Rule of thumb for ROTH conversion?

[RetireBy90]

Quote:

Originally Posted by yakers AFAIK there are two reasons for a Roth, 1) in inheritance it is tax free, a child inheriting a traditional IRA may have to take withdrawals at their peak earning period and 2) it is very flexible tax wise-one could draw it for an emergency item (car replacement?) without increasing taxes as would a traditional IRA. It could allow one to have an income level without going into a higher tax bracket. Having taxable, tax deferred and tax free resources leaves the most options but is the most complicated. DW & I are slowly converting about $5K a year from a traditional IRA to a Roth IRA as these are intended to be our legacy to our two sons. We will have a go at spending the rest down and it is still an emergency fund if we need it.

Despite the previous discussions about taxes on TIRA and Roth, I would add couple reasons to opt for a Roth. I put 10% in my R401k and 6% in trad 401K. Company match goes into Trad account.

A) Taxes aren't going down. I'm retired military and draw a pension, so does my DW. DW will also get a pension from the school system next year when she is done. So, we will draw about $60K or more in pensions each year, and also some SS. If I do my 401K to Roth then I won't affect (or effect ?) my SS taxable amount. I expect to be in a similiar tax bracket when I fire as I am now.

2) Call it piece-of-mind. I may pay a couple % more now than if I paid once retired, but my piece of mind will get smaller and smaller. I've been reading about your ability to make good finance decisions starts to decrease like at 65 or so, present company excluded of course. So, if I pay now I will have one decision made already and will perhaps be able to sleep better later. That has to be worth something.

3) With the flexibility you mention, you may not want to take any draw or may want to take a large draw.

[kaneohe]

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Originally Posted by RetireBy90 A) ................................... So, we will draw about $60K or more in pensions each year, and also some SS. If I do my 401K to Roth then I won't affect (or effect ?) my SS taxable amount. I expect to be in a similiar tax bracket when I fire as I am now.

Have you checked this out on a tax calculator ? I don't know what part of that 60K pension is taxable but if it is anywhere near 60K, drawing from your Roth won't affect taxation of the SS but it is also likely that drawing from a TIRA also wouldn't because you'd be at/past the saturation point where 85% of SS was taxable.

[grayparrot]

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Originally Posted by LOL! Is it time for an update?

My apologies for the delay. I did consult with a financial planning firm. Although I probably should not advertise their name here, they are a member of the Garrett Financial Planning network of fee-only advisors, they have an excellent reputation in California and their principals have been nationally recognized as being among the best independent fee-only planners.

I made contact with one of their partners, who has an engineering background prior to his finance experience. I described my parents' situation, and asked if he would review my materials, which he kindly agreed to do. I sent him a half dozen spreadsheets that I created to illustrate various components of the ROTH conversion decision. A few days later he wrote back a note suggesting that he didn't feel that it would be worthwhile for him to pursue review of the project. His explanation was that, while he had an unanswered question or two (such as the desirability of lumping conversions in fewer years vs. spreading them out over more lower-tax years, even if they then might be subject to RMDs) overall it was clear to him that my analysis appeared to be on target overall, and was not only taking into account all the primary facts, but also was rather more detailed than the vast majority of their cases, which typically rely on output from one of the packaged software solutions (moneytree, I believe.) The adviser's explanation was that he estimated it would take 10 hours for him just to familiarize himself with my models, and since their contract rate is $240/hour, he just didn't feel that the total cost he would need to charge to review my work, do his own calculations, and present his own suggestions would be justified since my approach appeared to be similar.

Anyhow, there you have it. I am actually still trying to suggest to my parents that it might be wise to make that investment just to get the second opinion. However, I'm confident in my math and my folks are inclined now to follow my advice, after we reviewed my analysis together. They will be converting over the next 24 months to avoid RMDs; they appear to have sufficient resources to both pay for the entire conversion with non-IRA assets, as well as to fund their spending goals for nearly a decade without tapping the new ROTH assets, giving the ROTH plenty of time to make up the conversion cost with tax-free growth. Within their lifetimes, the conversion will reach "breakeven" compared to a non-conversion scenario even for them, based on very conservative actuarial assumptions. And any assets they may leave to their heirs will be significantly more valuable than if they had been inherited in a taxable IRA and/or in non-IRA assets.

I remain entirely willing to share my spreadsheets with anybody who is interested, as long as doing so is ok/possible on this forum. I do see the "attachment" link feature, but I just want to make sure that submitting this kind of material, either on the forum or view private message, is kosher.

[RetireBy90]

Not to fan the flames, but after reading and re-reading the postings, I must say I agree with grayparrot. However, it has been educational (and entertaining) to follow the discussion.

One item I haven't seen discussed is what if we finally get a significant tax over haul, and end up with a national sales tax. Now after converting to a Roth, you end up paying the tax again when you spend the draws. OK not too likely, but that is the only down side I could come up with for the Roth. Has anyone given any thought to this possibility?

[Texas Proud]

Quote:

Originally Posted by RetireBy90 Not to fan the flames, but after reading and re-reading the postings, I must say I agree with grayparrot. However, it has been educational (and entertaining) to follow the discussion. One item I haven't seen discussed is what if we finally get a significant tax over haul, and end up with a national sales tax. Now after converting to a Roth, you end up paying the tax again when you spend the draws. OK not too likely, but that is the only down side I could come up with for the Roth. Has anyone given any thought to this possibility?

Just want to comment on your post... not the rest...

If a national sales tax is enacted, it probably does not change a whole lot.. IOW, you will still pay income tax on the IRA distributions and the sales tax.. the only way to save is if the rate on income is lower than what you converted it at...