Converting 457 to Roth?

[Persn]

Hi all, first post here. Just discovered this forum a few months ago, though DH and I have been retired a few years. DH and I were both state employees making good money and therefore have excellent pensions. The pensions are good enough that we don't have to touch our 457 accounts. Between us the balance is about 750K, we are 58 and 53 years old.

I saw the FA from the 457 plan yesterday. His advice was to change my AA to include more Vanguard index funds. Every fund he recommended had an expense ratio < .10 (ok, the international one was .12). Seems like sound advice - pretty good for a free session!

Then he started talking about Roth conversions. I had always thought that we were not eligible for Roths because of income limitations. He explained that conversions of our 457 funds weren't limited by income but that one must pay income tax on the amount converted. I get that much.

Here's my question. We are now (and are likely to be for the foreseeable future) in the 33% federal income tax bracket. We won't have to take any RMD's from the 1st 457 for 12 years. Does it make sense to start annual conversions now as long as it doesn't bump us into an even higher tax bracket? Is there an optimal split, meaning at some point should we stop conversions?

Are there any general guidelines for this? Insights are appreciated!

 

[kaneohe]

The generally accepted rule is to convert if the rate today (sounds like 33%) is
less than the rate you will pay later if you don't convert when the RMDs start.
If they are the same, then generally conversion is more favorable esp. if you can pay the conversion tax w/ outside funds .

Some exceptions to consider: if you think someone may else may inherit in that timeframe who is not a spouse , then consider using their tax rate (or perhaps a blend). If you expect to leave to charity, then consider not converting since charity tax rate is 0.

 

[Animorph]

No income limits for Roth conversions.


The other key component that makes Roth conversions beneficial is having extra money in a taxable account, or sufficient pension income, to cover your expenses plus the Roth conversion taxes. If you have extra money left at the end of the year, a Roth conversion might be worthwhile. You have to look at your tax situation, especially after age 70 with RMD's, to know for sure.

 

[Persn]

Thanks for the input. You both raise points I either wasn't aware of or hadn't considered. It helps!

 

[steelyman]

I, too, worked in state/academia and have a 457 plan through that. I've just left it alone and kept with the money I'd deferred into it (I viewed deferred compensation as a substitute for no employer match).

The choices available in my 457 don't include Roth options so I'd have to roll out. They have "institutional-class" funds available with very low expense ratios and they are my only avenue to a stable value fund, which I'd like to keep open.

Any conversions to Roth I do in the future would be from 403(b) accounts, not 457.

The only Roth conversion I've ever done was the first year the Roth was created. I opened a Roth IRA and a traditional IRA for the prior year that I immediately converted into the new Roth (the idea was to double the initial allowed annual limit, which I think was $2K).