Those Who don't/didn't do Roth Conversions

[pb4uski]

^^^^ I never went as low as zero tax, but extending the example in post #44 using https://www.irscalculators.com/tax-calculator the state income tax in California would be $165, in Vermont (my home state known for high taxes) would be $318 and for NY would be $443... so fairly modest. Each on $51,133 of income so less than 1% effective rate in all cases.

I notice that you are from MD, that state tax would be $937! Ouch! I would move... in fact did move to income tax free Florida.

 

[Midpack]

Not sure why OP would only want an echo chamber of people that don't like the idea of Roth Conversions.

+1. The OP’s question makes it sounds like Roth conversions don’t make any difference to anyone, just an arbitrary choice. Roth conversions are about minimizing lifetime taxes, often makes a big difference for people with large tax deferred holdings - it’s not rocket surgery. Starts with two simple calcs. We’re likely to save over $400K in taxes thru Roth conversions…we’d be stupid not to.

 

[Time2]

If you have zero work income for some years before SS or RMDs, money saved in a taxable account will serve you very well if you can live on $108k+. If your taxable account is say 50% contributions and 50% LTCGs, you can withdraw $212k, $106k of which is LTCGs, subtract the standard deduction of $26k and be taxed on $80k. The tax rate is 0% on an AGI of $80k of LTCGs and dividends. You do have to leave room for some dividends that your mutual funds would produce. If you can live on $80k, then you could reinvest $132k, resetting the cost basis. But 40 years ago, we did not know that law would not change and the number would keep increasing.

 

[schenbew]

DW and I will not do Roth conversions since like the OP our pension starts us in the 22% bracket, so the arbitrage benefit of conversion is near zero for us.

Looking at Roth conversions did cause us to realize that with significant tax deferred, after tax and Roth assets, DW and I would be better served in accelerating our tax deferred asset withdrawals before SS kick in for us. This helps to minimize our overall tax and IRMAA burdens, something I hadn't realized before doing the Roth conversion analysis.

 

[harley]

DW and I will not do Roth conversions since like the OP our pension starts us in the 22% bracket, so the arbitrage benefit of conversion is near zero for us.

You both may be in the 22% bracket, but if one of you passes before the other, the survivor could be kicked into significantly higher bracket. I don't know your pension details or tax situation, but even in your case there might be a good reason to do whatever conversion you could fit within your current bracket. Not trying to convince anyone, just pointing it out. I keep picturing someone (me) sitting there grieving the loss of a life partner, then getting hit with a nasty ongoing tax bill. That would suck. But I hate paying taxes, so YMMV.

 

[bada bing]

I haven’t.
Why?
High tax bracket
No heirs
Removing assets to pay the tax from portfolio that could continue to grow - reducing asset base.
RMDs aren’t required until we hit 75
It’s prepaying a tax you may never owe.
It’s an educated guess at best about paying a tax now that we would not owe for almost 20 years.

I do small Roth conversions ($40K/year) but the benefit is also small. I have similar reasons to keep conversions small, but IRMAA is my trigger. I'll be liable for fairly significant taxes on the eventual RMDs, but it's unavoidable.

In my case the tax benefit is so small that I could just ignore it. One driver in my conversions is it provides an opportunity to do a withholding for current year taxes. That allows me to get into safe harbor and avoid underpayment. I have a hobby business that provides an unpredictable amount of income. The ability to do one withholding in Dec. when the annual amount is known is a significant reason to do conversions for me.

 

[SnowballCamper]

We are in a similar situation to this:

DW and I will not do Roth conversions since like the OP our pension starts us in the 22% bracket, so the arbitrage benefit of conversion is near zero for us.

Looking at Roth conversions did cause us to realize that with significant tax deferred, after tax and Roth assets, DW and I would be better served in accelerating our tax deferred asset withdrawals before SS kick in for us. This helps to minimize our overall tax and IRMAA burdens, something I hadn't realized before doing the Roth conversion analysis.

I decided to set up a SEPP plan, but DW did not. The expected expiration of the TCJA was a factor that pushed me to start early withdrawals. We're unable to keep our taxable income down (pensions). The price for that it is one of us in a higher tax bracket when the other dies. The benefit of paying more taxes now just isn't high enough in the long term.

 

[schenbew]

You both may be in the 22% bracket, but if one of you passes before the other, the survivor could be kicked into significantly higher bracket. I don't know your pension details or tax situation, but even in your case there might be a good reason to do whatever conversion you could fit within your current bracket. Not trying to convince anyone, just pointing it out. I keep picturing someone (me) sitting there grieving the loss of a life partner, then getting hit with a nasty ongoing tax bill. That would suck. But I hate paying taxes, so YMMV.

