At what point did you stop doing Roth conversions?

[misanman]

I guess it wasn't clear to me that care in a ltc facility was considered 100% medical, and thus deductible as such. Are in home assisted living expenses deductible? Are on site assisted living expenses deductible. Is there a housing or meals portion that is not deductible? I can imagine that custodial care in a skilled nursing facility could be completely deductible but not sure where the line is drawn for other situations.

 

[SecondCor521]

I guess it wasn't clear to me that care in a ltc facility was considered 100% medical, and thus deductible as such. Are in home assisted living expenses deductible? Are on site assisted living expenses deductible. Is there a housing or meals portion that is not deductible? I can imagine that custodial care in a skilled nursing facility could be completely deductible but not sure where the line is drawn for other situations.

https://www.irs.gov/pub/irs-pdf/p502.pdf

 

[SAinMinn]

I'm in almost exactly the same boat. Age 54.5. Converted to the top of the 24% bracket this year, top of the 22% last year. Figure I'll keep it up through 2026. If all goes well, I'll have about 1M in each pre-tax and Roth, after drawing down my taxable brokerage account to pay the taxes. We shall see.

 

[RetireBy90]

I'm in almost exactly the same boat. Age 54.5. Converted to the top of the 24% bracket this year, top of the 22% last year. Figure I'll keep it up through 2026. If all goes well, I'll have about 1M in each pre-tax and Roth, after drawing down my taxable brokerage account to pay the taxes. We shall see.

I’ve been converting for 2 years now, trying to stay under IRMAA limit do $228K I think it is. Hope to continue for at. Least 2 more years at this level, then at a lower rate. My problem is all the booze I have to drink when I write those quarterly checks. Makes me cry every time.

 

[Koolau]

I stopped converting when every one of my tIRAs had been converted to Roth. At that point (and currently) my only non-Roth money in qualified plans is my one 401(K) plan. IF I ever choose to do more conversions (unlikely) I would need to transfer 401(k) money to new tIRAs and then convert. Now, I have exactly one RMD. It simplifies things. And, yes, I did convert some 401(k) money to tIRAs in the past, followed by Roth conversion. YMMV

 

[pacmanhunter]

Please keep in mind that the Build Back Better bill is set to make major changes to the Back Door Roth Process, see below:

Build Back Better Act Changes to Roth Conversions

The Build Back Better Act would put an end to these backdoor Roth conversions by prohibiting voluntary after-tax (non-Roth) contributions from being converted to Roth after-tax contributions effective December 31, 2021. The Build Back Better Act would also prohibit taxpayers from executing similar backdoor Roth conversions outside of the 401(k) context by rolling over after-tax amounts in traditional IRAs to Roth IRAs.

Of course, Senate approval of the Build Back Better Act is far from certain, but its passage by the House with these provisions makes it much more likely that if the legislation is ultimately enacted it would result in a sudden end to backdoor Roth conversions.

 

[DeborahB]

This has been an interesting discussion. I don’t think there is really any way to calculate your future expenses accurately. I retired at 62, 11 years ago. It was before the ACA existed so that did not factor into my scenarios. When I was working, I converted IRA $ to Roth IRAs to the extent I could. It raised my taxes so I had to be careful.

I took SS at 62 1/2 to have some sort of income stream. I don’t regret that decision. I wanted to get my money so if they changed the rules I wouldn’t get screwed.

But I’ve had life and expense changes! At 69 I moved across the country, bought a house with a mortgage after having no mortgage for years. My property taxes tripled. So - completely unable to plan ahead for this. It’s a huge improvement in my life, but expensive.

At the moment about 50% of my investments are taxable, 30% are in a conventional IRA, 20% in a Roth. The reason I have 20% in a Roth is that I converted a lot when I was working. My investments are almost entirely in individual stocks, most of which pay dividends. I tap the accounts in whatever manner makes sense at the time, for my expenses.

It is better for me to have a mortgage (refinanced for 30 years at 2.875%) so I can deduct the interest and my property tax, medical expenses and so on. I could pay off the mortgage but I’d lose the tax benefits.

I think conversions are a great idea - I wasn’t able to do as much as I wanted. But I think life brings financial adjustments. I am doing well, thanks to the stock market rise. I think I live on $60-$70K a year, but haven’t kept close track. Over 11 years my investments have grown, despite my expenses.

