Roth conversions

[Ronstar]

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.

Great question. The CPA at the tax seminar that I attended has me somewhat convinced that tax rates will rise by 2026.

That said, there is a lot of great info in this thread that is giving me thought of lowering my planned conversions. But I'm 62 and have never converted anything yet. So I have some catching up to do.

 

[CardsFan]

Great question. The CPA at the tax seminar that I attended has me somewhat convinced that tax rates will rise by 2026.

That said, there is a lot of great info in this thread that is giving me thought of lowering my planned conversions. But I'm 62 and have never converted anything yet. So I have some catching up to do.

I think pb4uski probably knows more about his than I, but it seems the conversion within the 12% bracket is almost a no brainer. I KNOW my marginal rate will be higher at RMD time. After that, its a crapshoot.

In another thread Edit to addactually it was THIS thread) there was a question about converting AFTER RMD time. When I get there, I think this might make sense, as our RMD's will increase, and certainly when one of us goes, the other will be in a higher bracket.

 

[Dtail]

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.

One aspect of general Roth accounts usage that I am not sure has been covered heavily in these discussions is when to USE the Roth accounts. I had thought in general that calculators such as I ORP suggests to use the Roth accounts LAST of all your accounts.
Is this statement generally true, as I like your concept of not using more RMD's than what is required.

 

[CardsFan]

One aspect of general Roth accounts usage that I am not sure has been covered heavily in these discussions is when to USE the Roth accounts. I had thought in general that calculators such as I ORP suggests to use the Roth accounts LAST of all your accounts.
Is this statement generally true, as I like your concept of not using more RMD's than what is required.

In our case, there is a high probability that we may never need the Roth account, and maybe not much of the tIRA (tho we WILL pay taxes on some at RMD time).

At RMD time we WILL pay taxes, on more money than we will need, so I see the Roth as a tax free pathway to the next generation.

YMMV

 

[free2020]

One aspect of general Roth accounts usage that I am not sure has been covered heavily in these discussions is when to USE the Roth accounts. I had thought in general that calculators such as I ORP suggests to use the Roth accounts LAST of all your accounts.
Is this statement generally true, as I like your concept of not using more RMD's than what is required.

As to Roth usage, for us, with large balance now, We can afford to pull at a trickle rate between now and 70 and then heavily. This is based on dealing with what we have now and more importantly, what we currently know about tax rates. Who knows what the tax policies would be in 2030 or 2040.

As to RMD, I have built a percentage table between 70 and 115 (current IRS) into my model and that tells me what my forced withdrawal threshold would be. Besides, if any consumption is to happen would like it to be well before 75-80.

 

[Dtail]

As to Roth usage, for us, with large balance now, We can afford to pull at a trickle rate between now and 70 and then heavily. This is based on dealing with what we have now and more importantly, what we currently know about tax rates. Who knows what the tax policies would be in 2030 or 2040.

As to RMD, I have built a percentage table between 70 and 115 (current IRS) into my model and that tells me what my forced withdrawal threshold would be. Besides, if any consumption is to happen would like it to be well before 75-80.

So conceptually, are you trying to limit your asset usage amount to the RMD forced % each year and the differences between that sum and your total needs come from the Roth account?

 

[free2020]

So conceptually, are you trying to limit your asset usage amount to the RMD forced % each year and the differences between that sum and your total needs come from the Roth account?

Sorry for being cryptic, it is more because of the lack of word choices to convey the message. Sorry for that

Actually, it’s the opposite of limiting asset usage. I am forcing depletion of tax deferred asset between now and 70. Because we have too much and the RMD gun could/would be pointing at us with large forced withdrawals from age 70. Under unknown tax regimes. And food won’t taste so good with false teeth

If we didn’t have enough Roth now, I wouldn’t touch it until 70. We can dip lightly into it. Compounding is great, tax free c is a rare gift from Uncle Sam.

 

[Rothman]

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.



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, I thought the old Ed Slott eternal tax free was based on you naming a very young heir and based on their life expectancy the Roth would grow faster than their required life expectancy-based withdrawals and therefore thus inheritance grew. What changed?

 

[harley]

Harley, I thought the old Ed Slott eternal tax free was based on you naming a very young heir and based on their life expectancy the Roth would grow faster than their required life expectancy-based withdrawals and therefore thus inheritance grew. What changed?

You know, I think you're right. The Stretch Roth IRA always had an RMD based on the beneficiary's life expectancy, which is why leaving one to a young grandchild (if reasonable) was such a good plan. I think I am confusing that with the new/proposed plan that keeps popping up where only a certain amount ($500K?) can be RMD'ed, with any additional amount having to be withdrawn before 5 years is up. They haven't passed that yet, but it keeps being proposed. If they do, then the ability for the Roth to grow faster than the RMD subtractions would probably go away, or at least be severely compromised before passing to a third generation. Sorry for the confusion.

