Any reason NOT to convert the remainder of my IRA to a Roth?

[mountainsoft]

I've been doing Roth conversions the last few years and the balance in my traditional IRA is getting fairly low. I figure I could probably convert the remaining balance next year if all goes as planned. Is there any reason NOT to convert the rest and close out the traditional IRA?

Just based on taxes, it's basically break even. We should be in the same tax bracket after retiring as we are now (12%). But there are other advantages to having Roth in retirement, including:

1. Offers some protection against future (likely) tax increases.

2. Reduces our taxable income which "may" reduce how much of our social security gets taxed.

3. Reduces our taxable income which would allow us to qualify for property tax deductions.

4. Reduces our taxable income so we would qualify for healthcare subsidies.

5. One less account to manage. Not a big issue, but less is always better.

I'm not seeing any downside to doing away with the tIRA completely, so is there any reason NOT to do this?

 

[RunningBum]

Two possible reasons that I see:

QCDs is one reason. It lets you deduct your charitable contributions directly off your RMD income, without having to itemize deductions. I might save some for this, though I have a pretty good sized DAF for charitable giving.

Some others are talking about leaving some in case of high medical expenses later in life, like assisted living or memory care. You'll have large medical expenses you can deduct so you could take more income then, tax free. The problem I see with this is that you've probably got quite a few years of RMDs to take before you need it for assisted living. I'm not saving any for this.

 

[mountainsoft]

QCDs is one reason. It lets you deduct your charitable contributions directly off your RMD income

Charitable contributions? Ha! It's mine, all mine.... Seriously, I doubt we'll ever be in a financial position to afford to give any away to charities. If there's any left over at the end of our life, we'll pass it on to our daughter.

As for RMD's, we're still 12+ years away from that requirement. Even if I don't convert any more of my tIRA to my Roth, we'll spend down the tIRA during the first few years of retirement anyway. RMD's aren't even a consideration in our case.

 

[skyking1]

Two possible reasons that I see:

QCDs is one reason. It lets you deduct your charitable contributions directly off your RMD income, without having to itemize deductions. I might save some for this, though I have a pretty good sized DAF for charitable giving.

Some others are talking about leaving some in case of high medical expenses later in life, like assisted living or memory care. You'll have large medical expenses you can deduct so you could take more income then, tax free. The problem I see with this is that you've probably got quite a few years of RMDs to take before you need it for assisted living. I'm not saving any for this.

Thanks for that!
I'm pretty new to this and although I have a pension, my wife has several tIRAs from different jobs. I hadn't really considered the Roth conversions but what you say makes good sense. We will be donating and those qualified donations later in life it would be great to just write the taxes right off. The second point is also equally valid because if we self-insure on long-term care for example it would come into play. I had always considered that her tiras would be some of the last money we would get out, probably via the rmds. Now that makes even more sense.

 

[RetMD21]

Two possible reasons that I see:

QCDs is one reason. It lets you deduct your charitable contributions directly off your RMD income, without having to itemize deductions. I might save some for this, though I have a pretty good sized DAF for charitable giving.

Some others are talking about leaving some in case of high medical expenses later in life, like assisted living or memory care. You'll have large medical expenses you can deduct so you could take more income then, tax free. The problem I see with this is that you've probably got quite a few years of RMDs to take before you need it for assisted living. I'm not saving any for this.

2 things I hadn't considered, thanks

 

[audreyh1]

Charitable contributions? Ha! It's mine, all mine.... Seriously, I doubt we'll ever be in a financial position to afford to give any away to charities. If there's any left over at the end of our life, we'll pass it on to our daughter.

As for RMD's, we're still 12+ years away from that requirement. Even if I don't convert any more of my tIRA to my Roth, we'll spend down the tIRA during the first few years of retirement anyway. RMD's aren't even a consideration in our case.

Well in that case, it’s better to convert it all, have no RMDs, and let your daughter inherit what remains in the Roth rather than the original IRA.

 

[mountainsoft]

Well in that case, it’s better to convert it all, have no RMDs, and let your daughter inherit what remains in the Roth rather than the original IRA.

That's my plan...

For other's who might be considering something similar, be aware of the five year rule on Roth conversions. When you convert money from a traditional IRA to a Roth, you have to wait five years before you can start withdrawing that money from your Roth. Otherwise you have to pay taxes on the distributions (Plus a 10% penalty if you're under 59-1/2). If you do multiple conversions over time, each conversion has it's own five year waiting period.

In my case, I started converting three years ago and still have two years before we retire. In addition, we will live off of our taxable savings for at least a couple years before tapping into our retirement accounts. So no issues with the five year rules in my situation.

