Is Roth Conversion Worth It?

[Still Learning]

We will both be 64 this year and into our 2nd year of retirement. Just met with our Accountant to review if we should convert our Vanguard IRAs to Roth IRAs. The value will be about $1.15 million next year and $1.5+ at 71.


Was expecting to convert 100% next year as we only took a 2.5% withdrawal this year keeping us in the 12% tax bracket. Our Accountant suggested only a 25% conversion to reduce taxes and avoid exposure to LTC industry in the future as the entire Roth fund is exposed. We currently have 5 years of self financed LTC that would last longer with in-home care should that be practical. Once we are on Medicaid we must make sure that any overnight hospital stays are under "admitted" status only for additional health & LTC benefits. Currently we are both healthy to date. While RMDs are exposed to the LTC industry we understand the main IRA fund is not. We also have $1 million in cash which we plan to create a new account at Fidelity with about $200K initially to start a new income stream. We have no debt and SS/Pension pay all bills including health care and 40% of discretionary spending.



To convert 25% next year would cost about about $55K. If we avoid the 25% Roth conversion then the first RMD at 72 would be about $53K and result in about $11,660 tax assuming 22% tax bracket.



We need to update our will and will be discussing potential of a trust to avoid some TLC exposure and protect the transfer of our assets to our daughter when we pass.



Starting to think Roth is not the end all and that creating a trust will start to complicate our retirement especially in later life. We need to up our withdrawal rate anyway to avoid too much money in our 80s and would reduce RMDs. Thinking that just staying with IRAs would be easier.


Thoughts?

 

[mz44]

Need to expand on your percentages. 25 percent and 100 percent of what?

 

[teejayevans]

Need to expand on your percentages. 25 percent and 100 percent of what?

I think he means his IRA…so 25% conversion will cost him $55k in taxes.

 

[pb4uski]

I don't get the objective to reduce exposure to the LTC industry? Is this some Medicaid LTC planning scheme?

So you're thinking of converting over $288k in one year and paying $55k in taxes? Sounds a bit extreme to me. Besides, the 22% tax bracket is only $91,700 wide... $81,050 to $172,750 of taxable income for MFJ couples.

If you did no conversions, what would your tax bracket(s) be at age 72 with SS and any pensions... before RMDs and after RMDs?

Do you really mean once you are on Medicare rather that Medicaid?

 

[SevenUp]

Was expecting to convert 100% next year...Thoughts?

Highly unlikely that would be a good idea. Much more likely that spreading conversions over some number of years would be better.

See Roth IRA conversion - Bogleheads for a couple of spreadsheet tools that could help you estimate what would work best.

 

[523HRR]

Have been taking Roth conversions up to the top of our ordinary income tax bracket for a few years now as expecting to be in a higher bracket once pensions start in another couple years.

 

[pb4uski]

Highly unlikely that would be a good idea. ...

+1 That would all but guarantee the OP and his DW much higher Medicare Part B and Part D premiums in a couple years because of IRMAA.

Maybe convert to just under the IRMAA tier 1 limits, $176k of income, if you want to be aggressive.

 

[CardsFan]

+1 That would all but guarantee the OP and his DW much higher Medicare Part B and Part D premiums in a couple years because of IRMAA.

Maybe convert to just under the IRMAA tier 1 limits, $176k of income, if you want to be aggressive.

Bold by me.

That is what we are doing, until RMD's hit. No way we will draw down the tIRA substantially, but MAYBE we will under the IRMAA limits for a few years after RMD's start.

First world problem. Ultimately we will pay back most of the taxes we avoided, but not all.

 

[Still Learning]

mz44 -Yes, would convert just 25% of IRA funds next year to reduce future RMDs. Spreadsheet shows 25% or even 100% conversion would work without later loss of projected assets.


pb4uski -Our LTC plan is not based on any government program. Health insurance provides us with 100 days nursing/rehab per hospital stay and we have self funded 5 years of LTC until we hit 75. At 75 our investment withdrawal will cover one of us being in LTC and at 85 it will be adequate for both of us. We continue to include our Accountant to understand tax implications of our retirement plan and discuss the viability of our income streams. At 72 we will be in the 72% tax bracket.



We are starting to meet with some elder care legal firms to decide if a trust is worth the partial protection it would provide from the LTC industry. Did not see any responses to the idea of a trust. Anyone have experience and able to discuss the pros and cons?


Not my intention to dwell on LTC costs in retired life, in fact there is little to like about LTC, but will enjoy our retirement better knowing our plan addresses some of the challenges should it become necessary.


Thanks for the replies.

