Convert to ROTH? A contrarian view

[foxfirev5]

For us converting to the 12% bracket is not a nobrainer. We've already converted a significant amount. Now with both of us on SS, going to the top of the 12% bracket would result in another 45k in taxes to save about 2k per year in the future. I explained to DW that if I pass she would have an additional 10% per year in taxes. She said she's willing to accept the consequences. End of discussion in this household.

 

[kgtest]

It depends. I don't think that converting make sense if your heirs are likely to have a much lower tax bracket than you do.... let them withdraw pay the lower tax rate.

Exactly... it depends on how long and how low the heirs tax bracket is predicted to be, assuming taxes usually go up, the conversion appears like a no-brainer if that estate plan is the goal and you can also avoid tax torpedo's while converting...

else, not probably for you or marginal if best savings. For my own DF I did some very complex math in spreadsheets, and you can come out with a $1 for $1 estimate of how much you are actually saving yourself and your heirs with some assumed death dates and other data points...

In DF case, and likely in mine, we have a bit of an opportunity or a lost opportunity if he does not convert on a multi-generational scale.

IF you are in one of the lower 10, 15, even 22% brackets converting becomes a bit more of a game of what-if's when analyzing, but well worth doing the math on the napkin. In DF case it is LITERALLY 100s of thousands in 1. Compounded Roth gains tax free with the advantage of time working its magic, and 2. Better tax rate per dollar over the lifetime of the taxpayer+heirs, assuming a break-even death date of X...

 

[pb4uski]

.... Now with both of us on SS, going to the top of the 12% bracket would result in another 45k in taxes ...

Given that for a couple if you have $105,050 of ordinary income less $24,800 standard deduction, so you're at the $80,250 top of the 12% tax bracket you would only have $9,235 of taxes... how in the world could Roth conversions to the top of the 12% bracket result in "another 45k in taxes"?

I concede that there may be some obscure scenario that does that but it seems unlikely, so show me the numbers, otherwise I call bullsh!t.

 

[Navigator]

This topic seems to be as dividing as the debate about owning rental property. If you convert enough that you are taxed at a higher rate than you plan for when doing withdraws then this would not be wise. However, unless you plan to be in a lower tax rate when you withdraw the funds how can it cost you ? I agree they may not be a big savings or may break even, and as mentioned there are several income cliffs that need to be considered but IMHO few situations where it would cost you.

One way it can cost you is with SS, which has a certain percentage taxed, based on income. Another way it can hurt you is by losing income-based benefits, such as ACA subsidies.

 

[sdfire]

2 Additional Factors

2 more factors to consider. These stopped me from making Roth conversions.

1. LTCG’s are taxed at $0 up the $80K or so. If you have $80K Or more of LTCG’s each Year as I do, any Roth conversion adds 25-27% in taxes on the first $80K or so. That is a pretty big hill to climb. That is because you end up paying an extra 15% on top of the 10-12% bracket. I just can’t do it.

2. Live in high tax state and might move to low tax state later. Hate to pay high now, when I might pay low later.

 

[pb4uski]

.... Now with both of us on SS, going to the top of the 12% bracket would result in another 45k in taxes ...

Given that for a couple if you have $105,050 of ordinary income less $24,800 standard deduction, so you're at the $80,250 top of the 12% tax bracket you would only have $9,235 of taxes... how in the world could Roth conversions to the top of the 12% bracket result in "another 45k in taxes"?

I concede that there may be some obscure scenario that does that but it seems unlikely, so show me the numbers, otherwise I call bullsh!t.

Yes, as I thought, there is no way one can get $45k in taxes by adding Roth conversion to the top of the 12% tax bracket to SS... even if each person gets the maximum SS benefit of $3,790/month.... no matter what the total tax is $9,235 (or $9,241 if using the tax tables).

