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

[Davidoff]

Conversions weren't justified in regards to savings

The small amount I would have saved with a Roth conversion didn't justify the effort in my mind. I've kind of adopted the attitude that I won't worry too much about trying to nickel-dime things. I have a sizeable IRA and a good pension, and with SS starting in a few months, I won't (haven't) need to touch the IRA. As for RMDs, I will either use them to travel, buy toys, or likely (after setting aside enough for taxes) re-invest them in a taxable stock account.

 

[carty1]

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 say "NO" to Roth conversions too! Almost same reasons you have, except I'm in a low tax bracket (and I want to keep it that way).

 

[big-papa]

I would put it this way. I'd very much like to, but no matter how I've twisted the numbers so far, the result always comes out the same for us, it's marginal. And because part of doing this sort of analysis includes some estimations about the future, it wouldn't take much of a change in how the future actually unfolds for this to go from marginal to "tell me, why did you do this again?"

This has not stopped me from continually trying to squeeze the turnip, mind you.

Cheers,
Big-Papa

 

[Sunset]

The small amount I would have saved with a Roth conversion didn't justify the effort in my mind. I've kind of adopted the attitude that I won't worry too much about trying to nickel-dime things. I have a sizeable IRA and a good pension, and with SS starting in a few months, I won't (haven't) need to touch the IRA. As for RMDs, I will either use them to travel, buy toys, or likely (after setting aside enough for taxes) re-invest them in a taxable stock account.

I don't get the idea it's a lot of effort, literally it takes me about 3 minutes to transfer from my IRA to Roth some $$$ or stocks.

I'd do it even if there is no tax savings, as it gives me an account with non-taxable cash that I can draw on for a giant purchase if needed.

 

[RetireBy90]

I don't get the idea it's a lot of effort, literally it takes me about 3 minutes to transfer from my IRA to Roth some $$$ or stocks.

I'd do it even if there is no tax savings, as it gives me an account with non-taxable cash that I can draw on for a giant purchase if needed.

+1

 

[indiajust]

Inheritance taxes seems to be a big part of the decision. I just read this months Schwab newsletter, and they had an article on transferring assets to their parents while altering parents wills to skip to their grandkids. First I have heard of such convoluted strategy. It serves to address the same issue, taxes.

 

[Dtail]

+1

Yup my decision is totally based on how can I maximize funds. The work involved for a conversion is minimal.

 

[CRLLS]

I don't get the idea it's a lot of effort, literally it takes me about 3 minutes to transfer from my IRA to Roth some $$$ or stocks.

I'd do it even if there is no tax savings, as it gives me an account with non-taxable cash that I can draw on for a giant purchase if needed.

The effort is spent in the analysis. not the actual doing. In engineering it is called Analysis Paralysis. So long as you keep running the numbers, you aren't making a mistake.

I agree with the 2nd part and have used it. That non-taxable cash account helped me pay off my home mortgage a few years ago.

 

[pb4uski]

I say "NO" to Roth conversions too! Almost same reasons you have, except I'm in a low tax bracket (and I want to keep it that way).

If you are currently in a low tax bracket and will also be in a low tax bracket in retirement once SS and RMDs start then that is a good decision.

What often happens is that people retire early and live off of savings until they start SS and during that time their income is low because they are living off of savings but once SS and RMDs start they will be in a high tax bracket and it is in those circumstances that Roth conversions can be valuable.

 

[N02L84ER]

After we retired early, we were in the 0% tax bracket so we started converting enough to completely fill the standard deduction. Then the ACA insurance cliff came into existence so we limited the conversions to keep total income less than 400% of the federal poverty level. We converted over $320K and paid less than $900 total in taxes. This was spread over 15 years. The Roth IRAs now total near $1M. Before the conversions started, the Roth IRAs totaled less than $20K. Then my DH inherited a traditional IRA from his deceased father and we still had 5 years before Medicare started, so all Roth conversions were stopped. Once we are both over 65 years old, we currently plan to restart conversions and will target the top of the 12%/15% tax bracket until we are both doing RMDs from our own IRAs.

 

[Echard]

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.

Due to heavy after tax funds vs pre tax funds, we are in the 22% tax bracket. While there would be a benefit after age 75, due to RMD’s, late SS option, and after tax earnings, the thought of paying 22% to save after age 75 seems unattractive to me. Especially since my health isn’t ideal.

