Anyone Regret doing a Roth Rollover ?

[RetiredHappy]

RMDs and Soc Sec are what pushed me to start Roth conversions, we won't start either for 3-5 years (was 6-8 years when I started conversions). If you've already started RMDs and Soc Sec, Roth conversions probably won't matter anymore...

In my total panic with the decision to sell our business and retire 5 years ago at the age of 53, I turned my entire IRA into deferred income annuities which will start at age 60 and 70, running for 25 years. It is about 15% of our total portfolio but it calmed my panic of not making another dime from working. I turn 60 towards the end of next year, so my "RMD" is now my annuity payout. I will also start SS at 62 because my older husband took his starting at 70 a couple of years ago. The only reason why ROTH may make sense is to stuff it away and grow tax-free and at withdrawal for my son. Either way, he should have enough to live on. In case anyone wonders, he has a disability which makes it very difficult for him to find employment even though he has 2 Bachelor degrees. I support him financially.

 

[RetiredHappy]

The difference between 22% and 24% is pretty small. If that were the only issue, I'd convert to avoid the 32% rate as that is 10% more than 22%.

However, you may need to look at the effect on IRMA , are you close enough in age that it would push you up to a higher rate for medicare.
Also the NIT tax of 3.8% begins at $250K (married).

My husband is already hit with IRMAA as it stands. It is certainly a tough one whether to do conversion or not.

 

[Dtail]

Only converting through the 12% bracket for my DGF, as I get more bang for the buck in keeping MAGI very low for large tax subsidies until 65. Then I expect to do some converting on my side.

 

[TheWizard]

The only reason to I can think of to regret doing a Roth conversion is if your income ends up being too high and you get kicked into a higher tax bracket. I had that happen last year, due to a massively successful year with my side gig as well as an unexpected house sale. I had done a Roth early in 2019, based in my normal-ish income level. Since they had changed the law a couple of years earlier and got rid of the ability to recharacterize I was stuck.

Tax brackets apply to income incrementally, so if you were a few thousand into the next bracket, then it's just that few thousand that gets taxed at the higher rate.
But I agree on waiting until December to finalize your conversion amount for the year.

The IRMAA tier thresholds are much nastier than tax brackets for being a little over...

 

[captain3d]

If you have low enough income for max ACA health refund then it can be another regret

 

[BoredAtWork]

I did a small Roth conversion in 2020. Now I’m rethinking this of not doing any more. I’m in one of the highest income tax brackets and expect to be in a high tax bracket until retirement when I’ll drop down considerably. About 90% of wealth is in taxable accounts and only 10% in tax deferred. I was originally thinking I need to find ways to get more into tax deferred but I’m capped on contributions to IRA or Roth based on income level. Doing Roth conversions right now with income bracket so high doesn’t seem to make sense. Perhaps worth revisiting when retired but not until then.

 

[target2019]

Regretting the Roth Rollover?

Could be a dance craze in this decade.

 

[RunningBum]

I did a small Roth conversion in 2020. Now I’m rethinking this of not doing any more. I’m in one of the highest income tax brackets and expect to be in a high tax bracket until retirement when I’ll drop down considerably. About 90% of wealth is in taxable accounts and only 10% in tax deferred. I was originally thinking I need to find ways to get more into tax deferred but I’m capped on contributions to IRA or Roth based on income level. Doing Roth conversions right now with income bracket so high doesn’t seem to make sense. Perhaps worth revisiting when retired but not until then.

Correct, it makes no sense to convert or contribute to a Roth with your income so high. The message you should be getting here is that Roth conversions are mainly a tax arbitrage play. The sweet spot is usually between early retirement and taking SS/RMDs/pension.

 

[chassis]

Regretting a Roth conversion seems likely to me, for a person who calculates the lifetime wealth impact of the conversions.

I don’t see actual calculations along those lines on this or many of the Roth threads. Just a lot of patting each other on the back for “tax arbitraging” and avoiding the much-feared “tax missile” or “torpedo”. Roth conversions provide a minuscule benefit to a small number of investors and only then under ideal conditions. Calculate the lifetime wealth benefit and convince yourself.

