Those Who don't/didn't do Roth Conversions

[LateToFIRE]

Of course he is correct. I was looking at the IRA's and Roth IRA conversions not as an entire retirement plan but simply as a comparison of the 2. When I take all of the RMD's that were not used to pay taxes and put them into an after-tax account, then it doesn't look so rosey as I showed. The unstated assumption in that is that the invested excess RMDs are never touched but left to grow. I guess using that for spending would be unfair unless I compared it to taking a similar $$ from the unconverted IRA.

Appreciate you taking a second look.

 

[LateToFIRE]

People are making this way too complicated. It's all difference in tax rates. It doesn't matter if you converted 20 years ago or convert 20 years from now. If the rate you convert at is say 10% difference (e.g. 22% to 12%) the difference in the amount of money you can spend is 10% of the TIRA money at that time. So if TIRA would grow to $2 Million (at the time you SPEND IT), then if you didn't convert then the taxes would be 22% ($440k) and you would have $2M - $440k = $1,560,000. If you did convert (at 12%) the Roth IRA balance would be $200k higher.

All this future value/present value stuff would affect both the TIRA and the Roth IRA and the relationship would be maintained.

The simplistic "difference in tax rates" approach looks to be a good starting point, but as I'm found of saying "the model is only as good as the accuracy of the assumptions and inputs". And that is where the complexity lies. IMO, timing of cash flows matters, greatly. Also, for clarity my focus on PV is more about valuing the benefit of conversion - i.e. looking at that expected benefit in terms of today's dollars because I suspect folks might get hung up on the big whooping numbers generated by conversion without putting that in a proper value perspective. For example, if I'm looking a $2M tIRA estimating I could save $400K best case in 35 years if I do some conversions next couple years, well that sounds like a no-brainer until I think about the fact that that's ~$142K PV @3% inflation rate. Is it worth it? There is some risk I trigger a tax liability today for a scheme that might not deliver the expected result or might not be needed in the future. For me, if these were the numbers, I'd most likely pass. The risk not worth it in the context of the size of the tIRA and the possibility might be wasting tax dollars.

[P.S. For completeness, if you can convert at 0% tax rate, no doubt one should do so. IMO, there is no downside risk. That definitely won't be the case for me. I might be able to do some small amount of conversions in the 12% bracket, but most would be in the 22-24% bracket - a much tougher decision. For others, of course, YMMV.]

 

[pb4uski]

The fly in the conversion ointment is that your future returns for 25-30 years won't be 5% on a straight line.

Perceptive glimpse of the obvious, but no matter what it is beneficial, it is just more or less beneficial depending on the return.

To pick a nit it actually could be if you bought a 30-year US Treasury bond which currently has a YTM of 5.101% on Schwab, so that kills the fly in the conversion ointment.

 

[pb4uski]

People are making this way too complicated. It's all difference in tax rates. ...

All this future value/present value stuff would affect both the TIRA and the Roth IRA and the relationship would be maintained.

+1... at the end of the day it is all tax rate arbitrage. Other than the nuance that I pointed out about taxes on the after-tax money that is used to pay the tax if you convert, it is all tax rate and growth on the tax savings.

 

[all4j]

The simplistic "difference in tax rates" approach looks to be a good starting point, but as I'm found of saying "the model is only as good as the accuracy of the assumptions and inputs". And that is where the complexity lies.

I've not read the entire thread, but feel as if I've seen the discussion many times before! The rigor one puts in determines the accuracy. I have yet to see in the thread an approach that wasn't filled with holes, inaccuracies, etc. Each introduce imprecision. Most end up showing the comparison to be within the margin of error they design into their analysis.

Not sure the OP is still tuned in, but in other words, pick an approach & don't worry about it, You say you don't feel like fooling with it? Then don't. If you'd feel better, a model can be formed to show you are right.

 

[LateToFIRE]

I've not read the entire thread, but feel as if I've seen the discussion many times before! The rigor one puts in determines the accuracy. I have yet to see in the thread an approach that wasn't filled with holes, inaccuracies, etc. Each introduce imprecision. Most end up showing the comparison to be within the margin of error they design into their analysis.

Not sure the OP is still tuned in, but in other words, pick an approach & don't worry about it, You say you don't feel like fooling with it? Then don't. If you'd feel better, a model can be formed to show you are right.

IMO, no amount of rigor is going to fully close the gap. The UNCERTAINTY FACTOR is probably my biggest takeaway from this thread. That should be part of the decision/assessment.

