Roth Conversion vs. Traditional IRA

[madatrub]

Quick question for the group, I've seen a lot of references to ROTH conversions by a lot of folks who have FIREd here.

Im currently 49, planning to retire in ~10-12 years. I've been maxing out 401k for quite a bit now, and in the last several years started maxing out my Traditional IRA (Im up against income limits to contribute to a roth directly). Once a year I complete a backdoor conversion of my maxed out Traditional IRA to a Roth IRA.

Am I on the right track with this strategy? Are there benefits to leaving some of it in the Traditional IRA and not doing a backdoor conversion?

 

[SevenUp]

Am I on the right track with this strategy?

Yes.

Are there benefits to leaving some of it in the Traditional IRA and not doing a backdoor conversion?

Only if you consider paying more tax than necessary a benefit.

 

[madatrub]

Yes.
Only if you consider paying more tax than necessary a benefit.

LOL thanks. One problem I'm finding is my ratio of 401k/roth is pretty heavily skewed towards tax deferred. I worry that if I don't at least course correct a bit, I'm going to get clobbered with taxes when I start tapping my 401k

 

[N02L84ER]

I retired at age 52 and had less than 3% in my Roth. After I retired, I started doing Roth conversions and now have more of my investments in the Roth than I do in the traditional IRA/401k. If your marginal tax bracket drops after you retire, that is the time to do Roth conversions.

 

[target2019]

LOL thanks. One problem I'm finding is my ratio of 401k/roth is pretty heavily skewed towards tax deferred. I worry that if I don't at least course correct a bit, I'm going to get clobbered with taxes when I start tapping my 401k

Tax-free growth is preferred to tax-deferred. However, you pay tax in both situations. And you should grow a taxable account.

Part of the planning you do is to find a tool that estimates taxes and so on. Do I get clobbered? Not if I use techniques to smooth the tax burden.

I went deep for 15 years in 401(k) - maximum contributions until the end. I also maxxed Roth IRA's. Is that right for you? I don't know what your plan is and can't say.

Nice being married and stuffing the Roth each year...lol.

 

[2HOTinPHX]

I retired at age 52 and had less than 3% in my Roth. After I retired, I started doing Roth conversions and now have more of my investments in the Roth than I do in the traditional IRA/401k. If your marginal tax bracket drops after you retire, that is the time to do Roth conversions.

nicej ob retiring at 52..how are you covering healthcare cost?

 

[Midpack]

Depends on what your marginal tax rate will be once SS, RMDs and other unavoidable income will be with and without Roth conversions as compared to your marginal rate before those years. We don’t know your projected rates. You also have to make assumptions about what you believe tax brackets will do over your lifetime. Obviously no one knows but do you believe they’ll go up, down or stay the same - the outcome hinges largely on tax brackets? For example...

 

[Montecfo]

Quick question for the group, I've seen a lot of references to ROTH conversions by a lot of folks who have FIREd here.

Im currently 49, planning to retire in ~10-12 years. I've been maxing out 401k for quite a bit now, and in the last several years started maxing out my Traditional IRA (Im up against income limits to contribute to a roth directly). Once a year I complete a backdoor conversion of my maxed out Traditional IRA to a Roth IRA.

Am I on the right track with this strategy? Are there benefits to leaving some of it in the Traditional IRA and not doing a backdoor conversion?

We have no way to know since we do not know your current and projected future tax rates.

I have come to believe that, speaking very generally, for people who earn relatively high incomes, Roth conversions make the most sense once you have retired and have a lower income than you did while working. Also, at that time your future tax situation is more clearly in view.

 

[joesxm3]

When retired it is good to have a pile of cash in a taxable account so you can use that to cover expenses without paying tax and be in a position to control your taxable income by ROTH conversions and tIRA withdraws at a time of your choosing.

 

[RetireBy90]

As said already, each situation is different and when to pay the tax to contribute the least to gummit is therefore different. I spent the last 10 years working maxing out the 401K and after a few years moved to to 100% of my contribution going to the Roth. It wasn't the most tax efficient way to grow the Roth but it is done now. Since retiring I have been doing conversions at about the same tax rate as I'll be paying at 70.

You will need to project income and tax burden at different points along your future. Your income and tax rate at retirement, when you start SS and when RMDs kick in. I Also project income and rate when wife or I pass for remaining partner. All this tells me to get about 75% of my IRAs to Roth and use remaining 25% for QCDs. My projections show that pensions and SS and other income will provide most of needs so it isn't going to be less income for us as we entered retirement. Like said, each case is different so you need to make some projections.

 

[TheWizard]

LOL thanks. One problem I'm finding is my ratio of 401k/roth is pretty heavily skewed towards tax deferred. I worry that if I don't at least course correct a bit, I'm going to get clobbered with taxes when I start tapping my 401k

We generally think of doing around 4% annual withdrawals from tax-deferred, so for each Million in tax-deferred, that's $40,000 a year of ordinary income, aside from any Roth conversions.

10 years is a ways off, but you should eventually start planning how to achieve your desired retirement income, including possibly delaying SS.

Taxwise, it's usually most efficient to keep your AGI gradually increasing a few percent each year from start of retirement through your mid70s.
Do that with a planning spreadsheet using moderate Roth conversions in the early retirement years.

You don't need to guess what income tax rates will be in the future to manage your AGI...

 

[SevenUp]

I've been maxing out 401k for quite a bit now, and in the last several years started maxing out my Traditional IRA (Im up against income limits to contribute to a roth directly). Once a year I complete a backdoor conversion of my maxed out Traditional IRA to a Roth IRA.

...Are there benefits to leaving some of it in the Traditional IRA and not doing a backdoor conversion?

This question as written refers to moving annual non-deductible traditional IRA contributions into a Roth IRA.

Don't know if you are also interested in converting accumulated pre-tax money to Roth, but that would be a different question.

 

[N02L84ER]

nice job retiring at 52..how are you covering healthcare cost?

The first 2 years we continued on our previous health plan; we were self-employed and used to paying 100% of our own insurance. Since 2015, we have been using ACA plans. Around half of our income is from Interest, Dividends, and Capital Gains. The other half that we spend is from Principal. We did Roth Conversions to take our ACA AGI up to around 395% of Federal Poverty Level to get some premium tax credits.

 

[SnowballCamper]

This

When retired it is good to have a pile of cash in a taxable account so you can use that to cover expenses without paying tax and be in a position to control your taxable income by ROTH conversions and tIRA withdraws at a time of your choosing.

And the difference in tax brackets between the year you do the conversion, and future years tax brackets (which RMDs force on most people).