IRA to Roth IRA

[RobbieB]

I've been doing some research and me thinks this would be a good idea.

Crystal ball time, are taxes going up, down or sideways -

Yeah I know. Anyway, no earned income so no new contributions, but I'm thinking that slowly transferring (not sell and buy) assets to Roth over many years at a rate to not enrich the tax man too much would be a good play. Not the whole thing, say about half so when I get to the mandatory age there will be a smaller minimum.

Then I would have about a 50-50 split of IRA and Roth. More stability and insurance against tax changes.

What do you guys think?

 

[MBAustin]

I believe the I-Orp calculator allows you to model Roth conversion scenarios.

 

[MasterBlaster]

I've been doing some research and me thinks this would be a good idea.

Crystal ball time, are taxes going up, down or sideways -

Yeah I know. Anyway, no earned income so no new contributions, but I'm thinking that slowly transferring (not sell and buy) assets to Roth over many years at a rate to not enrich the tax man too much would be a good play. Not the whole thing, say about half so when I get to the mandatory age there will be a smaller minimum.

Then I would have about a 50-50 split of IRA and Roth. More stability and insurance against tax changes.

What do you guys think?

It's only a good deal if your conversion tax bill now is less than your average tax bill when you eventually pull the money out. Some believe that if they can convert at the 15% bracket then it's a good thing to do.

Will your marginal rate now be less than your average rate later. Good luck with predicting future tax rates.

By the way, I hear talk of a tax reform deal that lowers income tax rates and introduces a consumption tax. That wouldn't do well for Roth converters.

 

[RobbieB]

That's sort of what I'm thinking, nothing drastic, stay under 15%.

A "National Sales Tax" eh? That would be interesting.

I dunno, just me thinking at the keyboard again. I'm going to run it by my broker and see what he thinks.

 

[pb4uski]

....What do you guys think?

That's exactly what I have been doing... my tax rate will be low from now until I start my pension and SS so I have been doing conversion to the top of the 15% tax bracket and paying ~10% of the converted amount in federal income tax. It is less than 15% because before Roth conversions our income is principally qualified dividends and capital gains and those are less than our deductions and exemptions so a portion of the Roth conversion is taxed at 0%, a portion at 10%, and a portion at 15% and that averages out to ~10%.

You can get a good idea of the impact by modeling it out in Taxcaster or TurboTax.

Be aware though that if you do too much and exceed the top of the 15% tax bracket that the incremental tax is onerous... about 30%... but that can easily be overcome but recharacterizing any excess above the top of the 15% tax bracket. The past couple years I have done my tax return and then recharacterized an amount sufficient so my taxable income is exactly the top of the 15% tax bracket.

I-orp would have me convert much more but I don't see the wisdom in doing that... I'm just not a believer.

 

[user5027]

Future taxes are an unknown.

We are doing roth conversions to the top of the 15% bracket now since I retired to reduce our taxable income when SS and RMD's begin.

IORP had a more aggressive plan.

 

[RobbieB]

Ran it by my guy and he thought it was a good idea too. So we will do the numbers in November and start up a Roth.

 

[pb4uski]

FWIW, what I do is in late December, after December dividends and CG distributions are received, I do an estimated tax return in TT based on everything I know at that point and then calculate my Roth conversion amount for the year up to the top of the 15% bracket.... so my Roth conversion is done the last couple days of the year.

Then I do recharacterizations as necessary as I am finalizing my return. I'm usually pretty close was the recharacterizations the last two years have been $534 and $1,537. While they are ridiculously small, I'm loathe to pay the 30% tax on the overestimates.

 

[shortstop14]

In my situation, I've had to balance the value of Roth IRA conversions against the value of an ACA subsidy. Right now I'm just doing enough Roth IRA conversion to get us to the optimal subsidy level. Other than some dividends and interest, it's our only income, so I can dial it in pretty accurately. When I convert to Medicare at 65 I'll ramp up the conversions to the top of the 15% bracket.

The value of the current subsidy appears higher than the value of reduced RMDs in my situation. It's not really what I'd prefer to do, but the tax code is what it is. Changes in the tax code could alter the plan, of course.

 

[RobbieB]

I don't get a subsidy, so that's not an issue. My SS income will be small until I claim on my own account.

It sounds like a good idea, keep the taxes small, reduce the mandatory minimum, insure against tax increases and diversify account types. The only way I lose is if taxes go down. And by not converting it all I reduce that risk too.

