Conversion to Roth IRA post-retirement?

Looking4Ward said:

I was going to do just that for 2015, my first full tax year of retirement. Moved $11K from my tIRA to a Roth IRA.

Then, after end of year capital gains distributions and total year dividends (qualified and regular) in my taxable accounts were totaled up the tax bill was over $2K. Removing the $11K of Roth conversion dropped the tax due to around $400.

I sent in the paperwork to re-characterize (undo) the Roth conversions.

So in my case it doesn't make sense because my taxable portfolio is larger than my tax deferred and provides a sufficient income stream via dividends and CG distributions to cover expenses. It also doesn't give me much if any headroom for Roth conversions.

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As others have stated, it depends on the individual. I expect to be in nearly the exact same situation for 2016 and I will probably cough up the $1600 additional tax. I would probably pay tax with increased withdrawal from the deferred account but I have not given it much thought.

PERSonalTime said:

.....Also, how much do you intend to convert as a percentage of your overall retirement portfolio. Btw, thanks for your response.

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May change year to year. I plan to rerun I-ORP each year and give it's recommendations due consideration. This year, I am targeting to max out the 28% tax bracket. Partly this is because I have deferred tax $$ in VENAX (Vangaurd oil and gas energy fund). This fund has been hit hard by low oil prices and the dip in the market. I don't plan on selling it anytime soon. By converting it this year, I pay taxes on the current low value which I expect (hope) to go up somewhat as oil prices level out in the next few years.

bizlady said:

So question, for those converting- are you paying the tax with after tax money or from the deferred accounts?

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After tax dollars.

gauss said:

One of the main reasons that I am starting now is that we have the benefit of filing a joint return with the associated higher deductions/exemptions and breakpoints before higher tax rates kick in compared to a single filer. My hope is to file jointly for the rest of our lives, but we cannot predetermine the date of our demise. I would not want to be mourning the loss of a spouse and then realize I was sitting on a large untaxed 401k and then have to convert it as a single filer, at the much larger rates, after not taking advantage of the chance to do it while married-jointly.-gauss

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This is a point I hadn't thought about and very applicable in my / DW situation. Thanks for posting.

We pay the tax from our taxable accounts. We have been converting for 10 years since my DH retired and I went part-time. I have now been retired for almost 4 years.
Before we started converting, 2.3% of our investments were in a Roth. On average we have only been converting 2% of our investments per year, and our Roth IRAs are now 26.8% of our investments. We plan to continue conversions until age 70 when we start collecting SS, another 13 years.
Every tax situation is different. Because neither of us have pensions or annuities and we are living solely on taxable investments that produce mostly qualified dividends and long term gains and we can convert for 20+ years, we are only converting slightly into the 10% tax bracket and have paid an average effective tax rate of just under 1.0%. The ORP calculator suggested much larger conversions over a much shorter period, but so far we are preferring our method.

jazz4cash said:

Thank you for addressing my concern. If I understand correctly, the Roth IRA clock starts with the first Roth IRA account but can be used for any subsequent accounts. Therefore it makes sense to at least establish a <small> Roth IRA to get the clock started, although it's too late for me. My Roth 401k is 5 yrs old but I have not started any conversions which will likely come from traditional deferred accounts.

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Yup. The age of the oldest Roth IRA account is what matters for (earnings on) contributions.

For conversions, each conversion has a separate 5-year clock (although I don't think it matters once you're 59.5).

hnzw_rui said:

Yup. The age of the oldest Roth IRA account is what matters for contributions.

For conversions, each conversion has a separate 5-year clock (although I don't think it matters once you're 59.5).

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That is my understanding as well. 59.5 substitutes for that second clock. (We "seeded" Roths in 2012 with 10K conversion each just to get the clock ticking.)

Thanks. These last few posts are good motivation for me to "seed" a Roth IRA for. DW. It's too late for me but she is not 59.5.


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jazz4cash said:

Thanks. These last few posts are good motivation for me to "seed" a Roth IRA for. DW. It's too late for me but she is not 59.5.

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If your AGI is below the income limits for direct Roth contributions, then you can still make contributions for tax year 2015.

2017ish said:

That is my understanding as well. 59.5 substitutes for that second clock. (We "seeded" Roths in 2012 with 10K conversion each just to get the clock ticking.)

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Rather than editing the prior post to add a supporting source, here is a Kitces Post discussing the interplay between 59.5 and the second 5 year clock for conversions. https://www.kitces.com/blog/underst...s-for-roth-ira-contributions-and-conversions/

Winemaker said:

Does it make sense to fill the Roth up to 15% bracket with tira conversions and supplement pension income from Roth (Roth ladder), or just supplement with tira withdrawals? I feel I'm going around in circles.

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Building a Roth ladder makes sense if you're not yet 59.5 and will need to either do 72t/SEPP or pay the 10% penalty on tIRA withdrawals.

If you're already 59.5, just supplement income directly from tIRA. If you still have some space in the 15% bracket beyond withdrawals for spending, then you can use the remaining space for Roth conversions.

In answer to a question, tax brackets have been moved to index for inflation but Social Security hasn't. Better information can be had by looking up ' tax torpedo '. Marginal taxes can be high for $40-60,000 married bracket.

One of the posters on bogleheads offers this simple to use spreadsheet to see a graph of your tax brackets when you are getting Social Security and have other income at:
Marginal Tax Rates

Shows the marginal federal tax rate for choice of tax years 2014, 2015, or 2016. User chooses one of the following three as the independent variable and enters dollar amounts for the other two.

Non-Social Security Ordinary Income
Qualified Dividend Income plus Long Term Capital Gains (QDI/LTCG)
Social Security Benefit

For example, the following graph shows the marginal tax rate as Non-SS ordinary income increases for a single filer age 65+ taking the standard deduction who has $10,000 of QDI/LTCG and a $30,000 Social Security benefit.

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Missing from this discussion is the impact of conversion income on Medicare premiums. While you can delay both Social Security and Medicare, a delay in Medicare adds penalties to the premium. Most people don't delay filing for Medicare at age 65.

In addition, AGI greater than $85k (single)/$170k married also causes an increase in premium based on the amount of income over this amount. Something to consider as you plan conversions.

- Rita

gauss said:

Tax bracket breakpoints, exemptions, standard deductions, indeed, are all indexed to inflation under current law.

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Just to be clear, in case it was not discussed, a very important bracket is NOT indexed to inflation. That is the bracket range in which a portion of your social security income becomes taxable. Those numbers have not changed since 1984. This is the reason why marginal tax rates for social security recipients can be incredibly high.

See: https://www.ssa.gov/policy/docs/issuepapers/ip2015-02.html

Since 1984, Social Security beneficiaries with total income exceeding certain thresholds have been required to pay federal income tax on some of their benefit income. Because those income thresholds have remained unchanged while wages have increased, the proportion of beneficiaries who must pay income tax on their benefits has risen over time.

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