Agree 100%, and that's another reason we are accelerating the tax deferred withdrawals...it reduces our future taxable income if one of us departs much sooner than the other.

 

[mrfeh]

Married filing joint standard deduction 2024 is ~$29,200, so this amount is "tax free". If you have all your money in deferred accounts, you can withdraw this amount without paying anything. Add $23,200 if you want to pay 10% on that amount and so on.

Then there's long term capital gains harvesting & qualified dividends to get from the taxable accounts under a certain amount, unless I'm wrong...

That income counts against ACA subsidies, however.

That's the rub for many people.

 

[target2019]

Well, it takes a long time for smaller RMDs to "pay back" in tax savings the tax paid early.

This is what folks mean by paying tax they may never end up owing.

That is a given, so thanks for focusing on it. Longevity is part of the equation for sure.

There are so many use cases for this, that I simply refer back to the advice, look at hard numbers over a long period, and see if it is worth the effort for you.

When I did this for our use case, conversions do something, obviously. But the difference for us is not so great to go whole-hog on conversions.

In our use case, conversion ends up costing us more state tax, and also a loss of a retirement income exclusion (if we go too far with the conversion amount).

YMMV, as always.

 

[Dtail]

We do some minor Roth conversions, as limiting income for ACA purposes has been more lucrative until I hit 65.

 

[Aerides]

We don't.
No heirs, small income from part time business keeps us in the good ACA range, so figuring out the sweet spot for Roth on top of that....eh taxes are already too complicated for my liking.

 

[Lakedog]

No conversions here -- single with pension (retired at 51 over 15 years ago), no heirs, 22% or higher tax bracket. Still a few years away, but RMDs will most likely go to charity.

 

[jazz4cash]

I have viewed it as pure tax arbitrage but diversification taxwise plays into my orocess also. We have not had much headroom for converting without going to a higher bracket and I expect to be in the same bracket when RMDs start. I do convert small amounts and contribute just to have a chunk of funds for emergencies, major expenses and income smoothing.
Thanks for the suggestion to consider what happens when one of us dies.

 

[Sunset]

For those that mention paying no tax on their Roth conversions, do you not end up paying state tax? Even in the years when I converted at the zero percent Fed tax level, I always ended up paying state tax on the full amount. So, state taxes along with impact on my ACA subsidy have to be factored in every year.
I do currently live in a fairly tax-unfriendly state, so maybe my experience is more of an outlier. I expect to eventually move to another, hopefully more tax friendly, state.

While IL is a pretty high taxation State, they don't tax retirement income. So withdrawals or conversions from an IRA are tax free.

Other income (interest, capital gains, etc) is taxed at ~5% by the State.

 

[donheff]

A retired CPA here. If your CPA lives to be 100 then he might care more. In my experience, few CPAs are really knowledgable about personal financial planning and retirement planning unless they are one of the few who specialize in that niche practice area. Most CPAs are audit or tax focused and are clueless about when Roth conversions are beneficial and when they are not.

He might not yet have done the math and thinks that deferral is always better which is a popular misconception. If you do the math, Roth conversions are really just a tax arbitrage game... voluntarily paying some now to avoid paying more later. Me and other retired CPAs and financial professionals on this forum who have studied Roth conversions think that it makes a lot of sense in many, but not all, circumstances.

In fairness, it is also situational... a tradeoff between what one would pay in tax today vs later. If unstarted pensions and SS will push you from 12% to 22%, then there are substantial savings to be had to at least convert to the top of the 12% bracket. OTOH, if unstarted pensions and SS will push you from 22% to 24% then it isn't very lucrative. So while if may not be lucrative for him, it might be worthwhile for you or vice versa.

For us, the benefits are substantial so we are doing them. For a more modest income friend, he can make measured withdrawals in the first decade and never pay federal taxes again as long as he lives unless he sells his rental property so I recommended that he just do withdrawals from tax-deferred to his brokerage account rather than Roth conversions.

For many people in ER living off of taxable savings until pensions and SS start will have headroom to do 0%, 10% or 12% Roth conversions vs paying 22% once pensions and SS start so it is a no brainer.

