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

[Gumby]

My interpretation was taking capital gains while your income is less than the threshold for the 15% rate on taxable gains (in 2023 that's $89,250 in taxable income for MFJ). So you pay zero percent on the capital gain, then you immediately rebuy and reset yourself to a higher basis.

...If you sell then repurchase after 30 days...

There is no wash sale rule for capital gains, only for losses. So you can rebuy and reset your basis immediately.

 

[pb4uski]

Read all 22 pages today with only one question, for poster Sunset.

On the first page, you mentioned: "OP - Do you do long term capital gains harvesting to get tax free money or are your pensions too high ?'

Do you mind clarifying what is meant by long term capital gains harvesting for tax free money? I seem to always pay taxes on my LT capital gains.
Thanks

My interpretation was taking capital gains while your income is less than the threshold for the 15% rate on taxable gains (in 2023 that's $89,250 in taxable income). So you pay zero percent on the capital gain, then you immediately rebuy and reset yourself to a higher basis.

Edit to add. There is no wash sale rule for gains, only for losses. So you can rebuy and reset your basis immediately.

+1 I think Sunset was talking about taking advantage of the 0% capital gains tax bracket if you have hedadroom to do so.

So for example, let's say that it is late December and you know what your 2023 tax return numbers will be and that your taxable income will be $10,000 below the top of the 0% tax bracket.

You would sell some assets in taxable accounts that have unrealized long-term gains sufficient to generate a taxable gain of $10,000 and that $10,000 gain would have $0 tax.

After that, you can either do nothing and keep the proceeds from the sale for spending or you could even buy back the same ticker seconds later and effectively increase your cost basis of that lot for no cost.

 

[RetireBy90]

There is no wash sale rule for capital gains, only for losses. So you can rebuy and reset your basis immediately.

I stand corrected. Thanks for mentioning that

 

[SunnyOne]

I am familiar with tax loss harvesting and do it myself, but was thrown off by tax gain harvesting and wondered if it was some cool trick I had yet to learn of...and how it might different from regular LT equity sales.

 

[livingalmostlarge]

I am doing some small Roth conversions for my dad because he's about to pass so that the rmd doesn't kill my mom who is 21 years younger when she has to take it. It's not a lot but they should have been converting this entire time a little like $10k a year.

That being said I know people who do taxes for a living, an old coworker who tells her clients to do a Roth 401k and they are in the 37% bracket. I'm like in retirement they are going to be making $700k income? Okay that's nuts but sure. You know how big a portfolio you need to have that much? Most people don't get there but ok

 

[RetireBy90]

I am doing some small Roth conversions for my dad because he's about to pass so that the rmd doesn't kill my mom who is 21 years younger when she has to take it. It's not a lot but they should have been converting this entire time a little like $10k a year.

That being said I know people who do taxes for a living, an old coworker who tells her clients to do a Roth 401k and they are in the 37% bracket. I'm like in retirement they are going to be making $700k income? Okay that's nuts but sure. You know how big a portfolio you need to have that much? Most people don't get there but ok

I/we are no where near that income level to pay that much tax, but my last 5 years working I put all my 401k contributions to a Roth. Paid at 22% rate at the time and now we are also in 22% so no savings for doing the Roth when I did, however it gave me flexibility to draw what I want/need at any time now that I'm over 59.5, also makes the RMDs manageable, and will make managing tax rate easier from here on. For me, I'll pay the same rate so I don't see any advantage to defer (rates could go up or down) and I'm done paying taxes on the Roth funds. Just a small load off my mind.

All said, some funds in Roth and some TIRA gives flexibility, IMHO

 

[PERSonalTime]

I've not read the entire thread, but feel as if I've seen the discussion many times before! The rigor one puts in determines the accuracy. I have yet to see in the thread an approach that wasn't filled with holes, inaccuracies, etc. Each introduce imprecision. Most end up showing the comparison to be within the margin of error they design into their analysis.

Not sure the OP is still tuned in, but in other words, pick an approach & don't worry about it, You say you don't feel like fooling with it? Then don't. If you'd feel better, a model can be formed to show you are right.

I’m still here. I really appreciate everyone’s response. This has been a very interesting thread!

