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Would Roth conversion make sense?
Old 01-26-2021, 07:28 AM   #1
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Would Roth conversion make sense?

I personally started doing Roth conversions last year as it made the most sense given my situation. I'm 54, retired and my income is low. To avoid a large tax hit at 70 due to RMD's and SS I now do conversions to the top of the 12% bracket so it was a relatively easy decision.


I'm asking today about my significant other. She is 41 years old, still working making ~$110 K so that puts her in the 24% bracket. She has option for a Roth 401K and also has a taxable IRA out of work of about 500K. Does it make sense for her to start doing Roth conversions for her 401K and then also doing Roth conversions for her regular IRA as well? Any advice or thoughts appreciated.Thank you.
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Old 01-26-2021, 07:41 AM   #2
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Lots of past threads on this, and I think it can legitimately be argued in either way in most situations given the unknowns. However, for our situation I'm doing a good amount annually for a simple reason. Even though DW and I are equally fortunate in good health, there's a good chance one will go before the other. The one left will be filing as a single person, and if you've ever figured what that tax bill would be it seems to make sense to lean towards Roth conversions.
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Old 01-26-2021, 08:32 AM   #3
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My assumption is you are not married? If so, your joint income would come into play.

Assuming your significant other is single, then no, it does not make sense to do Roth conversions while working and making $110k as a single person. Roth 401k might not be the right choice either at 24% + state tax if any. It takes a lot of savings to get back to the 24% bracket as a single person retired.
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Old 01-26-2021, 08:38 AM   #4
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My assumption is you are not married? If so, your joint income would come into play.

Assuming your significant other is single, then no, it does not make sense to do Roth conversions while working and making $110k as a single person. Roth 401k might not be the right choice either at 24% + state tax if any. It takes a lot of savings to get back to the 24% bracket as a single person retired.
No , we are not married.
I was just thinking she is going to face a tremendous tax hit when she hits 70. Just looking for ways to minimize it.
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Old 01-26-2021, 08:49 AM   #5
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I'd try to forecast income and taxes for when SS starts (62-70) and RMDs start (72) and see if she will be above 24%. If so, go with the Roth. If less, better to defer now.

I know it is hard to project 30 years in the future, but you can at least see if it looks obvious whether she will be paying more or less. Even if you get the amounts fairly close, you don't know what will happen with future tax rates and SS taxation. It's even harder for us to project so I don't see how we can give any specific advice.

ER plans? Consider that you (her) might want to defer income now with a 401K or tIRA, and convert a lot of it before you start SS and RMDs. I deferred everything I could while I was working, and am well on my way to getting all or most of my tIRA converted by age 70. That's good because any RMDs I'd take at 72 would push more SS and QDivs into being taxed for a nearly 50% effective federal tax rate.

And if ER is planned before 59.5, have a plan for income to bridge you until then.
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Old 01-26-2021, 08:50 AM   #6
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Originally Posted by FREE866 View Post
No , we are not married.
I was just thinking she is going to face a tremendous tax hit when she hits 70. Just looking for ways to minimize it.

Get married? (insert smiley face hiding under a chair)


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Old 01-26-2021, 09:23 AM   #7
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Quote:
Originally Posted by H2ODude View Post
Lots of past threads on this, and I think it can legitimately be argued in either way in most situations given the unknowns. However, for our situation I'm doing a good amount annually for a simple reason. Even though DW and I are equally fortunate in good health, there's a good chance one will go before the other. The one left will be filing as a single person, and if you've ever figured what that tax bill would be it seems to make sense to lean towards Roth conversions.
+1. There's nowhere near enough info in the OP's post to provide a meaningful answer, it's just not that simple...
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Old 01-26-2021, 09:29 AM   #8
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Quote:
Originally Posted by FREE866 View Post
I personally started doing Roth conversions last year as it made the most sense given my situation. I'm 54, retired and my income is low. To avoid a large tax hit at 70 due to RMD's and SS I now do conversions to the top of the 12% bracket so it was a relatively easy decision.


I'm asking today about my significant other. She is 41 years old, still working making ~$110 K so that puts her in the 24% bracket. She has option for a Roth 401K and also has a taxable IRA out of work of about 500K. Does it make sense for her to start doing Roth conversions for her 401K and then also doing Roth conversions for her regular IRA as well? Any advice or thoughts appreciated.Thank you.
The decision for Roth conversions centers around your current marginal tax rate and your expected marginal tax rate once any pensions, SS and RMDs are going.

In your case Roth conversions make sense because your current marginal tax rate is lower than what it will be once any pensions, SS or RMDs are included in your tax return.

For your SO, I'm guessing that her current 24% marginal rate is equal to or higher than what it will be once she is retired and any pensions, SS and RMDs are included in her income... assuming that, I don't think that Roth conversions are beneficial for her.
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Old 01-26-2021, 10:10 AM   #9
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Originally Posted by pb4uski View Post
The decision for Roth conversions centers around your current marginal tax rate and your expected marginal tax rate once any pensions, SS and RMDs are going.

In your case Roth conversions make sense because your current marginal tax rate is lower than what it will be once any pensions, SS or RMDs are included in your tax return.

For your SO, I'm guessing that her current 24% marginal rate is equal to or higher than what it will be once she is retired and any pensions, SS and RMDs are included in her income... assuming that, I don't think that Roth conversions are beneficial for her.
Right. That’s what I was leaning towards. Thank you PB.
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Old 01-26-2021, 07:27 PM   #10
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Roth conversion logic also focuses on Medicare IRMAA tiers.
I've been doing conversions in the 28/24% bracket the last several years partly to avoid being in an even higher IRMAA tier once I start RMDs in 2022.

I think I've succeeded but time will tell...
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