Thanks for the input.

 

[2017ish]

I like the idea of getting to 50/50 in the tax preferred accounts. We plan to do many years of conversion in a fairly aggressive manner (i.e., well beyond 15% rate) because our portfolio is grossly lopsided in favor of TIRAs and T401ks. Worst case scenario is if we barely touched the Taxable IRAs and one of us died [young]. The survivor would face RMDs being taxed at a single person's rates. (Can't remember if you are married or not....)

Edited--yeah, one of us will die sometime, so "young"!

 

[gauss]

I've been doing some research and me thinks this would be a good idea.

Crystal ball time, are taxes going up, down or sideways -

Yeah I know. Anyway, no earned income so no new contributions, but I'm thinking that slowly transferring (not sell and buy) assets to Roth over many years at a rate to not enrich the tax man too much would be a good play. Not the whole thing, say about half so when I get to the mandatory age there will be a smaller minimum.

Then I would have about a 50-50 split of IRA and Roth. More stability and insurance against tax changes.

What do you guys think?

That's what I am doing now. Roth convert 1/Nth of the balance each year to have it all converted by age 70. That way I will have no RMDs due when I start Social Security.

People say to me, "gauss--you know if you Roth convert, they may tax that Roth money some day...". I answer this by, yes - and they may raise general tax rates too. Bottom line is no additional tax law risk as far as I am concerned converting or not converting.

The other issue is that right now DW and I file taxes as MFJ. The associated tax brackets, standard deductions and exemptions are roughly twice as high for someone filing single. My single friends remind me of this during retirement strategy discussion. That being said, if DW or myself were to die suddenly - the surviving spouse would then be in a MUCH higher tax bracket with less exemptions/deductions to convert our tax deferred money. If the couple were dual earners and both receiving SS, then the second SS check would also stop.

Of course I hope I never have to benefit from this, but having to deal with the tax issues of conversion/RMD after the loss of a spouse would really throw a knot into the works if it could have been prevented.

I must mention that I am now in our final tax bracket so there will not be a decrease down the road with DW retires too.

-gauss

 

[pb4uski]

Good point... for a married couple filing jointly a robust program of Roth conversions mitigate the future impact of taxes if there is an early death. Another good reason for acting.

 

[MasterBlaster]

Bottom line is no additional tax law risk as far as I am concerned converting or not converting.

I don't agree.

The risk is that you pay more now, and then pay more later.

 

[zinger1457]

I also would like to start converting some of my deferred retirement plan to Roth. Does anyone have it set up where their 401K or other tax deferred plan monthly withdrawals go directly into a ROTH IRA? Is it possible? My current deferred retirement plan is the Feds TSP plan which I like and would like to keep but their withdrawal options are limited. The only options I can see available to me is to rollover the entire TSP into an IRA and do the conversion from the IRA or have my monthly TSP withdrawals go directly into a ROTH IRA. The TSP only allows one partial withdrawal which I already used up.

 

[jazz4cash]

I also would like to start converting some of my deferred retirement plan to Roth. Does anyone have it set up where their 401K or other tax deferred plan monthly withdrawals go directly into a ROTH IRA? Is it possible? My current deferred retirement plan is the Feds TSP plan which I like and would like to keep but their withdrawal options are limited. The only options I can see available to me is to rollover the entire TSP into an IRA and do the conversion from the IRA or have my monthly TSP withdrawals go directly into a ROTH IRA. The TSP only allows one partial withdrawal which I already used up.

See here.............
TSP Roth Conversion | CSRS & FERS Retirees

 

[Fedup]

I will try to convert mine very slowly. I don't plan to use mine until I'm 70 or RMD.


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[harley]

I don't agree.

The risk is that you pay more now, and then pay more later.

Not quite sure I see this. I've got a limited period of time I'll be able to stay in the 15% bracket, from the time I retired (age 50) to the time I'm forced to take RMDs (age 70). I (we) will also be taking SS at that point, all of which will push us back into the 25% bracket. So I put money into a tIRA while working, saving 25% taxes. Now I convert it to Roth paying 15%. That puts me up 10% on the taxes. Even if there's a National sales tax, when I start drawing down the tIRA I'd be paying the 25% tax and the National Sales Tax. If I pull tax free from a Roth that I paid 15% toconvert, then pay the National Sales Tax, it seems to me I'm still up the 10% on the tax I saved vs. paid.