Based on my family history, I’m likely to live to be fairly old. I will personally finance any LTC needs. If my quality of life is not good, I plan to die. I’ve seen the alternatives, no thank you. So far - I’m 73 and enjoying life. Good luck to everyone.

 

[Sanbenito1]

I am doing Roth conversions up to the top of my current tax bracket until age 72 and RMDs start. Main reason is because of the inheritance tax. I have a modest house in Silicon Valley and in 20-30 years it alone may put my estate at the top of the current estate tax. I expect the estate tax will get pushed back to lower levels to help pay for our deficit.

 

[Exchme]

Please keep in mind that the Build Back Better bill is set to make major changes to the Back Door Roth Process, see below:

Build Back Better Act Changes to Roth Conversions

The Build Back Better Act would put an end to these backdoor Roth conversions by prohibiting voluntary after-tax (non-Roth) contributions from being converted to Roth after-tax contributions effective December 31, 2021. The Build Back Better Act would also prohibit taxpayers from executing similar backdoor Roth conversions outside of the 401(k) context by rolling over after-tax amounts in traditional IRAs to Roth IRAs.

Of course, Senate approval of the Build Back Better Act is far from certain, but its passage by the House with these provisions makes it much more likely that if the legislation is ultimately enacted it would result in a sudden end to backdoor Roth conversions.

I saw a comment at Kitces.com that gave me concern a few months ago to the effect that this would prevent Roth Conversions if there was any after tax money in the IRA. I looked at the text of the bill and I'm not a tax attorney but it says it prohibits all conversions that contain money that would not be taxable if withdrawn.

About 20 years ago, I put a few thousand $ of after tax money in to my IRA. Looks like this will prevent me from doing any Roth Conversions whatsoever after Jan 1, even though the amount of after tax money is tiny. The technique of putting after tax money in the IRA was not only permissible but encouraged; now it could cost my estate hundreds of thousands! Perverse.

 

[Doc0]

I made my conversions based on where I wanted to be at age 70, now 72. If youanalythe progressivity of the tax law, the sweet spot at RMD is to have between 400K and 500K in tIRA. This RMD's roughly 4% the first year of between 16K and 20K, in my case aded to SS. Slightly more gets RMD'd every year. I calculate I can stay in the 12% bracket (or 15%) for about 15 years post RMD, which will be the majority if not all of my post age 72 life. In addition when I die my wife will have a smaller necessary RMD figured into her tax bill. A lot of people will have about 500K in IRA's so the government should treat this amount gently. Soak the rich commences at 22%.

My schedule of conversion was variable and decreasing as 72 aproaches. Because of the way we added SS. My wife is younger so she took at 62 and I claimed spousal. Ay 70 I went from spousal to full age 70 retirement and she continued age 62 benefits. At her FRA shewill claim spousal so our SS income ramped up. This means conversion had to ramp down as SS ramped up to keep me under 220K gross ordinary income. By doing it this way you avoid some of the cliffs built into the code. I also have been living off cash I specifically put away for Roth conversion so all of my taxes are due to conversion.

One feature of a 500K tIRA is you can take more than RMD out on any given year. This helps with SOR risk. If I take 30K out on good years I'm still below the 22% threshold. On bad years I can just take out the minimun RMD. Taxes are calculated on total tIRA size every year plus the age dependent RMD %, so on down years the portfolio would be down and the hit due to SORR is minimized. On up years you take out more than RMD but still under the amount which would kick you into the next bracket. You can always save some up year money to use as a buffer in down years.

 

[maestro]

Please keep in mind that the Build Back Better bill is set to make major changes to the Back Door Roth Process, see below:

Build Back Better Act Changes to Roth Conversions

The Build Back Better Act would put an end to these backdoor Roth conversions by prohibiting voluntary after-tax (non-Roth) contributions from being converted to Roth after-tax contributions effective December 31, 2021. The Build Back Better Act would also prohibit taxpayers from executing similar backdoor Roth conversions outside of the 401(k) context by rolling over after-tax amounts in traditional IRAs to Roth IRAs.

Of course, Senate approval of the Build Back Better Act is far from certain, but its passage by the House with these provisions makes it much more likely that if the legislation is ultimately enacted it would result in a sudden end to backdoor Roth conversions.

