Why ROTH conversion is a bad idea for me.

[Animorph]

My Roth conversions are driven by optimizing our yearly spending throughout retirement while maintaining a fixed final estate value as a reference. I could always spend more if I could end up with a $0 estate, but no thanks. IIRC we can spend up to $7k more each year of retirement while still having the same (estimated) final estate value if we optimize Roth conversions. If I didn't Roth convert the IRS would be getting that $7k. That's the choice I have.

 

[RunningBum]

I also have a problem with paying extra taxes now with money that could be invested instead.

I only cared about this when I was in a high tax bracket. Now, I have a problem keeping funds in an account I can't spend from.

 

[daver]

I’m married with heirs and believe Roth conversions would be beneficial. My problem is very little $ in taxable to pay the taxes, not ideal but my thinking is still worthwhile.

 

[free2020]

We spend a lot of time on this forum......... being nor happiness and would not improve my lifestyle. There is a chance that in some scenarios they would increase my bottom line - but that in itself has never been my priority.

1. I

3. I don't see myself surviving beyond my early 80s (57 now) but even if I do, I have enough money to live twice as well as I'm used to up until 95 and beyond. In other words: I don't need more money that the conversions could produce.

4..

One of the best threads on the ROTH subject. As you note, there are many; virtually all based on lowering the tax bill in the outyears! By paying taxes now.

The bolded statements makes me think harder about my own situation as I am supercharging my Roth, somewhat aggressively. What I'm getting from your well thought out approach is that fear or loathing of taxes shouldn't be the strategy for managing wealth for the last 20-30 years of my life. Especially, with the likelihod that I won't run out of money.

Excellent! Thanks for making me think.

 

[Sunset]

The key word in RMDs is "mandatory". We are free to withdraw/distribute our IRAs penalty free much earlier - which would effectively control the amount of taxes due over the years. RMDs are only a "problem" if the objective is not to touch IRA at all. Or minimally.

Which leads me to the conclusion that a lot of thinking that goes into tax planning (and consequently ROTH conversions) is estate related. A certainly valid approach but of limited value to people such myself.

Agreed, a person can withdraw from IRA earlier than 72, thus decreasing the RMD, that's what we do.
However, rather than put the money into a regular account, we convert it to Roth. This removes the taxation of future earnings that money makes, and it's still available as it would be had we not done a conversion.

Our State does not tax money from an IRA, regardless of what we do with it.

Our Roth conversion is not for estate purposes, but to have a pot of money that is not taxed but grows and is available to buy expensive stuff (car, vacation, second house) as needed without causing an increase in income.

 

[davismills]

I'm slowly converting to Roths as well.

I'm a little concerned that Congress will dream up an exotic transactional tax that will nail me when I withdraw money...if ever.

Example of government thinking: When I was stationed at McGuire AFB in NJ years ago, I used military aero club planes to fly into Newark to pick up visiting family. The airport authorities would send the aero club a bill for an arrival tax even though they knew that any military airplane was exempt. We pointed out the regulation and 3 months later they sent a bill for a departure tax.

The government mind is a strange thing.

 

[target2019]

They key word in RMDs is "mandatory". We are free to withdraw/distribute our IRAs penalty free much earlier - which would effectively control the amount of taxes due over the years. RMDs are only a "problem" if the objective is not to touch IRA at all. Or minimally.

Which leads me to the conclusion that a lot of thinking that goes into tax planning (and consequently ROTH conversions) is estate related. A certainly valid approach but of limited value to people such myself.

I'm in the 2nd year of our conversion strategy. I've decided on a small modification. I'll convert the same amount as last year, and withdraw some additional IRA funds to enjoy. We'll still be in the 12% bracket.

 

[Dtail]

Converting to the top of the 12% bracket for the DGF. No conversions for me, as managing MAGI for ACA purposes.

 

[Alan]

OP says he may move to a different country. This was the key driver for me doing larger Roth conversions. I had been doing smaller conversions after retiring if only to diversify on the future tax issue.

However, moving to the UK put me in the 20% UK marginal tax bracket but I knew that once I started receiving UK SS at age 66 I would jump into the 40% bracket so RMDs would definitely be taxed at 40% when they came.

 

[Time2]

The OP listed 5 reasons why, for me it's a good idea to maximize Roth Conversions in the 12% bracket. With #3, maybe I have enough but, that doesn't mean I want to give it to the government instead of my heirs.

 

[RunningBum]

The thread title is pretty misleading when you look at all the points.

1. I'm single and I have no heirs so estate planning is not part of my financial plan (I don't even have a will because I can't come up with any ideas)

Not caring about your estate doesn't make conversions a bad idea.

2. Because I'm single I'm not that concerned with RMDs increases after one of the spouse's death

MFJ->Single being a plus for conversions doesn't mean that starting single is a minus for conversions. It's just that this isn't a factor.

3. I don't see myself surviving beyond my early 80s (57 now) but even if I do, I have enough money to live twice as well as I'm used to up until 95 and beyond. In other words: I don't need more money that the conversions could produce.

