Roth conversions

[Splash]

1. What pct of conventional IRA do you/will you have converted to Roth by your RMD Year? ~35%, we plan to convert as much IRA and 401K as possible without going over ACA Cliff or 12% bracket.

2. Will you/ did you continue Roth conversion after your RMD’s start? Decision will be based on financials when we get there

3. Do you plan on converting 100% to Roth? I don't see that being economically feasible for us.

4. How old were you when you started Roth conversions? 55, converted tiny amount in 2017, first year of retirement

5. Do you do Roth conversions every year and once per year? And pay the tax in the quarter that you convert? We are new at this but thinking of converting in December when we have better estimates of investment income. May do a very conservative conversion earlier in the year and true up in December. My 401k plan limits conversions to 2 per year.

6. Is your Roth IRA investment mix the same as in your traditional IRA? Planning to put higher growth assets (equities) in Roth.

7. To what extent was/is your decision on delaying SS based on your Roth conversion strategy? Very much so. Looking for a long run way for doing Roth conversions as 75% of assets are tax deferred.

8. Do you have reasons to not do Roth conversions? No. I only wish Roths had been available in my early, lower earning years.

 

[pb4uski]

.....My message is,
1. 401k to company match
2.Roth to IRS limit and
3. And ....

Should there be a cash withdrawal need, let them know that Roth contribution is always there for you.

Am I generally correct?

Generally, however for those currently in a high tax bracket because of earned income but who will not have a pension and plan to retire early the the power of tax benefits is hard to beat.... I was in the 32% or higher tax bracket when much of my 401k deferrals were made (federal and state)... in retirement, I pay about 13% on current conversions (a mix of 0%, 10% and 12% and ~5% state)... hard to beat a 19% tax savings. Even once SS starts and I am in the 22% tax bracket (and no state taxes ) I'll be saving 10%.

 

[Ronstar]

I'm going to have to take a real hard look at it when we turn 65 and relocate to a no state income tax state.

Another wrinkle comes into the mix.

No wonder a lot of folks are moving to Texas and Florida. No state tax on big RMD's and pensions is surely a reason to move to a no state tax state. A big $ reason.

 

[Dtail]

Just curious.
When people do their Roth conversions, do they typically pay the taxes from the converted amount, or pay from separate monies?
I suppose it is all the same in the end, unless the separate monies are not held in their investment portfolio assets and thus the the investment portfolio remains intact, even though the NW (temporarily) decreases.

 

[Ronstar]

Just curious.
When people do their Roth conversions, do they typically pay the taxes from the converted amount, or pay from separate monies?
I suppose it is all the same in the end, unless the separate monies are not held in their investment portfolio assets and thus the the investment portfolio remains intact, even though the NW (temporarily) decreases.

I'm going to pay the tax on the first conversion or 2 from cash. Then I'll either sell taxable equities to get $ to pay the tax or just make an IRA withdrawal to pay tax on conversions down the road.

 

[pb4uski]

I have always paid mine from taxable funds as it is a backwards way of transfering more money into the Roth, which is tax-free from that date forward. From a different thread:

..... A simple example.... one has $10,000 in a tIRA and is in the 22% tax rate and expects to be in that tax rate indefinitely.

If you leave the money in the tIRA for 10 years at 7% it grows to $19,672. You take it out, pay the 22% in tax and have $15,344 to spend.

Alternatively, you convert and pay the tax from the proceeds of the tIRA and have $7,800 in the Roth. After 10 years at 7% the $7,800 has grown to $15,344.

Where there is a bit of an advantage is if you have $2,200 in taxable and $10,000 in a tIRA.

If you convert, your $2,200 goes poof (pays the taxes) and your $10,000 grows to $19,671.

If you don't convert, your taxable account grows to $3,744 after paying tax on the annual returns and the $10,000 grows to $19,671. When you withdraw and pay the taxes you have a net of $19,087.

So the advantage of the Roth is not having to pay tax on the growth in the taxable account, which totals $584.

 

[mpeirce]

Just curious.
When people do their Roth conversions, do they typically pay the taxes from the converted amount, or pay from separate monies?

I'm trying to get as much into the ROTH as I can, so I've always paid the taxes from non-IRA funds.

 

[Dtail]

Thanks for the responses folks.
Theoretically, I would like to pay the taxes from outside the converted funds, but (perhaps overthinking it) if the taxes are paid from investment assets, then I worry about ramping up the WR.

 

[UnrealizedPotential]

Another wrinkle comes into the mix.

No wonder a lot of folks are moving to Texas and Florida. No state tax on big RMD's and pensions is surely a reason to move to a no state tax state. A big $ reason.

I agree with you. But one thing to look at if one is planning on moving to a no state income tax state is the cost of property taxes. Will they be higher? Will it still be worth the move? I don't know the answer to that.

