Another beginners questions. Converting to Roth IRA

[hnzw_rui]

I always mention one more advantage of Roth conversion - assuming you can pay the taxes from already taxed savings: If you have a TIRA of $1000, what is it actually worth? It's worth $1000 MINUS whatever taxes you will eventually pay. If you have a Roth of $1000 it's worth $1000 since you don't have to pay taxes on it. What if you could "magically" change your TIRA to a Roth? You would now have a MORE VALUABLE asset. The "magic" is to pay the taxes with already taxed savings. (So the magic is not free.) But once you have done so, your Roth has been upgraded in value by the amount you paid in taxes. That EXTRA value gets to grow in the Roth TAX FREE until you eventually cash it in. SO... By paying some taxes, you get a "larger" Roth than you used to have as a TIRA. If you don't follow this, read the book. I'm sure they explain it MUCH better than I have. YMMV

True but one thing to keep in mind is there is such a thing as standard deductions and exemptions. In 2015, for married filing jointly under 65, you're allowed $20,000 in income at 0% tax. LTCG and qualified dividends are also taxed at 0% if you're in the 0-15% marginal tax bracket. It'll be a waste to convert everything to Roth and not take advantage of that 0% with no tax prepayment or anything as is the case with Roth.

 

[Turn_the_Page]

I just went through the same mental hurdle with the Roths, ie - why convert?

After doing some reading, my plan after I retire is to convert maybe 50,000 each year and pay the taxes on it then.

There is some advantage tax-wise to having your already-taxed and not-yet-taxed assets a bit more balanced. Like you, I have ~$1MM in 401ks and IRAs. If someone changes the tax laws and I don't do anything, then I don't have much wiggle room when I hit RMD. Pay some tax each year.

I set up a spreadsheet and ROUGHLY calculated the impact. I am not a financial planner and there are likely errors in my calcs, this is "back-of-the-envelope" stuff.

- $1mm in IRA
- Start at age 57
- tax rates same as today
- Assume 5% investment return
- Assume no withdrawals


-No conversions - total tax on IRAs lifetime = $374k
-$30k conversion each year, total tax = $356k
-$60k conversion each year, total tax = $230k

 

[pb4uski]

...-No conversions - total tax on IRAs lifetime = $374k
-$30k conversion each year, total tax = $356k
-$60k conversion each year, total tax = $230k

My savings are order of magnitude similar if I don't inflate tax brackets, but with tax brackets that increase due to inflation my savings are half of what they are if I don't inflate tax brackets.

 

[Turn_the_Page]

- $1mm in IRA
- Start at age 57
- tax rates same as today
- Assume 5% investment return
- Assume no withdrawals


-No conversions - total tax on IRAs lifetime = $374k
-$30k conversion each year, total tax = $356k
-$60k conversion each year, total tax = $230k

Here are the numbers if I assume a 2% annual increase in the tax levels

- No conversions - $371k
- 30K conversion annually - $315k
- 60k conversion annually - 231k