Not caring about what happens to your money doesn't make conversions a bad idea.

4. I will very likely move out of US or at least change state residency to something warmer with no state taxes (FL?) And state taxes rarely come up when ROTH conversions are discussed. I suppose what I'm saying is that now is not a good time - maybe later when state taxes are not in play.

Yes, this one has some validity. IF you move somewhere that state taxes are lower/none, or to a country with a lower tax rate. Funny though, in #3 you don't need the money, don't care about the money, but now you do? You don't get to argue it both ways and still declare conversions a bad idea.

5. Speaking of timing - while the standard advice is to take advantage of the current lower tax rates we really have no idea what the future changes in the tax code may bring (except for the upcoming 2025 reverse/hike). It's possible that there will be some kind of indirect ROTH taxation introduced.

At best you are saying conversions might be a bad idea with this option, and I think most would say the odds are against you.

 

[tenant13]

The thread title is pretty misleading when you look at all the points.

Not caring about your estate doesn't make conversions a bad idea.
MFJ->Single being a plus for conversions doesn't mean that starting single is a minus for conversions. It's just that this isn't a factor.
Not caring about what happens to your money doesn't make conversions a bad idea.
Yes, this one has some validity. IF you move somewhere that state taxes are lower/none, or to a country with a lower tax rate. Funny though, in #3 you don't need the money, don't care about the money, but now you do? You don't get to argue it both ways and still declare conversions a bad idea.
At best you are saying conversions might be a bad idea with this option, and I think most would say the odds are against you.

I wouldn't be moving for financial reasons - mostly for the weather, lifestyle and a different political climate (no place is perfect but I'm a bit tired of northern US).
As to the general thrust of the post: I tried to make it clear that I was discussing my personal take on conversions and why I think they don't work for me. And lastly, I care about the money of course - just not about the amount that exceeds my needs or gets left behind when I die.

 

[chassis]

@tenant13 I’m with you.

Roth conversions seem gimmicky to me. Financial companies, advisors and tax preparers benefit. The investor allegedly benefits to the extent an income tax bracket can be filled up with the conversion.

The question is - what is the quantified advantage in dollars, for performing the gimmicky gymnastics?

I am married with heirs. If things go as hoped we will have a surplus of financial resources. I am against paying the government now when I could pay them later.

If there is a net present value advantage to Roth conversions, I think the age at breakeven is fairly advanced (old) and the number of dollars of “benefit” or “advantage” are very small in the grand scheme of things. Roth conversions seem a little like something to do for someone who needs more to do.

 

[REWahoo]

Roth conversions seem gimmicky to me. Financial companies, advisors and tax preparers benefit.

A new conspiracy theory is born.

Up next: Roth conversions were created by the govt to trick investors into giving up tax dollars years in advance of when they are actually due.

 

[DayDreaming]

...
4. I will very likely move out of US or at least change state residency to something warmer with no state taxes (FL?) And state taxes rarely come up when ROTH conversions are discussed. I suppose what I'm saying is that now is not a good time - maybe later when state taxes are not in play...

I'm in a similar situation: single, no heirs, 60 yrs old, NJ resident. I'm on the fence about Roth conversions, but have been doing small ones for a few years (< $20k/year). IORP tells me that if I do massive conversions over the next 5 years, I'll have a few more thousand in disposable income each year, but even without that extra money, I still have more than I can spend each year. First World problem, I know.

One thing I'm really looking at now is IRMAA. IORP tells me that if I do the big ROTH conversions it suggests, my Medicare costs will be somewhere around $2k/year, as opposed to $6k/year if I do no ROTH conversions. So even though I'm single with no heirs, I don't need additional income, I still don't see any harm in doing ROTH conversions. And I think I'd feel angry paying $6k Medicare costs knowing that I could have knocked that down to $2k. (I know that doesn't really make sense). So I might be doing some big ROTH conversions, just not as big as IORP suggests. I don't feel I need to totally empty out my tIRA, and I like the idea of having some tax diversity by moving more from tIRA to ROTH.

FYI, in the year you turn 62, you might be able to exclude up to $75,000 income from your NJ state taxes:
https://www.state.nj.us/treasury/taxation/njit7.shtml

 

[tenant13]

A new conspiracy theory is born.

Up next: Roth conversions were created by the govt to trick investors into giving up tax dollars years in advance of when they are actually due.

That is in fact what they more or less are. And if you were to die soon after such a conversion - and before your RMDs kick in - you would in fact "lose".

In all seriousness though, I would not go as far as calling conversions gimmicky. It's a financial tool. Some may find it useful others not so much.

 

[tenant13]

I'm in a similar situation: single, no heirs, 60 yrs old, NJ resident. I'm on the fence about Roth conversions, but have been doing small ones for a few years (< $20k/year). IORP tells me that if I do massive conversions over the next 5 years, I'll have a few more thousand in disposable income each year, but even without that extra money, I still have more than I can spend each year. First World problem, I know.

