Rollover to a Roth?

[Bluemoon]

My partner has about $250,000 in her rollover IRA (all wih Vanguard). Should she rconvertl to a Roth? She is 67 on SS & pension, has no debts and her house is aid for.

 

[RunningBum]

Not all at once, she'd take a big tax hit since a lot of it would be in a high tax bracket. A good strategy is to convert up to the top of the 15% bracket. Include dividends and LTCGs, otherwise you pay 15% on each dollar converted + 15% on each dollar of divs or gains pushed above the line.

If her pension already has her above 15% and will do so in the future, it might be worth going up to the 25% bracket.

 

[haha]

My partner has about $250,000 in her rollover IRA (all wih Vanguard). Should she rconvertl to a Roth? She is 67 on SS & pension, has no debts and her house is aid for.

There are many more variables to consider, and it is hard to be completely sure that you might be advising the best action.

Many people will likely give opinions, but I think they may need more information.

I plan to convert as much into my Roth as I can without running up taxes. I have noticed that my returns tend to be better in my Roth than in my taxable account or TIRA, I think because I am not constrained by tax considerations. Although the TIRA has no immediate tax consequence of a gain, I still do not like the idea of converting capital gains into ordinary income. No matter what redistributionists may say, investing in equities tends to be risky, and in my case at least it is sensitive to tax treatment of those gains.

Ha

 

[GrayHare]

The primary factor for the conversion decision is usually the person's ordinary income tax rate now vs. ordinary income tax rate later. If the later tax rate is expected to be higher, converting now often makes sense, provided the conversion itself, most/all of which is usually treated as ordinary income, does not bump the person's tax rate higher. Many people convert small portions of tIRA to Roth annually so as not to bump their tax rate too high in any one year.

 

[Alan]

It will be worth looking at what her RMD's will do when they start in 3 years. For $250k she'll have to withdraw ~$9k.

Full schedule is here
IRA Required Minimum Distributions Table | Bankrate.com

Try out some scenarios with TurboTax or similar. Also try i-Orp to see what that calculator recommends for ROTH conversions.

 

[StuartR]

We have an economy on the verge of hyper-inflation through currency debasement, and Roth encourages people to hand over a larger portion of the earnings NOW vs later when the buying power will be significantly eroded.

We have a government that will invent new taxes, increase existing taxes, inflate currency, and break promises… such as the promise to not tax your Roth distributions.

When has the government ever broken a promise to not tax us?

First, there was the promise to never tax individual income. They broke that. Tax rates have been rising steadily since. Then there was the promise to create a retirement insurance fund, called Social Security, where funds would be waiting for you in retirement and the distributions to you would not be taxed. Then they broke that promise by taxing SS benefits. While they were at it, they never created a fund and operated a Ponzi scheme instead.

Roth is a bad deal for almost ANYBODY in the current economic and political environment.

 

[martyb]

hmmm....

 

[GrayHare]

Actually, Roth can help during inflationary times because inflation's illusory capital gains of Roth assets are not taxed. IMO it's not worth worrying about which tax laws might be changed because there is no way to predict that exactly.

 

[Nords]

Roth is a bad deal for almost ANYBODY in the current economic and political environment.

DCA, you may be a fellow nuke, but it's possible to form the conclusion from your profile that you may be a little less than objective in your assessment. We've had quite a few financial advisors start out like this, and their retention has been pretty low.

Mathematically, I'm a little confused about how paying 15% taxes now is worse than paying 25% taxes later... hyperinflation or not. If some people are in that situation, then it's probably better to pay taxes now rather than trying to forecast the political & inflationary risks.

 

[Bestwifeever]

I'm a little confused that someone would come in and make a heavyhanded statement about any financial decision (like this one re Roth IRAs) without any knowledge about an individual's financial situation. Maybe it's just me.

 

[mathjak107]

i agree . personally i dont think roths will be the best way for most americans and would never just tell someone its the best way.

i dont see most folks being in a higher bracket with no pay checks unless they have a pension or lots of money..

throw in the tax brackets dropping every year by about 2-3% allowing more and more through at lower and lower brackets and its going to be tough for most to actually be in a higher bracket.

even if rates were the same the roth would do worse than a deductable traditional just because the brackets keep dropping.

 

[pb4uski]

....throw in the tax brackets dropping every year by about 2-3% allowing more and more through at lower and lower brackets and its going to be tough for most to actually be in a higher bracket.

even if rates were the same the roth would do worse than a deductable traditional just because the brackets keep dropping.

Huh? Seems to me like brackets are increasing at ~ the inflation rate.

Top of 15% tax bracket for MFJ:

2007 63,700
2008 65,100 +2.2%
2009 67,900 +4.3%
2010 68,000 +0.1%
2011 69,000 +1.4%
2012 70,700 +2.5%

 

[Brett_Cameron]

Huh? Seems to me like brackets are increasing at ~ the inflation rate.

