100% Roth for the next 30-40 yrs possible?

[CRLLS]

Crazy idea #236:

I am wondering if there is ever a reason to forego any taxable investment account. Consider someone who has nothing but tIRA’s and Roths, and is over the magical 59-1/2 age. Could it ever make sense to convert the tIRAs completely to Roth?

Ignore the immediate tax vs spread out taxes for a moment. If all savings were in a Roth, it would grow tax free. Withdrawals are penalty free. SS would be taxed at zero or close to zero considering today’s standard deduction MFJ of 24,800, or 27,400 for seniors.

With this no/low income, as seniors they could apply for a tax assessment freeze on their home, virtually stopping or severely lowering the rate of increases on their real estate taxes. Another benefit is, if they do not outlive their investments, the remaining Roth will pass on to their heirs at no tax, which should not disrupt their plan at least for another 10 years based on the new law. I know they will have to eventually convert it to something other than the inherited Roth and pay taxes on the growth of that.

There could be 30-40 years of future growth/withdrawals with the possibility of no income taxes; no or low RE tax growth; and some estate benefits by doing this.

I must be missing something. There must be some catch beyond the income tax now vs spread out. Yes? No?

 

[Rianne]

Slam dunk! But we're still on ACA and cannot convert from tIRA yet. DH has income from home consulting gig. Then, pension at 65 kicks up the income. We're thinking of foregoing SS until 70, both of us. There are a few backdoor Roth conversion threads here. The current tax rates are generous now. That could change in 2025 (?) I think, so better to do all the converting soon (in the next 5 years). We're 63 now. Hoping to start major conversions when we hit 65 and medicare kicks in.

 

[RunningBum]

I'm not really clear what you are asking.

Of course having all of your money in a tax free Roth at an age when you can pull from it is the ideal situation. But at what cost?

When you are a wage earner, in a higher income tax bracket, it certainly makes sense to defer taxes in a tIRA, 401K or similar.

Once you have ER'd and dropped those wages, it's a good opportunity for many to do Roth conversions. But only to some extent. It doesn't work out optimally to convert at a high rate, just to have a 0 rate later with all Roth.

As far as foregoing taxable investments, there are limits on IRA/401K contributions. If you can invest more, which is desirable for ERing, you have to do it in taxable. Also, some people are in ESPP plans, or even have employee stock options, both of which are in taxable accounts.

Furthermore, if you plan to ER before 59.5, you probably need a taxable account to bridge that time. Sure, you might be able to do one of those plans (name/number escapes me now) to start withdrawals early, but generally it helps to have some in taxable.

So maybe your plan is to drain your taxable accounts first. Might be a good long term plan, but if you plan to leave money for heirs, it could work out better to not touch highly appreciated investments, and let them get the step up basis.

I feel like you are looking at the end result, and not the cost of the steps to get there. That cost varies greatly, so IMO you have to run your own numbers with your assumptions to decide how much to convert yearly, whether to leave some income deferred, and so on.

 

[GrayHare]

I see two problems right off. Assuming typical account values for those here, you'll be paying tax if you bulk convert to Roth. If everything is Roth, you'll have no, or too little, income against which to deduct future annual items like medical expenses. Such deductions normally lower taxes, so they go to waste if they have no income to deduct from.

 

[kaneohe]

The basic rule still applies.........what will you pay today to convert vs what will you pay later ? Even if initially it is favorable to convert, at some point the remaining TIRA will produce a small enough RMD that possibly won't be taxed due to the higher deduction. If you keep converting you will pay a tax to convert $$$ that would have produced income subject to no tax so it might make sense to stop at that point.

 

[mountainsoft]

Could it ever make sense to convert the tIRAs completely to Roth?

I am am the process of converting my tIRA to a ROTH right now, for many of the reasons you mentioned. I'm converting about 20-25K per year to stay within my 12% tax bracket. I should have the remaining tIRA balance converted to a Roth in about 3 years, just before we retire.

As long as you pay the tax on the conversion from an external taxable account, I don't see any downside to converting. It's unlikely taxes will be much lower than they are today, so better to do it now. We are planning for the same income after retirement, so we should stay in the same tax bracket.

 

[RunningBum]

Another reason to keep some money tax deferred is if you want to donate money to charities via a QCD. You get the taxable income reduction without having to itemize, which is valuable since many of us are no longer itemizing.

 

[CRLLS]

OK, I get the tax me now vs later part. But..... I did say ignoring that part. RMD's will force them to W/D and pay taxes whether they need it or not. Let's say that that would put them into the 22% bracket or higher, forever! And then the "extra" would presumably be out into a taxable account.

Has anyone done such a thing as I am suggesting?