 

[Still Learning]

pb4uski -sorry for the typo. Will be in the 22% bracket at 72

 

[Ready-4-ER-at-14]

Maybe just convert a lot in one year and take both the tax hit and the Medicare premium hit for that year, then convert rest in increment to stay in your desired tax band while reducing the nest egg in the regular ira.

We converted the parts likely to appreciate in a bold expensive move to Roth and then left the fixed income in regular.
We can take some of the maturing bond ladders annually to spend and pay conversion costs and let the Roth grow.

In hind sight should have started converting earlier. But accumulation thinking was in place.

 

[SecondCor521]

Can you explain a little bit about why you need protection from the LTC industry?

I think I know what LTC is, and what LTC insurance is, but I'm a bit puzzled as to how I might need protection from those two.

I don't know what you are concerned about, and so I'd like to learn from you what I apparently don't know. Thanks.

 

[pb4uski]

... Our LTC plan is not based on any government program. Health insurance provides us with 100 days nursing/rehab per hospital stay and we have self funded 5 years of LTC until we hit 75. At 75 our investment withdrawal will cover one of us being in LTC and at 85 it will be adequate for both of us. We continue to include our Accountant to understand tax implications of our retirement plan and discuss the viability of our income streams. At 72 we will be in the 72% tax bracket.



We are starting to meet with some elder care legal firms to decide if a trust is worth the partial protection it would provide from the LTC industry. Did not see any responses to the idea of a trust. Anyone have experience and able to discuss the pros and cons?


Not my intention to dwell on LTC costs in retired life, in fact there is little to like about LTC, but will enjoy our retirement better knowing our plan addresses some of the challenges should it become necessary.


Thanks for the replies.

I think you are too focused on LTC and I still don't get the concern... from an LTC perspective what does it matter whether assets are in a tIRA or in a Roth IRA?

If you convert 25% as you plan, you will be paying much more in Medicare Part B and Part D premiums because your income is so high.

If you'll be 22% at 72 with no Roth conversions, then there is no reason to be so aggressive.... you'll pay 22% now or 22% later... it doesn't make a difference. You might want to consider levelizing your total income with Roth conversions now, or alternatively, calculate your conversion amount using the RMD tables. Or at most, convert to the bottom of the first IRMAA tier... a total of $176k of income in 2021 to avoid those higher Medicare premiums. Is your accountant considering possible IRMAA impacts in the advice he is giving you? I suspect not.

One benefit of conversions now is that you'll avoid the expected increase in tax brackets when the current tax brackets sunset... but that's only 22% vs 25%. Another benefit is that if one of you die then the survivor will likely be in an even higher tax bracket.

BTW, many of us choose to delay starting SS or pensions so we can do more low-tax cost Roth conversions between ER and age 70/72.

 

[sengsational]

Sounds to me like if RMD's are too high, the specific LTC plan that the OP has will not work well. So rip off the band aid (convert tIRA to reduce RMDs).

 

[RetiredHappy]

Your mention of protecting from "LTC industry" and I don't know what you meant. There are 3 ways to pay:
1) Buy a good amount of LTCI now to cover the potential need to use it later.
2) Self-fund through taxable, IRA or ROTH. If you use IRA, you can potentially get some back as tax deductions.
3) Drain every dime that you have and go on Medicaid. I don't understand and despise people doing number (3) if they have money but decided to work the system by passing their money on to their family and sticking the bill to tax payers.

When you said "protecting from LTC industry", what do you mean?

 

[pb4uski]

Sounds to me like if RMD's are too high, the specific LTC plan that the OP has will not work well. So rip off the band aid (convert tIRA to reduce RMDs).

But why would high RMDs cause problems with a self-funded LTC payment plan? I don't get it or what the problem is.

 

[pb4uski]

...Our LTC plan is not based on any government program. Health insurance provides us with 100 days nursing/rehab per hospital stay and we have self funded 5 years of LTC until we hit 75. ...

OP, are you referring to Medicare here?

 

[Still Learning]

What got me into this question of LTC exposure was learning that ROTH IRA funds are just as exposed as savings, SS, pension, stocks and other income producing sources........I am still learning........... that retirement IRA funds are not, beyond withdrawals and RMDs. So just started investigating trusts again and still find them to be a bit complicated and only partially successful based on legal websites pending our first consultation with an elderly care legal firm. We should be able to self fund what we eventually need.



Believe the overall concept of converting to Roth IRAs makes sense for us. Currently in the 12% tax bracket vs 35% when working and 22% in a few years time as our income stream from current and new investments continue to increase.

 

[SecondCor521]

Ah, OK. I think I understand what you're saying.

If you end up spending everything else on LTC and only have your traditional IRA left...then you're saying you can protect it from paying for LTC by leaving the money in the traditional IRA, right? But if you protect it in that manner, don't the LTC providers (the doctors and facilities and such) have the right to stop providing care until/unless you pay for it? In other words, you have your money but don't have any actual long term care.

