, and the tax programs sometimes are not even available for a SWAG. It is also simpler if you put the conversion in a MM until you figure your re-characterization. Else, you need to also do a pull back of any gains/losses from the time you convert to the time you re-char, and my calculation never seemed to match the Feds exactly. Plus, the value can change from the time you request and the time it transacts. Kinda annoying.

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Old 09-29-2010, 09:08 AM   #36
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So does it make sense for someone in their 30's and 40's to do a conversion? The math says 'yes.' But in order to play this game you have to pay the government in advance and hope they don't screw you somehow over the next 30-60 years. I have a hard time reading that last sentence without chuckling.
Or crying? -ERD50
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Old 09-29-2010, 11:06 AM   #37
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Don't you still have to pay taxes on Capital gains & dividends on your taxable accounts ? So I'm not sure how you got to no income .
In this case it's because I sold some stock at a loss. Much of our taxable account money is in the S&P 500 index fund, so there aren't a lot of taxable events. Bonds are in the tax-deferred accounts.
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Old 09-29-2010, 12:55 PM   #38
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I am 43 and it doesn't seem to make sense for me. I expect my taxes in retirement 52 (hopefully) to be much lower than they are right now. I think I will only need 50% of the income I currently make in retirement due to no longer having a mortgage or child support.
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Old 09-29-2010, 01:23 PM   #39
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I am 43 and it doesn't seem to make sense for me. I expect my taxes in retirement 52 (hopefully) to be much lower than they are right now. I think I will only need 50% of the income I currently make in retirement due to no longer having a mortgage or child support.
Probably not. The opportunity for some of us is that we retired, but are not yet collecting SS and/or pension. So we may be in a lower tax bracket now, and anticipate higher brackets in the future.

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Old 09-29-2010, 02:21 PM   #40
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I am 43 and it doesn't seem to make sense for me. I expect my taxes in retirement 52 (hopefully) to be much lower than they are right now. I think I will only need 50% of the income I currently make in retirement due to no longer having a mortgage or child support.
I thought that too, but not so. Now I have this big gain on the deferred accounts that will eventually have to be taxed. I will defer the tax on my conversions to 2011 & 2012 per the special deal this year when my tax rate should go down a step. I might also be moved by then with further state tax savings, but maybe not.

If Roths were available when I opened most of my IRAs, there would have been a substantial tax savings on all the earning over the years. Roths are very good shelters for earnings over the long term. My conversions & Roths are accounts slated to be used last for that reason.
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