 

[REWahoo]

For other's who might be considering something similar, be aware of the five year rule on Roth conversions. When you convert money from a traditional IRA to a Roth, you have to wait five years before you can start withdrawing that money from your Roth. Otherwise you have to pay taxes on the distributions (Plus a 10% penalty if you're under 59-1/2). If you do multiple conversions over time, each conversion has it's own five year waiting period.
.

Isn't the 5 year withdrawal rule for Roth conversions applicable to the penalty amount only since taxes were already paid at the time of conversion? And isn't the 5 year rule really N/A for anyone 59 1/2 or older?

Accordingly, it’s also worth noting that because the 5-year rule for Roth conversions merely leaves the withdrawal of conversion principal potentially subject to the early withdrawal penalty, any other exceptions to the early withdrawal penalty can still shelter the Roth conversion amount from the penalty. Thus, withdrawals within 5 years of conversion by someone who is already over age 59 1/2 are not subject to the early withdrawal penalty, regardless of the 5-year conversion rule, simply because being over age 59 1/2 itself is an exception to the penalty!

https://www.kitces.com/blog/underst...s-for-roth-ira-contributions-and-conversions/

 

[mountainsoft]

Isn't the 5 year withdrawal rule for Roth conversions applicable to the penalty amount only since taxes were already paid at the time of conversion? And isn't the 5 year rule really N/A for anyone 59 1/2 or older?

As I understand it, you would have to pay taxes on the "earnings" (not your converted amount) if the conversion was less than 5 years old (even after 59-1/2). The penalty only applies if you're under 59-1/2.

https://www.schwab.com/ira/roth-ira/withdrawal-rules

Over Age 59-1/2: "If you haven't met the five-year holding requirement, your earnings will be subject to taxes but not penalties."

At least that's my interpretation. Then again, I could be mixing up my 5 year rules. Thankfully, I'll be beyond any 5 year limits by the time we retire.

 

[REWahoo]

Anyone else care to comment on which interpretation is accurate? If mountainsoft is correct I have to re-think my tax planning strategy.

 

[pb4uski]

You're right REWahoo, after you have turned 59 1/2 never any tax or penalties.

The 5-year holding requirement that mountainsoft refers to in post #9 is for the Roth IRA account must be 5 years old, not for conversions into the Roth IRA account.

 

[pb4uski]

Charitable contributions? Ha! It's mine, all mine.... Seriously, I doubt we'll ever be in a financial position to afford to give any away to charities. If there's any left over at the end of our life, we'll pass it on to our daughter.

As for RMD's, we're still 12+ years away from that requirement. Even if I don't convert any more of my tIRA to my Roth, we'll spend down the tIRA during the first few years of retirement anyway. RMD's aren't even a consideration in our case.

You don't do any charitable contributions at all?

We do relatively modest regular annual charitable contributions. While I don't expect that my tIRA balances will ever become small enough to consider converting the remaining balance, if I was in that situation I would leave some for QCDs.... why pay tax on Roth conversions for money that I am later going to donate to charity when I can easily avoid paying tax on those tIRA withdrawals?

 

[Yoheadden]

It sounds like for your situation, you would be better off closing out the tIRA next year. Like u said, 1 less account to manage is always a good thing.

I’m at the point of deciding to do conversions or not. If I may ask, what was your main motivation for doing them, wanting to leave money to heirs, afraid of being in a higher tax bracket, etc ?

 

[davebarnes]

We have decided to start doing QCDs at $1000/month because we have plenty of money in our tIRAs and because of the tax (or is that non-tax) advantages.
For us, that means leaving $100K in my tIRA as my trophy wife is 9 years younger.
Her expected death age is 95 so we will leave about $200K in her tIRA.
Isn’t is nice that financial planning is so simple in the USA?

 

[Sunset]

OP - Since you say you could convert the remaining IRA money in 1 year and stay in the 12% tax bracket.

It must be a pretty small amount left.

I would think, after retirement that you could stretch the Roth conversion (or simply IRA withdrawal) over many years and stay within the 10% bracket.

Of course without actual numbers it's just a guess.

 

[mountainsoft]

You're right REWahoo, after you have turned 59 1/2 never any tax or penalties.

Thanks for clarifying! The different rules can be a bit confusing.

 

[mountainsoft]

You don't do any charitable contributions at all?

Not really, no. I round up our grocery bills to the next dollar for the food bank, if that counts?

Otherwise, we simply don't have enough income to be giving any away. We're saving as much as we possibly can so we can retire, and we often spend money to help my mom and mother-in-law. Not to mention the endless hours of free labor for both.

