Roth Conversion or Not

[Exchme]

We have a set of guidelines that were developed to balance out our needs, and try to avert 10% of tax now, within reason.

I think at one time someone here developed a flowchart, to show the logic of the many possibilities of Roth conversions.

Unless someone knows all of my details, they probably can't make a 100% optimum decision for me. I think the same goes for your question. Well, yes, you can take from your IRA now, but without knowing your details it would not be right for me to say.

Yes, and it's not just the differences in account balances, pensions and SS benefits. Each person's best answer also depends on priorities like spending, charity and bequests and depends on expectations about returns, life expectancies, taxes, need for long term care, ACA premium credits and more.

 

[indiajust]

Absolutely, roths are tax arbitrage. pay now and invest tax free forever, or invest tax free and pay later. If tax rates don't change, the destination remains the same.

Slight difference in that roths don't have RMD. Otherwise outcomes identical.

 

[Dash man]

Absolutely, roths are tax arbitrage. pay now and invest tax free forever, or invest tax free and pay later. If tax rates don't change, the destination remains the same.



Slight difference in that roths don't have RMD. Otherwise outcomes identical.

That “slight difference” can be huge with a large 401k/IRA. You will be forced to take RMDs with each year requiring a larger percentage of your pretax accounts to be withdrawn. Add in pensions, social security and other taxable income streams, you may be pushed into a higher tax bracket than you expected. Tax brackets under current law will go up in 2026 if Congress doesn’t do anything, and long term with the national debt they could easily go up. If one of a couple passes, they are suddenly using individual tax rates. The destination is rarely the same.

 

[skyking1]

In our example, the roths are going to be left to grow for ~10 years from the start of the conversion phase, at a minimum. That's a lot of tax-free growth to get or lose. We have 130K in Roths now, and will convert ~300K over 7 years and skate right at the top of the 12% ( probably 15% later) bracket.
My goal is to eliminate DW's 401K and 403b, and roll them into roth at the same company with the same AA. It becomes apples to apples as far as that growth/loss potential.
My pension can cover the taxes and we will be drawing 2~3% from our taxed accounts and cash to supplement the income in that phase.
The net result will be no tax liability on the portfolio for a survivor. The SS and pension will generate tax liability regardless, but at least the nest egg becomes painless for a surviving spouse.

 

[Jerry1]

I max out the 12% bracket. I feel the main benefit is that I’m reducing future RMD’s. In that regard, it doesn’t really matter if I put the money in a ROTH or a taxable account. I do put them in the ROTH because there’s no reason not to, but frankly, I think I’ll benefit mostly by keeping my RMD’s lower and thus my future tax rate lower. Time will tell. I’m sure I could create a spreadsheet or formula to prove my position (or not) but by the seat of my pants, I’m fine with what I’m doing.

 

[SevenUp]

...it doesn’t really matter if I put the money in a ROTH or a taxable account.

Even if one is in the 0% bracket for qualified dividends and long term capital gains, incurring that income in a taxable account can affect the taxability of social security benefits. In that regard, using Roth is better.

 

[RunningBum]

Even if one is in the 0% bracket for qualified dividends and long term capital gains, incurring that income in a taxable account can affect the taxability of social security benefits. In that regard, using Roth is better.

And that 0% bracket isn't unlimited. If you need to access a lot of money, getting it from a Roth is tax free, but some of your LTCGs from a taxable account may be taxed at 15%.

 

[almost there]

For many, converting to Roth in 2023, 2024 2025. Will give a bonus 3% tax break. Over 2026. How its looking anyway...

 

[Jerry1]

For many, converting to Roth in 2023, 2024 2025. Will give a bonus 3% tax break. Over 2026. How its looking anyway...

I’m assuming you mean because the likely change back to the old rates. For example, the 12% bracket will revert back to the 15% bracket.

Point to make is that you’ll get that whether you convert it to a ROTH or just take it out of your IRA. That was one of my realizations. My RMD’s go down because I withdraw (lower) my IRA. I get the lower tax bracket by managing my withdraws irrespective of whether it goes into a ROTH or not. Using a ROTH makes sense, don’t get me wrong, but it’s a separate matter that stands on its own.

