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How to figure out when Roth conversions are worth it?
Old 02-21-2024, 01:16 PM   #1
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How to figure out when Roth conversions are worth it?

Before I got married I was consistent in adding to my Roth, but post-marriage, my wife and I are way above the cut-off as a couple (my income has gone up, and she was already a cybersecurity engineer at Google when we met). Looking at Roth conversions it seems like our marginal tax rate is way too high to consider doing conversions/backdoor Roth to be worthwhile but maybe I'm looking at it the wrong way? Everybody goes on about how great it is to do backdoor contributions, but as far as I can tell my taxes are likely to be substantially lower in retirement (we don't expect to need our combined current income to support our current lifestyle and we aren't aiming for higher).

Even when I stop working at some point, DW is 9 years younger than me and will keep going for a while most likely as our FI point got raised a lot by buying our house (I miss being FI, but I like our house and love my DW feeling safe and secure and able to put down roots), and it seems like the math is likely to stay in favor of not converting? But again, maybe I'm misunderstanding something about how to figure it out, all the articles I've read over the years act like it is a no-brainer for high income earners, but when I try to estimate it, it doesn't appear to be so...
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Old 02-21-2024, 02:20 PM   #2
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It depends on if you are talking about pure Roth conversions (because you have money already in your traditional IRA), which usually people would wait to do those until they are in a low income bracket because its likely a sizeable amount rolled from a previous 401k, so then not likely to be cost effective to convert while working.

OR

if you are talking about purely a backdoor Roth, in which the money has already been taxed when you received it in your paycheck and now you are just trying to figure out where to save it.
A) traditional IRA (allows for tax deferral but you are not getting any tax break and all gains wiil be taxed upon withdrawal)
B) Brokerage - can get the money at any time, but any dividends will be taxed in the year distributed at your ordinary income tax rate and you may have to pay Long term cap gains on sale.
C) backdoor Roth, you don't have to pay taxes on any gains.

In the latter scenario, unless you need the money before 59.5, C gives you the most flexibility and least taxes.
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Old 02-21-2024, 02:35 PM   #3
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Roth conversions come down to leveling your tax bracket throughout your retirement. Most people who benefit from Roth conversions have large TIRAs/401ks and are in a significantly lower tax bracket when they begin retirement than they will be once RMDs, Soc Sec and/or pensions/annuities begin - the window to convert is before that. TCJA, state taxes, IRMAA, widow tax rates and other variables should also be factored in to the decision. There is no universal case, you have to do the math as it applies to your specific situation, and you'll have to make some assumptions regarding future tax rates, longevity, etc.

It can be very worthwhile, but the sooner you get the math done, the more likely you could benefit. I've laid our case out before, but we're projected to save almost $400K in taxes thanks to Roth conversions.

https://arnoldmotewealthmanagement.c...ns-make-sense/
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Old 02-21-2024, 03:09 PM   #4
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The backdoor Roth thing is fundamentally a CONTRIBUTION to your Roth IRA, limited to $7000/year per person, or whatever the limit is now. It almost always makes sense provided you don't have pre-tax money in your tIRA, which a lot of folks do have.

Roth CONVERSIONS seldom make sense if you're still working and making a healthy earned income...
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Old 02-21-2024, 03:36 PM   #5
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Originally Posted by Retch The Grate View Post
Before I got married I was consistent in adding to my Roth, but post-marriage, my wife and I are way above the cut-off as a couple (my income has gone up, and she was already a cybersecurity engineer at Google when we met). Looking at Roth conversions it seems like our marginal tax rate is way too high to consider doing conversions/backdoor Roth to be worthwhile but maybe I'm looking at it the wrong way? Everybody goes on about how great it is to do backdoor contributions, but as far as I can tell my taxes are likely to be substantially lower in retirement (we don't expect to need our combined current income to support our current lifestyle and we aren't aiming for higher).

Even when I stop working at some point, DW is 9 years younger than me and will keep going for a while most likely as our FI point got raised a lot by buying our house (I miss being FI, but I like our house and love my DW feeling safe and secure and able to put down roots), and it seems like the math is likely to stay in favor of not converting? But again, maybe I'm misunderstanding something about how to figure it out, all the articles I've read over the years act like it is a no-brainer for high income earners, but when I try to estimate it, it doesn't appear to be so...
I think that you have it right that conversions are not beneficial in your circumstances. Roth conversions are only beneficial when the effective tax rate on the conversion is lower than the rate you expect when you are subject to RMDs.