 

[GrayHare]

If you are going to convert, in general you want to do so while tIRA asset prices are low. So you want to get in your time machine and bulk convert during 2009 or 2010 so that the run-up in value during the next decade all happens tax free. Converting now, while asset valuations seem high, is more risky. You might convert, pay the tax, then see the market tank depending on who is next elected prez.

 

[Jerry1]

The basic rule still applies.........what will you pay today to convert vs what will you pay later ? Even if initially it is favorable to convert, at some point the remaining TIRA will produce a small enough RMD that possibly won't be taxed due to the higher deduction. If you keep converting you will pay a tax to convert $$$ that would have produced income subject to no tax so it might make sense to stop at that point.

Since I don’t see ever going beyond the current tax rate of 22% (or 28% if it reverts back), I don’t see it making sense to convert beyond that, which I would certainly be if I converted my entire portfolio. I’m sure there would be a break even point somewhere, but my back of the napkin calculation indicates that would be many years before you’d actually be ahead.

 

[RunningBum]

OK, I get the tax me now vs later part. But..... I did say ignoring that part. RMD's will force them to W/D and pay taxes whether they need it or not. Let's say that that would put them into the 22% bracket or higher, forever! And then the "extra" would presumably be out into a taxable account.

Has anyone done such a thing as I am suggesting?

The difference in tax rates now vs. tax rates later is the crux of the issue.

I still don't know what it is you are suggesting. You mention foregoing a taxable account. And you ask about totally converting an IRA to Roth. These are two different things.

I have a large taxable account, for reasons mostly due to the what I said in my previous post. So no, I haven't done that.

I plan to get my tIRA totally converted to a Roth, or possibly leaving some behind for QCDs. The numbers for converting work for me. That doesn't mean they will work for everyone.

It's a case by case basis. Even if someone says Yes, they've done exactly what you suggest (whatever it is), doesn't mean it'd be a good move for you. Run your own numbers to see which way gives you the most wealth and/or spending ability.

 

[RunningBum]

Since I don’t see ever going beyond the current tax rate of 22% (or 28% if it reverts back), I don’t see it making sense to convert beyond that, which I would certainly be if I converted my entire portfolio. I’m sure there would be a break even point somewhere, but my back of the napkin calculation indicates that would be many years before you’d actually be ahead.

This again? I'll say it once in this thread. You can believe it or not.

There is no breakeven point, or getting ahead or being behind with Roth conversions.

Unless you leave your remaining tIRA to charity, someone is going to be paying that tax. You, or your heirs.

Furthermore, your tIRA is not available for you to spend until you convert or withdraw it, which entails paying the taxes.

It's not like SS, which does have a breakeven point. If you start taking it early, you can immediately spend it.

Look at it this way. Say you are 68, and get the news from your doctor that you have a terminal illness and have at best 2 years to live.

You think, well, that really sucks, but I'm going to live life to the fullest in those two years, and blow that dough.

You look at that tIRA that still has a large balance because you only conservatively converted. That's a great source of funds, you think, and you want to spend all of that. But, you have to withdraw it to spend it, and that's going to be a big tax hit, so you get less. See, you didn't hit your so-called breakeven point, but you came out worse, not better.

Contrast that to social security, where you are either lamenting you didn't take it right away, or happy you did. There really is a breakeven point with SS.

This doesn't mean you have to convert it all, and certainly not all at once. It's still a matter of which gives you the best results. It's just that there is no breakeven concept.

Even if you say you don't care what taxes your heirs pay, they should be grateful for anything they get, it still doesn't matter. You can't spend money directly out of that tIRA. It's of no use for you to die with a larger balance.

 

[GrayHare]

+1 on all of RunningBum's posts in this thread.

Tax rate now vs. tax rate later is the main issue on converting to Roth. Asking about anything else is, per the old joke, like asking Mrs. Lincoln about the play. Yes, there are other issues about converting, but in importance they pale in comparison to the tax rates.

 

[CRLLS]

The difference in tax rates now vs. tax rates later is the crux of the issue.

I still don't know what it is you are suggesting. You mention foregoing a taxable account. And you ask about totally converting an IRA to Roth. These are two different things.

I have a large taxable account, for reasons mostly due to the what I said in my previous post. So no, I haven't done that.

I plan to get my tIRA totally converted to a Roth, or possibly leaving some behind for QCDs. The numbers for converting work for me. That doesn't mean they will work for everyone.

It's a case by case basis. Even if someone says Yes, they've done exactly what you suggest (whatever it is), doesn't mean it'd be a good move for you. Run your own numbers to see which way gives you the most wealth and/or spending ability.

Well, Fair enough question. Let me explain.

