Roth conversion

[kongmen]

My wife and I are thinking of converting a relatively large sum of money from an old 457 to an existing roth. We've already moved the money from the 457 to an IRA at an online broker. I'm looking for folks who have done this and would like to learn from y'alls experience. We are even considering using the leftover proceeds from the sale of a former house to pay the taxes. We are currently in a paid off house BUT are seriously thinking about buying a different more expensive house and would like to use cash but that wouldn't be possible without the leftover cash from the old house. I guess the real question is do y'all think it would be financially beneficial to get a relatively small loan for a new house so that we can convert the old 457 money to a roth.



Thanks.

 

[sengsational]

Not enough info. We need to know the "spring chicken" factor

 

[CRLLS]

My wife and I are thinking of converting a relatively large sum of money from[-] an old 457 to an existing roth. We've already moved the money from the 457 to [/-]an IRA [-]at an online broker. I'm looking for folks who have done this and would like to learn from y'alls experience. [/-]We are even considering using the [-]leftover [/-]proceeds from [-]the sale of [/-]a former house to pay the taxes. We are currently in a paid off house BUT are seriously thinking about buying a different more expensive house and would like to use cash but that wouldn't be possible without the leftover cash from the old house. I guess the real question is do y'all think it would be financially beneficial to get a relatively small loan for a new house so that we can convert the [-]old 457 money[/-] IRA to a roth.



Thanks.

I have dropped the obfuscating stuff. So, to rephrase, is the question should you use the previous house proceeds to either pay the taxes for a Roth conversion, or to take out a mortgage for a new home?

If you have a solid plan, and it allows for either option to work that plan, then do what you feel like doing. There are a lot of variables and unknowns based on what you have posted. Run both the scenarios in Firecalc, I-orp and others to see how it might affect your outcome and then decide if you can live with either one. Everyone's goals are different. Only you can determine what is right.

 

[pb4uski]

From a similiar thread, not enough to go on in your case but really large conversions are rarely wise because they push you into a higher tax bracket than you would be if you were patient.

With respect to Roth conversions, a common approach is to develop an estimate of your income and tax situation when you are 72 and RMDs start... so including taxable accunt investment income, any pensions, SS, RMDs, etc. and what the effective tax rate on the RMDs is [(tax with RMD - tax without RMD)/RMD amount].

If you can do Roth conversions before age 72 at a lower effective tax rate then go, otherwise don't as it doesn't much matter if you pay x% now or x% later.

For us, when we reach RMD age I expect that we'll be in the 22% tax bracket, so we currently convert to the top of the 0% capital gains tax bracket.

Why the top of the 0% capital gains tax bracket rather than the top of the 12% tax bracket? Because that extra $200 of taxable income ends up being taxed at 27%... 12% on the Roth conversion increase in ordinary income and 15% on some capital gains being pushed from 0% to 15%.

 

[Sunset]

+1
pb4uski has said all at once is probably a bad idea.

OP it's Much better is to spread the conversions over a number of years, so you pay less tax overall.

Frankly, I believe it's good to keep some money within an IRA as medical costs will possibly be high enough to be able to pull out some IRA money tax free.

 

[pb4uski]

Not to mention that if you are overfunded and plan to do substantial charitable donations once you are 70 you can do qualified charitable distributions out of your tIRA and pay no tax on those withdrawals, so you want to keep some money in a tIRA.

 

[kongmen]

Wife and I are 61 and 58.



I was unaware of the ability to pull money out of an ira tax free for medical expenses.

 

[Sunset]

Wife and I are 61 and 58.

I was unaware of the ability to pull money out of an ira tax free for medical expenses.

Don't want to mislead anyone, so to clarify, it's when you have HIGH medical costs and dental costs, and it works for many folks as the costs will exceed the 7.5% of AGI at times.

This will depend upon a person's situation of course, but a nursing home/assisted living will probably get most folks into the huge deduction position.

"IRS allows you to deduct unreimbursed expenses for preventative care, treatment, surgeries, and dental and vision care as qualifying medical expenses. You can also deduct unreimbursed expenses for visits to psychologists and psychiatrists. Unreimbursed payments for prescription medications and appliances such as glasses, contacts, false teeth and hearing aids are also deductible.

The IRS also lets you deduct the expenses that you pay to travel for medical care, such as mileage on your car, bus fare and parking fees."

https://turbotax.intuit.com/tax-tips/health-care/can-i-claim-medical-expenses-on-my-taxes/L1htkVqq9#:~:text=How%20do%20I%20claim%20the%20medical%20expenses%20tax,gross%20income%20on%20line%204.%20More%20items...%20

 

[kongmen]

Thanks for the clarification Sunset.

 

[SecondCor521]

Note also that it only benefits you to the extent that (a) your itemized medical expenses exceed 7.5% of AGI AND (b) your itemized deductions exceed the standard deduction. That's a relatively high bar to get over for many MFJ situations.

 

[Winemaker]

Note also that it only benefits you to the extent that (a) your itemized medical expenses exceed 7.5% of AGI AND (b) your itemized deductions exceed the standard deduction. That's a relatively high bar to get over for many MFJ situations.

Our family just spent over $10,000 from 12/1-24, for in home care for my late DM. It does not take long to rack up the big bucks.

 

[Dash man]

You need to look further out than the RMDs at ages 72 and 73. Calculate them out as best as you can to 95 or more. You may find you’ll pay less taxes overall by doing large conversions. By delaying conversions your social security will likely push you into higher brackets. The current rates sunset in 2026 that may increase your taxes. Medicare’s IRMAA is another hidden tax that will bite you with RMDs. Paying tax now and letting your investments grow in a Roth tax free for the remainder of your life will likely leave you with a higher net worth to leave to your heirs. You also have to consider the possibility of one of you dying, leaving the other to pay taxes at a single rate. There’s more to Roth conversions than just the comparing the current tax bracket to a later one.