Why ROTH conversion is a bad idea for me.

[RobbieB]

Not doing any conversions. Pulling before I have to.

Blow That Dough!

 

[thefist]

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.

I had a similar result from i-orp. For me it suggested 3 or 4 jumbo conversions. I ran another scenario where I raised my age by 2, and updated the balances for the accounts after 2 years of conversions. Turns out that the first 2 big conversions did all the heavy work to get the tIRA down enough. From that point it could be trickled out over time or converted at lower brackets with little to no difference in disposable income.

Once the big chunk is done, then you can even cherry pick for good conversion opportunities in future years. One or 2 holdings have a bad year or quarter? Convert at a discount.

Give it a try. i-orp really likes these next 5 low tax years.

 

[skyking1]

Roth conversions seem tailor-made for couples, to reduce the tax torpedo for a surviving spouse. That whole incentive is gone for a single retiree.
We will do it for the reason above, and cruise right at the top of the 12% tax bracket while doing so.
Looking at that info, Roth conversions serve those with modest retirement incomes well.

 

[Perryinva]

At first, I agreed with Runningburn, while the OP may not CARE about conversions, saying they are bad held no water. Big difference. However, if there is ever a reasonable chance that the OP may marry, then conversions would indeed be bad if prepaying at the Single rate is higher than MFJ later on. I can see that. DW always points out that no matter how many times I or she says we would never remarry when one of us goes first, it always seems that everyone we know of who said the same thing, always ends up remarried. Though, I SWEAR if I ever think of remarrying should I be the last standing, I will pay good money for an intervention....LOL

IRMAA and current low tax rates while delaying SS are the big reasons for us. I don’t see it as gimmicky or even remotely difficult, so I don’t get it. The “don’t want to pay the IRS early” makes no sense to me. Can someone explain it? I certainly understand the good reasons to not convert All tIRA funds if that is your only source of income, with the whole Tax Torpedo thing, but in my case, as it is for many here, it’s the exact opposite. Pensions plus SS put us firmly in the 22/25% bracket. We get no tax free option for any tIRA withdrawals, ever. Before I file for my SS (currently 63), I’m in the lowest I have been in like 30 years. So whether I withdraw to use or convert now, it’s a relative win.

Do heirs ever have to pay taxes on an inherited Roth? I thought not. So tIRA amounts are NEVER all yours. The taxes WILL have to paid at some time (with the exception of filling 0% bracket, which is a relatively a small amount over your lifetime, unless you are young and retired, which most aren’t), so its more a mental thing, then, isn’t it. “I have $2M in tIRA and that is more & earns me more than $1.5M in a Roth”. Obviously wrong, and the earlier one converts to Roth, the longer tax free compounding occurs, as ling as filing status doesn’t go up.

 

[RetireBy90]

Pensions plus SS put us firmly in the 22/25% bracket. We get no tax free option for any tIRA withdrawals, ever. Before I file for my SS (currently 63), I’m in the lowest I have been in like 30 years. So whether I withdraw to use or convert now, it’s a relative win.

This is where we find ourselves. Small pensions, income from rental and SS for DW currently have us well into 22% bracket and I'll start SS in another 5 years. We worried about having enough to get there on so saved but turns out that we have enough with SS and pensions to meet our needs.

I strongly agree that advantages of Roth conversions are unique to each situation and if I could I would never pay taxes on the IRA savings. However it ain't so and I suspect most on this forum have saved and will have to pay taxes on it. There is always an exception to the rule, the poster that can pull up to the top of 0% tax is great and he sounds all set. However if I pulled $24K from my IRA each year I would still have my RMDs much higher than that so not an option for many.

Do the numbers yourself, what will your IRA balance be at 72 and you will need to pull about 4% RMD. Simple.

 

[Dtail]

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.

Agree, but one does see an occasional post whereby it is stated that all monies have been converted to a Roth.

 

[RunningBum]

Agree, but one does see an occasional post whereby it is stated that all monies have been converted to a Roth.

And those would be cases where their tax rate after 70 is > 0% even without RMDs. I'll have social security, a small pension, and interest and non-qualified dividends from my taxable account. I definitely won't be at 9%.