So for higher income earners, that eliminates while they are working.

The sweet spot seems to be from when you stop working until pensions and SS start because during those years where you are living off of taxable savings you are typically in a low tax bracket. That is us for now... we are filling up any headroom in the 10% and 12% tax brackets as when RMDs start we expect to be deep into the 12% tax bracket once my SS starts so RMDs will be about 18%... some at 12% and some at 22%.
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Old 02-21-2024, 11:14 PM   #6
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Roth conversions are only valuable if a person/couple has too much in IRA's. or has a really low tax rate to convert into.

(IMHO)
Too much in IRA's is when the taxes due from (0.0377 x IRA amounts) + SS + Pension = Higher tax rate than when working.

When a person starts getting close to that, they can just contribute to a Roth or buy tax efficient ETFs in a regular brokerage account.
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Old 02-22-2024, 01:32 PM   #7
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Yeah - conversions won't make sense to you whereas backdoor contributions and mega backdoor contributions likely will make sense for you if you have additional money to invest after living expenses.

backdoor is just a conversion from non deductible IRA's (when your income is too high to allow for tax deductions).
Mega back door is the after tax contribution to your 401(k) which then are rolled over into a Roth IRA.

Both options will give you access to tax free growth, something I've prioritized ahead of regular brokerage contributions.
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Old 02-29-2024, 07:56 PM   #8
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Thanks all, that makes me feel better about my inability to understand where the benefits were with my finances. If my wife didn't make so much money, and wasn't 9 years younger so keeping our income high even when I decide to retire, that would be one thing, but I guess this is just a "we are doing great, no special tricks for us" thing which is nothing I feel bad about.
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Old 03-01-2024, 01:37 PM   #9
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Yeah - conversions won't make sense to you whereas backdoor contributions and mega backdoor contributions likely will make sense for you if you have additional money to invest after living expenses.

backdoor is just a conversion from non deductible IRA's (when your income is too high to allow for tax deductions).
Mega back door is the after tax contribution to your 401(k) which then are rolled over into a Roth IRA.

Both options will give you access to tax free growth, something I've prioritized ahead of regular brokerage contributions.
When you convert from the tIRA making 6 - 8% to the Roth, you're buying a new index fund, stock, CD, etc. so you start at the bottom, right? We'd be buying into a high-stock market or can you take the existing index fund, CD to the Roth? When you say growth, you mean starting from the point you convert, not where you are already in the tIRA, correct?

Edit: you could lose the gains you have in the tIRA or am I understanding incorrectly?
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Old 03-01-2024, 01:49 PM   #10
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When you convert from the tIRA making 6 - 8% to the Roth, you're buying a new index fund, stock, CD, etc. so you start at the bottom, right? We'd be buying into a high-stock market or can you take the existing index fund, CD to the Roth? When you say growth, you mean starting from the point you convert, not where you are already in the tIRA, correct?

Edit: you could lose the gains you have in the tIRA or am I understanding incorrectly?
I don't have any CDs, so speak to those, but I have converted other investments in-kind from my IRA to my Roth without needing to sell.

Of course you need to pay taxes on the converted amount, but optimally that money comes out of taxable.
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Old 03-01-2024, 01:49 PM   #11
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Since your both still working check to see if your 401k plans offer a mega back door roth option. I found out that our plan does. You can contribute quite a bit to a roth this way on top of maxing out your 401k contributions.

Conversions likely won't be beneficial for you.
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Old 03-01-2024, 02:05 PM   #12
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When you convert from the tIRA making 6 - 8% to the Roth, you're buying a new index fund, stock, CD, etc. so you start at the bottom, right? We'd be buying into a high-stock market or can you take the existing index fund, CD to the Roth? When you say growth, you mean starting from the point you convert, not where you are already in the tIRA, correct?

Edit: you could lose the gains you have in the tIRA or am I understanding incorrectly?
Start at the bottom?
Not sure I understand your point.
All equity investments, index funds and otherwise, are subject to fluctuations in value. There's no guarantee what $1000 I put into VOO (S&P 500 ETF) will be worth a year from now, no matter if it's in a Roth, tax-deferred, or taxable account.