 

[Niuatoputapu]

We are currently invested

83% Tax-Deferred accounts
15% Roth
2% After-Tax

Our plan is:

2018-2022 - Spend down tax-deferred accounts with marginal rate of 31.35% (22% plus California's 9.35%)

2023-2026 - Sell California house and move somewhere with lower state tax.
With house cash available, convert to top of the lowest Medicare Part B MAGI bracket (middle of 22% bracket).

2027 til death of first one spouse - Start second SS, take annual RMDs and stay within the 12% (or whatever it is then) bracket.

Essentially we plan to pay 22% tax on trad-to-Roth conversions before age 70, so we do not pay 22% (or probably higher) tax on RMDs at age 70 and beyond (at least while both spouses survive).

Questions:

1. What pct of conventional IRA do you/will you have converted to Roth by your RMD Year? Plan to go from 83%/15%/2% to 58%/33%/9%, but that depends on market performance through 2026.

2. Will you/ did you continue Roth conversion after your RMD’s start? Open to the idea because the surviving spouse will be thrown into higher marginal bracket. Depends on market returns and longevity predictions, so - we'll see in 2027 and later.

3. Do you plan on converting 100% to Roth? No

4. How old were you when you started Roth conversions? Not yet

5. Do you do Roth conversions every year and once per year? And pay the tax in the quarter that you convert? N/A

6. Is your Roth IRA investment mix the same as in your traditional IRA? Overall portfolio is 60/40, Roth portion is 100% Equities.

7. To what extent was/is your decision on delaying SS based on your Roth conversion strategy? None, but conversions fit nicely into a "delay SS until 70" strategy.

8. Do you have reasons to not do Roth conversions?Yes, current marginal rate of 31.35%

 

[Corporateburnout]

Just curious.
When people do their Roth conversions, do they typically pay the taxes from the converted amount, or pay from separate monies?
I suppose it is all the same in the end, unless the separate monies are not held in their investment portfolio assets and thus the the investment portfolio remains intact, even though the NW (temporarily) decreases.

We pay from cash in our taxable account. When cash is depleted we will sell equities in the taxable account to pay the conversion tax.

 

[CRLLS]

We have very little left in our taxable/cash accounts, around 1%. We are in the "money is fungible" camp. Our plan is to pay the tax from our IRA's. Our goal is to lower the future RMD's, but only up to the top of the 12% bracket. Paying the taxes from that same IRA as being converted will help in that respect. We like having a few taxable/cash $$ left at our local bank.

 

[seabourne]

1. What pct of conventional IRA do you/will you have converted to Roth by your RMD Year?
Most if not all probably. I'm 39 and planning on pulling the plug in under a month. This year I've withheld most of my income, and will convert a large lump to start a ROTH ladder. The total conversion will depend on returns, tax levels, and whether I decide to do something earning significant taxable income again. I will also likely accelerate conversions to the 12% bracket limit in the event of a serious market downturn.

2. Will you/ did you continue Roth conversion after your RMD’s start? Probably not, but at 30+ years out I have time to worry about it later.

3. Do you plan on converting 100% to Roth? See above - it depends on the chances to cherry-pick low tax payment on the conversions versus the growth.

4. How old were you when you started Roth conversions? I'll be doing my first one this year at 39.

5. Do you do Roth conversions every year and once per year? And pay the tax in the quarter that you convert? I intend to convert once per year in the 4th quarter so that any income from the year can be considered in the amounts for tax/ACA purposes.

6. Is your Roth IRA investment mix the same as in your traditional IRA?
fewer bonds, almost exclusively stocks or cash.

7. To what extent was/is your decision on delaying SS based on your Roth conversion strategy? SS will be started based on need or lack of as well as anticipated tax consequences.

8. Do you have reasons to not do Roth conversions? Yes, i may reside in Australia for a few years and I'm not yet aware of the tax consequences of performing a ROTH conversion while residing there. I may have a lull depending on the tax interactions.

 

[SevenUp]

...I did check and the IRS website does show that an estimated payment made on 1/15 of any year is for the last calendar quarter of the preceding year. I also checked the instructions for Form 1040 line 65 I believe it was, which is where you put in estimated payments, and it did refer to payments made for the previous calendar year, or something like that.

As to the ability to only make one quarterly payment (and not payments for the first three quarters of the year), all I know about that is that there is an IRS approved method where you can calculate your income by quarter and your payments by quarter in order to see if you have any underpayment penalties. I believe it is Form 2210 or something like that. Anyway, I think based on that, that you can vary your quarterly estimated payments, and logically if one's income for a quarter is zero then a zero payment should be permitted. But I admit I've never actually confirmed that with the IRS; I've just done it and have not yet gotten in trouble.

