Why ROTH conversion is a bad idea for me.

[54andchange]

Long-term Roth skeptic here. I also believe, as one reply here already surmised, that roth threads largely are answered by Roth fans. I converted to Roth last year for the first time, stopping at the state retirement exemption level limit here, avoiding all state tax on the conversion. I may do a couple more years at the same level, but as I generally prefer maximizing compounding of equity gains by deferring tax payments as long as possible, I probably will not convert more. This article from Kiplinger's provides six reasons not to convert, which may or may not apply to your specific situation, but is good food for thought.

https://www.google.com/amp/s/www.ki...asons-you-should-not-do-a-roth-conversion?amp

 

[RunningBum]

Long-term Roth skeptic here. I also believe, as one reply here already surmised, that roth threads largely are answered by Roth fans. I converted to Roth last year for the first time, stopping at the state retirement exemption level limit here, avoiding all state tax on the conversion. I may do a couple more years at the same level, but as I generally prefer maximizing compounding of equity gains by deferring tax payments as long as possible, I probably will not convert more. This article from Kiplinger's provides six reasons not to convert, which may or may not apply to your specific situation, but is good food for thought.

https://www.google.com/amp/s/www.ki...asons-you-should-not-do-a-roth-conversion?amp

Have you actually run a spreadsheet to see the end result of compounding the larger pre-tax amount in tax-deferred against the smaller post-tax amount in a Roth? I'll bet not, and you may be surprised at the answer. You should also run the spreadsheet with the conversion tax paid out of your taxable account, so that you can see what happens when you have even more money grow tax free.

The Kiplinger article is very fair, though I think all of those factors have been brought up in this thread. The OP covered the lower state tax effect (point #1). Note that the article doesn't include your rationale of compounding equity gains by deferring taxes, for good reason. #6 is a little weak because it takes a secondary advantage of Roth conversions and uses it as a negative for smaller estates. Roth conversions can be quite favorable even for smaller estates for other reasons. Still, a good write-up and everyone should consider these points, as well as all the possible reasons why Roth conversions can be advantageous. As the article concludes, "evaluate your situation from all angles".

 

[Out-to-Lunch]

Long-term Roth skeptic here. I also believe, as one reply here already surmised, that roth threads largely are answered by Roth fans. I converted to Roth last year for the first time, stopping at the state retirement exemption level limit here, avoiding all state tax on the conversion. I may do a couple more years at the same level, but as I generally prefer maximizing compounding of equity gains by deferring tax payments as long as possible, I probably will not convert more. This article from Kiplinger's provides six reasons not to convert, which may or may not apply to your specific situation, but is good food for thought.

https://www.google.com/amp/s/www.ki...asons-you-should-not-do-a-roth-conversion?amp

Gosh, I didn't know we had skeptics and fans. I thought we were all just sharing info on how best to manage the existing tax laws!

The article you referenced basically came down to two things: (1) tax-rate arbitrage (and don't convert when you are on the wrong side of that) and (2) one innumerate musing (from a CPA??).

Consider this quote from the article (emphases added):

No. 2: If You Don’t Have Enough Cash or Savings to Pay the Conversion Tax


By converting to a Roth IRA, a person is paying tax on their IRA now instead of later in retirement. You shouldn’t plan to use funds from the traditional IRA to pay the tax since your new Roth IRA will have much less money. So, where will that money come from?

For example, assume you plan to convert a $100,000 traditional IRA to Roth and are in the 24% tax bracket. The $24,000 in taxes need to be paid now.

If $24,000 is withdrawn from a savings account to the pay the tax, your new Roth IRA will start with the same $100,000 it had before and will require no more taxes to be paid on distributions in the future. But if you pay the tax from the IRA funds being converted, your new Roth IRA will start with a balance of $76,000 — effectively handicapping it from the very beginning.

Do they really not understand the concepts of liabilities and disposable income? Or is this just random clickbait to fill up Kiplinger pages?

 

[54andchange]

Gosh, I didn't know we had skeptics and fans.

Out to Lunch: you are rude and your behaviour sophomoric. Your sarcasm, as a belittling attack towards me, is uncalled for. If I say I am a Roth Skeptic, who are you to imply I am not, or that the position itself is invalid?

Yes, the Kiplinger piece could have better explained why paying conversion tax from say the source IRA is not optimal. I would have noted the 10% early withdrawal penalty under 59 1/2 for instance.

 

[thefist]

Long-term Roth skeptic here. I also believe, as one reply here already surmised, that roth threads largely are answered by Roth fans. I converted to Roth last year for the first time, stopping at the state retirement exemption level limit here, avoiding all state tax on the conversion. I may do a couple more years at the same level, but as I generally prefer maximizing compounding of equity gains by deferring tax payments as long as possible, I probably will not convert more. This article from Kiplinger's provides six reasons not to convert, which may or may not apply to your specific situation, but is good food for thought.

https://www.google.com/amp/s/www.ki...asons-you-should-not-do-a-roth-conversion?amp

I read that article a week or so ago. It’s mostly good. If the valid points of the article apply for a person asking a conversion question, you’d see agreement out here. But the convert or not question largely has a numerical answer.

