Roth conversion projected benefit

[larrytbm]

I have been doing Roth conversions since 2008, the taxable conversion amounts total $320k and the incremental impact on taxes has been close to $38k. I will be 70 next year and the Roth accounts will have grown to about $600k. If these assets had remained in my tIRA, then they would be hit with RMDs and over the next 15 years (assuming 6% growth) there would be $531k in taxed RMDs plus $682k of assets remaining that would also be taxed beyond age 85. Total 1.2M taxable at whatever rates in affect and I would have been paying taxes on a lot of money I most likely wouldn't need to have withdrawn.

 

[NgineER]

Thanks for posting this. Real world examples are extremely helpful for people in the accumulation phase.

 

[GrayHare]

Per another thread, it's even better to convert at market lows. I got lucky with timing and converted the entire tIRA soon after the 2008-09 downturn. Since then the IRA value has roughly doubled and at 6% going forward it will double again in 12 years. Given multiple tax-free doublings my effective tax rate on the conversion will be 1% to 2%.

 

[Whisper66]

Per another thread, it's even better to convert at market lows....

+1 Made our first conversion in Jan 2016 when the fund had taken a hit. One year later the value is up a bit over 35%. That value increase would have cost me an extra $8-10k in taxes if I converted it or pulled it out of IRA today.

Edit: BTW - taking advantage of temporary opportunities like the example above OR future changes in tax laws are hidden benefits (or maybe pitfalls) that are unknown when considering ROTH conversions using tools like I-ORP.

 

[Options]

Better yet, you could use the "leapfrog method" wherein you convert at the beginning of the year, then convert again later in the year as the market falls. Then you reconvert the "losers" at the end of the year (or up until October of the following year after filing for a tax extension). I've posted threads previously from the BH forum providing detailed instructions on how to do this.

 

[pb4uski]

Similar story here except my Roth conversion program has not been in place as long. I've converted tot the top of the 15% tax bracket beginning in 2013. For 2013 to 2016, I have converted ~$229k and paid $17k in federal tax (7.3%) being a blend of some conversions at 0% because they are offset by itemized deductions and exemptions, some at 10% and some at 15%. Given that I expect to be in the 25% tax bracket once SS starts, I'll take the ~$40k in tax savings... plus no future taxes on growth on the ~$229k converted.

Good deal for me. Where else can I save $40k+ for a few hours work (compared to having done nothing)?

I expect to be able to convert $30-40k a year from now until we start SS in 5-9 years and pay less than 9% in tax on those conversions.

 

[larrytbm]

Per another thread, it's even better to convert at market lows. I got lucky with timing and converted the entire tIRA soon after the 2008-09 downturn. Since then the IRA value has roughly doubled and at 6% going forward it will double again in 12 years. Given multiple tax-free doublings my effective tax rate on the conversion will be 1% to 2%.

Actually, each year in January I did 4-6 different Roth conversions, each a different asset, with the total $ sum at least 2X my yearly goal. Then near tax time the next year I could see the winners and losers. If timing was right, I might keep all the conversions but if timing was totally wrong, then all might be recharacterized. Most years I would start with the biggest winner and so forth til the tax burden became too large. Other tax circumstances also played a factor. So I never had the problem of paying taxes on an asset that had declined in value, actually I never paid more in taxes than the assets had already gained in value.

 

[Koolau]

I was never sophisticated as the folks above. Most of my conversions got into the 25% bracket and I had only two strategic rules. 1. Pay the tax bill with taxed money (not from the IRA). 2. Get rid of all (DW's and my) tIRAs before RMDs.

1. Effectively, ROTHS of the same value as a tIRA are more valuable (will never be taxed - not even to inheritors.) The cost to do this is the up front tax payment taken from other sources (bank accts., taxable MMs or MFs, etc.)

2. I wasn't too worried about the 25% bracket as long as it didn't screw up my Medicare premiums. I will pay in the 25% bracket from here out (or until it changes.) By reducing my tIRAs I can worry less about breaking into a higher tax bracket in the future as RMDs come due and max SS hits (this year.) I still have the 401(k) to pay RMDs on. Within the 401(k) I have flexibility of which funds to draw from to adjust my AA or account for losses I expect to recoup later (yeah, right!)

I've become convinced that some folks are just born to figure all the angles while I'm much more simple (or lazy). In any case, I feel pretty good about where I stand now, even though I'm sure I left money on the table - wouldn't be there first time. As Butch Cassidy said "Just so's we come out ahead." YMMV

 

[pb4uski]

Actually, each year in January I did 4-6 different Roth conversions, each a different asset, with the total $ sum at least 2X my yearly goal. Then near tax time the next year I could see the winners and losers. If timing was right, I might keep all the conversions but if timing was totally wrong, then all might be recharacterized. Most years I would start with the biggest winner and so forth til the tax burden became too large. Other tax circumstances also played a factor. So I never had the problem of paying taxes on an asset that had declined in value, actually I never paid more in taxes than the assets had already gained in value.

I'm lazy... that sounds like w*rk to me.