More help with Roth Conversions

[mtheulen]

Morning All
Some info:
57 years old, will work until 62 (company will pay 100% health insurance if I stay)
400K in 401
400K in IRA
25K in Roth
Pension at 62
I have no understanding of Roth conversions or if it is a strategy i should look into
Having spent the last 40 years saving, I'am trying to get educated on tax strategy's going into retirement
I welcome all thoughts/opinions
Thanks

[pb4uski]

The idea of Roth conversions is that typically there is a period of time from when you stop working until when you start receiving SS and any pensions that you would have a very low tax rate. This is especially true for someone living off of savings (taxable accounts).

So the idea is to take advantage of your low tax rates during this limited period of time to convert money at low rates.

For example, when I was working my marginal tax rate was 28% when I deferred income. For the last few years I have been retired and am living off of savings so my only income is dividends from my investments so if I convert to the top of the 15% tax bracket I pay roughly 10% in tax.... so I save 15% compared to what I deferred. Once my pension and SS start I expect my tax rate will be either 15% or 25% or more, so by doing conversions today I am saving at least 5% and possibly more.

[mtheulen]

Quote:

Originally Posted by pb4uski The idea of Roth conversions is that typically there is a period of time from when you stop working until when you start receiving SS and any pensions that you would have a very low tax rate. This is especially true for someone living off of savings (taxable accounts). So the idea is to take advantage of your low tax rates during this limited period of time to convert money at low rates. For example, when I was working my marginal tax rate was 28% when I deferred income. For the last few years I have been retired and am living off of savings so my only income is dividends from my investments so if I convert to the top of the 15% tax bracket I pay roughly 10% in tax.... so I save 15% compared to what I deferred. Once my pension and SS start I expect my tax rate will be either 15% or 25% or more, so by doing conversions today I am saving at least 5% and possibly more.

Thanks
So it looks like in my case if i were to do a conversion, i should look at my tax bracket starting retirement, before i would collect SS.I anticipate 3-4 years between the start of retirement and drawing SS

[pb4uski]

Yes, so if your tax bracket after you retire but before you start SS is less than your tax bracket after you start SS then you would benefit.

You can do faux returns in TurboTax or the income tax calculator at tax-rates.org to get an idea of your tax rates.

[Animorph]

If you have no taxable account savings then Roth conversions are probably not beneficial for you. I think of it as transferring some of my taxable money into a Roth. The one case I can think of is if your pension leaves you some savings and you have some tax bracket space. In that case you can Roth convert and cover the taxes with the excess pension amount.

You should look at your tax situation early in retirement to see if you need/want to be careful (and can afford) not to exceed a tax bracket. You might use the Roth account to cover spending while avoiding entering the higher tax bracket. Or you might delay the pension while spending the 401k/tIRA and taking advantage of the lower tax brackets and a pension delay bump, if available. Or maybe SS bumps you up a bracket.

Also look at age 71 taxes when RMD's start and you have pension, SS, and RMD's all incurring taxes. Some earlier 401k/tIRA withdrawals will reduce your RMD's and might help keep you out of a higher tax bracket. You're just trying to get the money out of your retirement accounts at the lowest tax rates.

[N02L84ER]

Roth conversions could be advantageous after you retire. After determining your current tax bracket, expected tax bracket at 62 and expected tax bracket at 70+, it might work to your advantage to make 401K contributions up to the match or enough to drop your current marginal tax bracket one level and then save the rest to a taxable index fund for the next 4-5 years to allow you to do conversions after you retire. You would need to run the numbers for yourself.

[Frankie1926]

Do you think Roths will continue to be tax free in the future? It seems the government will be seeking every extra penny in the future.


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[pb4uski]

Quote:

Originally Posted by Frankie1926 Do you think Roths will continue to be tax free in the future? ...

Misplaced my crystal ball so I can't say for sure... but I think yes.

They might impose RMDs or some other change but I doubt they will be taxed directly.

[Options]

Quote:

Originally Posted by mtheulen Morning All Some info: 57 years old, will work until 62 (company will pay 100% health insurance if I stay) 400K in 401 400K in IRA 25K in Roth Pension at 62 I have no understanding of Roth conversions or if it is a strategy i should look into Having spent the last 40 years saving, I'am trying to get educated on tax strategy's going into retirement I welcome all thoughts/opinions Thanks

In my experience, the fastest way to learn "everything you wanted to know about Roth conversions but were afraid to ask" is to visit the BH forum and type in Roth conversions. Be prepared to spend some time studying.

[Dogberry]

Agree with all answers above.
Roth conversion is quite profitable in the following circumstance - if due to some news, a stock like Pepsi or Boeing drops precipitously >40% in a short period, then move it into your Roth asap. if you have 15 yrs to retirement, it is bound to recover and your account is the better for it.

[Chuckanut]

Quote:

Originally Posted by pb4uski Misplaced my crystal ball so I can't say for sure... but I think yes. They might impose RMDs or some other change but I doubt they will be taxed directly.

I agree. If they are taxed it will be indirectly. They might use the withdrawal as an excuse to raise the tax bracket on your taxable funds. It's a devious idea, but......?


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[Sunset]

Quote:

Originally Posted by Frankie1926 Do you think Roths will continue to be tax free in the future? ..

Yes.
Because lots of very rich folks including politicians have put stock options into the roths that magically became worth millions within a short time.

Also, because unless it is a hidden law, as soon as they announce that next year roth withdrawals are taxable, I'm emptying my account the next day, and so will everyone else, so there will be nothing to tax.