I sincerely doubt that you can somehow manage to get a bunch of LTC, spend down everything except your traditional IRA, then continue to get care, then somehow leave the traditional IRA to your daughter (or anyone, really) without any sort of Medicare/Medicaid claw back or estate liability that would need to be satisfied.

If that were true, I think there would be a lot of people interested in that approach, and at least some of them would figure it out and probably post about it here. Since that hasn't happened, I doubt that approach works.

I suppose it may be possible to screw Medicare/Medicaid in that fashion, but I think most people on this board would view that as not very sporting (i.e., unethical).

Or maybe I still don't understand your point.

ETA: Even if that is partly true, I'm unaware of any difference between traditional and Roth IRAs with respect to the ability of creditors to gain access to them. In other words, if your traditional IRA assets are protected as you describe - and I doubt it is, see above - then I would think your Roth IRA assets would likewise be protected, making the issue of Roth conversions a disconnected thing. But I don't know much about Medicare/Medicaid asset protection ideas. (My plan is to self insure and then either die when I run out of money, or leave what's left after I spend what is necessary for LTC to my kids.)

 

[Out-to-Lunch]

What got me into this question of LTC exposure was learning that ROTH IRA funds are just as exposed as savings, SS, pension, stocks and other income producing sources......... (emphasis added)

Exposed to what? I think it would help if you just plainly stated your fears.

You aren't confusing this with the differing protections (e.g., from creditors) offered by 401(k) plans vs. IRAs, are you? https://www.investopedia.com/articles/personal-finance/040716/which-retirement-funds-are-protected-creditors.asp

 

[Still Learning]

Out-to-Lunch-specifically, a long term facility can go after Roth IRA funds, IRA distributions but not the actual fund, SS, pension and other sources of income as I understand the information to date for lack of payment.

 

[chassis]

We will both be 64 this year and into our 2nd year of retirement. Just met with our Accountant to review if we should convert our Vanguard IRAs to Roth IRAs. The value will be about $1.15 million next year and $1.5+ at 71.


Was expecting to convert 100% next year as we only took a 2.5% withdrawal this year keeping us in the 12% tax bracket. Our Accountant suggested only a 25% conversion to reduce taxes and avoid exposure to LTC industry in the future as the entire Roth fund is exposed. We currently have 5 years of self financed LTC that would last longer with in-home care should that be practical. Once we are on Medicaid we must make sure that any overnight hospital stays are under "admitted" status only for additional health & LTC benefits. Currently we are both healthy to date. While RMDs are exposed to the LTC industry we understand the main IRA fund is not. We also have $1 million in cash which we plan to create a new account at Fidelity with about $200K initially to start a new income stream. We have no debt and SS/Pension pay all bills including health care and 40% of discretionary spending.



To convert 25% next year would cost about about $55K. If we avoid the 25% Roth conversion then the first RMD at 72 would be about $53K and result in about $11,660 tax assuming 22% tax bracket.



We need to update our will and will be discussing potential of a trust to avoid some TLC exposure and protect the transfer of our assets to our daughter when we pass.



Starting to think Roth is not the end all and that creating a trust will start to complicate our retirement especially in later life. We need to up our withdrawal rate anyway to avoid too much money in our 80s and would reduce RMDs. Thinking that just staying with IRAs would be easier.


Thoughts?

@StillLearning Roth conversions offer no benefit, or a very small benefit very late in life, for most people. McQuarrie is one author on this topic.

Use the search feature on this site and you will see extensive discussion on this topic.

My suggestion is don’t do Roth conversions because there is little or no benefit. It’s a chase after the wind and needless machinations of one’s financial accounts. My own home grown excel model agrees with McQuarrie as does the vaunted RPM spreadsheet.

Anecdotally, I have asked UHNW individuals in my circle, and a family office trustee (UUHNW clients) and none of these people are doing Roth conversions for themselves or their clients.

What prompted the idea to explore Roth conversions?

 

[Still Learning]

chassis - thanks for your thoughts. I started checking into Roth IRA conversions due to our current low tax bracket and to simplify life for my wife if I pass first. No thought to avoid taxes/other costs although I do like to pay minimum.

 

[SecondCor521]

Out-to-Lunch-specifically, a long term facility can go after Roth IRA funds, IRA distributions but not the actual fund, SS, pension and other sources of income as I understand the information to date for lack of payment.

From whence did you learn this information?

 

[RetiredHappy]

From whence did you learn this information?

https://www.elderlawanswers.com/can-an-ira-affect-medicaid-eligibility-14544