Roth Conversions - Or Not

[stephenson]

So, second day of asking questions

I've read a lot, but it is still not making sense to me ... when I used the Schwab calculator it indicates I should not convert ...

Getting ready to pull trigger on Social Security - and understand this will obviously increase my income and hence tax bracket.

Is there an easy way to understand whether or not Roth conversion makes sense?

- File Joint
- AGI is about 222K
- Taxable Income about 188K
- rentals, military retirement, megacorp pension and NonQual, interest income from MMF/CD/bond, capital gains and dividends from equity MF
- AGI and TI, above were for a year with moderate equity fund distributions
- I also did some year end tax loss harvesting
- Future years will likely be higher taxable income

 

[RetiredAt49]

The Schwab calculator is probably accurate… your income is too high to benefit from Roth conversions (unless you’re really young but you mention SS so I would not do any Roth conversions at your age and income level.

 

[RunningBum]

I'd probably convert to the next tax bracket, IRMAA level, or NIIT, based on you saying that you predict higher taxable income in future years, and that the current tax rate cuts are set to expire in (after?) 2026. If I was doing this for myself I'd be comparing a tax estimate for this year with tax estimates in future years, especially when SS and then RMDs start. That's why I say "probably" above.

Is your tax deferred account large? The larger it is, the more likely I am to convert, perhaps even beyond the first barrier listed above. Unless you plan to do a lot of charitable giving, in which case you want to leave enough in tax deferred for planned QCDs.

A nice benefit to converting is that now you'll have that amount available tax free if you need money for a large purchase and don't want to take an extra tax hit for it. Having money in a Roth gives you a lot of flexibility.

 

[stephenson]

Regular IRAs total about 2.2M, plus a Roth with about 350K.

Is it reasonable to use the Roth conversion solely for the advantage of beneficiaries? I frankly can't see us spending it - but, I could always whack out and buy and airplane or big boat

 

[Romer]

lots of valid discussions on both sides of the coin here.

For me, it was looking at leaving my wife in the best shape should I pass first. Transitioning from married to single tax brackets would almost double the amount of taxes for the same yearly income.

Having everything in a Roth and survivor SS would put her at very minimal exposure to taxes and possible zero. At least no State taxes as Colorado doesn't tax SS and at most only 50% of her SS would be taxed above the STD deduction resulting in a very small tax bill.

Getting rid of RMDs wasn't a primary concern, but a consideration

I think it comes down to a personal preference were one answer doesn't work for everyone. I explained why Roth conversions felt like the right answer to me. I know there are others who would disagree and that is OK.

 

[Sunset]

Regular IRAs total about 2.2M, plus a Roth with about 350K.

Is it reasonable to use the Roth conversion solely for the advantage of beneficiaries? I frankly can't see us spending it - but, I could always whack out and buy and airplane or big boat

At that amount I can't see Roth conversions getting rid of the IRA, it will grow about $200K per year.
While we have grown our Roth from 0 to a large number, the IRA's funding it are largely flat.

If thinking about beneficiaries, then I'd be inclined to split a chunk of the IRA amongst many younger ones, as their income is probably lower than yours. And leave the entire Roth to the spouse (plus some IRA), who later would leave it to heirs.

 

[SevenUp]

Is there an easy way to understand whether or not Roth conversion makes sense?

If the marginal tax rate you will pay to convert now is less than what you and/or your heirs will pay to convert/withdraw later, then it's a good idea.

Roth conversion - Bogleheads goes into more detail.

 

[RunningBum]

Is it reasonable to use the Roth conversion solely for the advantage of beneficiaries?

If they will probably be in a lower tax bracket than you, don't convert. Especially if you have many beneficiaries splitting your money.

It sounds like you may be in the 32% tax bracket, or would be if you made a hefty conversion. Suppose you leave $100K each to heirs that could mostly could keep the tax on their RMDs to 22%. If you convert, you could leave them $68K. If you don't convert but let them pay the tax, they get $78K.

 

[RunningBum]

At that amount I can't see Roth conversions getting rid of the IRA, it will grow about $200K per year.

I'm not sure what advice you are giving or conclusion you are drawing here, but conversion doesn't have to be an all-or-nothing thing. Converting cuts into some of the taxable growth and moves it to tax free. A lot of people won't and probably shouldn't fully convert their tIRA, but that doesn't mean they shouldn't partially convert.

Rather than looking at the failure to reduce an IRA on partial conversions that are offset by growth, you should look at how big the Roth is getting with those conversions + tax free growth.

 

[Dash man]

We’ve been converting heavily for a few years, but plan to stop after 2025 when the TCJA expires and DW starts her social security. We will be using the traditional IRAs for QCDs beginning in 2027, so will avoid paying taxes on RMDs. We’re planning to then live off our SS, a small pension and dividends/interest at that point which should give us about $270k/year total. We’re on our third year of paying IRMAA and will only convert about $150k each of the next two years to start reducing it. The IRAs just keep growing more than we take out, even with half in fixed income.