Top of 15% tax bracket for MFJ:

2007 63,700
2008 65,100 +2.2%
2009 67,900 +4.3%
2010 68,000 +0.1%
2011 69,000 +1.4%
2012 70,700 +2.5%

Tax bracket thresholds are inflated using CPI-U series CUUR0000SA0 with some averaging and rounding to make the nice numbers that end in '00'.

 

[pb4uski]

Understood, but my point was they are not decreasing as mathjak suggested..

 

[mathjak107]

i was refering to the the 25% marginal bracket and the fact more income is going through at lower taxes. what i meant when i said the brackets were dropping is what was the bracket above is now in the bracket below. sorry if i confused you..

2012 85,650
2011 83,600
2010 82400

over the next decade 100k will go through at 25%. that means some tough going for a roth unless taxes in that bracket go up .

my opinion is with 80 million retired baby boomers or retiring baby boomers no political party wtill want to tell them they are raising their income taxes.

i think everyother tax will soar but i think they wont touch the 15 and 25% brackets.

 

[kaneohe]

i was refering to the the 25% marginal bracket and the fact more income is going through at lower taxes. what i meant when i said the brackets were dropping is what was the bracket above is now in the bracket below. sorry if i confused you..

2012 85,650
2011 83,600
2010 82400

over the next decade 100k will go through at 25%. that mean some tough going for a roth unless taxes in that bracket go up .

my opinion is with 80 million retired baby or retiring baby boomers no political party will want to tell them they are raising their income taxes.

i think everyother tax will soar but i think they wont touch the 15 and 25% brackets.

I think it was clear in context tho not necessarily if you fixated on particular words....loose w/ the lingo......

 

[Animorph]

I think most of the points have been mentioned at least. Forums are decent for generating ideas. I'd be converting to Roth in small chunks to stay at a low tax rate, lower than it might come out in the future. Watchout for the effects of RMD's bumping you up a bracket. With the Roth in place you can continue the tax effects by withdrawing from the traditional IRA up to the top of a lower tax bracket and then meeting the rest of your income needs with Roth withdrawals.

Whatever the government can do with your Roth, they can do with your traditional IRA and taxable accounts. Diversity may be good thing for handling any of those changes.

 

[packrat44]

When I read StuartR's bio it appeared more like a sales pitch than an introduction.

While I am not thrilled about the track record of our congress-critters at keeping promises and their changing the rules midway through the game, I still believe ROTHs have strong merit.

 

[mathjak107]

roths are nice for transfering wealth , they work well if your borderline having your ss taxed but overall im not a fan .

the fact is anything that is easy to get to and spend most folks will spend that money before retirement so a roth to me makes it to easy and penalty free.

im not convinced we will be in a higher bracket with no pay checks and alot of the taxes on deferred money may be avoided using life insurance ploys ala ed slotts ideas.

i tend to think the mere fact that they let us do conversions a few years ago and pay the tax out over almost 3 years says the gov't dosnt think we may be in a higher bracket either later on and wants their money now.

with many eventually moving to low or no tax states even the state gov'ts prefer you do a roth and pre-pay those taxes now.

while i find it may not hurt to do a mix of vehicles as a precauation the flat out responce many give to do a roth automatically when someone asks may not be the best advice.

boy if roths were around when i started work back in the 1970's i would have gotten screwed big time since taxes came down so much.

its really a case by case issue rather then just general advice for everyone to do a roth.

 

[StuartR]

DCA, you may be a fellow nuke, but it's possible to form the conclusion from your profile that you may be a little less than objective in your assessment. We've had quite a few financial advisors start out like this, and their retention has been pretty low.

Mathematically, I'm a little confused about how paying 15% taxes now is worse than paying 25% taxes later... hyperinflation or not. If some people are in that situation, then it's probably better to pay taxes now rather than trying to forecast the political & inflationary risks.

Hello fellow nuke!

First off, I am not an FA. I do not push any basket of wall street products. What I can do is allow folks to remove their retirement wealth from the wall street casino and place it back in their direct possession so they can self-direct a wider range of investment choices with checkbook control. This also includes the CHOICE to go Roth or not.

That being said, my aversion to Roth stems from to two main points I made above. The inflation disadvantage and the history of government broken promises.

If you understand that governments "official" CPI Index is a deception and that real inflation, according to the very conservative estimate of John Williams' ShadowStats.com, is over 9% over the last decade just using the fedgovs old CPI measurements from the 80's. If you realize that the real inflation rate over the course of the next 10 years will accelerate well beyond the previous 10, due to the Fed Reserves injection of trillions with no end in sight, you may come to the conclusion that paying taxes LATER is ultimately beneficial in virtually everyone situation, no matter the tax bracket implications.