What does happen is that the effective tax rate on your Roth conversion increases and is higher than if you didn't have SS and if you had a married couple where each person had the maximum benefit it peaks at 33%. The average annual benefit for a married couple is about $28,000, so even a couple with double the average annual benefit would benefit from Roth conversions.

Roth conversion	SS	Taxable SS	Total income	Standard deduction	Taxable income	Tax	Effective tax rate on Roth conversion
105,050	0	0	105,050	24,800	80,250	9,235	8.8%
96,550	10,000	8,500	105,050	24,800	80,250	9,235	9.6%
88,050	20,000	17,000	105,050	24,800	80,250	9,235	10.5%
79,550	30,000	25,500	105,050	24,800	80,250	9,235	11.6%
71,050	40,000	34,000	105,050	24,800	80,250	9,235	13.0%
62,550	50,000	42,500	105,050	24,800	80,250	9,235	14.8%
54,050	60,000	51,000	105,050	24,800	80,250	9,235	17.1%
45,550	70,000	59,500	105,050	24,800	80,250	9,235	20.3%
37,050	80,000	68,000	105,050	24,800	80,250	9,235	24.9%
27,734	90,960	77,316	105,050	24,800	80,250	9,235	33.3%

 

[ShokWaveRider]

It depends. I don't think that converting make sense if your heirs are likely to have a much lower tax bracket than you do.... let them withdraw pay the lower tax rate.

Or your heirs like ours, are 3 of your favorite charities.

 

[pb4uski]

Or your heirs like ours, are 3 of your favorite charities.

In that case, if you darn tootin sure that you'll never need that money you may want to do QCDs in place of your RMDs while you are alive and can enjoy seeing those favoriate charities receive the money and see what they do with it and enjoy the accolades of being one of their big donors.

 

[NoiseBoy]

Using my 2019 return for an estimate of my future taxable interest and qualified dividend income, with my projected pension, puts me just into the 22% tax bracket (single.) Nuts. Considering that the top of the 24% tax bracket is $160k, there doesn't appear to be a significant opportunity for me under the current tax code. Now I begin to understand why people seek to minimize their ordinary interest and dividends.

 

[karen1972]

One advantage that is often mentioned here is a Roth IRA is not subject to RMDs and one can withdraw when/as needed. A taxable IRA is subject to RMDs and the account holder must withdraw yearly without regard to need.

This is certainly one, we expect that if for some reason we have a spike in spending needs one year, we can draw from our Roth to cover and not think twice about the tax ramifications. With ACA subsidies and such if you are planning to be close to the cliffs, the Roth sure comes in handy to ensure you don't go over, yet have plenty of money you can access.

 

[googily]

Speaking as one of those widows who now has to file single on a nest egg that was planned to support two of us, I can never decide what to do. We had no Roth money when DH died, and I have managed to get about $160k built up through conversions and after-tax 401k rollovers, but that's still only about 10% of my holdings. I'm at the very very very top of the 22% bracket, still working, but with a future of two pensions, starting survivor SS at 60 and my own at 70, and big RMDs if I don't do anything (and a strong belief that taxes will go up for me probably even before 2026), I feel like I should be converting to the top of 24%. Especially if maybe I want to buy a second home in a few years, since as of now about 85% of my stash is in pre-tax, and I'd get clobbered with a big tax bill.

No heirs, so that's not really even a consideration. I don't have any real objections to paying taxes, but would be aggravated if down the road I get some huge bills that I had known how to anticipate and mitigate but didn't bother.

If anyone feels like imagining what they'd do in this scenario, feel free to opine.

 

[pb4uski]

You say no heirs, but what will happen with your money when you die? Charities?

 

[foxfirev5]

Given that for a couple if you have $105,050 of ordinary income less $24,800 standard deduction, so you're at the $80,250 top of the 12% tax bracket you would only have $9,235 of taxes... how in the world could Roth conversions to the top of the 12% bracket result in "another 45k in taxes"?

I concede that there may be some obscure scenario that does that but it seems unlikely, so show me the numbers, otherwise I call bullsh!t.