Of course, my math skills, never strong, seem to be taking a hit as I get older. If I'm missing something, I'd be interested to understand it.

 

[pb4uski]

+1 except I probably saved 28% when working, pay ~10% on conversions because of deductions, exemptions and the 10% and 15% brackets blended, and would pay later after pension, SS and RMDs kick in.

I believe that the idea that future income tax rates will go down or the income tax will be replaced with a consumption tax is a remote possibility. If I'm wrong, I may still come out ahead depending on the magnitude... after all... I'll be 15% ahead with all my conversion money.

Besides, since Roths came along late in my career and I was precluded from contributing for a lot of that time I am light on tax-free funds and heavy on tax-deferred... so conversions provides some tax attribute diversification. Also, if changes were mad that would be detrimental to Roths, I would probably have enough notice to take it all out and put it in taxable accounts to avoid the issue.

 

[kramer]

Can someone provide details on the recharacterization process? My T-IRA and Roth IRA are with Vanguard.

I thought I read somewhere that it requires a write up and you send something to the IRS outside of the e-file system, but I don't really know. Ideally, I could do it all with Turbo Tax since I live abroad.

 

[kramer]

Other subtleties to consider:

It's possible the thresholds for taxation of Social Security will never be adjusted for inflation (I don't think they ever have been up to this point). This works in favor of converting now.

Since I own a lot of foreign stock ETFs I must file form 1116. Due to low overall tax rate as an early retiree living on dividends, I normally can't use most of my foreign tax credit. But when I convert, I can use more of it, since my overall tax rate goes up. For this reason, my actual marginal conversion rates drop from about 10% to 8% and from 15% to 12%.

A hidden cost for an early retiree is that you are giving up some free capital gains you could otherwise take if not converting (up to the top of the 15% bracket).

Don't forget about State taxes if they apply to your situation.

Conversion income can affect your ObamaCare subsidy.

 

[pb4uski]

Can someone provide details on the recharacterization process? My T-IRA and Roth IRA are with Vanguard.

I thought I read somewhere that it requires a write up and you send something to the IRS outside of the e-file system, but I don't really know. Ideally, I could do it all with Turbo Tax since I live abroad.

There is a form on the Vanguard website that you fill out and mail it in and then they process it. There is a field on a form in TT to input the recharacterization amount which reduces your Roth conversion.

Keep in mind:

You can recharacterize a contribution or conversion anytime until the federal
income tax-filing deadline (including extensions) for that particular tax year. If you’ve
already filed your tax return or filed for an extension in a timely manner—without
recharacterizing—the IRS will grant you an automatic six-month extension, from
the standard April 15 tax deadline to October 15. However, you may need to file an
amended tax return.

https://personal.vanguard.com/pdf/s220.pdf

 

[xdafly]

In my situation, I've had to balance the value of Roth IRA conversions against the value of an ACA subsidy. Right now I'm just doing enough Roth IRA conversion to get us to the optimal subsidy level.

Yes, we are also following this path. In our case, tIRA to Roth IRA are our only "reported income" and we convert only about 21-22k each year until 65.

The ACA subsidy PLUS cost sharing benefit (only available on Silver Plans) is substantial, in our case we pay only 30/mo with max OOP 900/year and have a better/more comprehensive plan than we had with decades of corporate health plan coverage (plus the payroll deductions were close to 400/month)

The actual "tax bite" from the 21-22k is minimal or close to zero as with a standard deduction for MFJ, no other income.

We do not plan on filing for SS until FRA.

 

[SmithOp]

I just started doing it this year after watching Ed Slott on PBS, its part of his retirement roadmap.


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[Cobra9777]

We convert to the top of the 15% bracket. However, the conversion amounts are fairly small and drive the full 15% incremental tax. This is because we have 2 pension annuities and rental income that consume much of the 15% bracket. Our tax-deferred balances are fairly large and, even with these conversions over the next 15 years, we can't avoid some portion of RMDs getting taxed at 25%, assuming fairly modest growth rates. The chances of getting taxed at 28% are very small however. So converting into the 25% bracket does not seem advisable. We just convert what we can at 15% in order to reduce the amount eventually taxed at 25%, and build up some withdrawal flexibility and tax diversity. When working, we deferred tax at 28% and higher, so it's all good.