Roth conversions

Ronstar

Ronstar

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I went to a retirement seminar and a follow up meeting with an FA with a strong tax background. The message I got was to get all portfolio $ out of our traditional IRAs as soon as possible. And pay the tax on the conversion out of $ in our taxable portfolio.

So I have been running numbers. The new tax law IMO makes Roth conversions more attractive than ever. I can convert roughly $100k per year at around 22% tax which is the same tax rate on my projected year 1 RMD in 2026. Heck I can roll over $35k without leaving the 12% bracket.

Unless I discover reasons to do otherwise, I'd like to minimize the total tax burden through say age 85.

Questions:

1. What pct of conventional IRA do you/will you have converted to Roth by your RMD Year?

2. Will you/ did you continue Roth conversion after your RMD’s start?

3. Do you plan on converting 100% to Roth?

4. How old were you when you started Roth conversions?

5. Do you do Roth conversions every year and once per year? And pay the tax in the quarter that you convert?

6. Is your Roth IRA investment mix the same as in your traditional IRA?

7. To what extent was/is your decision on delaying SS based on your Roth conversion strategy?

8. Do you have reasons to not do Roth conversions?
 
Interesting thread. Thanks for posting. We have just started making Roth conversions and I need to learn more. Hopefully this thread will help.

1. What pct of conventional IRA do you/will you have converted to Roth by your RMD Year? Not sure. We started at age 55. We are currently limited since we are trying to stay under the ACA cliff. At age 65 we will increase conversions and maximize within lower tax brackets (maybe 22% bracket?) But that is in 8 years. The rates may change.

2. Will you/ did you continue Roth conversion after your RMD’s start? Not there yet. Will wait and see what the rates are at the time.

3. Do you plan on converting 100% to Roth? Only to the degree we can maximize the lower rate brackets.

4. How old were you when you started Roth conversions? 55, first year without earned income that would have kept us in higher tax brackets.

5. Do you do Roth conversions every year and once per year? And pay the tax in the quarter that you convert?Once per year. The DW makes quarterly estimated tax payments.

6. Is your Roth IRA investment mix the same as in your traditional IRA?Our overall mix has not changed. But, the Roth contains the potentially higher return assets EM and small cap.

7. To what extent was/is your decision on delaying SS based on your Roth conversion strategy? Not there yet, 57. We also have future pensions to consider. We will use the same strategy, max Roth at lower tax brackets.

8. Do you have reasons to not do Roth conversions? Our strategy is simple. Maximize conversions at the lower brackets based on current tax law. I ignore talk of higher future taxes. They may or may not materialize and they may or may not include retirees/seniors.
 
Our plan is to finish converting DW's IRA over the next 3 years, while staying in the 12% bracket. After that, we will start converting mine. At the same time we plan to start SS at FRA, so to stay in the 12% bracket, my conversions will be fairly limited, with little chance to get more than 10% of it converted before RMD's.

Interesting question on conversions while taking RMD's. Never thought about it before. But since RMD's will certainly push us into a higher bracket, there would seem to be a logic to convert to the top of that bracket, to avoid even higher taxes later.

That all said, I sometimes wonder if all I am doing is pre-paying taxes for our son (and only heir). Of course, it is far more effective for him to inherit Roth money vs. tIRA money (both for taxes and no RMD's).
 
Ronstar said:
8. Do you have reasons to not do Roth conversions?
Click to expand...

If I'm in a high tax bracket in old age, it will mean that my investments have performed well and I have more money than I need, and I will therefore donate a good chunk of my RMDs and hence avoid paying taxes on them. If I'm in a low tax bracket for whatever reason, or dead, taxes are a non-issue.
 
I went to a retirement seminar and a follow up meeting with an FA with a strong tax background. The message I got was to get all portfolio $ out of our traditional IRAs as soon as possible. And pay the tax on the conversion out of $ in our taxable portfolio.

I agree in theory that it is best to get as much as possible into Roth for tax-free growth... as long as the marginal tax rate on the Roth conversions is at or below your ultimate marginal tax rate on RMDs. However, I have difficulty converting at 22% now vs just paying 22% later.

