Poll-Are You Doing A Roth Conversion?

[haha]

In 2008 I became eligible to do a Roth Conversion, and I have started this process. All of it will have to be done at 25% or higher, and I plan to stop each year at the 25% bracket limit. (At least under current tax rules). My plan is to convert as much as I can, and still stay withing the 25% bracket. By taking few or no capital gains, and due to having a lot of tax advantaged partnership income, some years I should be able to convert quite a lot. I also will try to avoid pushing MAGI high enough to trip another gotcha- higher Medicare premiums. I take the standard deduction, so both these thresholds are very similar. My taxable portfolio is not the most tax efficient, as I do a form of position trading. I see the conversion as a means to transform TIRA to Roth funds, at the cost of some of my fully taxable portfolio, as I will pay the tax due from my taxable accounts. Had I been able, I would have done the conversion before being so close to my RMD begining, but that was not available to me.

I will still have a good sized taxable account which I will use for buy and hold blue chips and MLPs, REITs,etc.. Then any (careful!) trading will be done in the Roth. I think it is possible to get paralysis by analysis, so I am going head long, feeling that although all my life I have hated to pay taxes early, in this case it will pay off.

What are others doing or considering?

Ha

 

[landover]

I am doing it since my taxable income is very less so I am converting with 0% tax rate (due to SD, PE, Child tax credit etc.).

 

[73ss454]

I started doing some 4 years ago when I retired. But since I am working PT this year I have to look harded to see if it will work for me.

 

[powerplay]

I rolled over a small traditional IRA to a Roth this year. Since I also retired this year I took advantage of a one time opportunity to put some money in a Roth by funding a Voluntary Contribution account just before retiring and then immediately withdrawing it after retiring and rolling it into a Roth. This is a benefit of the federal CSRS.

 

[TromboneAl]

I've rolled over lots without having to pay any tax on it at all. It seems too good to be true.

 

[Texas Proud]

I put in after tax money for a few years just so I could do it with little to no taxes... now that I am married, I can just put my money in (but do not as the budget is way to high right now)...


I did do a conversion way back in 2000 when you could spread it over two (maybe more) years...


Edit to add... did not answer the poll as there is NOT an option saying you are finished...

 

[haha]

I put in after tax money for a few years just so I could do it with little to no taxes... now that I am married, I can just put my money in (but do not as the budget is way to high right now)...


I did do a conversion way back in 2000 when you could spread it over two (maybe more) years...


Edit to add... did not answer the poll as there is NOT an option saying you are finished...

I hope in that situation you would just vote yes. (Option #1) It wouldn't seem to matter when you start or finish, just whether you are doing or have done it, may do it, or have no plans to do it.

I've rolled over lots without having to pay any tax on it at all. It seems too good to be true.

That is certainly an opportunity not to be missed! One other poster noted that he is also in this situation.

Ha

 

[kyounge1956]

I rolled over a small traditional IRA to a Roth this year. Since I also retired this year I took advantage of a one time opportunity to put some money in a Roth by funding a Voluntary Contribution account just before retiring and then immediately withdrawing it after retiring and rolling it into a Roth. This is a benefit of the federal CSRS.

I also converted a teeny little T-IRA to Roth this year, but I think I will do other conversions in the future after retirement. I worry about RMD's pushing me into a higher tax bracket when they kick in, or other withdrawals, e.g. needing a large amount in one year for something like a new car, so I plan to use conversions to shift money from tax-deferred to Roth before age 70-1/2 to reduce the size of eventual RMD's, spread the tax over more years and have tax-free money to draw on in case of a large expense.

 

[kyounge1956]

I've rolled over lots without having to pay any tax on it at all. It seems too good to be true.

How'd you manage that? It does seem too good to be true!

 

[Gone4Good]

This year we're still in a high enough tax bracket for it not to make sense. We'll have to see how things shape up next year, but doing a conversion seems like it should be a good idea.

I have to admit, though, that I have a strong aversion to doing something that is going to increase my immediate tax bill and won't yield any benefits for another 30 years or so. 30 years is a long time for things to change on you . . . national sales tax, alien invasion, the rapture, whatever.

 

[Ed_The_Gypsy]

Perhaps when my income and expenses are way down after I stop working.

 

[yakers]

I voted not yet as I am pondering more formal conversions. Virtually all our income is taxable, the downside to pensions, so no tax free conversions for us, a less compelling proposition than the zero tax folks. I have begun withdrawals from my IRA but DW works a little, maybe $2k a year and that goes straight into her Roth. Kind of a rolling conversion.

 

[Amethyst]

Interesting - I thought one had to convert the VC before retirement. Congratulations on your retirement!


Amethyst

I rolled over a small traditional IRA to a Roth this year. Since I also retired this year I took advantage of a one time opportunity to put some money in a Roth by funding a Voluntary Contribution account just before retiring and then immediately withdrawing it after retiring and rolling it into a Roth. This is a benefit of the federal CSRS.

 

[Tesaje]

Yep. It is really the only tax advantage thing that will save me money. I'll pay the tax over 2011 & 2012 when I slip into the next lower bracket. The bulk in my deferred acct will eventually bite me. Wish it was all in a Roth but that wasn't possible.

 

[REWahoo]

I did a conversion the second year I retired since I was living off after tax savings and had some room in the 15% bracket. Once those funds were gone and I'm now drawing from my IRA and SS, no more room - and no more conversions.

 

[haha]

I've rolled over lots without having to pay any tax on it at all. It seems too good to be true.

This kind of thing really puzzles me. MFJ, two exemptions. Taking the SD and adding the exemptions gives $18,700. Add that to the top of the 0 bracket band of $16,700 and we get $35,400 as the highest permissible AGI. Unless some of your conversion is after tax IRA, the entire conversion is taxable and thus part of AGI. Say you converted $10,000, that means $25,400 of AGI avaiable for living expenses for two people in a large house. No matter how many worn-out pants you buy, it is hard for me to imagine how this is done.

