roth conversions

[Cobra9777]

I'm not really understanding that. If you convert IRA to Roth at a 15% tax rate, to avoid later RMD at a 25% tax rate, isn't that the FIRST win?

Whether you later actually take withdrawals from the Roth or not, there is no ongoing tax there either way, the SECOND win.

If you DON'T do the conversion, and instead every year pay the tax due to RMD and SS, the excess dollars from RMD that you don't need for expenses goes into a taxable account, which generates taxable income every year... also at a higher tax rate because of the tax burden caused by the RMDs and SS. So the "unused" RMD left-overs are being taxed too, and at the higher rate.

Everything you mentioned has been taken into account, and the result is negative in our lifetime. It only goes breakeven or positive when the kids take withdrawals.

We have other sources of taxable income (two DB pensions and rentals), so we can't do conversions, inside the 15% bracket, in amounts necessary to completely eliminate RMDs or the 25% bracket. All we can do is reduce RMDs and the spillover into taxable. And that benefit is very clearly insufficient to offset the upfront tax and associated growth impact.

Doing higher conversions into the 25% bracket doesn't seem to make any sense at all, unless I think the kids will be 28% or higher.

 

[GTFan]

As to your last sentence I believe these roth conversions for a lot of people is a legacy play. Which is probably alright for the people who are pretty wealthy and will enjoy a financially secure retirement regardless. But I don't think children for a lot of middle class folk are owed a college education or a tax free inheritance at the expense of their retirement.

That is exactly the way I look at it, inheritance-wise. I'd much rather donate the excess to good causes than pay the 25% to the IRS, because I'm not planning to leave all the money to the kids. I certainly am not going to get, nor do I expect, much of an inheritance from my folks and I'm not interested in 'legacies'. This doesn't mean that we won't gift them money (up to the yearly tax-free limits) as we feel appropriate.

Couple that with the real and immediate bennies of ACA subsidies and I don't think we'll be doing much Roth conversions for quite a while, if at all. But I'm only 51 at retirement so there's plenty of time to change our minds.