 

[RunningBum]

At first, I agreed with Runningburn, while the OP may not CARE about conversions, saying they are bad held no water. Big difference. However, if there is ever a reasonable chance that the OP may marry, then conversions would indeed be bad if prepaying at the Single rate is higher than MFJ later on.

Good point.

 

[EastWest Gal]

The OP said he thought Roth conversions are a bad idea for him, in the title. I think he is probably right, and appreciate his candor, as well as everyone else's in this discussion. For us, some Roth conversions make sense.

It is about the tax consequences now or later. And about inheritance, frankly.

Everyone's situation is different. I think OP has nailed his situation, spot on.

 

[RunningBum]

The OP said he thought Roth conversions are a bad idea for him, in the title. I think he is probably right, and appreciate his candor, as well as everyone else's in this discussion. For us, some Roth conversions make sense.

Just so you know, the "for me" part was added later. I took issue with the original title.

 

[RunningBum]

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.

Unless you aren't able to withdraw Roth conversions at any time (haven't had the account open for 5 years yet, under 59.5), I can't see any way that a withdrawal could work out better than a conversion, unless you lose money. Few of the things we do are huge difference makers, but smaller things add up.

 

[pb4uski]

.... 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.

OK, I get it. PM me and I'll give the the name and address of where to send the check for that pesky amount in excess of your needs so it doesn't get left behind when you die.

 

[pb4uski]

.... 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.

But it isn't "paying the government now when I could pay them later"... it is paying the government less now rather than paying them more later

For us it was a very simple calculation.... once my pension and Social Security are online we projected that we would be in the 12% tax bracket before RMDs and in the 22% tax bracket with RMDs... the effective tax rate on the RMDs was ~15% (increase in tax with/without RMD divided by RMD).

But there is a 14-year period of time between when I retired and when my SS starts that our tax rate is 0% before Roth conversions because out ordinary income is less than the standard deduction so it would be foolish not to take advantage of those low tax brackets to get money out of tIRAs which will be taxed at ~15% later.

Over the past 7 years I've done ~$390k of Roth conversions and paid ~8.5%.... and saved $25k for just moving money from one pocket to another and paying the tax at a lower rate.

 

[pb4uski]

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.

And it wouldn't be unusual for early retirees who are living off of taxable account savings until pensions and SS start to have ordinary income that is less than the standard deduction so it would be foolish not to withdraw or convert at least the amount needed to fill up that 0% tax bracket.... and then if you expect to be in the 22% tax bracket later once SS and RMDs hit then to fill up the 10% and 12% tax brackets is also an easy decision.

 

[chassis]

But it isn't "paying the government now when I could pay them later"... it is paying the government less now rather than paying them more later

For us it was a very simple calculation.... once my pension and Social Security are online we projected that we would be in the 12% tax bracket before RMDs and in the 22% tax bracket with RMDs... the effective tax rate on the RMDs was ~15% (increase in tax with/without RMD divided by RMD).

But there is a 14-year period of time between when I retired and when my SS starts that our tax rate is 0% before Roth conversions because out ordinary income is less than the standard deduction so it would be foolish not to take advantage of those low tax brackets to get money out of tIRAs which will be taxed at ~15% later.

Over the past 7 years I've done ~$390k of Roth conversions and paid ~8.5%.... and saved $25k for just moving money from one pocket to another and paying the tax at a lower rate.

Thanks for the comment. I agree with a previous post that the Roth conversion doesn’t change the game in my eyes. It is a very marginal play. And a play that requires effort, machinations and gymnastics that I don’t see as being worthy of my time and effort.

I have difficulty with accelerating tax payments and also with restrictions on my money, such as a 5 year no-touch rule for a Roth. Don’t like it.

Do Roth conversions benefit estates to greater or lesser degrees, depending on the value of the estate?

For an estate with only SS income, do smaller estates benefit proportionately more than a larger estate does? The question relates to income tax rates, and living expenses as a percentage of portfolio value.

I’m trying to game i-orp into something that looks attractive to me, but so far I haven’t achieved that.

