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Roth conversion query
Old 08-08-2014, 09:39 AM   #1
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Roth conversion query

Thinking of doing a Roth conversion w/part of a current pretax IRA however, I'm not sure it will be of benefit in the long run. Situation:

- looking to convert 100k to a roth
- current tax bracket of 33%
- cannot contribute thereafter due to AGI being over limit
- both DW & I are 54 and hope to FIRE at 59

Question - based on today's tax rate, verse where we might be after FIRE, i'm not sure it's worth it to convert. We should have a lower tax base after FIRE, not sure paying 33% now, even adding any projected gains over the next 5-10 years would be of benefit verse letting the 100k sit and eat my lower tax bill later. I guess if i let it sit for 10 or 15 years of gains it may be beneficial.
Am i missing something in my view of this? Any insights appreciated
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I am not converting.
Old 08-08-2014, 09:47 AM   #2
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I am not converting.

I thought about it and even planned to do it a few years ago. Then I talked to my CPA and determined that it was going to cost me too much money in taxes now. I prefer to delay the payment of taxes and my accounts are much larger with the chance to appreciate. My tax rate may be higher as the country needs more of MY MONEY, but I will deal with it at that time. More money gives me more options.

So, I agree with you.
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Old 08-08-2014, 10:50 AM   #3
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I would NOT convert if you are in a high tax bracket now if your tax bracket will be substantially lower in retirement.
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Old 08-08-2014, 10:54 AM   #4
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I used the conversion calculator at Vanguard
( http://www.archimedes.com/vanguard/r...Consumer.phtml ). A conversion doesn't seem to break even / payoff for me until I'm in my mid-90s. I'd like to think I'll last that long but most mortality tables predict death in the mid-80s for males. I'm not yet convinced conversion is a great idea.
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Old 08-08-2014, 11:14 AM   #5
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Wait for a big crash, then convert. That's what we did in 2008, and it worked out great.
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Old 08-08-2014, 11:17 AM   #6
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Would not convert if you expect lower tax bracket later. Future gains do not change the decision.

For example future value assuming money triples:

Convert to Roth Now:
$100,000 -$33,000 taxes=$67,000
Tripled=$201,000

Do not covert:
$100,000*300%=$300,000
Taxes at 15%=$45,000
Net=$255,000
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Old 08-08-2014, 12:14 PM   #7
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Thanks to all for the insights. Will hold as is.
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Old 08-08-2014, 02:20 PM   #8
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Originally Posted by sunsnow View Post
Wait for a big crash, then convert. That's what we did in 2008, and it worked out great.
This should be a big consideration in addition to tax rates. If you can get 1/2 off prices for your conversion (and 1/2 off taxes) then you should be better off than paying something like 25% later.

The wording of the OP makes it sound like AGI prevents conversions, but it doesn't. It limits only contributions. And a backdoor Roth contribution effectively skirts that limit anyway. However, with an existing IRA the backdoor process looks more like a conversion than a contribution. If you can empty the IRA with your $100k Roth conversion and then can make backdoor Roth contributions without additional taxes in future years that might also tip the balance towards the conversion now.
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Old 08-08-2014, 02:52 PM   #9
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Originally Posted by Animorph View Post
This should be a big consideration in addition to tax rates. If you can get 1/2 off prices for your conversion (and 1/2 off taxes) then you should be better off than paying something like 25% later.
This sounds like the market timers who wait and watch the market double over 2 or 3 years, then drop 20% at which point they jump in and declare victory. And if you're waiting for a 50% drop, it may never come.
Quote:
The wording of the OP makes it sound like AGI prevents conversions, but it doesn't. It limits only contributions.
The whole topic is about converting, and the only mention of the AGI limit is
Quote:
cannot contribute thereafter due to AGI being over limit
so I don't know how it sounds like the OP is saying anything about the AGI preventing conversions.
Quote:
And a backdoor Roth contribution effectively skirts that limit anyway. However, with an existing IRA the backdoor process looks more like a conversion than a contribution. If you can empty the IRA with your $100k Roth conversion and then can make backdoor Roth contributions without additional taxes in future years that might also tip the balance towards the conversion now.
Doubtful in the OP's bracket. Very doubtful.
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Old 08-08-2014, 03:52 PM   #10
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I recently read that one can make a tax-free conversion from a t-IRA to an HSA ( annual contribution). Anyone else aware of this?
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Old 08-08-2014, 04:16 PM   #11
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Quote:
Originally Posted by racy View Post
I used the conversion calculator at Vanguard
( http://www.archimedes.com/vanguard/r...Consumer.phtml ). A conversion doesn't seem to break even / payoff for me until I'm in my mid-90s. I'd like to think I'll last that long but most mortality tables predict death in the mid-80s for males. I'm not yet convinced conversion is a great idea.
Thanks for this link. I hadn't ever come across it on the Vanguard site.
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Old 08-08-2014, 04:40 PM   #12
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Originally Posted by mn54 View Post
I recently read that one can make a tax-free conversion from a t-IRA to an HSA ( annual contribution). Anyone else aware of this?
I think that there are some pretty small limits on how much that you can convert this way.

-gauss
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Old 08-08-2014, 04:42 PM   #13
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Quote:
Originally Posted by racy View Post
I used the conversion calculator at Vanguard
( http://www.archimedes.com/vanguard/r...Consumer.phtml ). A conversion doesn't seem to break even / payoff for me until I'm in my mid-90s. I'd like to think I'll last that long but most mortality tables predict death in the mid-80s for males. I'm not yet convinced conversion is a great idea.
I didn't really grok that calculator. No matter what I did, the lines stayed really close to each other until just before age 99.

But my take is the same as the above, which I net out to "if you think your tax rate will be the same or higher when you pull money out, don't bother converting".

The other thing I discovered was that even if your tax rate would be lower when you pull the money out, it's still a drop in the bucket (for me) compared to simply moving to a no income tax state (that's huge!).
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Old 08-08-2014, 05:52 PM   #14
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You might also take a look at Retiree Portfolio Model - Bogleheads
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Old 08-08-2014, 05:52 PM   #15
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I didn't really grok that calculator.
Rather blunt instrument it is.
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Old 08-09-2014, 10:35 AM   #16
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Another calculator useful for income leveling is Retirement Calculator - Parameter Form
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