Another factor for us is that our Roth conversions are subject to state income tax now but will not be a few years from now and that makes a big difference.... so for now we convert to the top of the 12% (formerly 15% bracket) but our marginal rate is more like 17% (formerly 19%) once state income taxes are added in.

So I have been running numbers. The new tax law IMO makes Roth conversions more attractive than ever. I can convert roughly $100k per year at around 22% tax which is the same tax rate on my projected year 1 RMD in 2026. Heck I can roll over $35k without leaving the 12% bracket.

Unless I discover reasons to do otherwise, I'd like to minimize the total tax burden through say age 85.

Questions:

1. What pct of conventional IRA do you/will you have converted to Roth by your RMD Year?

Over the past 5 years I have converted an amount equal to ~25% of our retirement date tax-deferred and paid on average about 7.5% federal and 5% state income tax. However, due to good growth, our tax-deferred balances today are about the same as when we retired, but out tax free balances are much higher... 22% today vs 3% when we retired. We'll do another 30% between now and age 70 and pay 12% federal and ~5% state for the next few years, but again due to growth the tax-deferred balance will remain about the same.

2. Will you/ did you continue Roth conversion after your RMD’s start

N/A... we are years away from RMDs

3. Do you plan on converting 100% to Roth?

No... but I may convert to the top of the 22% bracket once we are no longer subject to state income taxes.

4. How old were you when you started Roth conversions? 57

5. Do you do Roth conversions every year and once per year? And pay the tax in the quarter that you convert?

Each December as part of my year end tax planning and rebalancing and I pay the tax as part of my January estimated payment and used the annual installment method to avoid underpayment penalties.

6. Is your Roth IRA investment mix the same as in your traditional IRA?

No. All our bonds are in tax-deferred, along with some equities.... Roths are all domestic equities.

7. To what extent was/is your decision on delaying SS based on your Roth conversion strategy?

It is a significant factor... if we do not delay SS then if significantly impacts our ability to do low-cost Roth conversions.

8. Do you have reasons to not do Roth conversions?
 
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The Roth conversion subject is a complex one for me. First DGF and I have separate TIRA accounts and also separate tax returns. She is already receiving SS(disability). I am trying to minimize income for ACA purposes. Then comes the delayment of SS decision.
I guess one of my general concerns is not wishing to raise the overall WR% in our beginning years of retirement due to sequence of returns risk (just for the withdrawals relating to the taxes due, not the actual conversion).
I realize I would just be delaying now for much larger WR at RMD time.
 
I've been converting to the top of the 15% bracket for years, especially after we changed our primary residence to FL (no income tax). Our income has grown significantly over the past few years, leaving me little space to convert in. I hadn't really considered converting up to the top of the 22% bracket. I don't have to deal with ACA limits or anything, so it's definitely worth considering.

CardsFan said:
That all said, I sometimes wonder if all I am doing is pre-paying taxes for our son (and only heir). Of course, it is far more effective for him to inherit Roth money vs. tIRA money (both for taxes and no RMD's).
Click to expand...

There are RMDs for a Roth being passed on to non-spousal heirs. They either have to take it all out before the end of the fifth year after inheriting it, or they have to start lifetime RMDs in the first year based on their life expectancy when they inherit (Term Certain Method). The old Ed Slott eternal tax free Roth plan doesn't work anymore.

Having said that, having the money in a Roth is still a really good way to pass on an inheritance. That, combined with concerns that the tax brackets might increase in the future make converting up to the top of the 22% bracket attractive. That would allow me to start DWs SS and not worry about squeezing everything in under the 12% bracket anymore. Now that I probably can't itemize my way down into the bracket as far I probably won't be able to do that anyway.
 
harley said:
There are RMDs for a Roth being passed on to non-spousal heirs. They either have to take it all out before the end of the fifth year after inheriting it, or they have to start lifetime RMDs in the first year based on their life expectancy when they inherit (Term Certain Method). The old Ed Slott eternal tax free Roth plan doesn't work anymore.

Having said that, having the money in a Roth is still a really good way to pass on an inheritance.
Click to expand...

Thanks for the clarification on the inherited Roth. I should have checked that more closely.
 