[Know I might not have been real clear on that in my comment.]

 

[Winemaker]

Right now my goal is to convert all of DW's tIRA over to a Roth, that will put her close to 7 figures there. She will continue to get my pension, and hers per my unplanned demise. We will then begin to convert/spend my 7 figure tIRA, and she will have close to my 7 figure Roth. At that point, she can defer, donate or whatever.

 

[pb4uski]

I've not read the entire thread, but feel as if I've seen the discussion many times before! The rigor one puts in determines the accuracy. I have yet to see in the thread an approach that wasn't filled with holes, inaccuracies, etc. ...

Sort of funny that you conclude that

...I have yet to see in the thread an approach that wasn't filled with holes, inaccuracies, etc. ...

when you concede

I've not read the entire thread...

Just sayin'

 

[Sunset]

Right now my goal is to convert all of DW's tIRA over to a Roth, that will put her close to 7 figures there. She will continue to get my pension, and hers per my unplanned demise. We will then begin to convert/spend my 7 figure tIRA, and she will have close to my 7 figure Roth. At that point, she can defer, donate or whatever.

Convert hers or yours or evenly divided, it doesn't matter the order.

 

[RunningBum]

IMO, no amount of rigor is going to fully close the gap. The UNCERTAINTY FACTOR is probably my biggest takeaway from this thread. That should be part of the decision/assessment.

[Know I might not have been real clear on that in my comment.]

So many people get hung up on the UNCERTAINTY of Roth conversions, yet there is even more UNCERTAINTY if you don't convert. I like the idea of locking in on the tax rate now and now I have CERTAINTY on what I've converted. It's possible it would have come out better to not convert, but I know what I have now. I don't know what tax rate or rules I'll be paying later.

(EDIT: LTF, not trying to pick on your post at all, just something I had been thinking of and this seemed like a great place to bring it up)

 

[pb4uski]

Good point. Since I retired I converted 50% of my retirement date tax-deferred balances and paid an average of 9.7% in federal income taxes (a combination of 0%, 10% and 12% based on current tax brackets).

I'm very sure that if I had not converted and had to withdraw as RMDs but in a higher tax bracket once SS and pensions had started that I would have paid more than 9.7% on those withdrawals, so there isn't much uncertainty in my circumstances.

BTW, despite converting amounts equal to 50% of my retirement date tax deferred balances over the last 10 years, my tax deferred balances are still about the same as when I retired. Ugh!

 

[Winemaker]

Convert hers or yours or evenly divided, it doesn't matter the order.

Well, it does matter to us. Statistically speaking, the male is the first to go. in our case, she would never have to take a RMD, unless she wanted to. Currently, without any RMDs, she would be looking at $120,000/year income, with my SS/death benefit being inflation adjusted. Thereby she could, accept, donate or defer ownership to my retirement accounts of $3mil, without causing undo taxation.

 

[RetireBy90]

So many people get hung up on the UNCERTAINTY of Roth conversions, yet there is even more UNCERTAINTY if you don't convert. I like the idea of locking in on the tax rate now and now I have CERTAINTY on what I've converted. It's possible it would have come out better to not convert, but I know what I have now. I don't know what tax rate or rules I'll be paying later.

Thank-you for putting this clearly. It is why I have done conversions in 22% bracket, to remove uncertainty when RMDs kick in. I had a problem and now I don't. I have 2 or 3 more years of about $50K conversions in 22% without affecting IRMAA. After that any spending will come from Roth and tIRAs will be used for charity bucket.

 

[target2019]

IMO, no amount of rigor is going to fully close the gap. The UNCERTAINTY FACTOR is probably my biggest takeaway from this thread. That should be part of the decision/assessment.

[Know I might not have been real clear on that in my comment.]

When one creates a case study there may be factors left out. For example, how do you pay the tax due on the conversion? To optimize the conversion, you may need discretionary money from a taxable account.

I think some UNCERTAINTY FACTOR affects every thread. You'll never find 100% certainty. And Black Swan events interrupt the geometric line that we are convinced will push upward. You also see arguments creeping in, with strong opinions.

We revisit Roth conversion(s) each year. If you can stay below 22% (24%), it's a way to increase the tax-free pile, maybe achieve a better blend. But we also have a State income exclusion in play, and at some income level it is gone.

If you look year-to-year, and maybe run out your complete plan for just ten years, it's easier to digest the possible outcomes.

