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

[FREE866]

With all these posts...thinking of changing my name to "Charity"

That was so bad it was almost good

 

[target2019]

In AARP Tax Aide training, we're regularly taught that in addition to the medical care costs, 100% of room and board while living in a facility where a primary purpose for being there is to receive medical care is also deductible as a medical expense. In my opinion, assisted living and memory care would both qualify, but not independent living in a retirement community. You can read details for yourself in Pub 502.
.

Yes, that's why I included a link for Publication 502 in my reply.

A possible stumbing block is that the qualified care provider sends monthly statements as well as a year-end. It's not always clear from their line items what is permissible.

Since I was on tap as their preparer for a long time, I studied up as the situation progressed in the CCR: Independent > Assisted > Chronic Care. I also consulted with Tax CPA and preparer. I built a fortress of receipts, rulings, etc.

 

[LateToFIRE]

I've been using RPM and i-ORP to model potential Roth conversions once I hit retirement and both are telling me not to bother. Probably because I'll reside mostly in the 22% Federal bracket most of my retired years, occasionally dipping into 24% in hefty RMD years. Paying tax at that rate today doesn't much help avoid tax in the future (unless rates increase materially in the future). Of course there is the question of what happens if I or DW passes, and pushes the survivor into a higher tax bracket. But, think I'll not worry too much on that one.

 

[FLSUnFIRE]

If you had other traditional IRA accounts, you may have not followed the pro rata rule properly. Even if a person has multiple IRA accounts, one of which was funded entirely with nondeductible contributions and the others were funded with deductible contributions, that doesn't allow the taxpayer to segregate the basis for purposes of a Roth conversion. The taxpayer is expected to add the account values together and treat the conversion as being pro rated across the nondeductible and deductible contributions. It should say that somewhere in the instructions for Part II of Form 8606.

Nope, only had the one tIRA and only because I had to recharacterize my Roth contributions that were made to date when I realized the capital gains mid year.

 

[Sunset]

To those folks that think moving small amounts via conversion from IRA to Roth is not worth the bother.

I know an old fella, and he did that for many years, and he was single the whole time, his Roth account is worth $500K now, as all those little conversions each year grew via compounding.

 

[LateToFIRE]

To those folks that think moving small amounts via conversion from IRA to Roth is not worth the bother.

I know an old fella, and he did that for many years, and he was single the whole time, his Roth account is worth $500K now, as all those little conversions each year grew via compounding.

Sure, but those same dollars would have grown in his deferred tax accounts as well. And the amounts he placed into the Roth account are net of the taxes he may have had to pay on the conversions. So the key question is did he come out ahead on taxes and by how much? I suppose we won't know if it was worthwhile until he's dead - because if he never needed to WD those funds his effort was wasted. Of course, his heirs might be in a better position for it, depending on their tax situation, if that would matter to him.

 

[5Miler]

To those folks that think moving small amounts via conversion from IRA to Roth is not worth the bother.

I know an old fella, and he did that for many years, and he was single the whole time, his Roth account is worth $500K now, as all those little conversions each year grew via compounding.

I was rather late to the Roth conversion scene and often wish I had invested more in my Roth than I did. I am single and now on SS which impacts my Roth conversions. I can convert about $30K per year which with my SS income puts me at the top of the 12% bracket covering the taxes with withholding from my SS. The first $10K is a no brainer as I still pay no taxes for Fed or state at that level. The next $20K to $23K costs me dearly as each dollar of income makes another dollar of SS taxable. I currently have about $200K in my Roth.

I know that when I start RMDs in 2026, I hope to have $300K in my Roth not counting any gains in the meantime. Fingers crossed.

Not sure it's a good strategy but I like the idea of having access to tax free money should the need arise as my RMDs are going to put me at the top of the 12% bracket (using today's numbers) so any additional withdrawals at that point will be even more expensive. I will never drain my IRA so will always have access to taxable funds if the situation warrants.

 

[MarieIG]

I'm working on Roth conversions and am paying the taxes owed from a taxable brokerage account. I like the option of having an account from which I (or DH) can remove some tax-free income - and I don't want to leave DH with a tax bomb when I pass.

(I'm assuming that I will shuffle off this mortal coil well in advance of DH.)

 

[LateToFIRE]

I was rather late to the Roth conversion scene and often wish I had invested more in my Roth than I did. I am single and now on SS which impacts my Roth conversions. I can convert about $30K per year which with my SS income puts me at the top of the 12% bracket covering the taxes with withholding from my SS. The first $10K is a no brainer as I still pay no taxes for Fed or state at that level. The next $20K to $23K costs me dearly as each dollar of income makes another dollar of SS taxable. I currently have about $200K in my Roth.

I know that when I start RMDs in 2026, I hope to have $300K in my Roth not counting any gains in the meantime. Fingers crossed.

Not sure it's a good strategy but I like the idea of having access to tax free money should the need arise as my RMDs are going to put me at the top of the 12% bracket (using today's numbers) so any additional withdrawals at that point will be even more expensive. I will never drain my IRA so will always have access to taxable funds if the situation warrants.

