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Something is missing from this ROTH conversion article
Old 08-17-2010, 11:28 AM   #1
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Something is missing from this ROTH conversion article

Here's an article about mania to convert TIRAs to ROTHs

what-the-experts-are-doing-with-their-own-roth-iras: Personal Finance News from Yahoo! Finance

However, there's something missing, namely the income differential between pre and post retirement. Right now my income is around $100k, after retirement it will be $30k. I will probably convert some of my IRAs to ROTHs up to the 15% income tax bracket, but no more. I plan to be "poor" in retirement so my tax bill will be small and if I chip away at my IRAs with conversions each year I can reduce those far off mandetory withdrawals
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Old 08-17-2010, 11:46 AM   #2
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Originally Posted by nun View Post
Here's an article about mania to convert TIRAs to ROTHs

what-the-experts-are-doing-with-their-own-roth-iras: Personal Finance News from Yahoo! Finance

However, there's something missing, namely the income differential between pre and post retirement. Right now my income is around $100k, after retirement it will be $30k. I will probably convert some of my IRAs to ROTHs up to the 15% income tax bracket, but no more. I plan to be "poor" in retirement so my tax bill will be small and if I chip away at my IRAs with conversions each year I can reduce those far off mandetory withdrawals
I read this article yesterday and came to the exact same conclusion. I ran some numbers and it just doesn't make sense for me to convert before I reduce my income and can manage my income (lower) tax bracket. I think I read some older posts here about conversions that mentioned many people (FIRE people) on these boards convert an amount each year up to right before they hit a higher marginal tax rate.

The analysis will probably be different if you anticipate a large pension.
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Old 08-17-2010, 01:37 PM   #3
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The analysis will probably be different if you anticipate a large pension.
So would most retirements...
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Old 08-17-2010, 06:50 PM   #4
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Roth conversions don't help lots of people, but the financial media somehow thinks otherwise. I think there are more pro-conversion than anti-conversion messages.

Refreshingly from Merriman & Co: FundAdvice.com - What we're telling our clients these days

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For the majority of clients, a Roth conversion is not suitable. Maybe 5 percent of them should do it.
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Old 08-17-2010, 08:28 PM   #5
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These folks are from the same mindset that believes you need 80% of your current income in retirement. Cut from a different cloth than us they are.
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Old 08-17-2010, 08:32 PM   #6
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I have always come to the same conclusion about the Roth IRA conversion. My tax bracket is simply far too high now, as compared to what I anticipate it will be in retirement, to make a Roth conversion worthwhile, even if (as expected) tax rates increase substantially.
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Old 08-18-2010, 10:50 PM   #7
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One thing that has greatly surprised me in the 4 tax years since I retired was how EASY it was to stay in a very low tax bracket. 10% bracket, and our total income is just slightly smaller than when I was working.
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Old 08-19-2010, 08:52 AM   #8
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One thing that has greatly surprised me in the 4 tax years since I retired was how EASY it was to stay in a very low tax bracket. 10% bracket, and our total income is just slightly smaller than when I was working.
That's good news. I'm in the 25% bracket now and I plan to go down to 15%, it would be good to go lower though. So ROTH conversions seem like a very bad idea to me. I still contribute to my ROTH every year, but the IRA money stays where it is.
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Old 08-19-2010, 09:19 AM   #9
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One thing that has greatly surprised me in the 4 tax years since I retired was how EASY it was to stay in a very low tax bracket. 10% bracket, and our total income is just slightly smaller than when I was working.
What is your secret for doing this?
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Old 08-19-2010, 09:43 AM   #10
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Primarily, you can fiddle with the timing of taxable events. Sell stocks with small capital gains instead of large. Offset a capgain by selling something else with a caploss. Postpone a gain from one year to the next. Pull a gain into current tax year. etc.

W-2 income you can't fiddle with. Whenever your paycheck comes, that's when the tax is due.

Also, depending on the tax laws of your state, all or part of pensions & SS are not taxed. In some states (Arkansas for example), you can lower your overall tax by shifting income between spouses.
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Old 08-19-2010, 04:27 PM   #11
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What is your secret for doing this?
Let's see:

1. No job, so no W2 income. Check.

2. Lots of investments in taxable accounts. Check.

3. Sell taxable investments to pay for expenses. Return of capital is tax-free and does not appear on page 1 or 2 of your Form 1040. Check.

4. Lots of tax-loss harvesting in the past, so any capital gains are offset by those old capital losses, so gains are tax-free. Check.

5. There is something called the 0% tax-bracket which is the difference between "adjusted gross income" and "taxable income". Check.

6. Absolutely no bonds, bond funds, CDs, money market funds, emergency funds in a taxable account. They are all held in tax-advantaged accounts and not touched. Thus no income on the top half of Schedule B.

Any taxable income is 100% qualified stock dividends or Roth conversions in excess of the 0% tax bracket.
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Old 08-19-2010, 04:49 PM   #12
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Any taxable income is 100% qualified stock dividends or Roth conversions in excess of the 0% tax bracket.
If bush tax cuts expire, the above will all go away. No more 0% tax rate on LTCGs and Qual. Dividends.

Also,some think that our taxes will be much higher in the future, if you are in this camp, converting to Roths makes sense.
TJ
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Old 08-19-2010, 04:51 PM   #13
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I get all your other points, but what is the point of having these investments, if they are never to be touched? Could this be your "bequest" fund?

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Let's see:


6. Absolutely no bonds, bond funds, CDs, money market funds, emergency funds in a taxable account. They are all held in tax-advantaged accounts and not touched. Thus no income on the top half of Schedule B.

.
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Old 08-19-2010, 05:31 PM   #14
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^ You use them by moving them to Roth IRAs. First spend taxable accounts while making IRA/401(k) conversions to Roth at a very low overall tax rate, then spend Roth IRA.

PS: I used "not touched" and not "never touched".
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