 

[finnski1]

The one thing I wish I had done was take more advantage of the special rule, I think it was in 2010, where you could convert and split the taxes over 2011 and 2012. It seems like the "convert now, pay the taxes a little later" strategy was worth a better look at the time than I gave it. Too late now, so I never figured out how big that mistake was after the fact.

By sheer coincidence and not some brilliance on my part I did take advantage of that. Though at the time it wasn't a huge ($40K) sum, I did get to spread it out over 2 years.

 

[SecondCor521]

Lots of data on why or why not to do Roth Rollovers but what I would really love to hear, anyone regret doing an IRA to Roth rollover. And if you did why?

Not yet, but I almost did.

I typically do my Roth conversions in December when I know my tax situation. Last year I did about half of my 2020 Roth conversion in March when the market was down. Since conversions can no longer be undone, that conversion income was locked in.

At the end of last year, there was briefly an opportunity tax-wise that occurred to me, but it required ultra-low income. My Roth conversion from March prevented me from exercising that opportunity.

I subsequently decided that it wasn't the best choice tax-wise, but I briefly was in a situation where I could have regretted it.

...

There are other scenarios where I would regret Roth conversions, but I think they are unlikely (which is why I do conversions):

1. If the value of my traditional IRA drops greatly and I end up not facing the higher tax brackets that I currently predict.

2. If the tax treatment of Roth IRAs becomes more adverse.

3. If my children end up inheriting my traditional IRA and they are in low tax brackets during their 10ish year SECURE withdrawal window. Although in this scenario I'll be dead, so it's questionable how much regret I would experience.

4. If the taxability of my SS is lower than I expect, or if the amount of my SS is drastically lower than I predict.

 

[TheWizard]

I've been asking the same question myself. After doing some calculations on future RMD's I was astonished at those amounts especially when you reach 90yo. A recent (SS?) table showed that there was a 50% chance that one of us would live to that age. The amount for 90 was about half our current home price! I know it's inflated dollars but still...

But the problem I'm wrestling with is my WR is somewhat high from now (age 59) until we start social security (planning 2029ish) and our mortgage is paid off in 2028 then drops drastically. So do we take $15k a year to pay the taxes for conversion on top of the WR or spend that money now and enjoy it?

Well, the RMD percentage at age 90 will generally apply to a lower balance in your tax-deferred account compared to your early 70s.
You can model this in a spreadsheet rather easily using a growth rate for your remaining portfolio of 6%, 8%, or whatever.
Reality, of course, is that mostly stock portfolios grow (or shrink!) at widely varying rates from one 12/31 to the next, but the spreadsheet gives you some idea of what might happen...

 

[ncbill]

I thought that extra ACA subsidies did not have to be paid back for 2020, that year only? That's what it says in https://www.healthinsurance.org/faq...m-subsidy-is-too-big-will-i-have-to-repay-it/ and I've seen a lot of discussion here.

I converted to the top of the 25% bracket a few times in retirement, not predicting that tax brackets would drop, but I used the best info I had at the time, so I don't regret that.

The one thing I wish I had done was take more advantage of the special rule, I think it was in 2010, where you could convert and split the taxes over 2011 and 2012. It seems like the "convert now, pay the taxes a little later" strategy was worth a better look at the time than I gave it. Too late now, so I never figured out how big that mistake was after the fact.

Wasn't there an offer years earlier to split the taxes over 4 years?

I want to stay in the 12% federal bracket (MFJ) so it will take me several years to convert my small rollover IRA.

 

[braumeister]

The one thing I wish I had done was take more advantage of the special rule, I think it was in 2010, where you could convert and split the taxes over 2011 and 2012.

Yes, that's exactly how it worked. A one-time good deal, unfortunately. I took advantage of it and converted my entire TIRA using that. Should have done at least some of DW's larger TIRA as well, but at least I got the break.