 

[jimandthom]

Planning on a couple more years of conversion.


We should not have a big problem staying in the 12% bracket, until the first of us dies. It could get a bit iffy on staying in the 12% range after that, with large RMDs ( of course depending on investment results).

 

[GrayHare]

Similar to the Stretch IRA, I would think there are people here whose traditional tax-deferred accounts have been growing faster than they can reasonably convert the funds to Roth.

 

[pb4uski]

That's me. Even though I convert to the top of the 12% (formerly 15%) bracket religiously, my tax-deferred balance inn $$$$ is the same today as when I retired and even under my plan for the next 8 years still grows ... so in effect I'm converting a good part of the growth.

 

[Corporateburnout]

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?Around 40%. Have been converting since we retired 4 years ago and will continue to convert to the top of the 12% bracket until RMD.

2. Will you/ did you continue Roth conversion after your RMD’s start? Possibly. Will evaluate once we're there.

3. Do you plan on converting 100% to Roth? Depending on whether we covert after RMD

4. How old were you when you started Roth conversions? 60

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

6. Is your Roth IRA investment mix the same as in your traditional IRA? No. All equities in Roth. Rebalance TIRA after conversions.

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

8. Do you have reasons to not do Roth conversions? No. It's a no-brainer to convert to the top of the 12% bracket. I-ORP shows an increase of 8K in disposable income over no conversions (assuming future tax brackets don't change).

We have been converting to the top of 15% tax bracket and will continue to the top of the 12%.

 

[kaneohe]

..........................................................
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.

.................................................................

Is this really true? Any links that say the same?

 

[SecondCor521]

Is this really true? Any links that say the same?

Well, I'm not sure which parts of what I wrote that you are asking about. My understanding is based on my reading of IRS documents at http://www.irs.gov, but I can't point you to the specific ones that I read that led me to my conclusions, as it has been a while.

Before writing the above, I did check and the IRS website does show that an estimated payment made on 1/15 of any year is for the last calendar quarter of the preceding year. I also checked the instructions for Form 1040 line 65 I believe it was, which is where you put in estimated payments, and it did refer to payments made for the previous calendar year, or something like that.

As to the ability to only make one quarterly payment (and not payments for the first three quarters of the year), all I know about that is that there is an IRS approved method where you can calculate your income by quarter and your payments by quarter in order to see if you have any underpayment penalties. I believe it is Form 2210 or something like that. Anyway, I think based on that, that you can vary your quarterly estimated payments, and logically if one's income for a quarter is zero then a zero payment should be permitted. But I admit I've never actually confirmed that with the IRS; I've just done it and have not yet gotten in trouble.

And then as far as avoiding penalties, I'd look at the instructions for Line 79 of Form 1040. I believe what it will say is that one of the ways to avoid penalties is if the amount owed (Line 78) is less than $1,000. There are other ways involving percentages that I won't quote here, but many people use those methods.

 

[Hermit]

No Roth for me. I am solidly in the 22% bracket and my income will never go down. I take enough from IRA each year as spending money to bump me up to just under the first Medicare income threshold. After 70, SS will put me in about the same place without any withdrawals from tax deferred. RMDs will be taken as QCDs to charity for the first 10 or 15 years so no income impact. This is part of my inheritance plan. For my situation, it seems best to just let the money grow in tax deferred accounts as long a possible.

 

[kaneohe]

...................................

And then as far as avoiding penalties, I'd look at the instructions for Line 79 of Form 1040. I believe what it will say is that one of the ways to avoid penalties is if the amount owed (Line 78) is less than $1,000. ...................................

This section from F2210 is more restrictive:

4 Current year tax. Combine lines 1, 2, and 3. If less than $1,000, stop; you don’t owe a penalty.
Don’t file Form 2210 . . . . . . . . . . . . . . . . . . . . . . . . . . 4
5 Multiply line 4 by 90% (0.90) . . . . . . . . . . . . . 5
6 Withholding taxes. Don’t include estimated tax payments (see instructions) . . . . . . . 6
7 Subtract line 6 from line 4. If less than $1,000, stop; you don’t owe a penalty. Don’t file Form 2210

You take the current yr tax and take 90% of that is your minimum required for safe harbor. Note that line 6 includes only W/H taxes .....but not est. tax payments...............so you can't get out of trouble by paying est. taxes in Q4.

You are quite right that the estimated payments can vary w/ time if your income varies accordingly . However unless income varies accordingly, you
generally have to pay each quarter. The reporting requirement is not fun either.