 

[mountainsoft]

what was your main motivation for doing them, wanting to leave money to heirs, afraid of being in a higher tax bracket, etc ?

I think my initial goal was to avoid RMD's, and just to reduce the number of accounts I have to manage. As I learned of other discounts and subsidies we could qualify for by keeping our taxable income lower, it just made more sense.

I ran simulations in Flexible Retirement Planner comparing converting or not converting. Since we'll stay in the same tax bracket the difference was small, but it was still beneficial.

Slightly better growth, fewer accounts to manage, more subsidies, qualifying for more discounts, what's not to love?

 

[mountainsoft]

OP - Since you say you could convert the remaining IRA money in 1 year and stay in the 12% tax bracket. It must be a pretty small amount left.

Yep, I only have 37K left in my tIRA after converting 15K last month. I'm thinking of converting another 10K this year, which would allow me to convert the remaining 27K (plus any growth) next year.

We got a late start planning for retirement. We've only got about 240K total in our retirement accounts. But since the majority of our income will come from my wife's pension and SS, that's more than enough to get us to 100% success rates.

I would think, after retirement that you could stretch the Roth conversion (or simply IRA withdrawal) over many years and stay within the 10% bracket.

My wife's pension will put us into the 12% bracket before we do anything else. So stretching out conversions wouldn't offer any benefits.

 

[Highbeam]

Not really, no. I round up our grocery bills to the next dollar for the food bank, if that counts?

Otherwise, we simply don't have enough income to be giving any away. We're saving as much as we possibly can so we can retire, and we often spend money to help my mom and mother-in-law. Not to mention the endless hours of free labor for both.

Don't feel bad, we don't give our money away either. You need a roof put on and I'll spit nails all day.

 

[CountryBoy]

Anyone else care to comment on which interpretation is accurate? If mountainsoft is correct I have to re-think my tax planning strategy.

I retired in 2014, living on a smaller, personal portfolio but every December I convert enough from my IRA to my Roth to meet the minimum income requirements to buy health insurance thru the Federal Marketplace.

EACH conversion (even though it's to the same Roth) cannot be touched for 5 years from the year of the conversion. The good news is, you can wait until December 30 and convert from your IRA to the Roth, and you get to include the entire year as one of your five years.

A quote from "How to create a Roth Conversion Ladder"

This is where it’s important to realize that each Roth IRA conversion must stand on its own. That means that there is a new five-year waiting period for each and every conversion that you do.

 

[Out-to-Lunch]

I retired in 2014, living on a smaller, personal portfolio but every December I convert enough from my IRA to my Roth to meet the minimum income requirements to buy health insurance thru the Federal Marketplace.

EACH conversion (even though it's to the same Roth) cannot be touched for 5 years from the year of the conversion. The good news is, you can wait until December 30 and convert from your IRA to the Roth, and you get to include the entire year as one of your five years.

A quote from "How to create a Roth Conversion Ladder"

This is where it’s important to realize that each Roth IRA conversion must stand on its own. That means that there is a new five-year waiting period for each and every conversion that you do.

Unless you meet one of the exceptions. Are you older than 59.5, or younger?

 

[Out-to-Lunch]

As I understand it, you would have to pay taxes on the "earnings" (not your converted amount) if the conversion was less than 5 years old (even after 59-1/2). The penalty only applies if you're under 59-1/2.

https://www.schwab.com/ira/roth-ira/withdrawal-rules

Over Age 59-1/2: "If you haven't met the five-year holding requirement, your earnings will be subject to taxes but not penalties."

At least that's my interpretation. Then again, I could be mixing up my 5 year rules. Thankfully, I'll be beyond any 5 year limits by the time we retire.

But in that Schwab document, they make it clear that the "holding requirement" is the period since the first IRA was opened.. Not since the conversion:

Withdrawals from a Roth IRA you've had more than five years.
If you've met the five-year holding requirement, you can withdraw money from a Roth IRA with no taxes or penalties.

 

[Whisper66]

I've been doing Roth conversions the last few years and the balance in my traditional IRA is getting fairly low....Is there any reason NOT to convert the rest and close out the traditional IRA?.....

It seems fully converting may make sense in your case. For others following this thread, a nice summary of reasons to leave some $$ in a traditional IRA is found here... https://www.investmentnews.com/5-re...aditional-iras-even-for-roth-ira-lovers-80918

 

[Ole Red 29]

Seems to be conflicting opinion on the required holding period for ROTH conversions after 59-1/2. Is it from account creation, from each conversion year or does it apply at all after 59-1/2? thanks