 

[BubbaChris]

If you have low enough income for max ACA health refund then it can be another regret

Right now I'm trying to figure out the ARP rule that limits ACA premium payments to 8.5% of income for this year and 2022. If it's really that straight forward, I'll be evaluating the value of a ROTH conversion versus taking LTCGs in my after-tax account.

Best regards,
Chris

 

[captain3d]

Me Also. This thread is helpful...
https://www.early-retirement.org/forums/f28/learning-to-live-with-maggie-magi-110112.html

https://www.kff.org/health-reform/i...ove-affordability-of-private-health-coverage/

People with income above 400% FPL will be newly eligible for marketplace premium subsidies. Under the ACA, people with income above 400% FPL were not eligible for marketplace premium subsidies. Now, they will be required to contribute no more than 8.5% of household income toward the benchmark plan.

phil

 

[SecondCor521]

Right now I'm trying to figure out the ARP rule that limits ACA premium payments to 8.5% of income for this year and 2022. If it's really that straight forward, I'll be evaluating the value of a ROTH conversion versus taking LTCGs in my after-tax account.

Best regards,
Chris

It is as long as (a) your income is over 400% FPL and (b) you pick a plan that is at least 8.5% of income. If your income is under 400% FPL then the marginal percentage effective tax rate will be different (sometimes higher, sometimes lower)(*). If you pick a plan that is less than 8.5% of your income, then you'll lose any subsidy but will also pay less than 8.5% of your income in premiums (e.g. a Bronze plan).

(*) Before people get on me that the applicable figure is under 8.5% below 400% FPL: Yes, I know that. Read this though, where it explains how the actual equivalent marginal tax rate is higher than the applicable figure: https://seattlecyclone.com/aca-premium-tax-credits-2021-edition.

 

[SevenUp]

Right now I'm trying to figure out the ARP rule that limits ACA premium payments to 8.5% of income for this year and 2022. If it's really that straight forward, I'll be evaluating the value of a ROTH conversion versus taking LTCGs in my after-tax account.

Roth Conversion and Capital Gains On ACA Health Insurance seems applicable to that situation.

 

[RunningBum]

Right now I'm trying to figure out the ARP rule that limits ACA premium payments to 8.5% of income for this year and 2022. If it's really that straight forward, I'll be evaluating the value of a ROTH conversion versus taking LTCGs in my after-tax account.

Check out healthsherpa.com or healthcare.gov to run some scenarios on how this would work for you. Of course it works on this year's plans but at least you get an idea. Just realize that next year could be a lot different. The key to the subsidy is that 2nd lowest cost silver plan, even if you go for a gold or bronze plan.

Roth conversion for LTCGs. I assume you're talking about being able to take LTCGs at 0%? If not, I would probably favor conversions, but it's not a slam dunk.

First factor is, do you need more money for living expenses? That clearly favors taking LTCGs. You sell the stocks/funds, and put the proceeds in your checking account, and you only pay tax on the gains. Roth conversions are for future use. Otherwise you might as well just do tIRA withdrawals.

Second factor, what are your future tax rates? If you're going to pay 15% LTCGs whether you take them now or later, and you can convert at a lower rate now than you expect later, the advantage goes to doing Roth conversions. But if you can take LTCGs at 0% now and they would be 15% later, it might be hard to see a similar % rate difference in Roth conversions now vs RMDs later.

Third factor, what about heirs? Under current law, they would get stepped up basis on taxable holding, and would have to fully withdraw from an inherited IRA in 10 years. If your LTCGs are taxed, this clearly favors Roth conversion. If you can get 0% tax on LTCGs, it depends on your current tax rate vs theirs over the next 10 years. Look at what happens if you do one or the other now, and die next year. If you do a conversion, your heir pays no taxes on that converted money, and they can even keep it in a Roth for 10 years. But if you pay more taxes on the conversion than they would on a withdrawal, you shouldn't have converted. If you take LTCGs and paid taxes on them, it doesn't work out because your heir would've got stepped up basis and could sell on inheritance with 0 taxes.