 

[SecondCor521]

This section from F2210 is more restrictive:

4 Current year tax. Combine lines 1, 2, and 3. If less than $1,000, stop; you don’t owe a penalty.
Don’t file Form 2210 . . . . . . . . . . . . . . . . . . . . . . . . . . 4
5 Multiply line 4 by 90% (0.90) . . . . . . . . . . . . . 5
6 Withholding taxes. Don’t include estimated tax payments (see instructions) . . . . . . . 6
7 Subtract line 6 from line 4. If less than $1,000, stop; you don’t owe a penalty. Don’t file Form 2210

You take the current yr tax and take 90% of that is your minimum required for safe harbor. Note that line 6 includes only W/H taxes .....but not est. tax payments...............so you can't get out of trouble by paying est. taxes in Q4.

You are quite right that the estimated payments can vary w/ time if your income varies accordingly . However unless income varies accordingly, you
generally have to pay each quarter. The reporting requirement is not fun either.

Well, as my Mom used to say, you learn something new every day. Thank you for pointing this out.

Currently, I have a negative federal tax bill - Line 63 is zero and line 74 is positive. But in the future, I may have to pay federal taxes, and if so I will keep this in mind.

If I do have to pay taxes, though, I think a single estimated tax payment on 1/15 may still work for me under the annualized income installment method since the majority of my income is likely to be in Q4. And now that I write that, I realize that one of my income sources is capital gains from a private company stock I owned, so it might be possible to have a significant portion of my income in the Q1 or Q2 because that is when those distributions might happen. Sigh. I'm really beginning to strongly dislike the complexity of taxes.

 

[devans0]

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, every penny.

4. How old were you when you started Roth conversions?
62

5. Do you do Roth conversions every year and once per year? And pay the tax in the quarter that you convert?
A couple of times a year. or quarterly, or once a year. We convert on dips.

6. Is your Roth IRA investment mix the same as in your traditional IRA?
No

7. To what extent was/is your decision on delaying SS based on your Roth conversion strategy?
Completely dependent. Taking SS before 70 would cost too much in additional taxes.

8. Do you have reasons to not do Roth conversions?
We are planning on a leaving a sum to our daughter. Roth will reduce taxes, overall.

 

[Cobra9777]

We're both 57 and retired 5 years. I've been converting to the top of the 15% bracket (now 12%) for 3 years. First 2 years of retirement, we did no conversions because we were still in a high bracket due to exercising employee stock options. Conversion amounts are small due to 2 pensions and some rental income. At this rate, I've projected that we will convert only about 35-40% of tax-deferred to Roth by 70.

The new tax law has me pondering conversions into the 22% bracket, but the cost is actually greater than 22% due to the 27% incremental rate on QDs and LTCGs. RMDs and SS will put us well into the 22% bracket at 70. So there's not a compelling case to convert further unless I think rates will revert to 25%. And then it's a small upside with a whole lot of unknowns. So I'm still undecided pending further analysis.

We convert in Dec and pay tax by Jan 15 using the quarterly method to avoid under-withholding penalties. AA in tax-deferred is a mix of bonds and equities. Roth and taxable are all equity. We will delay SS as long as possible to enable max Roth conversion.

 

[pb4uski]

^^^^ my brother from a different mother. Describes our strategy to a "tee".

 

[CardsFan]

I'm not sure we can even get to 35% conversion, within the 12% bracket. Going back to an earlier comment, does it make sense to keep converting after RMD's to avoid an even higher bracket later (particularly when one of you passes)?

FYI, we are still 8 years away from RMD's. Just trying to plan ahead.

 

[pb4uski]

I'm going to have to take a real hard look at it when we turn 65 and relocate to a no state income tax state.

 

[googily]

Thanks to this thread, I finally started focusing on the Roth notion, especially once I remembered that my 401k added in-plan conversions of after-tax contributions earlier this year, so I did that today--just $7k, but I figured it would start the clock at least.

But I'm still not sure it's something that I should pursue with my tIRA during the years that my income drops. If it's fairly likely I will be in the 22% or higher bracket once I hit 65 just with pension and SS and after-tax proceeds, so is there much reason to really push to make conversions? Is it as much about heirs as anything?

 

[free2020]

Enjoying the thread with so many aspects to consider with Roth. Since most here appear to fully grasp the power of Roth, I would humbly suggest that we all take an extra bit of initiative (surely many of you are)to spread this wisdom of maximizing ROTH contributions to the 20 and 30 something’s that you come across. I am. Not always successful so please let me know any tips.

My message is,
1. 401k to company match
2.Roth to IRS limit and
3. And ....

Should there be a cash withdrawal need, let them know that Roth contribution is always there for you.

Am I generally correct?