Wrong. With BBB, lawmakers would also close “backdoor Roth” tax loopholes, used largely by the rich, and prohibit further individual retirement account contributions once those accounts exceed $10 million.

 

[RunningBum]

I made my conversions based on where I wanted to be at age 70, now 72. If youanalythe progressivity of the tax law, the sweet spot at RMD is to have between 400K and 500K in tIRA. This RMD's roughly 4% the first year of between 16K and 20K, in my case aded to SS.

Have you compared $0 RMD vs $16-20K? The marginal rate might be a lot higher than you think, since you might hitting the SS torpedo.

One feature of a 500K tIRA is you can take more than RMD out on any given year. This helps with SOR risk. If I take 30K out on good years I'm still below the 22% threshold. On bad years I can just take out the minimun RMD. Taxes are calculated on total tIRA size every year plus the age dependent RMD %, so on down years the portfolio would be down and the hit due to SORR is minimized. On up years you take out more than RMD but still under the amount which would kick you into the next bracket. You can always save some up year money to use as a buffer in down years.

I take the opposite view. On a bad year you'd want to take out more, because you are able to withdraw or convert depressed shares and let the recovery take place in your taxable (getting the more favorable LTCG rates later) or Roth (growth is never taxed). Letting the recovery happen inside the tIRA means the growth will be taxed at the regular income rate when you eventually withdraw or convert it.

 

[maestro]

Please keep in mind that the Build Back Better bill is set to make major changes to the Back Door Roth Process, see below:

Build Back Better Act Changes to Roth Conversions

The Build Back Better Act would put an end to these backdoor Roth conversions by prohibiting voluntary after-tax (non-Roth) contributions from being converted to Roth after-tax contributions effective December 31, 2021. The Build Back Better Act would also prohibit taxpayers from executing similar backdoor Roth conversions outside of the 401(k) context by rolling over after-tax amounts in traditional IRAs to Roth IRAs.

Of course, Senate approval of the Build Back Better Act is far from certain, but its passage by the House with these provisions makes it much more likely that if the legislation is ultimately enacted it would result in a sudden end to backdoor Roth conversions.

Not all Roth conversions will be eliminated, and they would be a LONG way off. Fact check:
"Savers would be unable to convert pre-tax to Roth savings in IRAs and workplace retirement plans if their taxable income exceeds $400,000 (single individuals), $450,000 (married couples), or $425,000 (heads of household). It would start after Dec. 31, 2031."

 

[SecondCor521]

Not all Roth conversions will be eliminated, and they would be a LONG way off. Fact check:
"Savers would be unable to convert pre-tax to Roth savings in IRAs and workplace retirement plans if their taxable income exceeds $400,000 (single individuals), $450,000 (married couples), or $425,000 (heads of household). It would start after Dec. 31, 2031."

There is also a separate provision in the current version of the bill (the one that passed the House) completely prohibiting Roth conversions after the end of this year if a person has any post-tax traditional IRA contributions (aka traditional IRA basis).

Cite: HR5376, Section 138311(a)(1), page 2271 of PDF at https://www.congress.gov/bill/117th-congress/house-bill/5376/text

People with no post-tax contributions and under the income limits you cited would still be able to do Roth conversions.

 

[MarieIG]

Hmm, I removed all the post-tax money from my IRA over the past two years by following some advise from PB4uski. Seems that advice had an additional benefit that I had not foreseen . . .

I didn't make a contribution to my IRA this year, due to the prorata rule for conversions. But had I made such a contribution, it seems that it would have unwittingly torpedoed my plan for future conversions.

 

[MarieIG]

There is also a separate provision in the current version of the bill (the one that passed the House) completely prohibiting Roth conversions after the end of this year if a person has any post-tax traditional IRA contributions (aka traditional IRA basis).

Cite: HR5376, Section 138311(a)(1), page 2271 of PDF at https://www.congress.gov/bill/117th-congress/house-bill/5376/text

People with no post-tax contributions and under the income limits you cited would still be able to do Roth conversions.

I don't see the fairness in that portion of the bill at all.

 

[eyenitnoy]

If the money being used to pay taxes is cutting into other priorities, that's an issue.
You need to enjoy your life NOW and not sacrifice too much for future marginal tax savings-savings that you might never see given the uncertainties of mortal existence.