Questions:

1. What pct of conventional IRA do you/will you have converted to Roth by your RMD Year?

A- My intent is to convert 50% of TIRA to Roth IRA

2. Will you/ did you continue Roth conversion after your RMD’s start?

A- I am 7 years from RMD's and hope to be done with conversions.

3. Do you plan on converting 100% to Roth?

A- My plan keeps me in the 12% brkt so 50% is the target.

4. How old were you when you started Roth conversions?

A- I did my first conversion in 2017 while in the 0% brkt.

5. Do you do Roth conversions every year and once per year? And pay the tax in the quarter that you convert?

A- My intention is to do the conversion at the end of the year and pay
the taxes from taxable at that time.

6. Is your Roth IRA investment mix the same as in your traditional IRA?

A- At this time the Roth is more aggressive but will reduce risk over time as
conversions are completed.

7. To what extent was/is your decision on delaying SS based on your Roth conversion strategy?

A- SS strategy is still a moving target based on ability to convert in the 12%
brkt.

8. Do you have reasons to not do Roth conversions?

A- I can't think of any reasons not to convert half to a Roth.
 
I plan to convert 100% of my 401(k)/tIRA to Roth by 70; I'm currently in my fourth year. I started converting at 64-1/2 on retirement, while delaying SS to 70. I convert once yearly in January after doing taxes and pay estimated taxes quarterly, so my first payment isn't until April. My Roth and traditional IRA allocations differ, but my total porfolio allocations aren't changed by converting. Converting and delaying SS were a natural fit; the conversions were prompted by projections showing a higher tax bracket from SS and RMD's combined. If regulations don't change and the creeks don't rise, I expect to stop paying income taxes at 70.
 
Ronstar said:
I can convert roughly $100k per year at around 22% tax which is the same tax rate on my projected year 1 RMD in 2026.
Click to expand...

Since you'll pay the same tax amount later as now, why not pay later? I'd convert now only if the tax was expected to be significantly lower than later. Tax rates may go up in 2026, or they may drop more by then.
 
I discussed Roth conversions with my CPA and he didn't seem to think they were much value. I've got to admit I lost some faith in him when he expressed that opinion. I don't have a clear idea of what the proper course is but last year I converted 10K and will continue to yearly until I get some clarity. I've read past threads about it and will monitor this one.
 
Questions:

1. What pct of conventional IRA do you/will you have converted to Roth by your RMD Year?

100%


2. Will you/ did you continue Roth conversion after your RMD’s start?

No

3. Do you plan on converting 100% to Roth?

Yes

4. How old were you when you started Roth conversions?

The year I retired, 55, I am 63 now so this is my 8th year of conversions

5. Do you do Roth conversions every year and once per year? And pay the tax in the quarter that you convert?

Yes. No fixed time of year. If the market has been going down I may do the conversion at that time. Since my Roth is the same funds as the tIRA the advantage is that a greater % of the tIRA will have been converted

6. Is your Roth IRA investment mix the same as in your traditional IRA?

Yes

7. To what extent was/is your decision on delaying SS based on your Roth conversion strategy?

I am delaying as my SS is about double that of my wife so I am delaying to maximize her benefits after my death.

8. Do you have reasons to not do Roth conversions?

No.
 
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I am early 50's, retired, with a mix of around 67% taxable, 26% IRA, and 7% Roth. Delaying SS until age 70. I started Roth conversions a few years ago. Since I retired, I have used up the whole 10%/12% brackets with a mix of Roth conversions and capital gains.

I am surprised more people don't use more of the 10% and 12% brackets for capital gains at 0% (my remaining deferred capital gains are probably larger than my entire IRA). It might make more sense in the long run if you are single and don't plan on leaving a large legacy, which is my situation.

My entire traditional IRA is in bonds now that I have whittled it down a bit with conversions, so that should slow down the growth.

So far, I am unwilling to go into the 22% bracket territory on Roth conversions. If I do that, all my qualified dividends that year get taxed at 15% instead of 0%. So if I do do that one year, it makes sense for me to get it over with and go to the top of the 24% bracket.