And then as far as avoiding penalties, I'd look at the instructions for Line 79 of Form 1040. I believe what it will say is that one of the ways to avoid penalties is if the amount owed (Line 78) is less than $1,000. There are other ways involving percentages that I won't quote here, but many people use those methods.

All of that is true, but the original implication (that a 4th quarter estimated payment is equivalent to - or better than - withholding in its ability to preclude underpayment penalties) is not.

E.g., assume your 2016 federal tax was $900, your 2017 federal tax was $5000, and you had neither withholding nor estimated tax payments during those years.

You wouldn't have any penalty for 2016 - just owe $900 when filing.

But, if the $5000 was all due from 1Q2017 income, even making a $5000 estimated payment on 1/1/18 would leave you with a penalty for 1Q, 2Q, and 3Q underpayments.

ETA: Sorry, missed the page where this was already covered.

 

[shortstop14]

1. What pct of conventional IRA do you/will you have converted to Roth by your RMD Year?

Eight years away from RMDs now. It partly depends on when we start Social Security, which will reduce the headroom in the 12% bracket. Rough calculation looks like we might get to 50% converted. We're just over 71% in tax deferred accounts now.

2. Will you/ did you continue Roth conversion after your RMD’s start?

Haven't thought about that. It seems unlikely that they'll be much space with Social Security taken as RMD income, along with (very) small pensions and dividends in taxable accounts.

3. Do you plan on converting 100% to Roth?

Likely not possible.

4. How old were you when you started Roth conversions?

Started at 58 after two years flushing out some capital gains and exercising stock options following retirement.

5. Do you do Roth conversions every year and once per year? And pay the tax in the quarter that you convert?

The plan is every year, but keeping income to around $30,000 for ACA subsidy makes it tough to convert much. The subsidy is large enough to make RMD taxation a secondary concern. I convert in December when I know the actual amount of space under $30,000 available. Don't worry about estimated taxes because our tax rate is so low. No state income tax to worry about. Once we reach Medicare age and don't care about ACA, we'll have four or five years to convert more heavily - even if we take Social Security at FRA.

6. Is your Roth IRA investment mix the same as in your traditional IRA?

The overall allocation goes across all accounts, but the Roths are fully in equities.

7. To what extent was/is your decision on delaying SS based on your Roth conversion strategy?

It's partly a factor - having those years without SS gives more space for conversions.

8. Do you have reasons to not do Roth conversions?

As stated ACA subsidy reasons limit the conversions. Also, it's getting tougher to free up living cash from taxable accounts without taking capital gains, which reduces the space available for conversions.

I didn't realize I was going to have to turn into a tax accountant after retirement.

 

[FIREd_2015]

8. Do you have reasons to not do Roth conversions?

I've been thinking about doing conversions for several years now but this post finally motivated me to dig a little deeper and run some numbers using some online Roth conversion calculators. I entered my current marginal tax rate and expected future tax rate and was surprised to see that I am better off not converting. The incremental loss of ACA subsidy (approx. 10%) on top of my federal + State (CA) rate makes the conversion worse off than just staying put.

 

[broadway]

I've been thinking about doing conversions for several years now but this post finally motivated me to dig a little deeper and run some numbers using some online Roth conversion calculators. I entered my current marginal tax rate and expected future tax rate and was surprised to see that I am better off not converting. The incremental loss of ACA subsidy (approx. 10%) on top of my federal + State (CA) rate makes the conversion worse off than just staying put.

Are you staying below 400% FPL or 300% FPL or something else?

 

[FIREd_2015]

Are you staying below 400% FPL or 300% FPL or something else?

I am trying to stay just below the ACA subsidy cliff which is around MAGI of $48k in NorCal for my plan.

 

[googily]

Man, now you all really have me thinking about my current setup, eventual RMDs, Roths, etc.

So, a question: if you were 51, no kids, had a high six figure spousal inherited IRA (titled that way to allow me to take distributions before 59.5 without penalty), a very small all pre-tax IRA (rollover old 403b), a mid six figure 401k that has about $7k after tax just rolled over to an in-plan Roth, and a couple hundred thousand in an after-tax account, and likely a low six figure IRA inheritance coming from a parent in a few years, what would you do?

I will have early access to DH's SS when I'm 60 if I wish, a $30k non COLA pension at 65, and my own SS at 67, so there's no doubt that when I hit RMD time I'll be in the 22% bracket, as I am now while still working. But I could be in the 12% bracket when I retire early.

I'm not really looking for direct advice so much as just wondering how other people would approach this, since I don't think there is one right answer.

I think the short answer is that I'm just going to have a lot of taxes to pay, which I am mostly okay with, but I would love to go into it as well configured as possible.

Does anyone know if I could claim just a portion of the inherited IRA as my own? Then I could start converting some of it. I plan to claim all of it at 59.5 anyway.