 

[PERSonalTime]

Thanks for starting this thread. It was useful as people gave reasons why and why not although you asked for the why nots. It brought some clarity to my decision. We have done them to control ACA subsidies and stay out of Medicaid. I was not sure, if we should continue until I put together a spread sheet with modest gains and realized we will move from 12% into 22% (25%) not too long after I have to start RMDs. So, it’s a given for us for now unless something changes. We can probably delay that higher tax bracket for a number of years depending on the conversions. I think to know why not you have to have the why as well. Thanks again for starting this very informative discussion.

Thanks, djsander for the response. Your appreciation is greatly appreciated!

 

[PERSonalTime]

Echoing the thanks for starting this thread. Observing and engaging in the discussion has been extremely helpful to my understanding of the issues and questions.

Keying in on the issue of UNCERTAINTY, it's clear that this aspect of the question - to convert or not to convert - cuts both ways. For those of you who can convert within fairly low tax brackets, it certainly seems well worth it. As someone put - you're taking uncertainty OFF the table. Into the 22% and above brackets, the answers start getting way fuzzier and a whole lot less CERTAIN.

Thank you for your response. I think what we finally decided to do was to do some small conversions of DW’s T-IRAs. It won’t do much, but it may help to lower her RMD‘s at the time when they come.

 

[PERSonalTime]

While the money is in the traditional account, it's part yours and part Uncle's.

When you convert, you keep the part that's all yours. Best to do that when you get to keep the largest part - i.e., when the tax rate is lowest.

The commutative property of multiplication governs many conversion results.

+1

 

[target2019]

This thread is still timely, and very interesting. Would be nice to have an AI bot on hand to generate a summary...Lol

We just closed out one of her IRA's at Vanguard, and did that by converting 1/2 last year, and 1/2 just this week. If you have a smallish account, it may help you to dispose of it in this way (convert to Roth). One less thing on your retirement plate to monitor. For us, one less fund, one less account to track.

 

[pb4uski]

^^^ Yup. Last week I withdrew a small inherited IRA for the same reason, one less account to track and I don't have to worry about forgetting to take an RMD and get penalized or forget to drain it after 10 years and get penalized and I have loads of tax deferred funds in other IRAs.

 

[Route246]

We have not done any Roth conversions for the same reasons people have listed here. It never made sense as we live below our means and RMD, SS, etc. (We are 66/65) will always keep us in a high bracket and I am still working at maximum earning power at age 66. Our IRA/401 assets are around 3M, investable around 11M, not including real estate. CPA told us we will always be in a high bracket and will always be paying high tax as we do plan to sell equity positions at some point and pay capital gains. Why should we contribute taxes in the highest bracket now on money that is not needed and probably will never be needed? Additionally, we pay a huge penalty in losing the compounding that the government now subsidizes through tax deferment. It never made sense as our savings always far exceeded our retirement needs (assuming I did not die early). We have so much deferred capital gains in our brokerage account side that just the rebalancing is going to handcuff us to being in a high bracket for the rest of our lives. Roth really does nothing for us in that mode of operation except severely reduces compounding our our taxable equity base. I was always suspicious and felt it was a scam by the feds to get some tax relief now. Maybe I'm wrong but it doesn't mean I made a mistake.

 

[pb4uski]

...Roth really does nothing for us in that mode of operation except severely reduces compounding our our taxable equity base. I was always suspicious and felt it was a scam by the feds to get some tax relief now. Maybe I'm wrong but it doesn't mean I made a mistake.

Yup. You're wrong. It's not a scam. But it's also not designed to provide tax benefits to someone with $14m + in assets so you're right that Roth conversions don't work in your rare circumstances.

No disrespect intended but why in the world are you still working?

 

[Out-to-Lunch]

Principally, Roth conversions provide an opportunity for tax-rate arbitrage across time. If you will always be in the top rate, it is true that little or no benefit could be expected.

But you evidently have a misconception regarding the "huge penalty in losing the compounding that the government now subsidizes through tax deferment." The commutative law of multiplication assures us that it makes no difference if you realize gains first, then pay taxes, or pay taxes first, then enjoy gains.

 

[pb4uski]

... But you evidently have a misconception regarding the "huge penalty in losing the compounding that the government now subsidizes through tax deferment." The commutative law of multiplication assures us that it makes no difference if you realize gains first, then pay taxes, or pay taxes first, then enjoy gains.

