Rethinking my yearly Roth conversions

[CardsFan]

I’m a simple guy. If I could get more money into my Roth at 12%, I’d do it - period. Why not max out the 12% bracket? It just seems like a no brainer to fill up the lowest bracket while you can. Odds seem to favor that taxes are more likely to go up than down, so what harm could there be in filling up the current lowest bracket? Even if you don’t put it in a Roth, I’d get it out of my IRA at the 12%.

Also, I’m guessing you were paying more in taxes when you put it into your IRA so from that point of view, it’s a win to get it out at a lower rate.

+1

I just don't see the disadvantage of Roth conversions in the 12% bracket.

 

[Romer]

Remember that the current 24% bracket will be 28% in 2026

Mot sure if you are married, but a big reason for my Roth conversions was if one of us passes and we wind up with single tax brackets/rates

I was lucky, did a bunch of Roth conversions the last few years by transferring the stocks vs money. Those stocks have grown considerably in the Roth since then. That was luck vs skill though.

 

[MarieIG]

I’m a simple guy. If I could get more money into my Roth at 12%, I’d do it - period. Why not max out the 12% bracket? It just seems like a no brainer to fill up the lowest bracket while you can. Odds seem to favor that taxes are more likely to go up than down, so what harm could there be in filling up the current lowest bracket? Even if you don’t put it in a Roth, I’d get it out of my IRA at the 12%.

Also, I’m guessing you were paying more in taxes when you put it into your IRA so from that point of view, it’s a win to get it out at a lower rate.

This!

 

[Rianne]

Pb4uski, I asked you this before, somewhere in a thread, but I can't find it. I want to Roth convert a CD today and can WH taxes from the settlement account. I can roll the CD as is, a 5-year 5.5% CD right into the Roth, right?

 

[imjustawarrior]

Some things to consider:

1. If you are married, your taxes could be much higher once there is only one person.

2. Put the investments with the lowest expected return in the IRA to help control grow (e.g., bonds)

3. Converting to the top of the 12% bracket can really be more like a 27% marginal tax if you push qualified dividends/LTCG from the 0% bracket into the 15% bracket. I think it is best to run a tax return to see what the real marginal tax rate will be on any Roth conversions.

4. Tax rates are set to go up in a few years.

I would always convert at a marginal tax of 12%. It is unlikely to ever be lower. Paying taxes out of taxable is not a problem. It is easy to get money out of a Roth.

 

[Chuckanut]

I did Roth conversions every year until I started SS. The converted amounts each year were small but over the years I did manage to convert a nice size chunk to Roth. I still have taxable IRAs, and I still get to be concerned about RMD and IRMAA. But, all those small conversions do help to minimize today’s taxes. I can’t do much about IRMAA and even less about RMD, so I put my energy into other worthwhile financial efforts.

 

[FREE866]

Really appreciate all the thoughts and comments.

That said, one idea that’s been suggested I’d strongly never do is “ put more bonds in your IRA so it doesn’t grow so fast and you’ll have smaller RMDs”.

Lol

I’m 57. With an 18 year time frame ( at 75 is when I would be withdrawing) there’s no way in hell I would want that. . Not starting an argument, but I personally would never do that.

 

[Dtail]

Really appreciate all the thoughts and comments.

That said, one idea that’s been suggested I’d strongly never do is “ put more bonds in your IRA so it doesn’t grow so fast and you’ll have smaller RMDs”.

Lol

I’m 57. With an 18 year time frame ( at 75 is when I would be withdrawing) there’s no way in hell I would want that. . Not starting an argument, but I personally would never do that.

The general thought is to have equities in the Roth first to grow tax free for theoretically the fastest growing asset.
Then fill your taxable account with any remaining equities to potentially take advantage of qualified preferential dividends, LTCG, tax harvesting, etc.
The fixed income in general is subject to ordinary income tax.