In this situation there is no taxable account in existence to start. If things were left as they are, by the time RMD's hit there will be more income between SS and RMD's than there will be spending. At that point I assume they would open a taxable account and build it from those excess funds. It is either that, spend that dough (not their style) or put it in cash and lose any growth. The alternative is to bite the bullet and Roth convert virtually all IRA monies, pay the tax in one (2,3 or …) fell swoop so that the only income they have after the RMD would have hit, is from SS. If they can keep 1/2 of SS plus whatever other small bank account interest (1.00?) under 32k then their income tax is zero.

People here talk about keeping under "this cliff" or "that cliff" ad infinitum, which is good. I've never seen a discussion about targeting their plan to control Real Estate tax growth, or trying to keep their income tax at zero by doing the Roth conversions. Further, planning for a ripe old age is different than actually attaining it. What happens to the investments at that point? In a tIRA taxes on that will have to be paid by someone (the heirs) over or in 10 years. If there is enough dough to do the Roth conversion and still be comfortable, why not take one for the team and pay the taxes yourself rather than have your heirs do it? These are some things that I have been thinking about recently and wanted to get some other opinions.

 

[RunningBum]

I still think the only way to answer this is to run the numbers with reasonable assumptions.

Generally I'm a big fan of converting all of my tIRA into a Roth like you suggest. Some hate paying taxes upfront. I'm the other way, I hate having that tax liability hanging over my head. I have to watch that I don't overdo conversions and pay too much now. It's good to see you recognize that keeping retirement income low could prevent your SS from being taxed. I think some folks don't properly consider how SS is taxed and how you might be able to minimize it.

Would you be filling up the 0% tax space? It doesn't make sense to me to convert at 22% or even 12% and leave space in the 0% or 10% brackets. I don't think keeping taxes at 0% at any time in your life should be a goal. The goal should be to maximize your portfolio and spending. I was going to say "in your lifetime" but I agree with you that you should consider your heirs if you leave them with an inherited IRA. If you model it in a spreadsheet you would be able to see the best strategy for how much to convert. There are a lot of moving parts, and a lot of assumptions you have to make, but that doesn't mean you shouldn't try.

I would, and do, convert to the top of a bracket that's even with what I predict I'd be in if I still had RMDs. I would even convert at 24% now even if I projected 22% later, for a few reasons. I think tax rates are likely to increase in the future, and if I leave a tax deferred account alone it would grow and put me in the next tax bracket.

As far as the cliffs go, going $100 over can cost you many $1000s in lost ACA subsidies. It's easy to see why people would look at this very careful, and make sure they fully understand exactly where the cliff is. Fine tuning your conversion strategy probably nets you a smaller gain than preserving your subsidy, if you can.

We have a lot of "convert or not" threads too. Not sure why you haven't seen them. Probably few or none of them talk about getting to 0% because that's not the proper goal, as I said earlier.

 

[Dtail]

Running Bum,
Agree with you in general about minimizing taxes over a lifetime, but for me not paying any taxes at 59 y.o. allows a total tax subsidy of 23k for my brother and I.
Thus for me, I don't wish to go up to the cliff.
The past 2 weeks my internist cost 0 and the Cardiologist $5.

 

[RunningBum]

Running Bum,
Agree with you in general about minimizing taxes over a lifetime, but for me not paying any taxes at 59 y.o. allows a total tax subsidy of 23k for my brother and I.
Thus for me, I don't wish to go up to the cliff.
The past 2 weeks my internist cost 0 and the Cardiologist $5.

Subsidies are definitely one of the "moving parts" I mentioned.

I tried to be careful and talk about maximizing wealth/spending rather than minimizing taxes as a goal. I've referred to min taxes as the goal before, but it was pointed out that's not the best goal. For one thing, it misses the subsidies you mentioned. For another, time (inflation) changes the value of money, so it's hard to compare different sums of taxes paid over different times. Maximizing your overall portfolio, which in turn maximizes what you can spend, is a better gage.

 

[teejayevans]

There is no guarantee that tax laws don’t change in the future and add limits to Roth tax free status, sort of like SS. I would not make a big bet like that.

 

[RunningBum]

There is no guarantee that tax laws don’t change in the future and add limits to Roth tax free status, sort of like SS. I would not make a big bet like that.

Possible, but I judge that to be a long shot.

Relevant possibilities I see as more likely:

- Raising tax rates, which favors converting while rates are lower. I see this as a whole lot more likely.

- A new wealth tax. This also favors converting, since the tax paid to convert the Roth reduces your raw wealth, without affecting your spending ability. Seems pretty unlikely though.

 

[teejayevans]

Possible, but I judge that to be a long shot.

Relevant possibilities I see as more likely:

- Raising tax rates, which favors converting while rates are lower. I see this as a whole lot more likely.