I would almost certainly never convert the whole IRA to Roth, as it probably wouldn't make sense since the tax rate might be lower for such small distributions after age 70 and an IRA might be usable for tax deductions for medical care (with a big medical bill or assisted living bill one year, take out the funds from the IRA that year since you will have a large deduction).

Additionally, I will consider getting a QLAC (deferred annuity) in my early 70's with 25% of my remaining IRA funds (I want to get a deferred annuity anyway so it makes a lot of sense, something not properly stressed in Kitce's tendentious article on this topic).

So besides maxing out the 10/12% brackets each year with a mix of Roth conversion and capital gains, my plan is to take a very close look in 2024 or so (shortly before rates may go back up), when I have more insight into my future portfolio, and see if it makes sense to do that one time conversion to the top of the 24% bracket.
 
1. What pct of conventional IRA do you/will you have converted to Roth by your RMD Year? Plan shows~ 35%. Will be more or less depending on tax laws over the years. We convert each year as much as we are willing to pay taxes on within an upper limit that I-ORP calcs suggest would minimize our life time tax burden.

2. Will you/ did you continue Roth conversion after your RMD’s start? Possibly. That's a long way off for us. Probably if we continue at that point, it will be to benefit our children's inheritance by paying the taxes for them while we are still alive.

3. Do you plan on converting 100% to Roth? Most likely not, cost too much in taxes in our situation.

4. How old were you when you started Roth conversions? 55 (retirement), first year without a high earned income.

5. Do you do Roth conversions every year and once per year? And pay the tax in the quarter that you convert? Generally yes, unless income from other sources is too high such that converting would put us in a tax bracket we aren't happy with.

6. Is your Roth IRA investment mix the same as in your traditional IRA? No. We target an overall asset mix and put specific holdings where they make most sense.

7. To what extent was/is your decision on delaying SS based on your Roth conversion strategy? Not there yet but we don't plan on delaying SS based on Roth conversion strategy.

8. Do you have reasons to not do Roth conversions? As long as we are staying within tax brackets we are happy with, see no reason to not do Roth conversions. The 2018 tax brackets allow us to make more aggressive conversions than previously planned.
 
Ronstar said:
Questions:

1. What pct of conventional IRA do you/will you have converted to Roth by your RMD Year?

2. Will you/ did you continue Roth conversion after your RMD’s start?

3. Do you plan on converting 100% to Roth?

4. How old were you when you started Roth conversions?

5. Do you do Roth conversions every year and once per year? And pay the tax in the quarter that you convert?

6. Is your Roth IRA investment mix the same as in your traditional IRA?

7. To what extent was/is your decision on delaying SS based on your Roth conversion strategy?

8. Do you have reasons to not do Roth conversions?
Click to expand...

I'm still mulling over my plan, but at least I have a tentative one in place, so here are my thoughts:

1. I don't look at it this way. I intend to convert as much as I can each year while staying under 24% marginal federal taxes or loss of financial aid or ACA credits. I am aiming to convert enough to where my RMD+taxableSS-stdded would result in a taxable income just under the top of the 22% bracket when I start RMDs. For the next four or five years I will be focusing on the FAFSA cliff; after that I hope to convert larger amounts.

But as an effort to answer your question, if I take the amount I converted last year and multiply it by the number of years between now and RMD age, and divide it by my current IRA balance, I get about 50%.

However, if my traditional IRA grows as much as I project, the resulting balance at RMD age is between 600% and 700% of today's value even after the withdrawals.

(Finally, I might mention that I am using the Roth conversion pipeline, so my cumulative conversions partially determine what my cash flow looks like 5 years in the future, so I monitor that aspect as well and it could influence how much I convert also.)

2. Maybe smaller ones up to the top of the 22% bracket.

3. Nope. Whatever I can do with reasonable taxes being paid.

4. 10/10/16 at age 47. I will do my third conversion this December.

5. I do the conversions once a year in December when I know precisely what my income situation for the year will be. If I owe taxes, I would pay them by the January 15 estimated tax payment date.

6. Almost. I keep my 10% bonds in my traditional IRA. The rest of my traditional and all of my Roth IRA are in the same stock index mutual fund.