YMMV.

 

[dknighd]

I and DW have significant amounts of T-IRA/401K funds. Pension meets our day-to-day needs, and we have not done any Roth conversions.

At this stage in life, we really don't want to be bothered with doing the conversions. I'm interested in hearing from others who have NOT done Roth conversions and do NOT plan to do so. Why did you make that choice, and do you lose sleep worrying about potential or current RMD issues?

I have been doing Roth conversions, so I'm not your target audience. But I will reply anyway Sometimes the internet works that way


The primary reason I've been doing Roth conversions is to even out my taxable income. I like knowing that if we have a high spend year, we can spend from the Roth and not have to worry about what it does to our taxes. So, in most years I do a small Roth conversion (up to the top of our current tax bracket). Then occasionally we might withdraw from it. Essentially I consider it our tax free "emergency" account.


The majority of our money is in either income tax deferred, or tax free, accounts. My thinking might be different if we already had a large taxable account.


If tax rates stay the same, we will come out a little ahead just because we can spend without getting bumped up a bracket. If tax rates go up, we will be a little more ahead. If the government decides to switch from income tax to consumption tax we will come out a little behind.


My best guess is that RMD will leave us in the same bracket we are in now. If it bumps us up, which is possible, I'll consider that a good thing (it would mean we have more money)


Roth conversions are pretty easy to do. Most likely they will benefit me. And if I do not use that money it will benefit my kids (essentially I'm paying tax now to reduce what they might have to spend on a potential inheritance)


I don't loose sleep over it. Neither should you. The cost/benefit is probably under 10%. Which could easily be noise depending on what investments return.



The one thing that sticks in the back of my mind. If you have kids who will eventually inherit whatever you have left, I'd rather leave my kids a Roth account, or stepped up basis on a taxable account. I might receive a small inheritance one day. If that day comes I'd prefer it not tax deferred.

 

[jj]

Well, it does matter to us. Statistically speaking, the male is the first to go. in our case, she would never have to take a RMD, unless she wanted to. Currently, without any RMDs, she would be looking at $120,000/year income, with my SS/death benefit being inflation adjusted. Thereby she could, accept, donate or defer ownership to my retirement accounts of $3mil, without causing undo taxation.

I'm not quite following here. I see what you're doing to protect your wife from the increased taxation from RMDs after your death when she's filing as single.

Upon your death and inheriting your IRA, your wife could either:
- keep the IRA in your name and keep taking RMDs on your schedule, and if the RMD is less than $100k donate it all as a QCD, as long as she's 70.5.
- roll your IRA into one of her own to draw from it presumably more slowly than you had to if she's younger, and QCD if she wanted to.
- disclaim the IRA (or part of it) and allow it to go to your secondary beneficiaries (this could be children/charities/anyone).

How can she defer the IRA? Unless she'll still be under 75.

 

[Winemaker]

I'm not quite following here. I see what you're doing to protect your wife from the increased taxation from RMDs after your death when she's filing as single.

Upon your death and inheriting your IRA, your wife could either:
- keep the IRA in your name and keep taking RMDs on your schedule, and if the RMD is less than $100k donate it all as a QCD, as long as she's 70.5.
- roll your IRA into one of her own to draw from it presumably more slowly than you had to if she's younger, and QCD if she wanted to.
- disclaim the IRA (or part of it) and allow it to go to your secondary beneficiaries (this could be children/charities/anyone).

How can she defer the IRA? Unless she'll still be under 75.

I don't think one can roll an inherited IRA. And yes, you use the word disclaim, I used defer.

 

[SecondCor521]

I don't think one can roll an inherited IRA. And yes, you use the word disclaim, I used defer.

A spouse can, a non-spouse cannot. IRS Pub 590-A, page 20, column 1, option 2.

Disclaim is the accurate term. Defer means something else usually.

 

[PERSonalTime]

Using Form 8606. Do you have that form from the year(s) you made the n-d contributions?

Yes

 

[PERSonalTime]

As others have already said, you'll fill out part I of Form 8606 to do the pro rata calculations.



The additional wrinkle I wanted to mention is that in your case you will fill out two Form 8606s - one for all of your traditional IRAs and one for all of your wife's traditional IRAs. You each will have your own basis in your own IRAs and each of your basis(es?) will be tracked separately.



As an additional side note, when either of you passes away, if you still have a balance in your traditional IRA, its basis is inheritable by the beneficiaries of the account(s). As you might guess, it is in proportion to the percentage of the account(s) they inherit. The beneficiaries can use the final filed 8606 to get the information they need.

