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roth conversions
Old 08-16-2014, 10:59 AM   #1
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roth conversions

I know this may have been talked to death but is there previous threads on the pros and cons of roth conversion. I am still on the fence with this one. I am nearing 60 and feel it may be too late for me to do because it takes many years for you to come out ahead and may only be beneficial to my beneficiaries. I am going to withdraw a majority of my expenses from my tax deferred account and leave my heirs the taxable account at the stepped up basis. Of course one can always change their minds.
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Old 08-16-2014, 12:57 PM   #2
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I know this may have been talked to death but is there previous threads on the pros and cons of roth conversion. I am still on the fence with this one. I am nearing 60 and feel it may be too late for me to do because it takes many years for you to come out ahead and may only be beneficial to my beneficiaries. I am going to withdraw a majority of my expenses from my tax deferred account and leave my heirs the taxable account at the stepped up basis. Of course one can always change their minds.
I don't get the bolded part. IF there's a benefit to doing a conversion, meaning that you can smooth out your income over your lifetime, than doing a little bit helps a little bit, doing more helps more, doing it all helps you the most. There is no tipping point that makes it go from bad to good, or make it to a point where you finally come out ahead.

It could be that conversion isn't for you because of your situation, and at 59.5 you might be just as well off to take distributions rather than conversions. If it seems like a wash, that you'll stay in the 15% bracket, maybe there's no reason to deal with it.

One issue with leaving stuff in taxable is that if you sell some of it, perhaps to rebalance or perhaps to sell off a holding where prospects no longer look good, you'll pay cap gains tax. In a Roth, you can do whatever you want with no tax consequence. Again, maybe not an issue for you if it's in something like broad index funds.
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Old 08-16-2014, 09:46 PM   #3
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With a Roth conversion you have more after-tax value in the tax-advantaged account than with the tIRA. That extra amount is equal to the taxes that you paid for the conversion, and is effectively like moving that amount from you taxable account into your Roth.

So the advantage of the Roth will be having that extra amount moved from a taxable account to the Roth, where you no longer have to pay taxes on the investment gains. If you can move into a Roth for 10 years, you may be saving capital gains taxes on a doubling of your original "extra amount", which may not be totally insignificant.

On the other hand, if you are paying no taxes for capital gains at age 71, then a Roth conversion may not have much to offer.
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Old 08-17-2014, 08:11 AM   #4
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I agree w/ Running Bum an Animorph. Have you anwered the basic question.....what tax rate would you be converting at vs what tax rate would you be paying if you didn't convert and were withdrawing RMDs?
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Old 08-17-2014, 08:31 AM   #5
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Another factor to consider is that future tax rates may increase because of the high level of government spending. While I am doing roth conversions now because I am in the 15% bracket and expect to be in the 25% bracket in my 70s so it is beneficial to do Roth conversions now, even if I expected to remain in the 15% bracket in my 70s I still might be doing Roth conversions because the 15% bracket might become the 18% bracket later on if the government decides it needs to collect more taxes.

OTOH, if I expected my tax rate to be lower in my 70s than it is now I would not be doing any Roth conversions.
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Old 08-17-2014, 11:17 AM   #6
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Our case is very simple. Everything except the house is in a t-IRA.

I looked at what would happen with DW after I die. If I don't convert everything to a Roth, she will pay about 2x more taxes over her lifetime than if we convert everything before we turn 70 or 71. The way I eye-balled it, she would immediately be in a 25% marginal bracket that quickly escalates to the 28% marginal bracket--no escape. If we convert almost everything before RMDs kick in, we/she will never even have to file again. No taxable income (under current rules).

My plan is to convert everything after I quit early 2015 but before MRDs regardless of the marginal rate.

Your situation may be different, but I will bet the results will be similar.
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Old 08-17-2014, 12:41 PM   #7
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I'm a future tax rate contrarian. I think future income taxes will be even lower, offset by higher consumption taxes, be they national or federal.


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Old 08-17-2014, 12:51 PM   #8
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I'm a future tax rate contrarian. I think future income taxes will be even lower, offset by higher consumption taxes, be they national or federal.


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+1 It certainly seems the overall societal trend over the last 2 or 3 decades has been in the direction of lower income taxes. No reason to think that trend will reverse anytime soon.
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Old 08-17-2014, 01:08 PM   #9
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Err, i meant national or state. :-)


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Old 08-17-2014, 01:44 PM   #10
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Another factor to consider is that future tax rates may increase because of the high level of government spending. While I am doing roth conversions now because I am in the 15% bracket and expect to be in the 25% bracket in my 70s so it is beneficial to do Roth conversions now, even if I expected to remain in the 15% bracket in my 70s I still might be doing Roth conversions because the 15% bracket might become the 18% bracket later on if the government decides it needs to collect more taxes.
To play devil's advocate - what if we go to some other type of tax system, e.g. a national sales tax or value-added tax or flat tax, and income tax rates end up at below 15%? In general, I am suspicious of the ultimate benefit to myself by voluntarily prepaying taxes.
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Old 08-17-2014, 02:13 PM   #11
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Originally Posted by dallas27
I'm a future tax rate contrarian. I think future income taxes will be even lower, offset by higher consumption taxes, be they national or federal.