 

[FI_RElater]

...question

OP

you mentioned that you are considering "pulling the trigger" on SS
Is this at FRA ? at 70? or just at 62?
with what you've said, to me it doesn't make sense for you to start at 62 ==> SS is one of the most tax-advantaged income streams, so it's best to get closer to optimum (doesn't mean you have to wait until 70, but the longer delay ALLOWS for the possibility of some level of Roth conversions, and presuming you have the higher PIA it allows for higher SS for surviving spouse).

Further, having some level of Roth that can be accessed allows one to pull from it (ideally just a bit) so as to stay below some tax threshhold (either a bracket or IRMAA).
For us, I was lower PIA by a bit, but we did Roth conversions between retirement and my starting SS at FRA. I had pension, but didn't have rentals like you; we had set up a CD ladder that together with pension fit our expected needs for the first five years (it actually lasted longer) and now we have a good mix of taxable, tax-deferred, and Roth that supplements the pension and SS. When the second SS comes online, then we will start worrying about the IRMAA thresholds but based on the RMD table it probably won't initially be from the IRA withdrawals but instead from the taxable accounts ("first world problem", I know).
For us, flexibility in income stream is desired.

(and agree with RunningBum, it doesn't have yo be a full conversion, which clearly wouldn't make sense, a partial conversion over a few years (to keep below second IRMAA threshold) may make sense. We certainly couldn't /didn't do full conversion.)

 

[pb4uski]

Regular IRAs total about 2.2M, plus a Roth with about 350K.

Is it reasonable to use the Roth conversion solely for the advantage of beneficiaries? I frankly can't see us spending it - but, I could always whack out and buy and airplane or big boat

While I'm generally a strong advocate of Roth conversions, I don't think they make sense in your situation as I understand it. With $188k of TI you are near the top of the 22% tax bracket, so either Roth conversions or RMDs will be taxed at 22% or 24%, so I don't see any benefit.

In fact, it might be detrimental if your heirs are in lower tax brackets.

 

[Exchme]

At $2.2M in an IRA, it seems very likely to me that you would benefit from Roth Conversions. If you are not yet 70, my inclination would be to defer SS to age 70 and do Roth Conversions convert to the top of the 24% bracket. Once one of you passes the survivor is going to be in at least the 32% or maybe even higher bracket.

I advocate getting some good software and building a model or hiring a one-time-fee advisor and having them build one. Doing this right could mean a six figure, maybe even mid six figure boost to your lifetime spending power/estate, so don't just rely on folks on the internet.

 

[Montecfo]

Regular IRAs total about 2.2M, plus a Roth with about 350K.

Is it reasonable to use the Roth conversion solely for the advantage of beneficiaries? I frankly can't see us spending it - but, I could always whack out and buy and airplane or big boat

Reasonable? Sure.

But there sure are a lot of years and moving parts between now and then.

And would beneficiaries care? I doubt it.

 

[2017ish]

We retired with about 5 mil in TIRAs, 2-3 years living expenses in taxable, essentially no Roth's (apart from token amounts that were funded 5 years before retirement), and no other source of income until currently promised socials are supposed to kick in at ages 70. We convert to top of 32% bracket each year. (And keep all of our fixed income allocation in the TIRA accounts so as to limit growth.)

Our theory is: 1. Present low marginal rates; 2. Odds are astronomically high that one of us, likely DW, will be a single taxpayer dealing with RMDs; 3. When one or both of us is in assisted living, we'd rather not have our kids worrying about RMDs; and 4. Our kids are in higher federal tax brackets than us, and their states also have income taxes (one is in Cali).

As always, YMMV.

 

[FREE866]

I don't like that Schwab calculator for a couple reasons...


one---it asks that the future tax rate will be...how are we supposed to know that?


also , if the money you convert grows a decent amount that tells me that if you're withdrawing the money 10-15 years later that is a solid reason to convert given the growth is tax free and upon withdrawing you pay nothing on a possibly much larger balance

 

[SevenUp]

I don't like that Schwab calculator for a couple reasons...it asks that the future tax rate will be...

Well, that's not very useful.

There are ways of Estimating future marginal tax rate, and other than flipping a coin that's what you have to do if you want some idea of what to do.

 

[stephenson]

Whoops - sorry.

My 69th was March 2023, but have not yet filed for SS.

Wife is two months younger and does not have her own SS so will get spousal. Was waiting to ensure she would have highest amount possible.

We travel international a couple of times a year, do pretty much what we want - and end up adding to accounts each year.

 

[Sunset]

...

My 69th was March 2023, but have not yet filed for SS.

Wife is two months younger and does not have her own SS so will get spousal. Was waiting to ensure she would have highest amount possible.

....

I think in your situation it's often recommended for you to take it before 70, because when you do, your wife can collect the spousal amount.

Not collecting means she misses out on her getting the spousal amount which is a pretty good sized amount for each year of waiting.

