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Roth Conversions... When to stop?
Old 02-20-2020, 06:09 PM   #1
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Roth Conversions... When to stop?

There have been a number of IRA2Roth conversion threads lately, but thought this topic might be a good one on it's own.

When do you decide to stop the conversions?

Is it at a particular portfolio% (10, 20, ...)?
When projected RMDs go below a certain amount?
When IRA balance hits ZERO?

In my case, (single, 54), my asset location is about 72/18/8 (taxable/IRA/Roth).
I-ORP, as many have used, says to go all out and convert it all (into 24% bracket). This can be accomplished within 5yrs or so. But really, what's necessary? Going to top of 22% seems like a no brainer, but at Single filing, that's not much of a conversion each year. 24% begins around $81K.
RMD's can certainly be controlled with slow growing fixed income in IRA as an alternative.

So, what have you decided as far as when to stop the IRA2Roth conversions, and why?
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Old 02-20-2020, 06:26 PM   #2
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For our situation, I-ORP seems to suggest conversions that will move us to around 60/40/0 Roth/IRA/taxable account over time. I'm fine with that plan but not as interested in that ratio as I am in trying to minimize taxes over our lifetime.
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Old 02-20-2020, 06:50 PM   #3
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Not a lot of difference in rates between 22 and 24%, IMO, and those could revert to 25% and 28%, IIRC on the old brackets.

If you can convert all in that range, that would be great. You may want to stop short and keep some of the tIRA for QCDs when you hit RMD age. If you want to leave any of your estate to charity, leaving an IRA balance for that is efficient because I think this is the only way for a tIRA to get a stepped up basis.
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Old 02-20-2020, 07:25 PM   #4
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Not a lot of difference in rates between 22 and 24%, IMO, and those could revert to 25% and 28%, IIRC on the old brackets.
that's right. I love the simplicity of knocking this out quickly. Then some other priorities might get addressed right after, like mortgage payoff before IRMAA hits. If Trump is reelected, the rates are stable until 2025, and possibly longer. If not, who knows. i-orp uses the rate reversion in its calculations.

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Originally Posted by RunningBum View Post
If you can convert all in that range, that would be great. You may want to stop short and keep some of the tIRA for QCDs when you hit RMD age. If you want to leave any of your estate to charity, leaving an IRA balance for that is efficient because I think this is the only way for a tIRA to get a stepped up basis.
The QCD's are a very good point I forgot about. Before 72, use direct stock donation or DAF, then QCD thereafter.
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Old 02-20-2020, 08:55 PM   #5
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We are 75% tIRA and 8% Roth. The rest is taxable.
I planning on shifting to 75% Roth and 5% tIRA over the next decade+.
I haven't figure out the best tactical moves, but should have a better feel after my February 26th visit with my tax prep guy.
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Old 02-20-2020, 09:28 PM   #6
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I think we'll be able to convert until we run out of taxable investments. That's one way to stop.

If you don't have enough other income late in retirement to fill the lower tax brackets you might want to save some tIRA to withdraw at the low tax rates. Consider RMD tax rates throughout retirement, not just when you turn 72.

If you are within about 10 years of withdrawing from your Roth IRA I think the benefits of Roth converting at the same tax rate as RMD's will come out at are less than taking 0% capital gains. At least for us, that money will not spend enough time to grow in the Roth before it is withdrawn to save a lot of taxes compared to a taxable account. In 2021 my calculations have us filling only the 10% bracket with Roth conversion and then taking 0% capital gains up to the limit (and beyond). That severely tapers off our Roth conversions. YMMV as this is a pretty subtle optimization and depends entirely on your specific tax situation.

I think those are our strongest reasons for tapering/stopping Roth conversions while still having a tIRA balance.
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Old 02-20-2020, 09:55 PM   #7
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I would convert as long as my marginal tax rate is lower than the expected marginal rate in retirement. So you want to do some forecasting.