I suppose you may be spending some taxable fund sales that were no gain, or even a loss.

I hope you will come on and explain more. I may just not know how to achieve something like this.

Ha

 

[jimnjana]

I completed mine earlier in the year. Not expecting a big tax hit as a good portion of my contributions were non deductible also one of my REIT holdings has basically gone private, since no longer trades, its price per share went to zero, so my taxable basis I think will be very low.

 

[Khan]

I wanted to last year, but I couldn't figure out how; which is a reason I am moving to Vanguard.

 

[Independent]

After I retired, I dropped down a tax bracket. So now I convert enough to "fill up" my 15% bracket. When I start SS and run into RMDs, I think I'll be back in the 25% bracket. So it makes sense to pay 15% now instead of 25% then.

 

[rescueme]

This year we're still in a high enough tax bracket for it not to make sense. We'll have to see how things shape up next year, but doing a conversion seems like it should be a good idea.

I have to admit, though, that I have a strong aversion to doing something that is going to increase my immediate tax bill and won't yield any benefits for another 30 years or so. 30 years is a long time for things to change on you . . . national sales tax, alien invasion, the rapture, whatever.

DW/me went through the same exercise, and are not going to convert any TIRA holdings for the same reasons you outline.

Additionally, since the bulk of our remainder estate will be going to charity, our TIRA's will be given to our tax-exempt charities without them having to pay any tax. That means 100% of our bequests will be used for their "good works" rather than pay taxes.

If we need to tap into those TIRA's or the tax laws change, we will change our direction, as circumstances change.

So for now? No conversion.

 

[powerplay]

Interesting - I thought one had to convert the VC before retirement. Congratulations on your retirement!


Amethyst

There is a window after retirement and before the retirement is finalized in which to do the withdrawal. Since OPM took a full 6 months to finalize my retirement that window was much larger than I would have imagined. I sent the check for deposit into the VCA along with the withdrawal papers in the same envelope. OPM cashed the check, funded the VCA and then 2-3 weeks later returned the money via a check to my CU where the IRA was established. The CU manager called me the day it came to ask what I wanted to do with it as absolutely no information came with the check from OPM. I went to my CU the next day to take care of the paperwork.

 

[Koolau]

Guess I've thought of myself as one of the stronger proponents of this tax-planning gambit. I've been doing it since I retired nearly 5 years ago (in 2 days - woohoo!) The obvious motivations to me are three fold. (1) I want to reduce future RMDs which limit tax flexibility and also, (2) I'm convinced that taxes can only go up in the future and (3) using taxable funds to pay the taxes "steps up" the value of the future tax-free growth within the Roth.

But dang!! I DO hate paying the taxes - especially the state taxes since I deferred 4% state taxes and pay 8 % by virtue of changing states. I salve my tax-paying conscience by recalling that my state-change did away with taxes on pension and SS (again, woohoo!) Since I've been converting considerably more TIRA funds than pension/SS, I still come out the loser on the deal sometimes, but, se la vie. Just one more cost of paradise, I guess.

Actually doing the deed (converting) has tended to be a hassle, because of the dribs and drabs of TIRAs I've converted. This has especially been true when I've also moved custodians (e.g., TIRA at Bankers Life to Vanguard w/subsequent conversion to Roth.) I know, it's really not that difficult, but everyone has different rules (can you spell "signature guarantee"?). No custodian is in a hurry to let you take your funds out, so they drag their feet as much as possible. Most of my conversions have ended up with me receiving a check from one custodian and then sending the funds to the new custodian. Not a big deal, but is fraught with danger, depending upon the 60 day rule. I know you're supposed to send the funds directly, but it's actually simpler to do it with non-direct transfers (if you get the job done in time!)

I'll pass this on for free and folks (still w*rking) can take it for what they paid for it. Looking back, I would not have used tax deferral vehicles - e.g. TIRA, 401(k) etc. knowing what I know now. (Exception, of course, is taking the matching employer funds up to the limit of 6% in my case.)

I'll admit that the "forced, automatic" savings can be a good idea, but I could have accomplished that in other, more flexible ways. (Saving was never a problem to me - only investing.) I'm now saddled to a bucking tax-bronco and can't get off without at least dislocating an IRA-hip or tax shoulder.

My suggestion is that you really sharpen the pencil and see if it makes sense to YOU and your situation to continue using tax-deferred vehicles in your FI planning. One whole piece of the puzzle (future tax rates) is a complete unknown. Yes, you could get lucky and be in a lower tax bracket when you withdraw deferred funds, but it hasn't worked out that way for me (and thats the bad news as well as the good news!) My deferred accounts grew more than I expected, so it's sort of a win/lose proposition. As always, YMMV, so use your pencil and not mine.

 

[Bikerdude]

I converted a good amount over 6 years. It comes in handy when making a big purchase or keeping me below a tax trigger point. All my assets are now in tax protected accounts so every withdrawal is a taxable event.

I'm glad I did the conversions.

 

[haha]

I converted a good amount over 6 years. It comes in handy when making a big purchase or keeping me below a tax trigger point. All my assets are now in tax protected accounts so every withdrawal is a taxable event.

I'm glad I did the conversions.

Do you mean all your non-Roth assets are in tax protected accounts, or do I misunderstand?

Ha

 

[Sue J]

I've rolled over lots without having to pay any tax on it at all. It seems too good to be true.

I hope you will come on and explain more. I may just not know how to achieve something like this.

Ha

I know Al said his daughter was in college and the education credit gave him more room for conversions. Maybe he'll explain it in more detail.