Over the course of 7 years it would add up to the above numbers. I feel No need to go further in discussing the issue with you.

 

[googily]

You say no heirs, but what will happen with your money when you die? Charities?

I should have said no children. There are nieces and nephews and friends and charities, though of course my main plan is to bounce the check to the cemetery. [emoji16]

 

[2017ish]

Speaking as one of those widows who now has to file single on a nest egg that was planned to support two of us, I can never decide what to do. We had no Roth money when DH died, and I have managed to get about $160k built up through conversions and after-tax 401k rollovers, but that's still only about 10% of my holdings. I'm at the very very very top of the 22% bracket, still working, but with a future of two pensions, starting survivor SS at 60 and my own at 70, and big RMDs if I don't do anything (and a strong belief that taxes will go up for me probably even before 2026), I feel like I should be converting to the top of 24%. Especially if maybe I want to buy a second home in a few years, since as of now about 85% of my stash is in pre-tax, and I'd get clobbered with a big tax bill.

No heirs, so that's not really even a consideration. I don't have any real objections to paying taxes, but would be aggravated if down the road I get some huge bills that I had known how to anticipate and mitigate but didn't bother.

If anyone feels like imagining what they'd do in this scenario, feel free to opine.

Unless there are strong state tax reasons to the contrary, I'd think using the 24% bracket to the utmost for conversions would be prudent. Plus, whatever your portfolio equity allocation is, I'd put 100% of Roth in stocks and overweight income/bonds in the tax deferred accounts to reach your allocation.

(This is our approach, as we choose to convert to top of 24% even in these years where we'd otherwise pay no taxes. We believe the underweighting of equities in deferred accounts should help in the long run in getting as much as possible in the roths.)

 

[pb4uski]

Over the course of 7 years it would add up to the above numbers. I feel No need to go further in discussing the issue with you.

I'm sure that Uncle Sam will appreciate your efforts.

 

[googily]

Unless there are strong state tax reasons to the contrary, I'd think using the 24% bracket to the utmost for conversions would be prudent. Plus, whatever your portfolio equity allocation is, I'd put 100% of Roth in stocks and overweight income/bonds in the tax deferred accounts to reach your allocation.



(This is our approach, as we choose to convert to top of 24% even in these years where we'd otherwise pay no taxes. We believe the underweighting of equities in deferred accounts should help in the long run in getting as much as possible in the roths.)

Thanks. I do have the Roth in VTSAX, and all stocks and cash in taxable, then 65-35 overall.

Wish I had done some converting in March and April, but I was doing way too good of a job refusing to look at my portfolio!

 

[NgineER]

Speaking as one of those widows who now has to file single on a nest egg that was planned to support two of us, I can never decide what to do. We had no Roth money when DH died, and I have managed to get about $160k built up through conversions and after-tax 401k rollovers, but that's still only about 10% of my holdings. I'm at the very very very top of the 22% bracket, still working, but with a future of two pensions, starting survivor SS at 60 and my own at 70, and big RMDs if I don't do anything (and a strong belief that taxes will go up for me probably even before 2026), I feel like I should be converting to the top of 24%. Especially if maybe I want to buy a second home in a few years, since as of now about 85% of my stash is in pre-tax, and I'd get clobbered with a big tax bill.

No heirs, so that's not really even a consideration. I don't have any real objections to paying taxes, but would be aggravated if down the road I get some huge bills that I had known how to anticipate and mitigate but didn't bother.

If anyone feels like imagining what they'd do in this scenario, feel free to opine.

Can you quit working and start spending the pre tax money now?

 

[Out-to-Lunch]

Speaking as one of those widows who now has to file single on a nest egg that was planned to support two of us, I can never decide what to do. We had no Roth money when DH died, and I have managed to get about $160k built up through conversions and after-tax 401k rollovers, but that's still only about 10% of my holdings. I'm at the very very very top of the 22% bracket, still working, but with a future of two pensions, starting survivor SS at 60 and my own at 70, and big RMDs if I don't do anything (and a strong belief that taxes will go up for me probably even before 2026), I feel like I should be converting to the top of 24%. Especially if maybe I want to buy a second home in a few years, since as of now about 85% of my stash is in pre-tax, and I'd get clobbered with a big tax bill.