 

[FREE866]

The general thought is to have equities in the Roth first to grow tax free for theoretically the fastest growing asset.
Then fill your taxable account with any remaining equities to potentially take advantage of qualified preferential dividends, LTCG, tax harvesting, etc.
The fixed income in general is subject to ordinary income tax.

No , I get it. I do. It’s just I’ve been basically all equities for decades so I just kind of giggled at the thought of doing that. Maybe some day.

 

[SevenUp]

If you pay now, you are presumably doing it on a smaller amount. All the growth in the Roth account will be untaxed.

Well depending on investment growth, You could be paying that 12% on a lot more money... And then what if tax rates get raised in the future.

The amount on which you pay tax doesn't matter - only the rate matters.

See the second of two Common misconceptions.

If the future tax rate will be higher, then converting now wins.

 

[Dtail]

No , I get it. I do. It’s just I’ve been basically all equities for decades so I just kind of giggled at the thought of doing that. Maybe some day.

I do understand your thoughts.

 

[thefist]

No , I get it. I do. It’s just I’ve been basically all equities for decades so I just kind of giggled at the thought of doing that. Maybe some day.

I was the one who suggested it, and just one year older than you.
So I guess your AA is 100/0?
I’m a high stock allocation type too, but not 100.
Just remember that you were employed during 2022, 2020 spring, 2008, 200-2002. I’ve got an iron stomach for the markets, but 2022 was concerning. The 2023 to present recovery can be classified as luck. They don’t always recover that quickly.

 

[thefist]

Really appreciate all the thoughts and comments.

That said, one idea that’s been suggested I’d strongly never do is “ put more bonds in your IRA so it doesn’t grow so fast and you’ll have smaller RMDs”.

Lol

I’m 57. With an 18 year time frame ( at 75 is when I would be withdrawing) there’s no way in hell I would want that. . Not starting an argument, but I personally would never do that.

I am late to the game of understanding bonds also. Do yourself a favor and watch a couple things over the next year or so. Follow VGIT and VGLT ETFs. These are the intermediate and long term treasury ETFs from vanguard. Or, buy $1000 of each in the IRA so you’ll follow them. If the Fed drops rates as expected, you’ll likely see these increase in price. They can then be sold to buy more equities. This is the rebalancing part of a bond’s purpose which is not obvious to a 100% equities person. It’s not all about the interest.
Faithfully yours,
Former 100%equites guy.

 

[pb4uski]

Pb4uski, I asked you this before, somewhere in a thread, but I can't find it. I want to Roth convert a CD today and can WH taxes from the settlement account. I can roll the CD as is, a 5-year 5.5% CD right into the Roth, right?

Never tried it with a CD but I would think one should be able to do an in-kind transfer of a CD from your tIRA account to your Roth account, especially at the same brokerage.

Can you clarify on withholding taxes from settlement? Do you mean make and estimated tax payment from your settlement account? Not sure how one does that.

 

[Al18]

You might want to talk to a Certified Financial Advisor. Being 100% stocks is very risky - are you prepared for a 50% drop in your account value, that may last for a decade (as the SP500 did between 2000 to 2009)?

 

[FREE866]

I was the one who suggested it, and just one year older than you.
So I guess your AA is 100/0?
I’m a high stock allocation type too, but not 100.
Just remember that you were employed during 2022, 2020 spring, 2008, 200-2002. I’ve got an iron stomach for the markets, but 2022 was concerning. The 2023 to present recovery can be classified as luck. They don’t always recover that quickly.

I retired January 2017.

 

[FREE866]

You might want to talk to a Certified Financial Advisor. Being 100% stocks is very risky - are you prepared for a 50% drop in your account value, that may last for a decade (as the SP500 did between 2000 to 2009)?

Stocks have never gone down 50% and stayed down for a decade.

Could that happen? Sure , but it never has.

I believe the future will mirror the past and even if stocks do half of their historical average going forward I’m fine. But I actually think we are in for a better future than we’ve had.