 

[Sunset]

I'm not sure what advice you are giving or conclusion you are drawing here, but conversion doesn't have to be an all-or-nothing thing. Converting cuts into some of the taxable growth and moves it to tax free. A lot of people won't and probably shouldn't fully convert their tIRA, but that doesn't mean they shouldn't partially convert.

Rather than looking at the failure to reduce an IRA on partial conversions that are offset by growth, you should look at how big the Roth is getting with those conversions + tax free growth.

I totally agree, and simply stated things very awkwardly.

 

[donheff]

While I'm generally a strong advocate of Roth conversions, I don't think they make sense in your situation as I understand it. With $188k of TI you are near the top of the 22% tax bracket, so either Roth conversions or RMDs will be taxed at 22% or 24%, so I don't see any benefit.

In fact, it might be detrimental if your heirs are in lower tax brackets.

I tried to figure this out and got tied in knots. It is pretty straight forward if a married couple dies together and leaves it all to heirs. But, if your income is high due to taxable pensions and SS and, if it will remain high after the first of the couple dies, the income plus RMDs can kick the last to go way up the brackets. I did a big conversion last year to the top of 24% and considered higher but that was dizzying and I didn't proceed. I will probably kick the whole matter around again later this year. DW's big RMDs are coming soon.

I guess our tax planning objective should be to die together.

 

[LateToFIRE]

We retired with about 5 mil in TIRAs, 2-3 years living expenses in taxable, essentially no Roth's (apart from token amounts that were funded 5 years before retirement), and no other source of income until currently promised socials are supposed to kick in at ages 70. We convert to top of 32% bracket each year. (And keep all of our fixed income allocation in the TIRA accounts so as to limit growth.)

Our theory is: 1. Present low marginal rates; 2. Odds are astronomically high that one of us, likely DW, will be a single taxpayer dealing with RMDs; 3. When one or both of us is in assisted living, we'd rather not have our kids worrying about RMDs; and 4. Our kids are in higher federal tax brackets than us, and their states also have income taxes (one is in Cali).

As always, YMMV.

This makes sense. FYI, one thing I noticed in handling parents' finances when they required LTC was that the tax deduction for medical expenses sharply reduced their taxable income. Another way of saying, I think the tax hit of future RMD's would likely be less of an issue than you would expect if/when LTC / nursing home / medical expenses are high. It's a factor I have not seen mentioned much.

 

[TheWizard]

I did moderate Roth conversions in my 60s, approximately the size of my projected age 70 SS plus RMD.
This approach levelized my AGI to a degree so that there was no big jump in AGI or taxes when first SS and then RMDs started.

2022 was my first RMD year and I was still able to do a small $9000 Roth conversion without getting into the 32% bracket or getting into the next higher IRMAA tier.
I'm single and thus no issue with surviving spouse paying higher taxes.

The OP is 69 and late to the Roth conversion game. So the significant issue for him might be the surviving spouse tax situation.
Note that it's not necessary to leave 100% of tax-deferred funds to the survivor. A portion can be bequeathed to the ultimate beneficiaries, thus decreasing RMDs for the survivor...

 

[Time2]

If we just knew the date we were going to die, this would all be easy.


I have 5 years before I'm 73 and start RMDs, I have $200k left in tax deferred money. My wife has 9 years before her RMDs and has $300k in tax deferred. We only have 20 months before we will get $60k in SS. With dividends, that leaves little or no room in the 12% bracket and lots of room in the 22% bracket.
We can easily live in the 12% bracket, but if I die first, that will put my wife in the 22% bracket (or higher after the tax cut runs out 2025).
I'm thinking I will continue Roth conversions in the 22% bracket. I'm expecting most of our assets will be left to the kids.
My $200k could be $280k in 5 years (using 7% growth) that would require $10,000 in RMDs the first year, I expect it will grow faster then the RMDs draw it down and the same with my wife's. In 9 years hers could be $550k. At that time I see combined RMDs of $35k plus $22k dividends and $60k SS. With tax bracket creep, we may still be in the 12% bracket. But we have other assets that will add to our net income. So that, and one of us will file single at some point, leads me to believe I still need to Roth in the 22% bracket. (also want it easier for the kids)

I'm not happy going into the 22% bracket, even though our tax deferred has been whittled down, I still think it is a problem, especially if there is only one of us. I know our tax deferred is not huge compared to others, but still think it matters.

Open to other opinions.

 

[Midpack]

Everyone has to do the math for themselves, but it comes down to trying to level your lifetime tax rates. If you expect future taxes will be higher once all your income streams are active, Roth conversions probably make sense, otherwise it may not. The earlier the better as well, it makes way more sense if you can complete conversions before you begin Soc Sec, pensions or other "passive" income. At age 69 like the OP, the window of opportunity may close soon. I know because I did the math and began large conversions in 2019, wish I'd done the math and started earlier, next year I have to take Soc Sec at 70 yo so my conversions will be reduced. When DW's Soc Sec, my RMDs, then her RMDs begin - Roth conversions will be trivial if at all. Best of luck.