 

[SecondCor521]

Roth conversions seem tailor-made for couples, to reduce the tax torpedo for a surviving spouse. That whole incentive is gone for a single retiree.
We will do it for the reason above, and cruise right at the top of the 12% tax bracket while doing so.
Looking at that info, Roth conversions serve those with modest retirement incomes well.

I agree that the surviving spouse issue is an important planning consideration for married couples.

Single people can also get hit by the tax torpedo, and for someone with heirs, Roth conversions can still make a great deal of sense. Especially with what I would call the SECURE torpedo - my kids might inherit and be required to drain a large traditional IRA in 10 years right during their highest income years. It is a different issue but is similar to the married to single transition you mentioned.

 

[thefist]

Roth conversions are very much a personal decision. As a single filer, the content out here is somewhat lacking. Posts like this is where you learn. When others share what they are doing, it may resonate with others and provide another idea.
If I were to marry a former nun with an $800 net worth, then my conversions would have been a mathematical mistake. Different outcome if the new bride is a retired neurosurgeon with $10M net worth.
We make the decisions based upon what we have, and our most logical expectations of the future.

 

[ChrisC]

Do Roth conversions benefit estates to greater or lesser degrees, depending on the value of the estate?

Perhaps, you might want to look at Bigfoot's Retiree Portfolio Model on Roth Conversions to see if your estate will benefit from conversions: https://www.bogleheads.org/wiki/Retiree_Portfolio_Model

In my case, the benefit of conversions is the minimization of the "tax torpedo" arising from RMDs on top of pensions and social security that already place us in the 24% tax bracket, tax bracket creep if one of us passes (we'd go from the 24% bracket (MFJ) to 35% bracket (single) and passing Roths to our children.

The last benefit is the most significant to us especially with the new 10 year distribution rules from the SECURE Act. Two of our children are currently in the 32% bracket and the remaining one is at the 24% bracket. Transferring Roths to them will be of enormous financial value to them.

Seems to me that it is far better to give children a Roth IRA than a tIRA especially if the values of these Roth accounts could trip over $XX million, 20 years from now, even with modest growth rates.

 

[pb4uski]

Thanks for the comment. I agree with a previous post that the Roth conversion doesn’t change the game in my eyes. It is a very marginal play. And a play that requires effort, machinations and gymnastics that I don’t see as being worthy of my time and effort.

I have difficulty with accelerating tax payments and also with restrictions on my money, such as a 5 year no-touch rule for a Roth. Don’t like it.

Do Roth conversions benefit estates to greater or lesser degrees, depending on the value of the estate?

For an estate with only SS income, do smaller estates benefit proportionately more than a larger estate does? The question relates to income tax rates, and living expenses as a percentage of portfolio value.

I’m trying to game i-orp into something that looks attractive to me, but so far I haven’t achieved that.

Yes, while I haven't run it in quite a while, i-orp ended up recommending much more than I was comfortable with for Roth conversions.

I guess I would disagree that Roth conversions are a very marginal play though it might be in some cases, but not for us. For me it would be a couple hours a year to figure out what my tax situation looks like and how much I should convert and actually do the conversion... so an average of $3,600/year over the last 7 years for a couple hours of work each year is well worth the effort for me.... it is the time needed that is marginal, not the benefits. And I calculate the benefit assuming that we will both live long... if one of us dies and the surviving spouse is filing single then the benefits of having locked in withdrawals at a low tax cost are even better.

Also, any conversions that I have done have been at a much lower tax rate than DD/DSIL pay and a slightly lower rate than DS pays so it does end up benefiting our heirs too. IOW, if you're working or have other substantial sources of income it is much better to inherit a Roth than to inherit a tIRA.

If you're over 59 1/2 then the 5-year no-touch rule doesn't apply (assumes that you have had a Roth for at least 5 years).

 

[Winemaker]

Unless you aren't able to withdraw Roth conversions at any time (haven't had the account open for 5 years yet, under 59.5), I can't see any way that a withdrawal could work out better than a conversion, unless you lose money. Few of the things we do are huge difference makers, but smaller things add up.