 

[meleana]

Our FA said we could do Roth conversions or not. Not going to have a HUGE effect in later years in terms of taxes, but helpful for our son tax wise IF he ends up inheriting the Roths. And of course if we end up having to draw for them later in life.



I really didn't want to do them, but then since they are kind of small (around $50,000 per year for just a few years- started last year since I was on an ACA plan before that and had to keep income low) and since we are waiting to collect SS until age 70. (Hubby is 69 and I am 67) and staying in the 12 percent tax bracket- I decided that if we just pay those taxes out of the conversion instead of our taxable accounts I am ok with it. And honestly we barely notice it.


I'm converting just the stock funds in the Traditional IRA's to Roths and keeping the bond funds and treasury money markets in the Traditional IRA's.



I liked the idea of keeping my after tax money that's essentially cash in a savings account. We live on it after all (no pensions) and then I wanted a buffer of cash for emergencies or whatever. Plus I didn't want to bother with the tax harvesting of our brokerage account to pay the taxes, but we could have maybe strategically used that account for the taxes. The holdings in it are very tax efficient.


That's our story and each year we will revisit the issue. Doesn't have to be all or nothing.

 

[pb4uski]

Due to heavy after tax funds vs pre tax funds, we are in the 22% tax bracket. While there would be a benefit after age 75, due to RMD’s, late SS option, and after tax earnings, the thought of paying 22% to save after age 75 seems unattractive to me. Especially since my health isn’t ideal.

Yeah, if you are already in the 22% bracket then there isn't much bang for the buck for Roth conversions to reduce RMDs. The biggest bang for the buck is 12%/22% where there is a 10 point gap between tax brackets.

 

[Midpack]

To satisfy my own curiosity, I went back and checked our analysis and found:

A) By converting to the top of the 22% bracket until age 71, we save $342K in Fed taxes and break even at age 83.
B) Had I converted to the top of the 24% bracket until age 71, we'd save $535K in Fed taxes and break even at age 87.

I began plan A in 2019 and will see it through. Now in 2023, we're on track as planned. There are obvious cases where Roth conversions are advantageous, and obvious cases where conversions provide no benefit - and we all land somewhere on that continuum depending on longevity, future tax brackets/rates, amount in deferred assets, various other assumptions, etc. Everyone should just do the math all else being equal - it all comes down to knowing your tax brackets before Soc Sec/RMDs/etc. and after. There is no free online calculator that can answer the question for all...and some FAs don't have a clue.

 

[misanman]

We have Roth converted in the past and I will look at it each year to see if it makes sense. I have a spreadsheet that calculates our tax liability as monthly actuals come in and as I explore various withdrawal/conversion alternatives. One reason we have converted is to allow us to smooth our taxable income year-to-year even though we might have occasional major expenses. I am planning to convert to the top of the 12% bracket (between $5k and $10k) this year.

 

[SevenUp]

A) By converting to the top of the 22% bracket until age 71, we save $342K in Fed taxes and break even at age 83.
B) Had I converted to the top of the 24% bracket until age 71, we'd save $535K in Fed taxes and break even at age 87.

How are you defining "break even"?

 

[DangerDad]

We haven’t done Roth conversions because of a high marginal tax rate due to a pension. It’s likely RMD’s will push us to a higher bracket but not enough difference to make Roth worthwhile. Those RMD’s are 14 years away—and who knows, they may get extended even further.

 

[Sunset]

We haven’t done Roth conversions because of a high marginal tax rate due to a pension. It’s likely RMD’s will push us to a higher bracket but not enough difference to make Roth worthwhile. Those RMD’s are 14 years away—and who knows, they may get extended even further.

I can see if getting pushed from 22 to 24% why worry...
But getting pushed from 24 to 32% is a big jump, and extra 8%

Just like the 10 to 12% not much savings, but
12 to 22% is a HUGE jump,of an extra 10%

 

[pb4uski]

I can see if getting pushed from 22 to 24% why worry...

But getting pushed from 24 to 32% is a big jump, and extra 8%



Just like the 10 to 12% not much savings, but

12 to 22% is a HUGE jump,of an extra 10%

+2. Since at the end of the day Roth conversions are just a tax rate arbitrage play, it works best in circumstances where you have large jumps between adjacent tax brackets and has negligible benefit where adjacent tax brackets are similar.