 

[Jerry1]

...it doesn’t really matter if I put the money in a ROTH or a taxable account.

Even if one is in the 0% bracket for qualified dividends and long term capital gains, incurring that income in a taxable account can affect the taxability of social security benefits. In that regard, using Roth is better.

You kind of misquoted me. I said, with regards to lowering RMD’s it doesn’t matter if I put the money in a ROTH or not. Certainly there are reasons to use a ROTH. However, if you’re just going to buy CD’s, it will matter less. Your investment strategy in and out of your ROTH matters.

 

[almost there]

I’m assuming you mean because the likely change back to the old rates. For example, the 12% bracket will revert back to the 15% bracket.

Point to make is that you’ll get that whether you convert it to a ROTH or just take it out of your IRA. That was one of my realizations. My RMD’s go down because I withdraw (lower) my IRA. I get the lower tax bracket by managing my withdraws irrespective of whether it goes into a ROTH or not. Using a ROTH makes sense, don’t get me wrong, but it’s a separate matter that stands on its own.

Agree, but we were talking about Roth's. As far as RMD's go. With any luck, my IRA will be down to around 200k in 12 yrs at 72. To keep RMD from being an issue.
Spent my entire life trying to make as much as possible. Now, its reversed.

 

[SevenUp]

I max out the 12% bracket. I feel the main benefit is that I’m reducing future RMD’s. In that regard, it doesn’t really matter if I put the money in a ROTH or a taxable account. I do put them in the ROTH because there’s no reason not to, but frankly, I think I’ll benefit mostly by keeping my RMD’s lower and thus my future tax rate lower. Time will tell. I’m sure I could create a spreadsheet or formula to prove my position (or not) but by the seat of my pants, I’m fine with what I’m doing.

Even if one is in the 0% bracket for qualified dividends and long term capital gains, incurring that income in a taxable account can affect the taxability of social security benefits. In that regard, using Roth is better.

You kind of misquoted me. I said, with regards to lowering RMD’s it doesn’t matter if I put the money in a ROTH or not. Certainly there are reasons to use a ROTH. However, if you’re just going to buy CD’s, it will matter less. Your investment strategy in and out of your ROTH matters.

Yes, with regard to future RMDs all that matters is how much you remove from the traditional account. But as long as one is going to do a non-RMD withdrawal from the traditional account, and not spend it immediately, there are good reasons to put the money in Roth instead of taxable.

I think we are saying the same things, although perhaps looking at different portions of a split hair....

 

[pc95]

I wonder if the tax-tides rise fairly significantly with marginal tax rates in the farther out future:

10-15 years which is our retirement time horizon.

Could all rates go up a moderate to significant % - that's why I wonder about converting at moderate rates right now (24%).

The best time to convert was Mar 2020 recently. If this current bear run goes down another 10%+, I may pull the trigger on another chunk of tIRA > rIRA
Generally you want to convert when in deep pull-backs or if possible "black-swan" times if you can sell-buy in time.

 

[Sunset]

I wonder if the tax-tides rise fairly significantly with marginal tax rates in the farther out future:

10-15 years which is our retirement time horizon.

Could all rates go up a moderate to significant % - that's why I wonder about converting at moderate rates right now (24%).

The best time to convert was Mar 2020 recently. If this current bear run goes down another 10%+, I may pull the trigger on another chunk of tIRA > rIRA
Generally you want to convert when in deep pull-backs or if possible "black-swan" times if you can sell-buy in time.

You can transfer the actual stock, so no need to sell-buy.

 

[ncbill]

That “slight difference” can be huge with a large 401k/IRA. You will be forced to take RMDs with each year requiring a larger percentage of your pretax accounts to be withdrawn. Add in pensions, social security and other taxable income streams, you may be pushed into a higher tax bracket than you expected. Tax brackets under current law will go up in 2026 if Congress doesn’t do anything, and long term with the national debt they could easily go up. If one of a couple passes, they are suddenly using individual tax rates. The destination is rarely the same.