So, not a simple answer, and probably other factors I didn't cover. Plus, those tax laws could very easily change. If stepped up basis goes away, that's a big game-changer.

 

[thatguy]

I regret not doing Roth conversions sooner. There were several years where I might have done the conversions at a 15% or 12% tax rate. I don't know if I could have paid the tax from outside money at the time but I didn't even think about converting till my first RMD year.

 

[pb4uski]

Regretting a Roth conversion seems likely to me, for a person who calculates the lifetime wealth impact of the conversions.

I don’t see actual calculations along those lines on this or many of the Roth threads. Just a lot of patting each other on the back for “tax arbitraging” and avoiding the much-feared “tax missile” or “torpedo”. Roth conversions provide a minuscule benefit to a small number of investors and only then under ideal conditions. Calculate the lifetime wealth benefit and convince yourself.

Been there, done that... I guess that you missed my post in another thread:

Here’s another take from an early retiree who decided that Roth Conversions don’t result in enough benefit for his circumstance to be worth the effort.

https://www.caniretireyet.com/roth-iras-roth-conversions-needs/

WADR to the author who I have read before and like, he is a bit all over the place on this article. First, early in the article he correctly observes that Roth conversions are principally a tax rate arbitrage play.

So, there is no difference in the ending values of the two accounts, assuming your tax rate is unchanged between the initial contribution, and your withdrawal. (Thanks to Mike Piper at Oblivious Investor for making this commutative property of multiplication crystal clear.)

If your tax rate changes, though, the story is different: If your tax rate goes down, a Traditional IRA does better. And if your tax rate goes up, then the Roth does better.
Then he goes on to say that his tax rate is dramatically lower in retirement so Roth conversions are not particularly beneficial.

A tax rate lower in retirement than when we were working is true for us too, even once RMDs begin.

But what we are talking about when we talk Roth conversions is a "sweet spot" between early retirement and RMDs. During first 12 years of this 14 year period for us, before I start my SS, our marginal tax rate with no Roth conversons is 0% as our income is less than the standard deduction. For the last 2 years, after I am collecting SS but before RMDs begin (I'm 70-72), we are just a little into the 12% tax bracket. After that, once RMDs begin, we are in the 22% tax bracket for life.

He goes on to say that his modeling with the Prelana calculator showed a 5-10% increase in net worth for doing Roth conversions... that is very consistent with my Excel model for Roth conversions... my model suggests that Roth conversions increase our net worth by 7% measured without any deferred income tax liability and 9% if I include a deferred income tax liability. ... and these calculations are using conservative investment return assumptions. He then goes on to say:

Given the variation in results from the commercial calculators, I created my own spreadsheets to further analyze and understand the factors related to RMDs and the Roth conversion decision. My spreadsheets show us maintaining our current 15% tax bracket, with headroom to spare, and project only a 2-3% benefit to net worth from doing Roth conversions.

It seems to me that even a 2-3% improvement in net worth makes it worth the risk of being wrong and the negligible effort of doing Roth conversions.... so it is definitely worthwhile for us but I can see that for others... especially those at the bottom of the 22% tax bracket without Roth conversions... that it might not be worth the effort.

 

[SecondCor521]

Regretting a Roth conversion seems likely to me, for a person who calculates the lifetime wealth impact of the conversions.

I don’t see actual calculations along those lines on this or many of the Roth threads. Just a lot of patting each other on the back for “tax arbitraging” and avoiding the much-feared “tax missile” or “torpedo”. Roth conversions provide a minuscule benefit to a small number of investors and only then under ideal conditions. Calculate the lifetime wealth benefit and convince yourself.

I know the amount of my 2020 Roth conversions: $XXXXX.

I know the tax rate I paid on those Roth conversion: 0%.

I know the tax rate I would have paid on that amount if I had left it in my traditional IRA until I had to take it out later: 41.32%

I know my average monthly spending over the past six months, excluding any college-related expenses for my two college sophomores: $YYYY

I calculate that $XXXXX * (41.32% - 0%) / $YYYY = 4.11.