 

[ERD50]

Originally Posted by Midpack View Post
A) By converting to the top of the 22% bracket until age 71, we save $342K in Fed taxes and break even at age 83.
B) Had I converted to the top of the 24% bracket until age 71, we'd save $535K in Fed taxes and break even at age 87.

How are you defining "break even"?

I had only recently considered 'breakeven' for Roth conversions, but it is something to be aware of.

I did a spreadsheet, assuming 12% conversions of $50,000 for 5 years prior to RMDs on a starting $1M tIRA. Then 22% on the tIRA RMDs. I came up with a breakeven of ~ age 87.

That's because while you have reduced your tIRA balance, the RMD is only a % of that, so it takes time to get all your money back in savings. At least that's how I see it.

But then, if your heirs are at a tax rate > 12%, they will continue to see the benefit, so now what do we make of it? I'd say not much overall, I'll just stick to the basic math.

It's tempting to go into the 22% bracket for conversions, assuming we don't pass at near the same time, one of us will be pushed into the higher single rates. But that's a tough tax-bill to swallow, and it takes even more assumptions, so I'm just sticking with the almost certain 12/22 arbitrage.

And if we both pass before that break-even, who cares - it's not like we depleted our savings with that tax bill, so no real impact on quality of life. Heirs benefit, so it's all OK.

-ERD50

 

[DangerDad]

I can see if getting pushed from 22 to 24% why worry...
But getting pushed from 24 to 32% is a big jump, and extra 8%

Just like the 10 to 12% not much savings, but
12 to 22% is a HUGE jump,of an extra 10%

Yes, I think most people understand that an 8 or 10 % projected difference in marginal tax rate would favor Roth conversions. The examples you used don’t apply to me but your point is well taken.

 

[SevenUp]

I had only recently considered 'breakeven' for Roth conversions, but it is something to be aware of.

I did a spreadsheet, assuming 12% conversions of $50,000 for 5 years prior to RMDs on a starting $1M tIRA. Then 22% on the tIRA RMDs. I came up with a breakeven of ~ age 87.

That's because while you have reduced your tIRA balance, the RMD is only a % of that, so it takes time to get all your money back in savings. At least that's how I see it.

But then, if your heirs are at a tax rate > 12%, they will continue to see the benefit, so now what do we make of it? I'd say not much overall, I'll just stick to the basic math.

It's tempting to go into the 22% bracket for conversions, assuming we don't pass at near the same time, one of us will be pushed into the higher single rates. But that's a tough tax-bill to swallow, and it takes even more assumptions, so I'm just sticking with the almost certain 12/22 arbitrage.

And if we both pass before that break-even, who cares - it's not like we depleted our savings with that tax bill, so no real impact on quality of life. Heirs benefit, so it's all OK.

-ERD50

Re: "it takes time to get all your money back in savings."

That's the main part I don't understand. The $1M was sitting in the tIRA, and you took advantage of the opportunity to pay only 12% tax in order to get it into the Roth, from which it can be spent tax-free at any time.

Had you not done so, it would now require paying 22% to get at the tIRA money for any spending, so it seems your payoff is "immediately upon having a 22% marginal tax rate instead of 12%."

 

[NgineER]

Our FA said we could do Roth conversions or not. Not going to have a HUGE effect in later years in terms of taxes, but helpful for our son tax wise IF he ends up inheriting the Roths. And of course if we end up having to draw for them later in life.

I think it could have a huge effect on taxes paid when one spouse passes, but likely not a huge impact on the two of you. I think this can often be missed if there is not a holistic view till end of life for both.

 

[Peter]

I think it could have a huge effect on taxes paid when one spouse passes

This has been mentioned a few times, but it assumes (I think) that income remains the same, and tax brackets change to 'single' from 'married filing joint'.


In our case, when I die, income from social security and two pensions will go away, so the problem could be reduced income rather than increased tax.

 

[RunningBum]

Re: "it takes time to get all your money back in savings."

That's the main part I don't understand. The $1M was sitting in the tIRA, and you took advantage of the opportunity to pay only 12% tax in order to get it into the Roth, from which it can be spent tax-free at any time.

Had you not done so, it would now require paying 22% to get at the tIRA money for any spending, so it seems your payoff is "immediately upon having a 22% marginal tax rate instead of 12%."

+1. That's exactly how you should look at a Roth conversion.