T-IRA to Roth Conversion in 2010

[Maurice]

Has anyone here done much thinking/modeling around the 2010 Roth conversion opportunity?


For those not aware, there is a one time exception to Roth IRA conversion income limits in 2010. Anyone can convert his traditional IRAs (or SEP IRAs) to a Roth that year. Interestingly, the tax bill can be deferred, with half due in 2011 and half due in 2012.


I've done some math on this myself lately and for me it seems like it will be a worthwhile exercise. Of course one has to make a series of assumptions as part of the calculations, but in my case it seems like it will most likely be advantageous to do the conversion.


Has anyone given this much thought?

[wolfbay]

I didn't know about it but since I'm retired & taxable income is down I was thinking about converting to roth now while in 15% bracket.I assume I could do it each year if in 15%.Does anyone know if this is allowed & is it a good idea?Sorry I can't answer your question

[Texas Proud]

There is at least one long discussion on this awhile back.. do a search

And the answer is yes... and doing it with an after tax IRA so the taxes are not much... (I can not do a regular IRA.. so I am limited anyhow)..

[ziggy29]

Originally Posted by wolfbay

I didn't know about it but since I'm retired & taxable income is down I was thinking about converting to roth now while in 15% bracket.I assume I could do it each year if in 15%.Does anyone know if this is allowed & is it a good idea?Sorry I can't answer your question

It's a good idea if you think future withdrawals will be taxed at greater than 15%.

[Maurice]

Depending on what assumptions you make, it can be advantageous to do the conversion in certain scenarios even if your future marginal tax rate is less than it is today.

[ExtinctBird]

I was giving it some serious thought. I thought that the conversion option would become available in 2010 and stay available, unless something changed between now and then.

[Nords]

Originally Posted by Maurice

Has anyone here done much thinking/modeling around the 2010 Roth conversion opportunity?
Has anyone given this much thought?

http://www.early-retirement.org/foru...not-30664.html

Just to make things interesting, our kid starts college in the fall of 2010. So any Roth IRA conversions (with their boost to one's AGI) will have to be weighed against the prospect of financial aid. I don't think FAFSA or financial-aid offices really have much sympathy for the discussion.

We've been converting a little every year of the last four and, when the college years end or we figure out the financial aid picture, we'll keep going until all our IRAs are Roths. My RMDs would start in 2031 so I think we'll make it.

[Darryl]

Lot of good reasons to convert. Unfortunately for me I did mine at a market top and paid tax on the dollars converted. Keep in mind if you suffer a 50% drop the 15% tax is now effectively 30%. That was 98? 99? 2000? my 44 year old brain is a little foggy. With todays AA and solid coaching from this board I understand dips but am not anticipating 50% drops like back then.

[buz14260]

I converted mine in '98 too, pretty high at the time. A lot of people really were upset when the market turned down in 2000 and they were paying taxes on money they didn't have anymore. As I recall you could undo your roth and redue it again. I looked at the work involved and the taxes saved and it wasn't worth it. Now that Roth is probably 400% more than it was in '98! You know somehow the g'ments going to figure out a way to tax that someday.

[Getting short]

I have been considering converting my TIRA to a Roth lately and would really appreciate the insights of folks on this board. Here is my situation:

I will be retiring early next year at almost 56 yo. I will have two COLA'd pensions which by my calculations should cover my living expenses. I have 529's and taxable accounts for college expenses for my two kids. In my retirement accounts I currently have approximately: 160k in TSP, 110k in 403b, 50k in Roth & 110k in TIRA. I plan to leave the money in the TSP as I'll be able to make withdrawals before 59 1/2 if necessary. I ran the numbers last year with my FA and we came to the conclusion that a conversion was not worthwhile money-wise as my tax bracket will be the same after retirement.

However, since I am likely to need relatively little of this money to cover living expenses, I'm concerned about future RMDs, or if inherited, my kids having to take immediate taxed withdrawals vs. letting it ride and taking untaxed withdrawals when they want the money.

Am I thinking this through correctly?? Any comments would be very welcome.

[lucija]

Originally Posted by Getting short

I have been considering converting my TIRA to a Roth lately and would really appreciate the insights of folks on this board. Here is my situation:

I will be retiring early next year at almost 56 yo. I will have two COLA'd pensions which by my calculations should cover my living expenses. I have 529's and taxable accounts for college expenses for my two kids. In my retirement accounts I currently have approximately: 160k in TSP, 110k in 403b, 50k in Roth & 110k in TIRA. I plan to leave the money in the TSP as I'll be able to make withdrawals before 59 1/2 if necessary. I ran the numbers last year with my FA and we came to the conclusion that a conversion was not worthwhile money-wise as my tax bracket will be the same after retirement.

However, since I am likely to need relatively little of this money to cover living expenses, I'm concerned about future RMDs, or if inherited, my kids having to take immediate taxed withdrawals vs. letting it ride and taking untaxed withdrawals when they want the money.

Am I thinking this through correctly?? Any comments would be very welcome.

OK... so, you're saying, and correct me if I am wrong, you (1) will probably need little to none of the $$ in your retirement plans (living expenses covered by pensions), (2) you're planning to leave an inheritance to your kids, (3) you do not anticipate a change in your tax bracket (ever).