Why should I convert $X dollars from our tIRAs,403b or 401k and convert to a Roth, when we can just take ($X+$Y) and just spend/save it? Our Roths have been open since they were allowed and we are 62/65. The whole purpose of converting is to lower the balance to reduce future taxation on growth. My calculators show a 2% difference in portfolio growth and 10% more in taxes paid if we convert. At 70, I pick up another $4000/month in SS, and were in the 22% bracket now. Trust me, there's enough in the Roths now for kids.

 

[RetireBy90]

Thanks for the comment. I agree with a previous post that the Roth conversion doesn’t change the game in my eyes. It is a very marginal play. And a play that requires effort, machinations and gymnastics that I don’t see as being worthy of my time and effort.

I have difficulty with accelerating tax payments and also with restrictions on my money, such as a 5 year no-touch rule for a Roth. Don’t like it.

Do Roth conversions benefit estates to greater or lesser degrees, depending on the value of the estate?

For an estate with only SS income, do smaller estates benefit proportionately more than a larger estate does? The question relates to income tax rates, and living expenses as a percentage of portfolio value.

I’m trying to game i-orp into something that looks attractive to me, but so far I haven’t achieved that.

I don't want to jump on ya or just repeat what smarter folks than I have already said. I didn't do simulations or complex computations, just took my steady income today and added in my expected SS and then looked at the tax brackets and RMD if I was 70 today (did this couple years ago). The RMD would be taxed at 24% for the rest of our lives. I'm doing conversions into the 24% bracket a bit through 2025 and then will re-assess at that point. I'm able to convert about $80-$90K in 22% bracket and pay the taxes from after tax funds. It will allow me to contribute any remaining RMD via QCD and have about 2/3 of funds in the Roth where I can take out any time or pass to kids tax free.

I recommend you run a excel spreadsheet to compute your total taxable income at age 72. You will be required to take RMD of about 4% first year and pay taxes. What bracket does that RMD in using today's dollars and brackets. If it is higher than your bracket today it will cost more in taxes to wait.

I understand that some will do this and conclude it isn't worth it to me. I would suggest that couple others here enjoy playing with this just as I do, so a couple hours here or there is fun. Others just don't want to think about it any more than necessary. Good to both of them. Me ? I'm doing the calculations couple times a year and enjoying saving a few thousand in taxes. I have a tax liability of about $200K (taxes due if I do nothing) that I hope to get down to about $150-175K, to say nothing of the taxes I'd owe on the gains over next 7 years.

 

[Out-to-Lunch]

Why should I convert $X dollars from our tIRAs,403b or 401k and convert to a Roth, when we can just take ($X+$Y) and just spend/save it? Our Roths have been open since they were allowed and we are 62/65. The whole purpose of converting is to lower the balance to reduce future taxation on growth. My calculators show a 2% difference in portfolio growth and 10% more in taxes paid if we convert. At 70, I pick up another $4000/month in SS, and were in the 22% bracket now. Trust me, there's enough in the Roths now for kids.

When you say "10% more in taxes," what two situations are you comparing?

If you save the excess outside of a Roth, you will pay taxes on the earnings of the excess. If you save the excess inside of a Roth, you will not pay these taxes. Help me understand how the former is preferable?

 

[RunningBum]

Why should I convert $X dollars from our tIRAs,403b or 401k and convert to a Roth, when we can just take ($X+$Y) and just spend/save it?

Tax free growth in the Roth vs taxes on earnings in your taxable account if you save it.

 

[Winemaker]

When you say "10% more in taxes," what two situations are you comparing?

If you save the excess outside of a Roth, you will pay taxes on the earnings of the excess. If you save the excess inside of a Roth, you will not pay these taxes. Help me understand how the former is preferable?

Converting or not converting. I am using 86 as my termination date as well as DW, she robbed the cradle.

 

[Winemaker]

Tax free growth in the Roth vs taxes on earnings in your taxable account if you save it.

Like I mentioned, we may try to give Robbie a run for his BTD title. Or maybe a close 2nd. We just saved too much pre-tax in prior years. BUT, if SS gets means tested, or cut, or we need LTC, we are prepared. First world problems.