Roth Conversion - not worth it?

[dixonge]

Just ran the numbers on Schwab's calculator. It indicated that the difference between IRA and Roth 14 years from now would be a whole $6.

This doesn't seem right though. Our income will go up this year, next year and two years after that (pensions and SS). After this point, no more income increases. At 7% growth for 14 years, wouldn't my tIRA taxes then be worse than conversion taxes now?

Feel like I'm missing something...

 

[kaneohe]

what is missing (or misleading) is the idea that the $$ amount of conversion taxes determine whether things are favorable or not.

Ex:
1)20% tax bracket for simplicity; start w/ 100K TIRA. You convert to Roth and pay 20K from taxable account. You now have a 100K Roth and no taxable acct.

vs
2)you don't convert. You now have a 100K TIRA and 20K in taxable acct.

N yrs later the IRAs have doubled along to 200K w/ taxable acct doubling to 40K.
1) You liquidate the Roth and pay nothing and have 200K in taxable.
vs
2) You liquidate the 200K TIRA and pay 40K in taxes from the taxable acct.
You end up w/ 200K in taxable.

For 1) you paid 20K taxes to convert. For 2) you paid 40K in taxes to remove from TIRA. Yet even tho you paid more taxes in 2) you ended w/ the same amount because the TIRA grew larger.

 

[Palmtree]

You also have got to figure in the effect of RMD's later in life. If you have a lot in a TIRA then the RMD plus social security can push you into a higher tax bracket. If it's in a Roth then it's not a taxable withdrawal.

 

[harley]

Other than the basic question of the value of taxes now vs. taxes later, another issue is whether the Roth is for your use or is intended for your heirs. In our case I'm hoping that what I convert will never be used by us, so passing it on to DD will result in her not having to pay a large tax bill when forced to withdraw the entirety of the account over a 5 year period. No calculator that I know of takes that into consideration.

 

[CRLLS]

And how do those numbers change when one passes and the other is taxed as single?

A lot of calculations, and their results, depend on the assumptions one makes when they begin calculating.

 

[Kwirk]

when forced to withdraw the entirety of the account over a 5 year period.

Isn't this 10 years?

 

[Clone]

so passing it on to DD will result in her not having to pay a large tax bill when forced to withdraw the entirety of the account over a 5 year period.

Liquidated over a period of 10 years.

I agree with the view that putting a required 10% distribution each year (plus any growth) on the kids peak earning year's incremental tax rate is a consideration for us.

We are trying to convert a bunch before the tax rates revert to pre 2018 levels for a couple reasons:

Convert before I draw SS, and lock in a higher tax rate.
Minimize the tax torpedo of higher RMDs for surviving spouse while filing as a single person
Minimize the impact of changes from the SECURE act.

 

[dixonge]

For 1) you paid 20K taxes to convert. For 2) you paid 40K in taxes to remove from TIRA. Yet even tho you paid more taxes in 2) you ended w/ the same amount because the TIRA grew larger.

But in scenario 2, I gave more money to Tio Sam! OTOH, I could afford it more then, having more income and more equity. So basically six of one, half dozen of the other I guess...

I think the reason the calculator ended up with such a small difference is that the current tIRA is not large. Small 5 figures actually. Our future income will keep us in the *current* 12% bracket, especially with such a large standard deduction. RMD's on this one IRA will *not* push us over, but even if it did, the higher tax would only be on that income that goes over, which won't be by much.

IOW, I probably shouldn't bother, and probably should have left the wife's IRA alone last year. Oh well.

Thanks for the answers!

 

[kaneohe]

...........................

IOW, I probably shouldn't bother, and probably should have left the wife's IRA alone last year. Oh well.

Thanks for the answers!

before you conclude definitely, be sure to consider what others have said about when one spouse passes. TIRAs still have RMDs and w/ a singles deduction and similar income, tax rates may be higher. TIRAs may look bigger because they are puffed up (before tax) $$ but you can't really spend them w/o paying the tax.

 

[audreyh1]

what is missing (or misleading) is the idea that the $$ amount of conversion taxes determine whether things are favorable or not.

Ex:
1)20% tax bracket for simplicity; start w/ 100K TIRA. You convert to Roth and pay 20K from taxable account. You now have a 100K Roth and no taxable acct.

vs
2)you don't convert. You now have a 100K TIRA and 20K in taxable acct.

N yrs later the IRAs have doubled along to 200K w/ taxable acct doubling to 40K.
1) You liquidate the Roth and pay nothing and have 200K in taxable.
vs
2) You liquidate the 200K TIRA and pay 40K in taxes from the taxable acct.
You end up w/ 200K in taxable.

For 1) you paid 20K taxes to convert. For 2) you paid 40K in taxes to remove from TIRA. Yet even tho you paid more taxes in 2) you ended w/ the same amount because the TIRA grew larger.

This simply illustrates that if you are in the same tax bracket in each case, it’s a wash. But normally you get pushed into higher tax brackets if you convert a large amount to Roth.

If RMDs don’t push you into a higher tax bracket in the future, then it might be a wash.

 

[harley]

Isn't this 10 years?

I'm sure it is. I didn't pay attention to the details. Once the possibility of the stretch IRA was gone I just started focusing on how to minimize the tax hit for the inheritance. I'm hoping that by the time DW and I are gone the Roth will be worth multi-millions, so avoiding the potentially million or so in taxes will make me smile in my grave.

 

[Ed_The_Gypsy]

You also have got to figure in the effect of RMD's later in life. If you have a lot in a TIRA then the RMD plus social security can push you into a higher tax bracket. If it's in a Roth then it's not a taxable withdrawal.

This can easily be a BIG hit...for the survivor after one of you passes. The survivor loses a deduction and some SS from the partner. And I expect that future tax rates will be higher than today's.