So what was your point?
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Old 03-01-2024, 02:06 PM   #13
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When you convert from the tIRA making 6 - 8% to the Roth, you're buying a new index fund, stock, CD, etc. so you start at the bottom, right? We'd be buying into a high-stock market or can you take the existing index fund, CD to the Roth? When you say growth, you mean starting from the point you convert, not where you are already in the tIRA, correct?

Edit: you could lose the gains you have in the tIRA or am I understanding incorrectly?
Presumably the same investment options are available in the Roth IRA account as in the traditional IRA account. Thus the gains or losses will be the same going forward from today, regardless of which account has the investments.
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Old 03-02-2024, 07:09 AM   #14
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Start at the bottom?
Not sure I understand your point.
All equity investments, index funds and otherwise, are subject to fluctuations in value. There's no guarantee what $1000 I put into VOO (S&P 500 ETF) will be worth a year from now, no matter if it's in a Roth, tax-deferred, or taxable account.

So what was your point?
Not a point, a question. For example, I have a 5-year CD earning 5.5% in my tIRA. Do I have to sell that CD to convert and purchase a new one at a lower rate? Or can I transfer that CD to the Roth? If I sell an index fund in tIRA to purchase the same fund in Roth? This answered that question from Exchme:
I don't have any CDs, so speak to those, but I have converted other investments in-kind from my IRA to my Roth without needing to sell.
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Old 03-02-2024, 07:19 AM   #15
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Not a point, a question. For example, I have a 5-year CD earning 5.5% in my tIRA. Do I have to sell that CD to convert and purchase a new one at a lower rate? Or can I transfer that CD to the Roth? If I sell an index fund in tIRA to purchase the same fund in Roth? This answered that question from Exchme:
I don't have any CDs, so speak to those, but I have converted other investments in-kind from my IRA to my Roth without needing to sell.
Ok, I see now.
No idea how a CD transfer to Roth would work. Most of us don't have CDs in IRAs, especially Roth IRAs...
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Old 03-02-2024, 07:42 AM   #16
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I do convert in-kind from traditional IRA to Roth IRA but all those are ETFs.

Check with your financial institution to see if you can o the same for CDs.
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Old 03-03-2024, 10:11 AM   #17
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Roth conversions are only valuable if a person/couple has too much in IRA's. or has a really low tax rate to convert into.

(IMHO)
Too much in IRA's is when the taxes due from (0.0377 x IRA amounts) + SS + Pension = Higher tax rate than when working.

When a person starts getting close to that, they can just contribute to a Roth or buy tax efficient ETFs in a regular brokerage account.
Thanks Sunset for the formula, let me take a shot at it with our numbers,

In our case, money in the taxable brokerage accounts is more than our tax deferred accounts,

Our both IRAs of - 1,146,161 X 0.0377 = $ 43210

Our both SS at age 70 = $ 60,948 /yr

No pension

We do get dividends + interest from Brokerage + interest of $125000 /yr
(Thanks in part to VXUS in Taxable accounts)

We both are retired at 67 + 62,

We are in 24% tax bracket now, thanks in part to Roth Conversions,

Should I continue with Roth Conversions ?

Thanks for your opinion & thoughts
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Old 03-03-2024, 11:31 AM   #18
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We do get dividends + interest from Brokerage + interest of $125000 /yr
How much is qualified dividends, vs. interest + non-qualified dividends?
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Old 03-03-2024, 12:01 PM   #19
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Qualified Dividends - $ 74228. VS $ 50411

(Int 10237+Non Q Div 40174)

(Tax Exempt Interest 10,237)
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Old 03-03-2024, 12:34 PM   #20
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When you convert from the tIRA making 6 - 8% to the Roth, you're buying a new index fund, stock, CD, etc. so you start at the bottom, right? We'd be buying into a high-stock market or can you take the existing index fund, CD to the Roth? When you say growth, you mean starting from the point you convert, not where you are already in the tIRA, correct?

Edit: you could lose the gains you have in the tIRA or am I understanding incorrectly?
Wouldn't you execute the conversion by just transferring assets from a tIRA to the Roth so there is no restarting all? That's what I do when I do a Roth conversion. No gains are lost.
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