This makes some sense - to have a certain amount of funds in "tax free" accounts. I hadn't quite thought about the fact that many retirees could have most of their funds in tax-deferred accounts, as my portfolio will be skewed more towards taxable brokerage vs tax-deferred accounts.

 

[EarlyandLate]

Have you considered that RMDs and other income may creep you just into the next IRMAA tier? It would be a shame to hit that and realize that a little blip of a Roth conversion in 2023 and years after might have averted that.

My income and tax situation over the years would be very confusing to an outsider. While I was working, my peak years income was so high that I usually paid more in taxes that the median household income in the US. For the last 5 or six years, my income has been all from qualified dividends and interest and low enough that I have paid $0 in federal tax. Now that I have hit the speed limit of 65, my dividend income keeps increasing, my pension has started and when I start taking SS, I'll already be in the first IRMAA tier. I figure that over my lifetime, it'll all average out ok.

 

[5Miler]

This makes some sense - to have a certain amount of funds in "tax free" accounts. I hadn't quite thought about the fact that many retirees could have most of their funds in tax-deferred accounts, as my portfolio will be skewed more towards taxable brokerage vs tax-deferred accounts.

I have to admit to blindly just packing money into my 401K and traditional IRA accounts over the years without considering the flexibility allowed by funds in non tax deferred accounts. My tax deferred accounts represent over 80% of my holdings at this point. This after living entirely off my IRA for the first 9.5 years of my retirement. If I only knew then what I know now.

For some unknown reason I did take advantage of the opportunity in the 1990's to convert all my Traditional IRA holdings ($18K) to a Roth and spread the tax payments out over, I believe it was three years. Glad now I had a glimmer of forethought at that time. Unfortunately I went back to sleep after that.

 

[target2019]

We have this breakdown from end of 2022 with type of accounts:

21.2% Taxable
57.0% Tax Def'd
21.7% Tax Free

When I look at the allocations, it looks flexible enough to me for the present.

 

[LateToFIRE]

I have to admit to blindly just packing money into my 401K and traditional IRA accounts over the years without considering the flexibility allowed by funds in non tax deferred accounts. My tax deferred accounts represent over 80% of my holdings at this point. This after living entirely off my IRA for the first 9.5 years of my retirement. If I only knew then what I know now.

For some unknown reason I did take advantage of the opportunity in the 1990's to convert all my Traditional IRA holdings ($18K) to a Roth and spread the tax payments out over, I believe it was three years. Glad now I had a glimmer of forethought at that time. Unfortunately I went back to sleep after that.

Don't feel too bad about that - I too did the max 401K thing for the past 30 years, basically set it and forget it, because I have (1st world problem) been in or near the highest tax brackets for a lot of those years. Also contributed, along with DW, max to after-tax t-IRA's (for reasons I'm scratching my head on right now). At least DW was able to back-door her IRA contributions to Roth.

Our taxable brokerage balances come from lumpy windfalls: sale of real estate, RSU/stock proceeds, inheritance, and other long forgotten sources, etc., basically stuff we've already paid mucho taxes on and may have future capital gains taxes.

Believe me when I tell you, there wasn't some genius plan to create tax-free funds for retirement.

Rough Breakdown (once all r.e. sales completed):

Tax-free: 15%
Taxable/Brokerage: 50%
Tax-Deferred: 35%
[corrected]

As you can surmise, the RMD's will become a real headache at age 75, just not sure whole lot I can do about that as window for conversions will be short owing to taxable income/gains from RSU's, deferred comp, asset sales, etc. creating tax noise before SS/pension kick in. Not bad problems to have, but problems nonetheless.

 

[Sunset]

This makes some sense - to have a certain amount of funds in "tax free" accounts. I hadn't quite thought about the fact that many retirees could have most of their funds in tax-deferred accounts, as my portfolio will be skewed more towards taxable brokerage vs tax-deferred accounts.

That is us, as we were very "good" at saving in IRA/401K's due to no pension for me.

For us having a Roth is a comfort. To have an account of money that earns tax free income so it stays equal/better than inflation fairly easily and should we need extra $$ it's there.

Our plan had been to build it up to buy a house to move, not sure now if we will move.

 

[karen1972]

Laws keep changes, life keeps changes, my decision to convert or not keeps changing.

I converted aggressively in my 40s. I didn't think my taxable would make it to 59.5 and with low interest rates the 72t didn't make sense (luckily they fixed that).

Extended I-ORP showed a $4-5k/year lifetime difference between converting and not, that was enough for me to take action, plus it just gives me more flexibility having tax free income to cover lumpy expenses and not having to worry about a big tax surprise.

I'm now at the point I-ORP has under $1k difference, so I"m now down to just doing conversions if I have free space in the zero tax bracket created by the standard deductible and HSA tax credit.

Granted everything will change once again if we finally get married. More incentive now that they changed the inherited IRA rules for non-spouses.

 

[Alex The Great]

Currently I do have around $250K in Roth. The only time I converted $50K from tIRA into Roth was this year as I anticipated lower income due to retirement. But in fact it turns to be high income year since I've been laid off with severance package. The remaining balance is solely due to Mega Backdoor Roth I extensively used during the last five years, after employers started to offer after tax 401K. There is still a substantial balance left in 401K and tIRA: my plan is to convert it in small amounts each year to fit ACA requirements.