Thanks for the info. Sounds like a big headache. I'll let TurboTax figure it out. I'm gonna hate the big RMD hit when it comes, but being in the 22% bracket already doesn't leave a lot of options.

 

[djsander]

I and DW have significant amounts of T-IRA/401K funds. Pension meets our day-to-day needs, and we have not done any Roth conversions.

At this stage in life, we really don't want to be bothered with doing the conversions. I'm interested in hearing from others who have NOT done Roth conversions and do NOT plan to do so. Why did you make that choice, and do you lose sleep worrying about potential or current RMD issues?

Thanks for starting this thread. It was useful as people gave reasons why and why not although you asked for the why nots. It brought some clarity to my decision. We have done them to control ACA subsidies and stay out of Medicaid. I was not sure, if we should continue until I put together a spread sheet with modest gains and realized we will move from 12% into 22% (25%) not too long after I have to start RMDs. So, it’s a given for us for now unless something changes. We can probably delay that higher tax bracket for a number of years depending on the conversions. I think to know why not you have to have the why as well. Thanks again for starting this very informative discussion.

 

[Sunset]

Well, it does matter to us. Statistically speaking, the male is the first to go. in our case, she would never have to take a RMD, unless she wanted to. Currently, without any RMDs, she would be looking at $120,000/year income, with my SS/death benefit being inflation adjusted. Thereby she could, accept, donate or defer ownership to my retirement accounts of $3mil, without causing undo taxation.

In our situation, I think DW would take my IRA as who knows how much $$$ would be needed in the future. Some intensive LTC can be very expensive.

I like the idea how disclaim of an IRA would cause it go to next in line beneficiaries, as it makes giving an IRA a flexible choice. Having a number of IRA's makes it even more flexible, can accept a couple and disclaim the other(s).


I don't think I could do what you are doing, and that is just my personal choice.
I'm still not sold on converting all of hers, vs doing some of yours, and leaving her with a small IRA, as she would still be in the single 24% with an annual income of ~195K/yr.

I guess it's my in-bred fear from growing up poor, that thinks if I give away a huge amount of money before death, then I'll regret it greatly should I have unexpected need of it.

 

[Winemaker]

In our situation, I think DW would take my IRA as who knows how much $$$ would be needed in the future. Some intensive LTC can be very expensive.

I like the idea how disclaim of an IRA would cause it go to next in line beneficiaries, as it makes giving an IRA a flexible choice. Having a number of IRA's makes it even more flexible, can accept a couple and disclaim the other(s).


I don't think I could do what you are doing, and that is just my personal choice.
I'm still not sold on converting all of hers, vs doing some of yours, and leaving her with a small IRA, as she would still be in the single 24% with an annual income of ~195K/yr.

I guess it's my in-bred fear from growing up poor, that thinks if I give away a huge amount of money before death, then I'll regret it greatly should I have unexpected need of it.

We, like you and your wife, have clearly won the game. We are merely positioning ourselves to what we think the probable outcome will be, and act accordingly. DW's tIRA was 1/4 of mine when we started converting, we're not too far from zeroing her out. We'll be married 40 years, here in 17 days.

 

[Koolau]

We, like you and your wife, have clearly won the game. We are merely positioning ourselves to what we think the probable outcome will be, and act accordingly. DW's tIRA was 1/4 of mine when we started, we're not too far from zeroing her out. We'll be married 40 years, here in 17 days.

Congratulations on your milestone of 40 years of marriage.

 

[LateToFIRE]

I and DW have significant amounts of T-IRA/401K funds. Pension meets our day-to-day needs, and we have not done any Roth conversions.

At this stage in life, we really don't want to be bothered with doing the conversions. I'm interested in hearing from others who have NOT done Roth conversions and do NOT plan to do so. Why did you make that choice, and do you lose sleep worrying about potential or current RMD issues?

Echoing the thanks for starting this thread. Observing and engaging in the discussion has been extremely helpful to my understanding of the issues and questions.

Keying in on the issue of UNCERTAINTY, it's clear that this aspect of the question - to convert or not to convert - cuts both ways. For those of you who can convert within fairly low tax brackets, it certainly seems well worth it. As someone put - you're taking uncertainty OFF the table. Into the 22% and above brackets, the answers start getting way fuzzier and a whole lot less CERTAIN.