Some things I would consider (not to say you should do any of this):
+ convert to ROTH up to the top of whatever bracket you're in, this will reduce future RMDs
+ leave taxable $$ "as is" and perhaps increase taxable savings later on with RMDs, your kids would inherit these with a stepped up basis

I believe, inherited ROTH is treated just like any other IRA with respect to RMDs (required withdrawals based on beneficiaries life expectancy).

[megacorp-firee]

Originally Posted by lucija

OK... so, you're saying, and correct me if I am wrong, you (1) will probably need little to none of the $$ in your retirement plans (living expenses covered by pensions), (2) you're planning to leave an inheritance to your kids, (3) you do not anticipate a change in your tax bracket (ever).

Some things I would consider (not to say you should do any of this):
+ convert to ROTH up to the top of whatever bracket you're in, this will reduce future RMDs
+ leave taxable $$ "as is" and perhaps increase taxable savings later on with RMDs, your kids would inherit these with a stepped up basis

I believe, inherited ROTH is treated just like any other IRA with respect to RMDs (required withdrawals based on beneficiaries life expectancy).

A point to consider ... and I think that this has been touched on, is that if your IRA get big enough and you have not touched it, when you get to RMD, then the amount is added to your 2 pensions and that may push you into the next (or higher) tax brackets. I am looking at that scenario now. I think I will need to start converting to ROTH while I can at lower rates.
...any tax experts out there? please comment

[megacorp-firee]

Question on Roth or regular IRAs
if you have a trust as the beneficiary, what do they use for the distribution term (how many years?).
I think that the Roth has none, since there is no longer any tax liability. T/F?
What about regualr IRAs?
Thanks.

[Finance Dave]

Originally Posted by Maurice

Has anyone here done much thinking/modeling around the 2010 Roth conversion opportunity?


For those not aware, there is a one time exception to Roth IRA conversion income limits in 2010. Anyone can convert his traditional IRAs (or SEP IRAs) to a Roth that year. Interestingly, the tax bill can be deferred, with half due in 2011 and half due in 2012.


I've done some math on this myself lately and for me it seems like it will be a worthwhile exercise. Of course one has to make a series of assumptions as part of the calculations, but in my case it seems like it will most likely be advantageous to do the conversion.


Has anyone given this much thought?

Yes. I think the idea is sound. The one risk is that they close the loophole prior to 2010, but even then you're simply left with savings that won't get the preferential tax treatment. I say go for it.

Dave

[Getting short]

Thanks lucija and megacorp for your help. Yes, your assumptions are right and your comments make sense to me. Thanks for the correction on the RMDs on an inherited Roth, I'm sure I knew that at one time .

megacorp, recently both my lawyer and FA told me to change the beneficiaries of all of my retirement accounts to my children directly rather than to my trust. I'm sorry that I can't cite the exact reason, but it had to do with the stretch out provisions, which apparantly get very complicated when going through a trust.

[Grandpa]

I learned about this little known tax benefit a year ago, and am hoping that the law isn't overturned by the next president/congress before then. I view this as an income windfall for the government in the shortrun, but a huge tax reduction in the longrun. This tax provision will be hugely attractive to wealthy individuals, which is why I assume it will be overturned, so I'm not counting on it.

[Texas Proud]

Originally Posted by Grandpa

I learned about this little known tax benefit a year ago, and am hoping that the law isn't overturned by the next president/congress before then. I view this as an income windfall for the government in the shortrun, but a huge tax reduction in the longrun. This tax provision will be hugely attractive to wealthy individuals, which is why I assume it will be overturned, so I'm not counting on it.

USUALLY they do not overturn something like this as it is a one time benefit.. if it was a continuous law then they might...

More than likely they will raise the top tax bracket like Rangel (sp?) is talking about.

[ERD50]

Originally Posted by Nords

http://www.early-retirement.org/foru...not-30664.html

Just to make things interesting, our kid starts college in the fall of 2010. So any Roth IRA conversions (with their boost to one's AGI) will have to be weighed against the prospect of financial aid.

Nords, add another complication to that list - the Lifetime Learning and Hope Credits.

Federal Tax Benefits for Tuition and Fees

Converting your Trad to Roth increases your AGI, and that can limit these credits. It raises your 'effective' marginal rate, but you need to run the taxes multiple times to figure this all out.

I ended up un-converting a good (bad?) portion of my Trad-to-Roth conversion last year, and I took some cap gains this year which has already raised my AGI, so I'm not even going to bother at all this year.

My next question will be is whether delaying my (non-cola) pension will be worth it. I can start collecting X in 2 years or 2X in 12 years, with a weird weighted curve in-between years. If I delay the pension, I can do more Trad-to-Roth conversions in that time span.

The answer will be obvious in hindsight ;(

-ERD50

[Maurice]

Originally Posted by Grandpa

I learned about this little known tax benefit a year ago, and am hoping that the law isn't overturned by the next president/congress before then. I view this as an income windfall for the government in the shortrun, but a huge tax reduction in the longrun. This tax provision will be hugely attractive to wealthy individuals, which is why I assume it will be overturned, so I'm not counting on it.

I really doubt it will be overturned for the reason you state - its a windfall in the short term. Congress won't be able to give it up for some long term benefit. Especially if pay-go is enforced.

[teejayevans]

Originally Posted by Maurice

I really doubt it will be overturned for the reason you state - its a windfall in the short term. Congress won't be able to give it up for some long term benefit. Especially if pay-go is enforced.

Especially since they can change the tax law in 2011 and treat Roth
withdrawals like SS, where you pay tax on up to 85% the income you
pull out.
TJ