I noticed that error in his thinking too. An example, let's say you're in the 40% tax bracket and have $1m in tIRA and the investment will triple over 10 years.

Scenario A: Convert and pay $400k in tax, then the remaining $600k triples in value over 10 years to $1.8m tax-free.

Scenario B: Don't convert and the $1m triples to $3m in 10 years. Then you take it out, pay 40% ($1.2m) in taxes and have $1.8m to spend.

Same thing... deferral of taxes does nothing for you if the tax rate is the same!

 

[Sunset]

We have not done any Roth conversions for the same reasons people have listed here. It never made sense as we live below our means and RMD, SS, etc. (We are 66/65) will always keep us in a high bracket and I am still working at maximum earning power at age 66. Our IRA/401 assets are around 3M, investable around 11M, not including real estate. CPA told us we will always be in a high bracket and will always be paying high tax as we do plan to sell equity positions at some point and pay capital gains. Why should we contribute taxes in the highest bracket now on money that is not needed and probably will never be needed? Additionally, we pay a huge penalty in losing the compounding that the government now subsidizes through tax deferment. It never made sense as our savings always far exceeded our retirement needs (assuming I did not die early). We have so much deferred capital gains in our brokerage account side that just the rebalancing is going to handcuff us to being in a high bracket for the rest of our lives. Roth really does nothing for us in that mode of operation except severely reduces compounding our our taxable equity base. I was always suspicious and felt it was a scam by the feds to get some tax relief now. Maybe I'm wrong but it doesn't mean I made a mistake.

Your taxable account will pass tax free to your beneficiaries (including spouse) due to the step up in basis. So you could consider not going out of your way to realize those gains unless of course you need the money.

 

[Route246]

First, we were never planning on saving any certain amount but I believed in maximizing our position in equities for the long term and paying taxes from a high bracket was always an unpleasant thought given the importance of compounding with a multi-decade time horizon. My annual maximum 401-K contribution to SPY and equivalents has turned out pretty well in spite of two painful hits along the way. Add to that other after tax contributions into equities and the result was what we have today. CPA looked at my career earning power and long term prospects of savings and investment in equities and always advised against Roth and I trusted him for this.

Regarding why I'm still working is two-fold. First, I studied and worked to attain maximum earning power and I'm in a field where my qualifications, skills and productivity is in very high demand. I achieved critical mass about 10 years ago (give or take a few depending on the market) so at that point I was working voluntarily, not to pay bills or fund lifestyle. The field has become quite a lucrative niche, I'm publicly respected in the field and I'm obviously not working for the money. So, I guess you can say I'm working out of habit and ego and the desire to continue to contribute. I also have a supportive wife who prefers me out of the house, too, LOL. There are plenty of very wealthy people in technology who are like me, working because we enjoy the challenge and mental stimulation and to be blunt, we probably would not do so well in retirement as we all know horror stories of colleagues who retired to the couch and watch too much Netflix (or other activities that contribute to a lack of brain stimulation).

Yup. You're wrong. It's not a scam. But it's also not designed to provide tax benefits to someone with $14m + in assets so you're right that Roth conversions don't work in your rare circumstances.

No disrespect intended but why in the world are you still working?

In my/our case I realized that the amount of taxable income to our graves is always going to be high and it is a wonderful problem to have. I used to hear those ads saying the theory that you will be in a lower tax bracket when you retire and withdraw so deferring the taxes is a good thing from that perspective. To my horror our CPA told us due to the structure of our portfolio we will probably always be in a very high bracket and trust me, we are very happy and thankful that we have this problem, but there is principle involved and while I don't like paying a lot of taxes, for us at least, the alternative would mean less assets, less financial security and less flexibility which is not a good trade-off.

Circling back, I sort of planned on having quite a bit for retirement, I just wasn't sure as death, divorce, health issues, loss of earning power, etc. can happen so uncertainty was always part of the calculus. At one time I had so much term life insurance (2M) that I was worth much more dead than alive, at least from my wife's perspective. Roth just never looked attractive, even when I didn't have much and my plan to get to critical mass (FI) was going to be slowed down moving funds to a Roth, in my opinion.

Principally, Roth conversions provide an opportunity for tax-rate arbitrage across time. If you will always be in the top rate, it is true that little or no benefit could be expected.