One thing I'm really looking at now is IRMAA. IORP tells me that if I do the big ROTH conversions it suggests, my Medicare costs will be somewhere around $2k/year, as opposed to $6k/year if I do no ROTH conversions. So even though I'm single with no heirs, I don't need additional income, I still don't see any harm in doing ROTH conversions. And I think I'd feel angry paying $6k Medicare costs knowing that I could have knocked that down to $2k. (I know that doesn't really make sense). So I might be doing some big ROTH conversions, just not as big as IORP suggests. I don't feel I need to totally empty out my tIRA, and I like the idea of having some tax diversity by moving more from tIRA to ROTH.

FYI, in the year you turn 62, you might be able to exclude up to $75,000 income from your NJ state taxes:
https://www.state.nj.us/treasury/taxation/njit7.shtml

Thanks for that. It would seem that starting at 62 ROTH conversions up to 75k in NJ would avoid state income taxes. Good to know. As to Medicare - right now I'm in a lower tax bracket than you are so that wouldn't be an issue. But who knows what the future brings? Perhaps my investments will explode uncontrollably

 

[RunningBum]

I wouldn't be moving for financial reasons - mostly for the weather, lifestyle and a different political climate (no place is perfect but I'm a bit tired of northern US).
As to the general thrust of the post: I tried to make it clear that I was discussing my personal take on conversions and why I think they don't work for me. And lastly, I care about the money of course - just not about the amount that exceeds my needs or gets left behind when I die.

Every one of my comments was directly related to your situation as you presented it, not a general take. Is there a specific response of mine to your 5 points that you disagree with?

That is in fact what they more or less are. And if you were to die soon after such a conversion - and before your RMDs kick in - you would in fact "lose".

No, you don't "lose" by any stretch of the imagination. You either die with more money available to you because you did a conversion, or you died with more money in an account that you can't touch without paying taxes.

I don't care, do what you want. But to present conversions as a bad idea because you don't care about excess money seems very misleading.

 

[tenant13]

Every one of my comments was directly related to your situation as you presented it, not a general take. Is there a specific response of mine to your 5 points that you disagree with?
No, you don't "lose" by any stretch of the imagination. You either die with more money available to you because you did a conversion, or you died with more money in an account that you can't touch without paying taxes.

I don't care, do what you want. But to present conversions as a bad idea because you don't care about excess money seems very misleading.

Perhaps I should have titled this post: "Why I don't care about ROTH conversions".

 

[RunningBum]

Perhaps I should have titled this post: "Why I don't care about ROTH conversions".

That sounds like what it is to me.

 

[chassis]

Perhaps I should have titled this post: "Why I don't care about ROTH conversions".

+1

 

[RockLife]

"1. I'm single and I have no heirs so estate planning is not part of my financial plan (I don't even have a will because I can't come up with any ideas)"

I have an idea, good buddy, ole pal o' mine!

 

[Winemaker]

In lieu of making Roth conversions, we're just making withdrawals. I've run countless calculators and nothing is convincing. Final portfolio is maybe 2% more, taxes up 10%more. Maybe we'll knock Robbie of as king of the BTD! Kids will still end up with sizeable estate.

 

[2177V]

I think the diversification into tIRA and Roth accounts may be useful. It will be for me.

I really don't feel like giving more to the IRS than I have to. I'd probably be doing the same Roth conversions even if I was single with no heirs. And you never know if that extra money may come in handy.

If you don't have significant taxable and tIRA assets, and your tax bracket never dips below the marginal rate your RMD's will be taxed at, then Roth conversions are most likely not a big deal.

I agree. Having both a tIRA and Roth allow us to game the system as follows: My wife and I withdraw from a tIRA up to the taxible threashold for a married couple of $24,800 which is your standard deduction 2020. After $24,800, I withdraw from my Roth. Hence $24,800 of tIRA income is tax free due to the standard deduction. Having 100% Roth does not allow you to game the system this way.

I do have to take into account other income such as SS...but you get the idea. I use Turbo tax from the previous year to determine the maximum tIRA income before I enter the next tax bracket. People who rollover to 100% Roth may not be taking advantage of the $24,800 standard deduction for a married couple. For single people the standard deduction is $12,400 which is still a lot of money that is not taxible.

 

[RunningBum]

I agree. Having both a tIRA and Roth allow us to game the system as follows: My wife and I withdraw from a tIRA up to the taxible threashold for a married couple of $24,800 which is your standard deduction 2020. After $24,800, I withdraw from my Roth. Hence $24,800 of tIRA income is tax free due to the standard deduction. Having 100% Roth does not allow you to game the system this way.

I do have to take into account other income such as SS...but you get the idea. I use Turbo tax from the previous year to determine the maximum tIRA income before I enter the next tax bracket. People who rollover to 100% Roth may not be taking advantage of the $24,800 standard deduction for a married couple. For single people the standard deduction is $12,400 which is still a lot of money that is not taxible.

The basic rule of Roth conversions is to convert if you can do so at the same or lower rate than you'd have when taking RMDs. None of us are converting at > 0% if we're going to be in the 0% tax bracket later.