7. It was independent and I made my SS decision first, but as someone else noted the decisions play well together. My plan is to take SS at 70 unless there is a significant bear market in my late 60s.

8. The only one I can think of is if the government decides to make Roth's non-tax-free somehow. I assess the likelihood of this action as relatively low, so for planning purposes I ignore it.
 
VanWinkle said:
Questions:



5. Do you do Roth conversions every year and once per year? And pay the tax in the quarter that you convert?

A- My intention is to do the conversion at the end of the year and pay
the taxes from taxable at that time.
Click to expand...

This timing is to be able to more accurately calculate the amount to convert to the top of the bracket and lessen the chance of going into the next bracket?

Do you pay the tax then or can or can you just pay the tax when you file in April of the following year?
 
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SecondCor521 said:
I'm still mulling over my plan, but at least I have a tentative one in place, so here are my thoughts:

If I owe taxes, I would pay them by the January 15 estimated tax payment date.
Click to expand...

My taxes have always been dead simple so this concerns me, I'd hoped to get some direction from my CPA but I'm afraid that failed. Can you expound on the process flow of this a little more?
 
There are so many moving parts, and for me, they change each year. I FIRE'd 6 years ago when I was 57. The first couple of years, I mostly did LTCG harvesting in my taxable accounts @ 0% federal tax. My COBRA and then ACA premiums were reasonable and I didn't seek an ACA subsidy. Then my ACA premiums started to go up significantly, and I also was moving from LTCG harvesting to Roth conversions. For the previous 2 years, I selected a Silver plan with Cost Sharing, which limited my MAGI to 250% of the federal poverty level. I did limited Roth conversions. Then for this year, Cost Sharing was effectively killed and ACA premiums in my area increased over 70% from last year. So for this year, I will Roth convert up to 400% of the poverty level. (Also, I increased my Roth conversion in late 2017 because I didn't need to worry about qualifying for Cost Sharing in 2018) If I go over 400%, I would lose an ACA annual subsidy of about $8,000 this year. That is such a large amount in tax savings that it takes precedence over larger Roth conversions this year. BTW, this year I have a Bronze plan with a $6,550 annual deductible, and the unsubsidized premium is almost $1,400/month (just for me). I'm paying about $725/month, and the rest is covered by the ACA subsidy. Because my property tax is high and my health insurance premiums are high even with the subsidy and will be partially deductible, I'll continue to itemize deductions. (I expect to owe more in taxes under the new tax law because I'll lose part of my SALT deduction.)

Next year I'll hit Medicare age. I plan to hold off claiming Social Security and intend to increase my Roth conversions. I haven't figured out what will make sense to do next year when part of the year I'll need to pay for an ACA plan, and part of the year I'll be on Medicare.

My mom inherited my dad's IRA when he died 3 years ago. My mom is now 96, has dementia, and has had a couple of falls with fractures in the past 2 years. She now lives in her home with 24/7 nursing aides. I have POA for her finances. Since her home health care is tax deducible, I withdrew 100% of her inherited IRA last year to pay for her care, since she would not owe any income tax given her huge medical deductions. She has a COLA'd pension and Social Security, which combined, pay for about 1/3 of her annual expenses.
 
Olbidness said:
My taxes have always been dead simple so this concerns me, I'd hoped to get some direction from my CPA but I'm afraid that failed. Can you expound on the process flow of this a little more?
Click to expand...

Sure. Here's what I do:

1. I decide what my target is. For me, I want to have an AGI under $25K in order to get an automatic zero EFC on the FAFSA. This is because I have three kids who will be in college over the next five years or so, and financial aid acts like a parallel taxation system to the federal income tax system. If my AGI were over $25K, then you can think of it as me having a marginal tax rate of over 40% on those additional dollars.

2. In December, I total up what my AGI would be without any Roth conversion. For me, this means totaling up my side gig, my taxable account dividends, my taxable accounts' interest, and any realized capital gains I might have. Say for the sake of an example that these various sources total $8K.

3. I then subtract that $8K from step 2 from the $25K target in step 1, leaving me with a target Roth conversion of $17K. In order to allow for some margin, I might then decide on $16.8K.