And I am allowed to rollover into my current 401k. And everything is at Vanguard.

Sorry, that's a lot of info, but you can see why having so many scenarios is driving me nuts. (First world problems.) Analysis paralysis!

 

[free2020]

Man, now you all really have me thinking about my current setup, eventual RMDs, Roths, etc.

So, a question: if you were 51, no kids, had a high six figure spousal inherited IRA (titled that way to allow me to take distributions before 59.5 without penalty), a very small all pre-tax IRA (rollover old 403b), a mid six figure 401k that has about $7k after tax just rolled over to an in-plan Roth, and a couple hundred thousand in an after-tax account, and likely a low six figure IRA inheritance coming from a parent in a few years, what would you do?

I will have early access to DH's SS when I'm 60 if I wish, a $30k non COLA pension at 65, and my own SS at 67, so there's no doubt that when I hit RMD time I'll be in the 22% bracket, as I am now while still working. But I could be in the 12% bracket when I retire early.

I'm not really looking for direct advice so much as just wondering how other people would approach this, since I don't think there is one right answer.

I think the short answer is that I'm just going to have a lot of taxes to pay, which I am mostly okay with, but I would love to go into it as well configured as possible.

Does anyone know if I could claim just a portion of the inherited IRA as my own? Then I could start converting some of it. I plan to claim all of it at 59.5 anyway.

And I am allowed to rollover into my current 401k. And everything is at Vanguard.

Sorry, that's a lot of info, but you can see why having so many scenarios is driving me nuts. (First world problems.) Analysis paralysis!

It appears that between the two IRA’s approaching 1 million at age 51, you’re in great shape. Preparing for the likely monster MRD at 70 would be my my main concern. Roth conversions make sense, so does planned giving. Finally, a 72T (SEPP) withdrawal before you turn 59.5 could make sense also. Although I did not have quite a million at 51, I did a SEPP at age 54. Timing could not have been better with how well the market has done over the past 8 years. I’ve not ERed but was able to pick a lower paying job but with lot less corporate BS. The SEPP was key. And RMD in 10 years won’t be as much of a tax hit as it would be without the SEPP.

Hope this is helpful.

 

[newtoseattle]

I haven't completely decided but am considering trying to convert approx 50% total of pre tax accounts to Roth to the top of the 22 or 24% brackets in a couple years when I retire. I could do this over 2-3 years. My theory of front loading the conversions is that with retirement in the early 50's it'll have a long to to grow and all the growth will be tax free.
Also - by lumping in a couple years I will just forgo any aca subsidy for a couple years when I'm relatively younger and get just get an as cheap as possible bare bones health plan for those 2-3 years.

 

[mpeirce]

I haven't completely decided but am considering trying to convert approx 50% total of pre tax accounts to Roth to the top of the 22 or 24% brackets in a couple years when I retire. I could do this over 2-3 years. My theory of front loading the conversions is that with retirement in the early 50's it'll have a long to to grow and all the growth will be tax free.

Especially if you are paying the taxes on the conversions with after tax money (not from the IRA), getting as much converted early makes a lot of sense. This gets the extra money into the ROTH for tax free compounding earlier.

 

[googily]

It appears that between the two IRA’s approaching 1 million at age 51, you’re in great shape. Preparing for the likely monster MRD at 70 would be my my main concern. Roth conversions make sense, so does planned giving. Finally, a 72T (SEPP) withdrawal before you turn 59.5 could make sense also. Although I did not have quite a million at 51, I did a SEPP at age 54. Timing could not have been better with how well the market has done over the past 8 years. I’ve not ERed but was able to pick a lower paying job but with lot less corporate BS. The SEPP was key. And RMD in 10 years won’t be as much of a tax hit as it would be without the SEPP.

Hope this is helpful.

Thanks! I am "lucky" (ahem) to not have to do the SEPP, since I can withdraw from the spousal inherited IRA without penalty before 59.5.

That's why I was wondering if it's possible to maybe split the iIRA, and keep half of it as inherited and claim the other half as my own, and then start Roth conversions from there.

I also need to start spending more money.

 

[sengsational]

I'm left wondering how many of those reporting in this thread have run i-orp and if that agrees with their plan. A warning for using i-orp: put the same percent equities for all buckets, or it will preferentially spend out of the lower equity percent bucket and mess up the analysis.

 

[pb4uski]

I have run i-orp. It recommended way more Roth conversions than I am comfortable with... they would recommend converting into the 22% tax bracket now which would make some of my conversions at a 27% marginal tax rate followed by 22%... and that is only federal tax... add another 7-8% for state income taxes and that is 34-30% total tax.

I concede that economically they may be right but I just have a real hard time writing a huge check for taxes. Once we redomisticate to a no income tax state in a few years I may reconsider it.