I’m not wanting to pick on anyone, but @chassis has not helped by leaving out the numbers while disagreeing with the theory. Saying “it doesn’t work for me” is too subjective. Maybe an extra $2000 per year on a $200k budget is noise. Or maybe the result is $200/yr savings and it truly is no big deal.
Sharing personal numbers is not for everyone. But when the question has a numerical answer, it’s necessary to be taken seriously.

 

[Out-to-Lunch]

Out to Lunch: you are rude and your behaviour sophomoric. Your sarcasm, as a belittling attack towards me, is uncalled for. If I say I am a Roth Skeptic, who are you to imply I am not, or that the position itself is invalid?

Yes, the Kiplinger piece could have better explained why paying conversion tax from say the source IRA is not optimal. I would have noted the 10% early withdrawal penalty under 59 1/2 for instance.

Well, your message had its intended effect on me, because it was painful for me to read. In no way did I mean my comment as belittling you. I apologize that I sounded as if I did, sincerely. I really, really had never thought of Roth conversions as an issue where there were "sides." I had only thought of our discussions about them as trying to weigh situtations where they fit and where they didn't.

 

[chassis]

Long-term Roth skeptic here. I also believe, as one reply here already surmised, that roth threads largely are answered by Roth fans. I converted to Roth last year for the first time, stopping at the state retirement exemption level limit here, avoiding all state tax on the conversion. I may do a couple more years at the same level, but as I generally prefer maximizing compounding of equity gains by deferring tax payments as long as possible, I probably will not convert more. This article from Kiplinger's provides six reasons not to convert, which may or may not apply to your specific situation, but is good food for thought.

https://www.google.com/amp/s/www.ki...asons-you-should-not-do-a-roth-conversion?amp

Yes, agree with this post. I'm a Roth skeptic at this point. And continuing to build and refine my model. 2% net worth improvement at age 91 is a marginal play.

 

[pb4uski]

.....but as I generally prefer maximizing compounding of equity gains by deferring tax payments as long as possible ...

Compounding of equity gains really isn't a relevant factor... it is totally a tax arbitrage play. Let's say that you have $10,000 in a tIRA and the relevant tax rate is 12% and investments double in 10 years.

If you convert and pay $1,200 in tax then you end up with $8,800 in the Roth and in 10 years it doubles to $17,600.

If you don't convert and the $10,000 doubles to $20,000 and you withdraw and pay 12%/$2,400 in tax then you have $17,600 to spend.

So you equity gains don't matter either way... what matters is if there is a difference in tax rates between today and tomorrow... which is nil in the example above.. so there is no particular benefit.

If you use the same example and the tax rate today is 12% but in 10 years will be 22% then if you convert you end up with $17,600 but if you don't convert you end up with $15,600...$20,000 * (1-22%)... so where your tax rate today is better than your tax rate later then you are better off to convert. It's that simple.

On the Kiplinger article, let's look at them:

No. 1: If You Will Be in a Lower Tax Bracket in Future Years... agreed... it's the inverse of what I was explaining above... if it is beneficial to convert when future rates are expected to be higher then it would obviously be disadvantageous to convert when future rates are expected to be lower.

No. 2: If You Don’t Have Enough Cash or Savings to Pay the Conversion Tax... I wouldn't agree and the example above proves that even if you pay the conversion tax from the conversion that you still come out ahead if your tax rate now is lower than your tax rate later. For many people, between ER and when pensions and SS start they will be in a lower tax rate than they will be once pensions and SS start.

No. 3: If You Might Need the Money Within Five Years or Less... no necessarily... if you are over 59 1/2 you can withdraw conversions out tax and penalty free... but if under 59 1/2 then I would agree.

No. 4: If You Plan to Leave Your IRA to a Charity... totally agree and we often refer to this... the reality is that many here have very significant tIRA balances that even with aggressive beneficial Roth conversions will still have significant balances left over for qualified charitable distributions.

No. 5: If Your Beneficiary Will Have a Lower Tax Bracket Than Yours... agreed and we often talk about this here as well. In my case DD and DSIL are in a higher tax bracket than we currently are but DS is in a lower tax bracket.

No. 6: If Your Estate Isn’t Large Enough... I'm not sure what their point is here but I haven't heard that people do conversions for estate tax benefits and it woudl rarely apply anyway... people do it for the income tax benefits.

 

[RunningBum]

#2 makes sense if you are under 59.5 and don't have enough in taxable to pay the taxes, because you get hit with an early withdrawal penalty on the part you pay taxes with out of the conversion. But that's the only case where it's a bad idea. The author shows bias against conversion by talking about how much less money you have in your Roth by paying taxes out of the conversion (after 59.5) but that's a wash as pb4 shows at the top of the previous post. The author should have stuck with the under 59.5 and cash poor case because that's the only valid part of this point.

 

[james22]

For later.

 

[pb4uski]

Huh?