Roth Conversions - Conventional Wisdom

[mathjak107]

Quote:

Originally Posted by pb4uski I'm not sure if it makes much of a difference. Let's say I have $25 in taxable and $100 in tax deferred and my current and later tax rates are 25%. If decide not to convert at a 7% annual return, the $100 will grow to be $197 in 10 years and the $25 will grow to be $49 in 10 years. If I then withdraw that $197 and pay the 25% tax of $49, I have $197 left to spend. Alternatively, if I convert the $100 and pay $25 in tax so the taxable account is gone and I have $100 in the tax-free Roth and the roth grows at 7% for 10 years I have $197 to spend. Same thing.

you are correct. the flaw in most calculations is folks use outside money to pay the taxes on the roth up front but then want to figure paying the taxes on the traditional not from outside money like the roth but pulling it from within the traditional balance .


the advantage of the roth is in other areas.

mostly the fact that our final years income is not what counts when comparing tax rates to retirement. for most of us 40 years of rampping up will have our long term tax bracket average inflation adjusted at a much lower rate than our retirement one which is usually based within spitting distance of our final earning years.

unless you had a career that started you off in the higher tax rates or had a dead end job odds are a roth will leave you with more spending dollars since odds are you retirement tax braccket will typically be higher than your career one.

he other is the fact you will be taxed on any rmd money reinvested forever. the roth stays untaxed.

whether or not you get a medical subsidy or your ss taxed are two other concerns.

all of the above have little to do with whether taxes go up or not.

[ziggy29]

Quote:

Originally Posted by Dog Is there a limit to how much you can add to a Roth once you are retired? Are there any special rules or gotchas other than staying within 15% or 25% tax rate? I seem to recall someone telling me I could not use my 72t distributions from a tIRA to fund a Roth.

There is no limit to direct Roth *conversions*, nor are there income limits for Roth conversions since they were repealed a few years back.

However, other than a direct conversion you can only *contribute* to a Roth with *earned* income, and a 72t distribution is not earned income. You can only directly convert from the tIRA to a Roth, and that could reduce the required amount of 72t income in future years.

[pb4uski]

Quote:

Originally Posted by LOL! Yep and 15% + 15% is 30%. I noticed this by using TurboTax. I will be in the 15% tax bracket this year if I work play my cards right. However, if i go over, all that extra income will be taxed at 30% because of the above.....

I ran into this last year. I had overconverted by a small amount and was looking at 30% on the amount overconverted but was able to avoid it by recharacterizing the excess so the taxable income on my tax return was exactly the top of the 15% tax bracket.

[Dog]

Thanks Ziggy. We have two more years to contribute via earned income. I will need to research the direct conversion to Roth. I do have a 401k that I could look at until the 5 year clock runs out on 72t from my tIRA.


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[pixelville]

Another reason to convert in the early years, especially if you retired early with decades before RMD, is that typically your IRA/401k will grow at a rate much higher than inflation, and with compounding over decades, RMDs will likely push you into higher tax brackets than you thought you would be (since tax-brackets are only inflation-adjusted). Of course, there are a lot of assumptions here.
Maybe mathjak107 was saying the same thing about inflation & tax brackets?

Also, sooner or later, one spouse passes away and the surviving spouse files as Single resulting in higher taxation with same income. If this money was in Roth, that would not be a concern.