So, if the after tax dollars you are spending to pay your conversion taxes is reducing you life quality, you might consider pausing, or reducing, the amount you roll until you are age 59.5 At that point, you can use money from the IRA itself to pay the tax if needed.

Given the value of tax free compound growth over the long term, you should really try to get as much into the ROTH as you can. But you also have to live your life. It's a balancing act, and a not an easy one.

 

[eyenitnoy]

There is also a separate provision in the current version of the bill (the one that passed the House) completely prohibiting Roth conversions after the end of this year if a person has any post-tax traditional IRA contributions (aka traditional IRA basis).

Cite: HR5376, Section 138311(a)(1), page 2271 of PDF at https://www.congress.gov/bill/117th-congress/house-bill/5376/text

People with no post-tax contributions and under the income limits you cited would still be able to do Roth conversions.

Personally, I'd not plan anything around the bill at this point. It's prospects in the Senate are dicey and no one can really say what the final bill, if there is one, is going to look like.

 

[RetireBy90]

There is also a separate provision in the current version of the bill (the one that passed the House) completely prohibiting Roth conversions after the end of this year if a person has any post-tax traditional IRA contributions (aka traditional IRA basis).

Cite: HR5376, Section 138311(a)(1), page 2271 of PDF at https://www.congress.gov/bill/117th-congress/house-bill/5376/text

People with no post-tax contributions and under the income limits you cited would still be able to do Roth conversions.

So, lets suppose that many years ago I did some after tax contributions to a tIRA. Fast forward 40 years and lots of records lost. So I consider all the tIRA pretax and subject to income taxes. IRS doesn't know how much of my contributions were after tax, I don't know, so if I continue to assume they are all pretax and all are taxable, it seems pretty low risk to continue my conversions as did this year, declaring all conversions as taxable income from the 1099-R. This is just a friend doing this, not suggesting any shady activities.

 

[fh2000]

We only do small amount of Roth conversion in order to meet income limit of ACA. As one post mentioned above, the credit that we receive will be likely about $100,000 by the time DW starts Medicare. If we have to pay that back as tax, we will gladly do that.

 

[SecondCor521]

So, lets suppose that many years ago I did some after tax contributions to a tIRA. Fast forward 40 years and lots of records lost. So I consider all the tIRA pretax and subject to income taxes. IRS doesn't know how much of my contributions were after tax, I don't know, so if I continue to assume they are all pretax and all are taxable, it seems pretty low risk to continue my conversions as did this year, declaring all conversions as taxable income from the 1099-R. This is just a friend doing this, not suggesting any shady activities.

Emphasis added. The IRS can figure it out. 40 years ago, they received a 5498 from your IRA custodian and saw your $2K contribution. They also probably received a copy of your 1040 where you didn't take a deduction. Ergo, you made an after-tax contribution.

I agree with you the risk of the IRS catching this are low and approaching zero. There are very few people who probably are able to properly complete Form 8606s, and that's even with them *wanting* to complete it correctly.

 

[thefist]

Austin704… I seems we are in a similar situation. Both IORP and Pralana have suggested full conversion of IRA to Roth (in 24% bracket) before TCJA sunsets. So far I’ve only gone up to 22.
Here’s a few things to consider:
- run the calculations every year. After a few conversions the benefit of them will likely be reduced and you can then opt to stop. Or slow down.
- work backwards from RMD to determine when to stop. Estimate your SS and other income at 72 and how much of an RMD you can tolerate for tax purposes. Once you have that balance, determine how much you need to reduce your IRA balance to get there.
- hold your bonds in IRA to slow down the growth
- do a bunch of conversions in these early years, then after 59.5 you can then take small distributions later to keep it down. Or do small conversions.
- figure out the number where you get “control” over your IRA balance and work towards it. Control in this case means that you can withdraw or convert the gains each year, tax efficiently, and keep the balance from growing.

 

[patela6]

For my mom

Appreciate this thread. Been wondering whether to bring this up with my mom. Is there a calculator that y’all recommend to figure out her best Roth conversion strategy?

