|
08-08-2014, 08:39 AM
|
#1
|
Dryer sheet aficionado
Join Date: Jun 2014
Posts: 41
|
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
|
|
|
|
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!
Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!
You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!
|
08-08-2014, 08:47 AM
|
#2
|
Recycles dryer sheets
Join Date: Feb 2014
Posts: 215
|
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.
__________________
DH retired 2014.
Sold my business in '16 and retired 5-17!
|
|
|
08-08-2014, 09:50 AM
|
#3
|
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Nov 2010
Location: Sarasota, FL & Vermont
Posts: 36,374
|
I would NOT convert if you are in a high tax bracket now if your tax bracket will be substantially lower in retirement.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
Retired Jan 2012 at age 56
|
|
|
08-08-2014, 09:54 AM
|
#4
|
Full time employment: Posting here.
Join Date: May 2007
Posts: 883
|
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.
__________________
"It is better to have a permanent income than to be fascinating". Oscar Wilde
|
|
|
08-08-2014, 10:14 AM
|
#5
|
Recycles dryer sheets
Join Date: Oct 2011
Posts: 106
|
Wait for a big crash, then convert. That's what we did in 2008, and it worked out great.
|
|
|
08-08-2014, 10:17 AM
|
#6
|
Thinks s/he gets paid by the post
Join Date: Aug 2013
Posts: 1,660
|
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
|
|
|
08-08-2014, 11:14 AM
|
#7
|
Dryer sheet aficionado
Join Date: Jun 2014
Posts: 41
|
Thanks to all for the insights. Will hold as is.
|
|
|
08-08-2014, 01:20 PM
|
#8
|
Thinks s/he gets paid by the post
Join Date: Jul 2005
Posts: 4,366
|
Quote:
Originally Posted by sunsnow
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.
|
|
|
08-08-2014, 01:52 PM
|
#9
|
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jun 2007
Posts: 13,228
|
Quote:
Originally Posted by Animorph
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.
|
|
|
08-08-2014, 02:52 PM
|
#10
|
Full time employment: Posting here.
Join Date: Sep 2007
Location: mpls, mn
Posts: 770
|
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?
|
|
|
08-08-2014, 03:16 PM
|
#11
|
Moderator
Join Date: Jul 2010
Posts: 7,945
|
Quote:
Originally Posted by racy
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.
__________________
"One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute." William Feather
----------------------------------
ER'd Oct. 2010 at 53. Life is good.
|
|
|
08-08-2014, 03:40 PM
|
#12
|
Thinks s/he gets paid by the post
Join Date: Aug 2011
Posts: 3,609
|
Quote:
Originally Posted by mn54
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
|
|
|
08-08-2014, 03:42 PM
|
#13
|
Moderator
Join Date: Oct 2010
Posts: 10,725
|
Quote:
Originally Posted by racy
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!).
|
|
|
08-08-2014, 04:52 PM
|
#14
|
Dryer sheet aficionado
Join Date: Jul 2004
Location: Kingsport
Posts: 31
|
|
|
|
08-08-2014, 04:52 PM
|
#15
|
Recycles dryer sheets
Join Date: Dec 2013
Posts: 390
|
Quote:
Originally Posted by sengsational
I didn't really grok that calculator.
|
Rather blunt instrument it is.
|
|
|
|
Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
|
|
Posting Rules
|
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts
HTML code is Off
|
|
|
|
» Recent Threads
|
|
|
|
|
|
|
|
|
|
|
|
|
» Quick Links
|
|
|