But you evidently have a misconception regarding the "huge penalty in losing the compounding that the government now subsidizes through tax deferment." The commutative law of multiplication assures us that it makes no difference if you realize gains first, then pay taxes, or pay taxes first, then enjoy gains.

 

[SevenUp]

...our CPA told us due to the structure of our portfolio we will probably always be in a very high bracket....

Depending on the definition of "very high" compared with where you are now, Roth could be better for you due to the way "Traditional plus taxable" vs. Roth works.

 

[Winemaker]

I noticed that error in his thinking too. An example, let's say you're in the 40% tax bracket and have $1m in tIRA and the investment will triple over 10 years.

Scenario A: Convert and pay $400k in tax, then the remaining $600k triples in value over 10 years to $1.8m tax-free.

Scenario B: Don't convert and the $1m triples to $3m in 10 years. Then you take it out, pay 40% ($1.2m) in taxes and have $1.8m to spend.

Same thing... deferral of taxes does nothing for you if the tax rate is the same!

While I argued this point with myself and others for a while, I was not including the NIIT tax and the IRMAA penalties in the analysis. I am converting up to the IRMAA II level and well short of the added 3.8% of NIIT.

 

[Slim11]

I went back and forth on this issue also. At first it seemed that it was almost a wash. But, who knows what will happen in the future? Codes change, taxes change, brackets could change. So while it still seems like a bit of work to not get a lot of reward, its another mechanism to spread out your money and cover all the bases. So I am going with converting a little bit at a time over the next 10 years and spliting my 457 in half, so half to the roth half in the 457. At that point I will reassess the strategy and see if its worth doing more. I dont see myself spending the money, but leaving it to the kido. But If I do need it it will be thier. I am 50, so a ways to go still.

 

[LateToFIRE]

Similar to Route246, but not quite at their admirable level of assets, I have grappled with this idea of being in a relatively high tax bracket in retirement. What I've determined after much analysis is that during a window between various taxable near-term liquidity events (ex. sale of r.e., RSU's, etc.) but before RMD's kick in I could have a handful of years in a reasonably low tax bracket as I would be living off of what you might think of as already taxed funds, or rather a taxable portfolio in which a large chunk of the investments would have little by way of gains (because I would have already been taken to the cleaners on taxes, at the highest rates imaginable, ugh). Anyhow, putting the tiny violins aside, I intend to utilize this window to do some amount of Roth conversions, not that I'm convinced I'll come out ahead in the end, but more as a down the middle approach in the face of many unknowns, including a bet that there is a reasonably high probability the future will involve higher overall tax rates.

 

[jazz4cash]

Paid at 22% rate at the time and now we are also in 22% so no savings for doing the Roth when I did, however it gave me flexibility to draw what I want/need at any time now that I'm over 59.5,

All said, some funds in Roth and some TIRA gives flexibility, IMHO

I have the same view of Roth conversions. The benefit is flexibility, not necessarily tax savings. Flexibility makes me happy!

 

[pb4uski]

While I argued this point with myself and others for a while, I was not including the NIIT tax and the IRMAA penalties in the analysis. I am converting up to the IRMAA II level and well short of the added 3.8% of NIIT.

Does NIIT apply to tax-deferred withdrawals? I don't think so in which case it would not impact the example. And I think IRMAA would kick in both cases.

In any event, I think the bottom-line conclusion that there are no savings from continued deferral if the tax rates are the same.

 

[pb4uski]

....I used to hear those ads saying the theory that you will be in a lower tax bracket when you retire and withdraw so deferring the taxes is a good thing from that perspective. ...

I think many of us deferred income while we were working under that premise that our tax rate in retirement would be lower than our tax rate while working and for most people that is true.

I know in my case it is. As much as I bellyache about taxes on tax-deferred withdrawals, Roth conversions and RMDs, at the end of the day the tax that I am paying on those are still less than the tax I avoided when I deferred that income. Not only that, when I deferred the income the income would have been subject to state income tax and now I reside in a no income tax state so there are additional savings.

For those whose tax rate in retirement is more than it was when you deferred that income... CONGRATULATIONS! You have obviously been much more financially successful than you were when you decided to defer that income so it is somewhat of a success tax.