4. I log into Vanguard or call them and make the Roth conversion amount before 12/31. Last year I did the conversion on 12/27.

5. In December I can also fill out a proforma tax return. In my case, with a sub-$25K AGI and two dependents, my federal tax bill was zero last year (actually negative with some refundable credits).

6. If my tax bill were positive, I would subtract about $900 from my tax bill and write a check and send it to the US Treasury or IRS or whomever before January 15th of the following year as an estimated tax payment.

7. When I completed my tax form that April, I would list the payment from step 6 on line 65 of my form 1040, which would reduce my tax owing to about $900, which meets one of the three IRS safe harbor rules for avoiding underpayment penalties.

Overall, I think what is not well known but appears to be true from my reading of the IRS rules, is that one can make an estimated tax payment by 1/15 for the previous years' taxes and not owe any penalties. Technically this is the fourth quarterly estimated tax payment date, but I believe it is permitted to pay any subset of the quarterly payments - i.e., you don't have to pay something every quarter if you don't want or need to.

What also may not be clear is that, in my particular situation, I do not have any federal or state taxes withheld from any of my income sources listed in step 2 above.

I hope that answers your question. If not, feel free to ask further.
 
Roth is my favorite subject, sincere thanks to the OP for the post and the poll; It helps me a lot to fine tune my approach.

1. What pct of conventional IRA do you/will you have converted to Roth by your RMD Year?
Current mix is 75% deferred to 25% Roth; RMD is 12 years out and based on model, project the ratio to be 67% deferred to 33% Roth in 2030; Should there be a significant market dislocation in the meantime, hope to boost the Roth % higher but the primary consideration is how well my net worth grows; My model is based on not being "forced" to do an RMD larger than our needs. Charitable will go higher with better-than-projection net worth growth to stay under RMD

2. Will you/ did you continue Roth conversion after your RMD’s start?
No
3. Do you plan on converting 100% to Roth?
No

4. How old were you when you started Roth conversions?
51
5. Do you do Roth conversions every year and once per year? And pay the tax in the quarter that you convert?
No, did opportunistically with market declines; 2009-10 was the last time; Actually, cash strapped Uncle Sam allowed taxes on conversion to be paid over two years then, some of you may remember this. Thanks to the rapid market recovery in 2010-12, Mr. Market paid my Roth account back all of the taxes I paid within that 2 year time frame. .
6. Is your Roth IRA investment mix the same as in your traditional IRA?
About the same
7. To what extent was/is your decision on delaying SS based on your Roth conversion strategy?
I plan to take SS as soon as they let me. 62.
8. Do you have reasons to not do Roth conversions?
Not any more than our needs in our out years.

Since it is very difficult to model so far into the future, plan to adjust plans along the way, with some maxims like "Draw down deferred tax assets fast between now and 70"; "Live off Roth from 70 to 85" "Die penniless"; During all this any upside growth will go to charity. Also, I am not too hung up about paying more taxes for doing well. It's OK. More concerned with superior compounding; We have done well over the past decade and hope it does over the next decade as well.
 
SecondCor521 said:
I hope that answers your question. If not, feel free to ask further.
Click to expand...

What I did last year was to convert 8K from TIRA to Roth and used 2K from the TIRA to pay the tax. I'm guessing that is not optimal but the way I saw it I was going to have to pay capital gains tax on taxable assets I'd have to sell. My TIRA/401K are well into 7 figures and I don't have anywhere near enough taxable assets to cover that much conversion.

Previously when I was employed I elected to contribute to the company Roth 401K knowing full well that I was paying a higher than desirable tax rate. But the value of my non-Roth accounts was so high that I just wanted to start some diversification of the tax treatment and to get the 5 year clock started.
 
Olbidness said:
I'm guessing that is not optimal
Click to expand...

It's really really hard to figure optimal. Each person has a different set of finances, goals, preferences, opinions, age, risk tolerance, and backup plans. Then the tax law changes every so often, and our personal situations also change every so often.

I admire the people who can dial in their taxes according to some plan. I try to do it too, but I don't figure to the N'th degree. As long as I get in the ballpark I think I will be OK financially. But there is the OCD part of me that wishes I could dial everything in perfectly.
 
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