People tend to assume that markets will always go up, but I would hate to do a large conversion right before a large (and possibly protracted) market decline. Then you would have a smaller portfolio, and have paid more tax than you would have to. Ouch!

So I think doing it over time and making sure you have income to fill the brackets in the out years makes the most sense.

I will not be able to convert all or even most of mine as it looks like my window of time at lower rates will be limited (and I'm 60%+ tax deferred).
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Old 02-20-2020, 11:22 PM   #8
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I looked at converting everything before the rates are scheduled to revert; however, we're now planning to leave some dollars in tax-deferred for use for possible medical expenses and/or QCDs. I am thinking of leaving roughly ~300k to $500k (in today's dollars) in tax-deferred at 72. I figure with that amount, RMDs won't be too bad, and that amount is big enough to make a dent in LTC.
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Old 02-21-2020, 01:26 AM   #9
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Although I'm not 100% convinced that it's optimal, my current plan is to convert as much as possible as early as possible with the constraint that the remaining traditional IRA and RMDs will still likely result in an equal or higher marginal tax rate in my mid-70's.

So if I were to convert enough now to put me in a 3x% tax bracket such that my remaining RMDs and Social Security would have me in a 1x% tax bracket, that would be over-converting and I wouldn't do that. At some point there is an equilibrium where I can convert now and keep my marginal rate the same (with whatever assumptions I'm making about rates of return and brackets and so forth)...that's my target currently.

I'm not sure if it's optimal, but that equilibrium point also probably mostly smooths out my available cash flow over my lifetime. I say mostly because there will be some discontinuities around starting to pay Medicare, starting to collect SS, and starting RMDs at 65, 70, and 72, respectively.
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Old 02-21-2020, 03:41 AM   #10
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I don't use i-orp to plan my strategy. What I've been doing is Roth conversions in my pre-70 years to get my AGI up close to my projected AGI in my age 72 year and beyond.

This AGI Levelizing approach has resulted in Roth conversions of around $40,000 a year the past few years, all in the 24% marginal bracket.

When I'm 72 in a couple years, the plan is to not do anymore Roth conversions. I'll have less than $10,000 of AGI headroom before hitting the next higher Medicare IRMAA tier and I'd rather not be in that tier. So I'll just relax from age 72 onward...
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Old 02-21-2020, 06:41 AM   #11
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I ran i-orp multiple times with the various Roth conversion limits. Then looked into the details of how that balanced the tax across the various years and where the money was coming from.

In the end I decided to not do the full conversion but split the difference as recommended conversions would have drained my taxable by age 54 which I wasn't comfortable with.

Also since tax law and markets are always changing I wasn't 100% comfortable making massive permanent moves in a 3 year period as recommended so I decided to spread it out and see if I can get a better deal for myself.
- if we have the correction would I be ok having paid taxes on the higher price?
- If they lower the 22% bracket (which has been suggested) would I be ok that I voluntarily paid 22%?

In the end I'll end up running it every year and modifying it accordingly. In the end my goal is not about % but max money to spend each year.
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Old 02-21-2020, 07:08 AM   #12
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We have about 56% in TIRA and are in 2nd year of Roth conversions, some into 24% bracket. My plan is to convert through 2025. If I follow the plan laid out We would have about 30% left in TIRA after 2025 and 12% after 2027.

I don't see any reason to stop till it is done for my situation. We don't need any IRA draws while we have taxable accounts available, and at age 70 when I plan to start my SS our income will exceed the bills. There are lots of variables here, but if things go as projected we will have IRA assets left at any age. With all converted to Roth we will be able to pull any amount or none without having to consider the tax implications. If I want to buy a place in the sun for winters we can do that without any worry about the taxes (except property). We may leave about some so that we can use for QCD rather than self directed charity fund we have today.
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Old 02-21-2020, 08:20 AM   #13
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Quote:
Originally Posted by thefist
Is it at a particular portfolio% (10, 20, ...)? No
When projected RMDs go below a certain amount? Indirectly, tax driven
When IRA balance hits ZERO? Maybe, tax driven
Without going into details (all in earlier threads), assuming 30 more years:

With normal spending, projected dividends & CG and mandatory RMD & Soc Sec at 70/72, I was faced with mostly 10% Fed marginal tax rate for the next 7 years and then 25% post TCJA for 23 years. So I am converting to the top of the 22% bracket for the next 7 years and then I’ll be at the 15% rate (assuming TCJA expires) for the last 23 years. Reduces our lifetime tax burden by $352K. That will leave us about 1/3 tax deferred and 2/3 tax free. I would have ratcheted back to 7 equal conversions if 22% allowed us to empty our tax deferred. However, I don’t believe for a minute tax rates will remain as they are TCJA or even pre TCJA, I believe they rates will effectively go higher sooner or later so we expect to save more than projected.

We each have to make our own assumptions (there are dozens) and use our unique $ situation.

[Anyone who is not converting to the top of the 12% bracket is probably needlessly leaving money on the table] It's above that it gets more complex.
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Old 02-21-2020, 08:56 AM   #14
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When do you decide to stop the conversions?
When you can't afford to?

For the last couple years I've been converting about 25K per year to stay within our 12% tax bracket. That meant coming up with $2400 cash to pay taxes on the conversion. Our daughter recently moved out which means we no longer have her rent money coming in. I'm thrilled she is on her own now, but it's a big reduction in the money we have to save. So I'm not sure we'll have the extra money to pay the conversion taxes next year. My priority is contributing the maximum to our Roth accounts.

In any case, my traditional IRA balance is low enough now that we will spend it all within the first 4-5 years of retirement.
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Old 02-21-2020, 09:04 AM   #15
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Let's make it even more complicated
https://humbledollar.com/2020/02/bankrolling-roth/
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Old 02-21-2020, 11:32 AM   #16
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A very complex problem w/ many variables but the basic question still remains:
what is the cost (tax rate) if you convert now vs what would it be if you didn't convert and withdrew later (e.g. at RMD time). If the tax rate now is lower than it would be later, then convert. You can simply repeat the calculation each yr.

An example of over-converting might be if you converted everything and had no/low taxable income in retirement. Then if you had been able to withdraw from TIRA at that time, the tax rate would be zero so you wasted $$ converting when that amount would have been untaxed if you had not converted.

Others have mentioned QCDs that would not be taxed later/bequests to charity when you pass that would not be taxed if from TIRA but they would have been taxed if you converted to Roth.

Also consider the tax rates of heirs vs your tax rate at conversion.
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Old 02-21-2020, 12:21 PM   #17
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For me, when to stop is when the marginal rate on the conversion is more than 22%, which is what I expect our marginal tax bracket to be once we start SS so that is what RMDs would be taxed at.

At this point, the IRMAA tier is the top of what I will be converting to... though I do have to think through it it might make sense to go higher if I think that tax brackets will revert to higher levels in 2026 and beyond.
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Old 02-21-2020, 12:21 PM   #18
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It's been alluded to tangentially in this thread a couple of times, but the SECURE Act provides an additional reason to do Roth conversions.

Since non-spouse heirs have to take out the entire traditional IRA within 10 years, which will add to their taxable income, it may be preferable now to try to drain the traditional IRA down to a point where that higher income for 10 years is manageable.

Depending on ages, the older IRA owner might die when their kids are in their high earning years and thus in high tax brackets.

First world problems, I know. Something to think about though.
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Old 02-21-2020, 01:52 PM   #19
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Let's make it even more complicated
https://humbledollar.com/2020/02/bankrolling-roth/
I do not think borrowing makes sense over the longer term. Interest just eats into tax savings. It can work for a brief amount of time, like to get into the next taxable year.
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Old 02-21-2020, 02:00 PM   #20
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We'll look at Roth conversions each year. We'll stop when I'm no longer comfortable with the extra tax payments. For 2020, it's a certainty, as I have a pretty good handle on the changes coming in our particular situation.
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