Don't forget the growth over time.

I still kick myself for not converting mom's IRA to Roth ~20 years ago during her terminal illness.

Given her medical bills it probably would have been tax-free...or I could have easily paid the taxes out-of-pocket.

Now, despite inheriting it over a decade ago with annual RMDs based on my life expectancy it is worth several times what it was back then.

But instead of the RMDs being tax free I'm paying ordinary income tax on them, which crimps my ability to convert my IRA rolled over from a previous 401k to Roth.

 

[almost there]

I have never seen anyone post "I wish I had not converted so much of my IRA to my Roth". Only those who wish they would have converted more in the past. Myself included.
Will see if there is a situation where one regrets converting. Just curious what it would be.?

 

[Rianne]

I have never seen anyone post "I wish I had not converted so much of my IRA to my Roth". Only those who wish they would have converted more in the past. Myself included.
Will see if there is a situation where one regrets converting. Just curious what it would be.?

You're right, hindsight is 20/20. But if we keep our tIRA in bonds (treasuries and CDs) it will grow very slowly but be safe. And we will spend out of the tIRA and keep our 60% taxable stock funds for growth. We have a corporate pension starting in 2023, $2500/month, and will wait until 70 for DH SS. Our tIRA is worth approx. $700k. If we Roth converted, do we just convert to safe bond type investments?

 

[almost there]

It does not matter what the IRA funds converting to Roth are invested in. (to my knowledge)
I have converted ind. stocks, mutual funds, Money market, and CD's.
To me the big deal is how much to convert per year, based on your tax bracket.
So for most folks, a little per year to the top of your bracket.
Most but not all.... anyway. Converting 700k in a single year would be a catastrophe IMO.
I have been chipping away / converting my IRA for several years now. Have 530k left. Will convert 30k this year, and 50k next year. Then plan (Jan 2024) at 62 to start pulling 2500 a month out of it (450k tIRA) for approx. 20 yrs. And take SS at the same time (2900 a month today) And just let the Roth grow.
To make it easy on my heir's, will get the IRA depleted prior to exiting the planet. Thats my plan anyway.

 

[Sunset]

I have never seen anyone post "I wish I had not converted so much of my IRA to my Roth". Only those who wish they would have converted more in the past. Myself included.
Will see if there is a situation where one regrets converting. Just curious what it would be.?

Haven't experienced it yet, but my plan is to leave $200K or more in an IRA, so that if I go into a nursing home it can be withdrawn and the taxes offset by the medical deduction. Making it roughly tax free.

It's the only bright side of going into a nursing home

 

[Out-to-Lunch]

Haven't experienced it yet, but my plan is to leave $200K or more in an IRA, so that if I go into a nursing home it can be withdrawn and the taxes offset by the medical deduction. Making it roughly tax free.

It's the only bright side of going into a nursing home

+1. Me too. (I was targeting $500k... may have to noodle harder on that figure.)

 

[Sunset]

+1. Me too. (I was targeting $500k... may have to noodle harder on that figure.)

My number is very vague, didn't do any calculations to optimize it.

If I figure the cost is $120K/yr and I have 50K normal income (SS, interest, RMDs, etc) then need 70K from IRA that will last 3 years.

Men don't tend to live long in a nursing home, but there are exceptions.

You may be more correct than me, especially if the nursing home is for DW.

 

[Out-to-Lunch]

My number is very vague, didn't do any calculations to optimize it.

If I figure the cost is $120K/yr and I have 50K normal income (SS, interest, RMDs, etc) then need 70K from IRA that will last 3 years.

Men don't tend to live long in a nursing home, but there are exceptions.

You may be more correct than me, especially if the nursing home is for DW.

BTW, I do not claim my number was well thought-out! It may have been influenced by the number of digits I have on one hand... Not to mention how much I expect to be able to Roth-convert in the window I have identified.

And, yes, there is a DW whom I expect to outlive me.