Couple that will a history of broken promises and as Mathjak107 astutely observed "the mere fact that they let us do conversions a few years ago and pay the tax out over almost 3 years says the gov't dosnt think we may be in a higher bracket either later on and wants their money now.", ought to throw up some serious red flags about nature of Roth.

 

[RunningBum]

boy if roths were around when i started work back in the 1970's i would have gotten screwed big time since taxes came down so much.

I don't see how. Your earnings on the Roth still would've been tax free. It's just less of a savings.

Had you done a Roth INSTEAD of a 401K (which didn't exist then either), you would've made the worse choice, but for many people it's not an either/or, it's an "and".

its really a case by case issue rather then just general advice for everyone to do a roth.

True enough, though huge tax drops and other big tax law changes aren't so much case-by-case as they are things that affect many people that weren't easily predicted.

 

[GrayHare]

Looks like we have a doubter. Convert to Roth now or keep as tIRA? Let's go to the math to see what the numbers say. Scenario: 9900% (100x) hyperinflation and 15% tax rate now and later. $1000 in tIRA, $150 in non-retirement bank account.

1) Convert to Roth now, pay $150 in taxes from bank funds. After 100x hyperinflation, Roth value $100000, bank $0. Total after-tax net worth: $100000.

2) Keep as tIRA. After 100x hyperinflation, tIRA value $100000, bank $15000, totals $115000, which has pending taxes of $17250. Total after-tax net worth: $97480.

So, for each $1000 of initial tIRA, converting to Roth now makes you $2520 richer.

 

[mathjak107]

I don't see how. Your earnings on the Roth still would've been tax free. It's just less of a savings.

Had you done a Roth INSTEAD of a 401K (which didn't exist then either), you would've made the worse choice, but for many people it's not an either/or, it's an "and".

True enough, though huge tax drops and other big tax law changes aren't so much case-by-case as they are things that affect many people that weren't easily predicted.

the tax free part may not mean anything if rates are the same.

given the same tax rates and gains the roth and the traditional both would equal the same amount assuming you equal the amounts up .

as an example in the 25% bracket 5000.00 in a roth ,plus the taxes you have to prepay is the same as 6650 pretax in your 401k

if both doubled over time they both yield the exact same bottom line after the taxes on the 401k are paid.

folks always figure this wrong because they prepay the taxes upfront on the roth with money outside the roth . they then try to compare by paying the taxes out of the traditional..

they really end up equalling the same thing at the end of the day.

 

[StuartR]

Looks like we have a doubter. Convert to Roth now or keep as tIRA? Let's go to the math to see what the numbers say. Scenario: 9900% (100x) hyperinflation and 15% tax rate now and later. $1000 in tIRA, $150 in non-retirement bank account.

1) Convert to Roth now, pay $150 in taxes from bank funds. After 100x hyperinflation, Roth value $100000, bank $0. Total after-tax net worth: $100000.

2) Keep as tIRA. After 100x hyperinflation, tIRA value $100000, bank $15000, totals $115000, which has pending taxes of $17250. Total after-tax net worth: $97480.

So, for each $1000 of initial tIRA, converting to Roth now makes you $2520 richer.

What you fail to consider is purchasing power of your dollars today vs. purchasing power of those dollars at some future date after the inflation effect. After all, it not about the number of digits in the bank but what can actually be consumed with those dollars when you go to spend it.

You left out a time preference, so lets assume 10 years. If we just consider today's conservative estimate of 9% real inflation and not a hyper-inflation scenario, the actual lost buying power of the $17,250 tax bill in the future is equivalent to $7,287 today, since you will be paying the tax bill with dollars that are worth less in the future.

This situation only gets worse for Roth as you extend the time preference and increase the real inflation rate, which is already baked in the cake.

 

[Animorph]

the tax free part may not mean anything if rates are the same.

given the same tax rates and gains the roth and the traditional both would equal the same amount assuming you equal the amounts up .

as an example in the 25% bracket 5000.00 in a roth ,plus the taxes you have to prepay is the same as 6650 pretax in your 401k

if both doubled over time they both yield the exact same bottom line after the taxes on the 401k are paid.

folks always figure this wrong because they prepay the taxes upfront on the roth with money outside the roth . they then try to compare by paying the taxes out of the traditional..

they really end up equalling the same thing at the end of the day.

True, but if you have an option for a Roth 401k or traditional 401k, or a Roth IRA or traditional IRA, you are limited to equal contributions amounts for either. That $5k in a Roth IRA is worth $6650 in a traditional IRA, but you can only put $5k into the traditional IRA. So even with equal tax rates, the Roth can be better if you are maxing out your contributions.