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tIRA to Roth Conversions
Old 02-17-2021, 07:38 AM   #1
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tIRA to Roth Conversions

I hate to ask a stupid question but here goes. I really don't know anything about the process of doing roth conversions. Currently we have no taxable income because we live off of the income generated by Social Security and VA Disability. I would like to do some Roth conversions and keep myself below the allowable level of income so I can stay tax free.
If I'm looking at things correctly and, Roth conversions are treated as income, according to the tax calculator at dinkytown.net I should be able to do $20k annually and not have to share with Uncle Sam.
Now the question is...am I correct?
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Old 02-17-2021, 08:42 AM   #2
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Yes. It should be as simple as doing a transaction on your financial institution web site.

Depending on how much tIRA money you have, you might want to actually pay some tax now, in order to pay less later, when you will be required to pull money out (Required Minimum Distributions).
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Old 02-17-2021, 09:44 AM   #3
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+1 While I agree with sengsational that you might want to pay some now rather than before RMDs start, that decision depends on what your income will be before SS, pensions and RMDs start (and VA disability in OP's case).

OP, what tax bracket do you expect to be in once you are receiving SS, VA Disability and RMDs?

If for example, RMDs will be putting you into the 22% tax bracket it may be better to voluntarily fill up the 10% and 12% tax brackets now rather than pay 22% later. OTOH, if even with RMDs you'll be in the 10% tax bracket then what you are doing is good... pay 0% now rather than 10% later.
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Old 02-17-2021, 10:20 AM   #4
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Originally Posted by pb4uski View Post
+1 While I agree with sengsational that you might want to pay some now rather than before RMDs start, that decision depends on what your income will be before SS, pensions and RMDs start (and VA disability in OP's case).

OP, what tax bracket do you expect to be in once you are receiving SS, VA Disability and RMDs?

If for example, RMDs will be putting you into the 22% tax bracket it may be better to voluntarily fill up the 10% and 12% tax brackets now rather than pay 22% later. OTOH, if even with RMDs you'll be in the 10% tax bracket then what you are doing is good... pay 0% now rather than 10% later.
Using future estimates from Fidelitys best scenario and plugging them into todays tax estimation at dinkytown I'd be only in mid 12% bracket even if I made no conversions.
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Old 02-17-2021, 10:29 AM   #5
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Another question... before RMDs are you in the 0% or 10%... IOW, is the effective tax rate on the RMDs 12% or lower than 12%?

I think you should consider converting to the top of the 12% tax bracket because 1) tax rates are likly to go up in 2026 if they revert to rates before the 2017 Tax Act and 2) if one of you dies then the surviving spouse will likely be in a higher tax bracket.
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Old 02-17-2021, 12:02 PM   #6
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Originally Posted by pb4uski View Post
Another question... before RMDs are you in the 0% or 10%... IOW, is the effective tax rate on the RMDs 12% or lower than 12%?

I think you should consider converting to the top of the 12% tax bracket because 1) tax rates are likly to go up in 2026 if they revert to rates before the 2017 Tax Act and 2) if one of you dies then the surviving spouse will likely be in a higher tax bracket.
Thanks, I hadn't considered that angle. We have a 2 month exposure the ACA in 2021 so getting outside the subsidies income level might cost me. In 2022 I will incorporate that into the plan going forward.
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TIRA -> Roth IRA or direct into self dir
Old 02-22-2021, 09:30 AM   #7
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TIRA -> Roth IRA or direct into self dir

Hello. First, thank you to all for the invaluable information and insights. I have learned a tremendous amount from these forums.

I am on the road to full retirement as is my DW.

I am trying to wrap my head around the value/need of converting funds in multiple existing tIRA/401/403 plans into fewer .... i.e. two (wife and myself) Roth IRAs.

DW and I are >60 years old.

Shortly we will both be retired (can not claim FIRE...still thrilled) therefore- no earned income anticipated moving forward. SS at some point in the future understanding the 8% benefit of waiting. Small state/city defined pension.

Multiple IRA (several for DW and myself) .
Multiple 401/403 ( originated in conjunction with former employer sponsored plans in both DW and my name)

Understanding at time of withdrawal from existing IRA/401/403 the withdrawal is taxable at the rate of normal income, why move these funds into a Roth IRA as opposed to into a self directed non-qualified investment plan?

Certainly I am missing a fundamental piece of this equation. Thank you for educating me!
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Old 02-22-2021, 11:14 AM   #8
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Originally Posted by FargoI View Post

Understanding at time of withdrawal from existing IRA/401/403 the withdrawal is taxable at the rate of normal income, why move these funds into a Roth IRA as opposed to into a self directed non-qualified investment plan?

Certainly I am missing a fundamental piece of this equation. Thank you for educating me!
By "self directed non-qualified investment plan" I assume you mean a taxable account? If so, there's an easy answer. You are taxed either way taking money out of the IRA, but in the Roth, all growth and distributions (dividends) are tax free. And you can make your Roth account self-directed as well.
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Old 02-22-2021, 11:47 AM   #9
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Roth IRA conversion - Bogleheads provides a good overview of this topic.
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Old 02-22-2021, 01:18 PM   #10
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Originally Posted by FargoI View Post
Hello. First, thank you to all for the invaluable information and insights. I have learned a tremendous amount from these forums.

I am on the road to full retirement as is my DW.

I am trying to wrap my head around the value/need of converting funds in multiple existing tIRA/401/403 plans into fewer .... i.e. two (wife and myself) Roth IRAs.

DW and I are >60 years old.

Shortly we will both be retired (can not claim FIRE...still thrilled) therefore- no earned income anticipated moving forward. SS at some point in the future understanding the 8% benefit of waiting. Small state/city defined pension.

Multiple IRA (several for DW and myself) .
Multiple 401/403 ( originated in conjunction with former employer sponsored plans in both DW and my name)

Understanding at time of withdrawal from existing IRA/401/403 the withdrawal is taxable at the rate of normal income, why move these funds into a Roth IRA as opposed to into a self directed non-qualified investment plan?

Certainly I am missing a fundamental piece of this equation. Thank you for educating me!
Simply to avoid paying taxes. Disbursements from a Roth IRA are tax exempt. Multiple sources of income allow you to be more flexibility when it comes controlling your taxable income.
If someone has other reasons chime in.
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Old 02-24-2021, 05:13 PM   #11
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Quote:
Originally Posted by MrBig1 View Post
I hate to ask a stupid question but here goes. I really don't know anything about the process of doing roth conversions. Currently we have no taxable income because we live off of the income generated by Social Security and VA Disability. I would like to do some Roth conversions and keep myself below the allowable level of income so I can stay tax free.
If I'm looking at things correctly and, Roth conversions are treated as income, according to the tax calculator at dinkytown.net I should be able to do $20k annually and not have to share with Uncle Sam.
Now the question is...am I correct?

Since you have no taxable income because you live off of SS and VA disability, you are correct. Once you exceed $32K of Roth conversions, some of your SS and/or VA disability will probably also become taxable.
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