 

[karen1972]

We have this breakdown from end of 2022 with type of accounts:

21.2% Taxable
57.0% Tax Def'd
21.7% Tax Free

When I look at the allocations, it looks flexible enough to me for the present.

After 9 years of converting I'm finally at

28% Taxable
47.5% Tax Def'd
22.5% Tax Free

I started at 7% tax free as same issue.. single high earner, not much choice.

I broke it down further to split taxable, so total leaves me 61% of invested money to still to be taxed. If I add the house equity, that puts my NW at 50% to still be taxed which doesn't seem bad.

 

[FREE866]

After 9 years of converting I'm finally at

28% Taxable
47.5% Tax Def'd
22.5% Tax Free

I started at 7% tax free as same issue.. single high earner, not much choice.

I broke it down further to split taxable, so total leaves me 61% of invested money to still to be taxed. If I add the house equity, that puts my NW at 50% to still be taxed which doesn't seem bad.

Interesting
I guess all tax free would be ultimate goal right?
After three years of conversions my assets are :
50 % taxable
43% tax deferred
7% tax free

The 50% taxable is almost all equity though and liquidations will be effectively tax free as they are long term capital gains.

 

[karen1972]

Interesting
I guess all tax free would be ultimate goal right?
After three years of conversions my assets are :
50 % taxable
43% tax deferred
7% tax free

The 50% taxable is almost all equity though and liquidations will be effectively tax free as they are long term capital gains.

My goal isn't tax free, just evenly lower taxes over my remaining lifetime..

I hope my LTCGs are free, but I leave them in the "to be taxed" pile because I don't know what will happen. I had 2 stocks just this year go from public to private forcing sale...stuff happens outside ones control.

 

[ExPatKiwi]

I've been using tIRA backdoor conversion to ROTH for my DW and myself for the last 6 years now and also started mega backdoor (after-tax 401k) to my ROTH the last 6 years or so. I'm already maxing out pre-tax 401k and HSA's so only after-tax $$ to play with so may as well fill the ROTH accounts.

I feel the tax free ROTH will help immensely in retirement as CT has a retirement income tax exemption but steep cliff drop off at $100k AGI (not inflation adjusted). So the plan is to tap 401k/IRA's up to the CT cliff $100k to live off and or convert some to ROTH in early retirement prior to SS. We will use the ROTH accounts for cash needs as needed to keep us under the CT income tax exemption limit.

 

[jj]

Laws keep changes, life keeps changes, my decision to convert or not keeps changing...

Granted everything will change once again if we finally get married. More incentive now that they changed the inherited IRA rules for non-spouses.

my bold

Karen, I'm not sure I'm following what you mean here. Is your partner more than 10 years younger than you? If they're not then the rule forcing them to empty out your IRA within 10 years doesn't apply to them.

"Eligible Designated Beneficiaries – a group that includes surviving spouses, persons who are disabled, persons who are chronically ill, persons who are not more than 10 years younger than the decedent, and minor children – were allowed to continue stretching distributions from inherited retirement accounts."

 

[Winemaker]

^^^ The more $$$ I have in my Roth, and the less I have in my tIRAs, the better for my kids and grandkids.

 

[Gumby]

I've been using tIRA backdoor conversion to ROTH for my DW and myself for the last 6 years now and also started mega backdoor (after-tax 401k) to my ROTH the last 6 years or so. I'm already maxing out pre-tax 401k and HSA's so only after-tax $$ to play with so may as well fill the ROTH accounts.

I feel the tax free ROTH will help immensely in retirement as CT has a retirement income tax exemption but steep cliff drop off at $100k AGI (not inflation adjusted). So the plan is to tap 401k/IRA's up to the CT cliff $100k to live off and or convert some to ROTH in early retirement prior to SS. We will use the ROTH accounts for cash needs as needed to keep us under the CT income tax exemption limit.

The $100k cliff for pension income and tIRA withdrawal exemptions is going away starting in tax year 2024. https://www.cl-law.com/news-events/...-of-the-2024-2025-connecticut-biannual-budget and https://ctmirror.org/2023/08/14/ct-...,annuities and individual retirement accounts.

 

[thod]

I am at:
54% tax deferred
40% taxable
6% tax free

The 6% tax free was 4% contributed while working and only 2% via roth conversions the last 3 years since we retired.

I am trying to figure out how to convert more of the tax deferred in the coming years, but I have to be careful due to the ACA subsidies I could lose.

But for the most part we live off of the dividends (50%) and capital gains in the taxable account (50%) each year.

If ACA was not involved I would be doing alot more conversions.

 

[LateToFIRE]

The $100k cliff for pension income and tIRA withdrawal exemptions is going away starting in tax year 2024. https://www.cl-law.com/news-events/...-of-the-2024-2025-connecticut-biannual-budget and https://ctmirror.org/2023/08/14/ct-...,annuities and individual retirement accounts.

Maybe trying to stem the outflow of well-heeled retirees