Age: 67 working part time, earning 30-40k ish
Single/widow
Roughly $1.5M total assets, likely 40k to 50k expenses.
In Medicare
I’d guess roughly $1M in IRA’s or 401ks
Gets about 1k SS per month from Dads benefit.
Will get roughly $2k a month from SS when she switches to her benefit at age 70.

Help! What do I advice her to do?? I’d like to frame this as if you do X conversions now, it will save you Y, all else being equal…

 

[RunningBum]

Appreciate this thread. Been wondering whether to bring this up with my mom. Is there a calculator that y’all recommend to figure out her best Roth conversion strategy?

Age: 67 working part time, earning 30-40k ish
Single/widow
Roughly $1.5M total assets, likely 40k to 50k expenses.
In Medicare
I’d guess roughly $1M in IRA’s or 401ks
Gets about 1k SS per month from Dads benefit.
Will get roughly $2k a month from SS when she switches to her benefit at age 70.

Help! What do I advice her to do?? I’d like to frame this as if you do X conversions now, it will save you Y, all else being equal…

Plug her numbers now and at 72 (with RMDs and the higher SS) and see what taking more income now and a lower RMD later buys her. From a really quick run it looks like she pays 22% on additional income for a conversion now, and a reduction on RMDs later save 40% due to being in the middle of the tax torpedo. So in simple terms if this holds true for $10K, it would save her $1800.

You need to plug in better estimates because $30K and $40K may be a significant difference. Likewise get the real SS numbers. And she has ~$500k in taxable? How much interest and dividends does that throw? How long is she going to continue working? Then increase the unearned income box $1000 at a time to see the actual marginal rate for each $1000 by looking at the actual Federal Income Tax number and noting the difference. Ignore the Marginal % they give because that's the tax bracket, and it doesn't factor in that add conversion income or subtracting RMD income adds or subtracts more than $1000 because of the way SS taxation works. Keep going $1000 at a time to figure out when the rates start getting much higher. I don't know how else to do this except for trial and error unless you really understand how all of the tax levers are working.

Then for looking at age 72, plug in the numbers there. Her RMD goes in the Unearned Income field. Reduce this by $1000 on each run and again note the difference in Federal Income Tax. Her RMD is going to initially be about 4% of her IRA so if in the earlier step you think she might convert $100K total, that reduces her RMD by $4000. This ignores the growth in the IRA but tax brackets also increase over time so it's somewhat of a wash. To get more accurate you'd have to make a spreadsheet and decide what assumptions to make on returns.

 

[patela6]

Plug her numbers now and at 72 (with RMDs and the higher SS) and see what taking more income now and a lower RMD later buys her. From a really quick run it looks like she pays 22% on additional income for a conversion now, and a reduction on RMDs later save 40% due to being in the middle of the tax torpedo. So in simple terms if this holds true for $10K, it would save her $1800.

You need to plug in better estimates because $30K and $40K may be a significant difference. Likewise get the real SS numbers. And she has ~$500k in taxable? How much interest and dividends does that throw? How long is she going to continue working? Then increase the unearned income box $1000 at a time to see the actual marginal rate for each $1000 by looking at the actual Federal Income Tax number and noting the difference. Ignore the Marginal % they give because that's the tax bracket, and it doesn't factor in that add conversion income or subtracting RMD income adds or subtracts more than $1000 because of the way SS taxation works. Keep going $1000 at a time to figure out when the rates start getting much higher. I don't know how else to do this except for trial and error unless you really understand how all of the tax levers are working.

Then for looking at age 72, plug in the numbers there. Her RMD goes in the Unearned Income field. Reduce this by $1000 on each run and again note the difference in Federal Income Tax. Her RMD is going to initially be about 4% of her IRA so if in the earlier step you think she might convert $100K total, that reduces her RMD by $4000. This ignores the growth in the IRA but tax brackets also increase over time so it's somewhat of a wash. To get more accurate you'd have to make a spreadsheet and decide what assumptions to make on returns.

Thank you so much for the detailed response!
Mom recently reduced her working hours/income and will likely retire altogether next year. Something else to factor. If we made a blanket statement that her income is $0 next year, is there some simple math I can explain this to her? She relies on us for decisions like this, last thing she would want to investigate herself

Thanks again!

Edit: she has about $400k cash and I think around $100k in Roth. Will have to double check, but it’s roughly around those figures