I am sorry for your loss.

My crystal ball is likely no better than yours, but I agree with the notion of converting to the top of the 24% bracket. You say you will have other funding sources coming on line soon, which will push you high anyway. Future tax rates are speculation, but my speculation is that current tax law will stay in place, in which case your 22% becomes 25%. Seeing how 24% is not THAT different from 22%, I would take it to (possibly/probably) avoid 25% or 28% rates in the future.

 

[RunningBum]

googily, I'm also in the camp that thinks that converting to the top of the 24% bracket seems like the right thing for you. As others have said, 24% is better than the 25/28% that might be coming back in the future, and converting to a Roth keeps future gains and dividends from being taxed, while RMDs have to go to your taxable account.

 

[googily]

Can you quit working and start spending the pre tax money now?

I had actually been gunning for the end of next year, but there pandemic actually brought a change in my job that has been really energizing and so I'm going to ride that out for a bit and see what happens.

As I mentioned, I'm starting to think about buying a second house in a few years, so I want to pile up money until then given how much it will cost me to get it set up.

 

[googily]

googily, I'm also in the camp that thinks that converting to the top of the 24% bracket seems like the right thing for you. As others have said, 24% is better than the 25/28% that might be coming back in the future, and converting to a Roth keeps future gains and dividends from being taxed, while RMDs have to go to your taxable account.

Thanks. I have gamed out income and tax scenarios and without Roth to draw on I would more likely be in the 28 or 33% brackets depending on withdrawal needs. So yeah, 24% is still better than that. I just turn into a wuss whenever I have to actually pay the taxes on conversions! (I've found the easiest way psychologically is to just withhold a huge chunk of my paycheck.) Am kind of hoping for a good old fashioned October panic in the market so I can convert shares "on sale", so to speak.

At least I did start the clock on Roth in 2018, so the money starts to become available in 2022, though of course I would be planning to not touch it until I hit 59.5 in 2026.

 

[Oakster]

Not only equal buying power but equal amounts also. Win-Win. Neither is promised anything. I know that "if this" and "if that" things could be less in the end than the whole before our demise, or it could be higher. My preference is that when we're gone, I don't want either of them repeating the Smother's Brothers argument. "Mom (and Dad) always liked you best."

My grandparents on my mother's side wanted to treat both families the same, so my mom and dad received $200 to spend on us kids for Christmas and my Aunt and Uncle received $200 for their kids for Christmas. The problem was, they had two kids and my parents had 4. My grandparents viewed this method as fair, while $50 per kid would have given my family twice as much as my cousins family.....

 

[pb4uski]

^^^ That is a bit odd... if those grandparents had done their own shopping rather than schlepping it off on you parents I wonder if they would have spent $50 on each of you or $25?

 

[CRLLS]

My grandparents on my mother's side wanted to treat both families the same, so my mom and dad received $200 to spend on us kids for Christmas and my Aunt and Uncle received $200 for their kids for Christmas. The problem was, they had two kids and my parents had 4. My grandparents viewed this method as fair, while $50 per kid would have given my family twice as much as my cousins family.....

Exactly my point. It could be a no-win/no-win situation. I can see by your response that you're not a fan of equality by family. At least that's what I felt when reading it. Our wills, which direct relatively little of our estate, are currently structured fairly complicated in order to address that in some small way. Outside of our wills, we're trying to address some of the inequality with Roth conversions.

Simple "Per stirpes" and "per Capita" both have their own issues with fairness IMO. It is a complicated. All we can do is try. In the end, whether one child or grandchild feels slighted or not, is not in our hands. All we can do is to try.