+1 I missed the boat years back when we could have gotten a lot of DW's large 401Ks into Roths so we won't get killed with high brackets when one of us dies and/or to benefit the kids after we both die. I had always figured we were in too high a tax bracket already to make it worthwhile. When I finally caught on by following some endless conversion threads here, I concluded that we should have been doing conversions up to the top of the 24% bracket for years. I did one last year and it did feel pretty painful. Still haven't decided this year. DWs RMDs are looming, and we can't get much done with the time remaining so is the angst worth it for a small long-term change?

 

[yakers]

Did a few small($5k) conversions a few years back, pretty much 22% tax then now and who knows going forward. But our intention is to pass on our Roths to our 2 sons, ‘the last thing we will spend’ our reserve for unplanned expenses. We expect there will be plenty in taxable account and our condo for them too but who knows. Most of our RMDs are QCDs. Could get kicked up a tax bracket when one of us departs, first world problem.

 

[CRLLS]

We have done Roth conversions in the past. We converted up to the IRMAA limit. Our reasoning was that most of our nest egg was in deferred accounts. When RMDs kicked in, our income would then be in the 22% bracket. So why not prepay that eventual tax now. By reducing those accounts, it reduced the amount of future RMDs (and the tax). Further, if one of us dies, the cost of filing single kicks in.

Two years ago, an unexpected, recurring source of income occurred. A company that I helped form 5-10 years ago, started paying out dividends to the two stockholders. It is a rather large amount. Not that I am complaining. However. is enough to change our plans and we now don't do Roth conversions even though we have 2 more years before RMD time.

Since our financial plan runs to our age of 100, there will be more than likely, much left to our heirs. I don't know their tax brackets. It is their burden to deal with, not mine.

 

[FREE866]

Figured I'd just throw this question out here as opposed to starting a brand new thread.


I'm 57 now. 12% tax bracket. Been doing Roth conversions last few years. I do conversions up till the top of 12% bracket. I'm wondering now , given RMD's wont start for me until age 73 ( before it was age 70) if it still makes sense for me to continue with Roth conversions.I really like the idea that I already have 100K in Roth and planned to continue for ~10 years so I really like the idea of possibly having ~500K in tax free money to pull from at age 67+



Any thoughts?

 

[mrfeh]

Figured I'd just throw this question out here as opposed to starting a brand new thread.


I'm 57 now. 12% tax bracket. Been doing Roth conversions last few years. I do conversions up till the top of 12% bracket. I'm wondering now , given RMD's wont start for me until age 73 ( before it was age 70) if it still makes sense for me to continue with Roth conversions.I really like the idea that I already have 100K in Roth and planned to continue for ~10 years so I really like the idea of possibly having ~500K in tax free money to pull from at age 67+



Any thoughts?

Are you using the ACA? You'd need to figure out what subsidies you're missing out on.

Even then, it takes assumptions about the future to come up with an answer. It's not black and white, unfortunately.

 

[street]

Can you please illustrate your point of paying no taxes while doing a Roth conversion if you are living off of taxable income. Which marginal tax bracket could you fill up to pay zero taxes?

Not sure you will get a correct answer but an opinion. For some there is only one way and one way only.

 

[FREE866]

Are you using the ACA? You'd need to figure out what subsidies you're missing out on.

Even then, it takes assumptions about the future to come up with an answer. It's not black and white, unfortunately.

I am not. I’m on my girlfriend’s healthcare plan.

I do realize it requires assumptions of future

 

[oldtimer]

Figured I'd just throw this question out here as opposed to starting a brand new thread.


I'm 57 now. 12% tax bracket. Been doing Roth conversions last few years. I do conversions up till the top of 12% bracket. I'm wondering now , given RMD's wont start for me until age 73 ( before it was age 70) if it still makes sense for me to continue with Roth conversions.I really like the idea that I already have 100K in Roth and planned to continue for ~10 years so I really like the idea of possibly having ~500K in tax free money to pull from at age 67+



Any thoughts?

Since you were born after 1959 (1960+), your RMD won't start until the year you turn 75. So you have 2 more years than you thought.

 

[FREE866]

Since you were born after 1959 (1960+), your RMD won't start until the year you turn 75. So you have 2 more years than you thought.

Right. When the changes were announced like a year ago or whenever that was I thought I had seen age 75 as the start of requiring RMDs but for some reason I couldn’t get confirmation. Thank you for clarifying. Then I’m even more pondering whether Roths still make sense.

 

[pb4uski]

Not sure you will get a correct answer but an opinion. For some there is only one way and one way only.

If you will be paying taxes once RMDs start and have the opportunity to convert at zero tax earlier and don't do it, it's just the correct answer unless you like paying taxes unnecessarily. No opinion at all. A no brainier.

Math is hard.