- A new wealth tax. This also favors converting, since the tax paid to convert the Roth reduces your raw wealth, without affecting your spending ability. Seems pretty unlikely though.

1. Remember, we’re talking 30-40 years.
2. And 100% Roth

I personally would recommend you have all 3: taxable, tIRA, Roth accounts...this gives you flexibility and you aren’t making a big bet

 

[mountainsoft]

I still think the only way to answer this is to run the numbers with reasonable assumptions.

Agreed. It's also a good idea to rerun the numbers each year to see if it continues to make sense. A couple years ago my calculations showed Roth conversions offered a small, but noticeable advantage. I just ran the numbers again, and it looks like I've reached a point where the outcome is virtually the same either way. So I'm not sure if I'll convert more next year or not. My traditional IRA is low enough now that I'll spend it all by the time I'm 63 anyway, so no RMD's to worry about.

Even if it works out the same, I'm still leaning towards paying the taxes now with a conversion so we won't have to once we retire. It would also help keep our taxable income lower for health care subsidies and whatnot.

 

[PatrickA5]

The basic rule still applies.........what will you pay today to convert vs what will you pay later ? Even if initially it is favorable to convert, at some point the remaining TIRA will produce a small enough RMD that possibly won't be taxed due to the higher deduction. If you keep converting you will pay a tax to convert $$$ that would have produced income subject to no tax so it might make sense to stop at that point.

Agree with this. If I have no taxable accounts and all I have are TIRA, Roth and SS, I'm going to try to convert to that "sweet spot" where RMD's + SS is not taxed. In this situation, I wouldn't want to convert to the point where there is no money in TIRA as you would be wasting the zero tax bracket (standard deduction).

For example, assuming a first year RMD % of 3.90%, if ALL you had was TIRA, then you could have a RMD of $27,400 (MFJ) and pay zero taxes. That $27,400 RMD equates to about a $700,000 TIRA balance. In this (very simple) example, converting an IRA to below that balance would result in overpaying taxes. Obviously, you would then need to factor in taxes on SS and other income you might have.

I guess my point is that there are reasons that you would NOT want to totally convert your TIRA to a Roth. It takes some calculations to figure out what you want your ending TIRA to be, but it is probably some number above $0. And, of course, that ending balance is constantly changing due to market changes.

 

[RetireBy90]

For OP question, I’m doing some of your plan, in that I’m converting my TIRA to Roth or avoid taxes on RMD and hope to dodge any tax increases after 2025. I have a sizable portion of our investments in TIRA so I may not completely convert, but I hope to get it to around $100K or less so any RMDs can be covered with QCDs. Lots to think about and I would agree a decision like conversions should be well thought out and personal to your situation. For example, you don’t have the expiration of tax rates after 2025. However in your shoes if you were in US, I would do some Roth conversions, the extent of them depending on your situation.

 

[PatrickA5]

I thought I'd throw some numbers into TurboTax to try to prove my point in the post above to see if I was even close.

Assume a 72 year old couple filing MFJ in 2019. This couple doesn't have anything other than a Traditional IRA and a combined $30K in SS. Their TIRA has $600K. Should they have been converting that money in the past - or perhaps this year?

Assuming they only take out their RMD of about $23,500 and combine that with their $30,000 in Social Security - they are in the 0% tax bracket. None of the IRA or SS would be taxable. Thus, it would have been a mistake to convert any of that money.

Of course, members of this forum, for the most part are not in that situation. Most have large taxable accounts or pensions, etc. But, for a lot of people it doesn't make sense to convert and for sure doesn't make sense to convert ALL of a TIRA.

 

[RunningBum]

I thought I'd throw some numbers into TurboTax to try to prove my point in the post above to see if I was even close.

Assume a 72 year old couple filing MFJ in 2019. This couple doesn't have anything other than a Traditional IRA and a combined $30K in SS. Their TIRA has $600K. Should they have been converting that money in the past - or perhaps this year?

Assuming they only take out their RMD of about $23,500 and combine that with their $30,000 in Social Security - they are in the 0% tax bracket. None of the IRA or SS would be taxable. Thus, it would have been a mistake to convert any of that money.

Of course, members of this forum, for the most part are not in that situation. Most have large taxable accounts or pensions, etc. But, for a lot of people it doesn't make sense to convert and for sure doesn't make sense to convert ALL of a TIRA.

That makes sense. Thanks for running the numbers.

This is also consistent with the general rule we've been saying all along--convert if you in a lower (or probably the same) tax bracket than you will be at your RMD and SS age. Otherwise you most likely should not convert. So if you're going to be at 0% later, don't pay conversions taxes now.

And don't forget to account for growth in your IRA if you think it will grow faster than the tax brackets and standard deduction grow.