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+1 It certainly seems the overall societal trend over the last 2 or 3 decades has been in the direction of lower income taxes. No reason to think that trend will reverse anytime soon.
I'd guess that a consumption tax would be a way to raise additional tax money rather than replacing part of the income tax money. And I can't see the downward trend continuing. At some point we have to pay for the wars and military actions. Lowering taxes during war time just mortgaged the future. But, you both raise points that future taxes are unknown and income taxes could drop while increasing overall taxes.
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Old 08-17-2014, 02:50 PM   #12
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If we convert almost everything before RMDs kick in, we/she will never even have to file again. No taxable income (under current rules).

My plan is to convert everything after I quit early 2015 but before MRDs regardless of the marginal rate.

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Ed.......won't you be wasting the lower brackets (0, 10%, 15%) if you later have no taxable income esp. if you converted at 25% and above rates?
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Old 08-17-2014, 05:20 PM   #13
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Originally Posted by dallas27
I'm a future tax rate contrarian. I think future income taxes will be even lower, offset by higher consumption taxes, be they national or federal.




I'd guess that a consumption tax would be a way to raise additional tax money rather than replacing part of the income tax money. And I can't see the downward trend continuing. At some point we have to pay for the wars and military actions. Lowering taxes during war time just mortgaged the future. But, you both raise points that future taxes are unknown and income taxes could drop while increasing overall taxes.
Yes, the overall tax rate can go up significantly while the income tax rate goes down. There are many ways to make this happen, consumption tax being only one way. I'm pretty sure that there creative ways to squeeze that particular turnip that haven't even been invented yet. One of the reasons I'm particularly leery of strategies that have one paying tax money now in anticipation of savings to be realized by virtue of the world staying the same for the next 20 to 40 years.
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Old 08-17-2014, 07:01 PM   #14
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To play devil's advocate - what if we go to some other type of tax system, e.g. a national sales tax or value-added tax or flat tax, and income tax rates end up at below 15%? In general, I am suspicious of the ultimate benefit to myself by voluntarily prepaying taxes.
I guess I'm implicitly betting against a national sales tax or VAT since it isn't even realistically on the horizon - unlikely in my lifetime. I'll go with the better odds that income tax rate may creep up over time.

Besides, wouldn't a national sales tax or VAT be extremely regressive (depending on implementation details)? If so, I doubt we'll see it in this political environment.
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Old 08-17-2014, 07:05 PM   #15
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I'd guess that a consumption tax would be a way to raise additional tax money rather than replacing part of the income tax money.
Sadly my guess is that too. Most countries in Europe have both income tax and VAT. Lovely.

Personally, I think a switch FROM income tax to consumption tax would be a good thing for the economy. But the only way to make it be a switch, not an addition, and make it stick, would be to repeal the 16th amendment.
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Old 08-17-2014, 07:31 PM   #16
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Ed.......won't you be wasting the lower brackets (0, 10%, 15%) if you later have no taxable income esp. if you converted at 25% and above rates?
No. When MRDs cut in and with her SS, she would START in the 25% bracket. That is the Tax Torpedo. It hits surviving spouses worst who have reduced SS and only one deduction.

You can't take less SS and you can't withdraw less than the MRDs. Gotcha!
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Old 08-17-2014, 07:48 PM   #17
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No. When MRDs cut in and with her SS, she would START in the 25% bracket. That is the Tax Torpedo. It hits surviving spouses worst who have reduced SS and only one deduction.

You can't take less SS and you can't withdraw less than the MRDs. Gotcha!
I thought you said if you convert everything, you would have no taxable income. That's the time I was referring to.....when you wouldn't be using the
low brackets....perhaps 0%, 10%, 15%...........That means you might have converted at 25% when you could have taken some RMDs at the lower rates?
and you might live longer than you think.......
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Old 08-17-2014, 08:23 PM   #18
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No. When MRDs cut in and with her SS, she would START in the 25% bracket. That is the Tax Torpedo. It hits surviving spouses worst who have reduced SS and only one deduction.

You can't take less SS and you can't withdraw less than the MRDs. Gotcha!
Tough problem to have. I bet knowing what you know today you would have paid tax on that income when you were working.
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Old 08-18-2014, 12:31 PM   #19
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Tough problem to have. I bet knowing what you know today you would have paid tax on that income when you were working.
+1 for me. I've often wished for a do-over on some of my tax planning.

In general, picking up the rest of the theme, I believe we will end up with the same or higher income taxes AND a VAT or similar tax on consumption. My back of the envelope calculation suggests that each man, woman and child in the nation currently "owes" almost $60,000 toward the national debt. That doesn't even include the implied debts of SS, M-care, Vet-care, etc. etc. Since only half the households even pay Fed taxes, something's got to give (as the old song says.) I don't wish to discuss "how we got here" nor even "how we can keep from getting in deeper." My only point is that unless there is some sort of paradigm shift in national accounting, taxes must almost certainly go higher - not lower. Now, I've been wrong before. Once, I thought I'd made a mistake - and I hadn't. So, YMMV.
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Old 08-18-2014, 01:16 PM   #20
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My only point is that unless there is some sort of paradigm shift in national accounting, taxes must almost certainly go higher - not lower.

Taxes, probably. But increasing the tax base (economic boom, close loopholes) and/or balancing the budget (inflation magic) achieve the same result.

An economy is a vast array of financial levers that all interact and incentivize behavior, not just 1 or 2 metrics.




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