No roth conversion for me!

[elroy]

Folks,

I need the benefit of some of your collective wisdom and experience. I've been contemplating an IRA to Roth IRA conversion. Will likely retire at 50 - 55 in 10 - 15 years, will likely take a 72t distribution on my traditonal IRA if not converted, and currently at the 25 - 28% tax bracket. Ran the numbers in some conversion calculators with several current and future tax brackets and it is break even at best even without the 72t distribution.

Wouldn't the 72t make it even less desirable? Say $35K distribution for 55, 56, 57, 58, 59.... keeping me in low tax brackets since my pension and SS will not figure in until 60 and 62.

What am I missing?

Elroy

 

[Nords]

Although they seem self-evident or rhetorical, these are questions that are difficult to fit into even Fairmark's excellent Roth IRA conversion calculator:

What am I missing?

1. If you pay the taxes on the Roth conversion from taxable funds, then it has the equivalent effect of raising the basis in your new Roth. Example: You convert your $100K IRA (which is loaded with unrealized gains) and pay $15K tax. Your Roth IRA starts with $85K. If you pay the tax from other sources then your Roth IRA starts at a basis of $100K (effectively a $15K contribution) and is no longer taxed.
1a. Compounding in your new Roth runs amok because you're not required to take RMD withdrawals.
2. Will your RMDs, even after 72(t), result in your Social Security being taxed?
3. Will taxes 20 years from now be lower than they are today?
4. If you don't have to take RMDs in retirement, what tax bracket will you be in? For many it's the 15% bracket.
5. Can you convert your IRA to a Roth in several years' increments up to the top of the 15% tax bracket? If so, could you do that conversion when you retire at age 50-55 and are no longer in the 25-28% bracket?
6. Could you hedge your bets by converting some of your IRA(s) to Roth(s)?
7. Do you wish to calculate RMDs for the rest of your life (along with doing your own taxes, tracking your investments, mowing your own lawn, and butchering your own beef cattle)? If you think this isn't a problem then I'll forward my FIL's RMD comments to you...

 

[elroy]

Nords,

Thanks for the comments and questions. Checked out the Fairview site and read up a bit. Not sure how to answer some of the non retorical questions but #5 is closest to my thinking. I may work down my after tax savings between 50-60 while converting my IRA to a Roth IRA up to the 15% tax bracket limit (or the equivelant of this in the future) once the pension and SS kick in. At my current income level it is "unlikely" I will be in a higher tax bracket when retired so the conversion now is not as advantagous as during my early retirement years. So this leads me to another question maybe someone can answer.

Can you do a 72(t) and roth conversion at the same time?

Elroy

 

[Nords]

Can you do a 72(t) and roth conversion at the same time?

Sure. You can also do a Roth conversion while you're taking RMDs.

You have to keep up a 72(t) for a certain number of years (I believe it's five? but I've forgotten) so don't drain the IRA with the conversion before meeting the minimums.

 

[vic]

When will the Roth conversion for $100K+ earners be opened up? Is there only a specific window for higher earners to roll over or is this a relaxation of the rules. Can't wait to roll it all over.

Vicky

 

[Papi]

You have to keep up a 72(t) for a certain number of years (I believe it's five? but I've forgotten) so don't drain the IRA with the conversion before meeting the minimums.

FOr the 72(t) you need to withdraw at least once a year and keep taking withdrawls for 5 years or  until you reach age 59 1/2, whichever is longer.

See http://www.retireearlyhomepage.com/wdraw59.html for more info.

Yeah, my dad has to do the RMD as well with his IRA.  Not only does the paperwork hassle drive him batty, but it forces him into a higher tax bracket and causes a portion of his SS to be taxed.  I love my Roth

 

[kristinecfp]

The new income limit for Roth IRA conversions doesn't go into effect until 2010.  Also, taxpayers who convert in 2010 can spread the taxes out over 2 years.

See http://www.marketwatch.com/News/Sto...9-4CC7-A646-9B213167E09C}&siteid=google&dist= for more info.

Kristine

 

[mathjak107]

as i previously mentioned at 591/2 you can draw 35,000 of income from a ira or 401k and pay as little as 1500 bucks in taxes...the first 20,000 is at zero and the next 15,000 is at 10%.....unless someones in a low income bracket or very young i dont see a roth or roth conversion making much sense