And I would never hire an advisor. Costly and my situation is very simple.

 

[mountainsoft]

If you're darn, tooting sure that you will be in the 12% tax bracket once SS and RMDs start then there is no real benefit to doing 12% Roth conversions... IOW, paying 12% now or 12% later doesn't matter.

I heard that often when I was debating whether to do Roth conversions. However, this advice always seemed to be looking at things in a bubble. While we are in the same 12% tax bracket we were in while we were working, there are a few reasons I converted my traditional to a Roth while we were still working.

1. No worries about RMD's, or being forced to withdraw money we don't need (and pay taxes on it).

2. Tax rates will most likely increase in the future. Better to pay them now at the lower rates.

3. Going all Roth lowered our taxable income. This allows us to qualify for other discounts such as Property Tax deductions (should save about 2K-3K per year there), and additional subsidies on our healthcare (currently paying $0 premiums for our Obamacare/ACA coverage).

It took us several years to do Roth conversions to the top of the 12% bracket, but we're 100% Roth now. No regrets.

 

[Eucerin]

+1

I just don't see the disadvantage of Roth conversions in the 12% bracket.

A nice ACA subsidy is the only reason we haven't done the conversion

 

[Al18]

Stocks have never gone down 50% and stayed down for a decade.

Could that happen? Sure , but it never has.

I believe the future will mirror the past and even if stocks do half of their historical average going forward I’m fine. But I actually think we are in for a better future than we’ve had.

And I would never hire an advisor. Costly and my situation is very simple.

SP500 on 1/1/2000 1518
SP500 on 12/1/2008 735
SP500 on 12/1/2012 1515


That's a pretty rough 13 year patch

 

[pb4uski]

Stocks have never gone down 50% and stayed down for a decade.

Could that happen? Sure , but it never has.

I believe the future will mirror the past and even if stocks do half of their historical average going forward I’m fine. But I actually think we are in for a better future than we’ve had.

And I would never hire an advisor. Costly and my situation is very simple.

Not true, it has happened and fairly recently. As Al18 posted, the SPY... with dividends reinvested had a small negative total return for the 10 years from Jan 2000 to Dec 2009. From Portfolio Visualizer. If mean reversion is really a thing then the future is not looking so good.

Portfolio	Initial Balance	Final Balance	CAGR	Stdev	Best Year	Worst Year	Max. Drawdown	Sharpe Ratio	Sortino Ratio	Market Correlation
SPDR S&P 500 ETF Trust	$10,000	$9,036	-1.01%	16.11%	28.18%	-36.81%	-50.80%	-0.15	-0.20	0.98

 

[Dtail]

A nice ACA subsidy is the only reason we haven't done the conversion

Same here for 23k, but fiance has done some conversions. So have converted 11% total so far combined.

 

[FREE866]

Not true, it has happened and fairly recently. As Al18 posted, the SPY... with dividends reinvested had a small negative total return for the 10 years from Jan 2000 to Dec 2009. From Portfolio Visualizer. If mean reversion is really a thing then the future is not looking so good.

Portfolio	Initial Balance	Final Balance	CAGR	Stdev	Best Year	Worst Year	Max. Drawdown	Sharpe Ratio	Sortino Ratio	Market Correlation
SPDR S&P 500 ETF Trust	$10,000	$9,036	-1.01%	16.11%	28.18%	-36.81%	-50.80%	-0.15	-0.20	0.98

https://www.officialdata.org/us/stocks/s-p-500/2000?amount=1000000&endYear=2010

 

[Al18]

Good luck with your investing strategy.

 

[38Chevy454]

I'm late to the discussion, but I think that assuming tax rates will stay at current levels is low probability. So converting now is going to be better. It won't be any worse, so there is no real risk to not doing it. The only thing that may limit the conversions is if you are trying to hold income below a certain threshold. I would absolutely Roth convert to the top of 12% bracket each year that you can; because I feel tax rates will go higher.