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Old 08-19-2014, 10:10 AM   #21
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I'm on the fence regarding Roth conversions. Currently, we're still in a very high tax bracket due to DW still working and some megacorp options I'm selling. But in a couple years, we will be solidly in the 15% bracket, with 15 years to do conversions, until RMD/SS put us in the 25% bracket. All that sounds like a classic case for converting.

But the more analysis I do, the more hesitant I become. Most likely, we would never take any Roth withdrawals. So, in our lifetime, the impact is negative... taxes paid, plus the associated growth hit, exceed the tax benefit of lower RMDs. But of course, there is a huge shift from taxable and tax-deferred into tax-free Roth, which will benefit our kids. But even that depends on their tax bracket at the time, tax code at the time, etc. In theory, the kids will be FIREd and in the 15% bracket when we die, which is a more-or-less breakeven scenario for converting.

Too many if's. Too far in the future. Our retirement preparedness is pretty solid, but not so "rock solid" that I'm ready to start prepaying tax for the kids at age 53. We're way too early in ER. I'll re-evaluate after a few years.
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Old 08-19-2014, 10:51 AM   #22
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Originally Posted by Cobra9777 View Post
I'm on the fence regarding Roth conversions. Currently, we're still in a very high tax bracket due to DW still working and some megacorp options I'm selling. But in a couple years, we will be solidly in the 15% bracket, with 15 years to do conversions, until RMD/SS put us in the 25% bracket. All that sounds like a classic case for converting.

But the more analysis I do, the more hesitant I become. Most likely, we would never take any Roth withdrawals. So, in our lifetime, the impact is negative... taxes paid, plus the associated growth hit, exceed the tax benefit of lower RMDs. But of course, there is a huge shift from taxable and tax-deferred into tax-free Roth, which will benefit our kids.....
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.

I understand the "we're way too early in ER" concept, a few years under the belt can make one feel more comfortable with the situation.
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Old 08-19-2014, 10:59 AM   #23
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Originally Posted by Cobra9777 View Post
I'm on the fence regarding Roth conversions. Currently, we're still in a very high tax bracket due to DW still working and some megacorp options I'm selling. But in a couple years, we will be solidly in the 15% bracket, with 15 years to do conversions, until RMD/SS put us in the 25% bracket. All that sounds like a classic case for converting.

But the more analysis I do, the more hesitant I become. Most likely, we would never take any Roth withdrawals. So, in our lifetime, the impact is negative... taxes paid, plus the associated growth hit, exceed the tax benefit of lower RMDs. But of course, there is a huge shift from taxable and tax-deferred into tax-free Roth, which will benefit our kids. But even that depends on their tax bracket at the time, tax code at the time, etc. In theory, the kids will be FIREd and in the 15% bracket when we die, which is a more-or-less breakeven scenario for converting.

Too many if's. Too far in the future. Our retirement preparedness is pretty solid, but not so "rock solid" that I'm ready to start prepaying tax for the kids at age 53. We're way too early in ER. I'll re-evaluate after a few years.
I started conversions this year at 60 primarily because (1) I figured we would be in the 25 percent bracket until SS/RMDs place us in the 28 precent bracket in 2021-2024; (2) if one of us dies, as a single tax payer the surviving spouse will be in the 28-33 percent bracket especially when RMDs kick-in; and (3) I anticipate that my kids will be in brackets no lower than 25 percent and probably will wind up much higher, if career trends hold for them.

I see the conversions primariliy as an estate planning measure for my children as I don't think we'll ever touch the Roth-IRAs.
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Old 08-19-2014, 11:56 AM   #24
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I started conversions this year at 60 primarily because (1) I figured we would be in the 25 percent bracket until SS/RMDs place us in the 28 precent bracket in 2021-2024; (2) if one of us dies, as a single tax payer the surviving spouse will be in the 28-33 percent bracket especially when RMDs kick-in; and (3) I anticipate that my kids will be in brackets no lower than 25 percent and probably will wind up much higher, if career trends hold for them.

I see the conversions primariliy as an estate planning measure for my children as I don't think we'll ever touch the Roth-IRAs.
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.
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Old 08-19-2014, 12:12 PM   #25
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I think his #2 reasoning is also a good point - we often don't talk about the consequences of one spouse becoming single again, and how much that affects that spouse's taxes. If you can lower the later taxes for the surviving spouse, isn't that good too? I don't have kids, but will do Roth conversions for this reason.
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Old 08-19-2014, 01:08 PM   #26
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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.
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Old 08-19-2014, 01:25 PM   #27
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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.
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