In other words, the tax savings on my arbitrage play *for a single year* of Roth conversions paid for a bit over 4 months of my living expenses.

I figure that's a good trade for a few hours of (mostly enjoyable) analysis, a few minutes on Vanguard's website, and an extra 30 minutes at tax time. I don't think that's miniscule.

But I do agree that people should do the math for themselves, with their own numbers and their own goals and situation in mind (as with any financial strategy really). My numbers are probably close to best-case for Roth conversions. Other people with other numbers could easily come to the conclusion that Roth conversions are a wash or even counterproductive.

 

[chassis]

Been there, done that... I guess that you missed my post in another thread:

Hi @pb4uski it's been a while. The comment was directed toward the original post. Thanks!

 

[RunningBum]

In other words, the tax savings on my arbitrage play *for a single year* of Roth conversions paid for a bit over 4 months of my living expenses.

I figure that's a good trade for a few hours of (mostly enjoyable) analysis, a few minutes on Vanguard's website, and an extra 30 minutes at tax time. I don't think that's miniscule.

But I do agree that people should do the math for themselves, with their own numbers and their own goals and situation in mind (as with any financial strategy really). My numbers are probably close to best-case for Roth conversions. Other people with other numbers could easily come to the conclusion that Roth conversions are a wash or even counterproductive.

That's impressive!

I started to take a look at estimating my Roth conversions savings. It would be a lot of work to do that. I'd have to:
- Figure out how much each dollar of my conversions over the last 11 years were taxed.
- How much more ACA subsidy I'd have received without doing conversions
- Effect in my taxable account due to taking money out of there to pay the conversion taxes. Loss of those funds, loss of the growth on those funds, and any tax paid to convert those funds to cash to pay the tax
- How much my Roth grew tax free
- How much my tIRA would've grown tax-deferred
- How much tax I'd pay to drain my tIRA via RMDs and perhaps withdrawals. This would include any IRMAA charges and any additional SS benefits being added to taxable income, along with QDivs and LTCGs going from untaxed to 15% tax. If I don't drain the tIRA in my lifetime, how much tax my heirs would pay. Unless you give your tIRA money away, someone will be paying the tax.

Phew! Lots of work, not worth my time at all. Much, much more work that doing a Roth conversion to the top of some tax bracket. A simple spreadsheet shows an advantage of converting at a lower rate now vs. a higher rate later, especially since I paid taxes out of my taxable account. The only doubt is whether my assumptions are correct, mostly about future tax rates. I'd rather not speculate on those, so a bird in the hand converting at reasonable rates now looks good to me. So I know I'm coming out ahead, but it's hard to know by how much. And I won't know for certain for quite a few years.

A nice plus is that converted money is available to me from the Roth right now with $0 in taxes on Roth withdrawals. If I needed to make a big withdrawal from a tIRA that could really spike the taxes paid over what I converted at.

 

[FlaGator]

I know the amount of my 2020 Roth conversions: $XXXXX.

I know the tax rate I paid on those Roth conversion: 0%.

I know the tax rate I would have paid on that amount if I had left it in my traditional IRA until I had to take it out later: 41.32%

I know my average monthly spending over the past six months, excluding any college-related expenses for my two college sophomores: $YYYY

I calculate that $XXXXX * (41.32% - 0%) / $YYYY = 4.11.

In other words, the tax savings on my arbitrage play *for a single year* of Roth conversions paid for a bit over 4 months of my living expenses.

I figure that's a good trade for a few hours of (mostly enjoyable) analysis, a few minutes on Vanguard's website, and an extra 30 minutes at tax time. I don't think that's miniscule.

But I do agree that people should do the math for themselves, with their own numbers and their own goals and situation in mind (as with any financial strategy really). My numbers are probably close to best-case for Roth conversions. Other people with other numbers could easily come to the conclusion that Roth conversions are a wash or even counterproductive.

Yeah, doing them at -0- tax kinda blows up the idea they are not worth doing, much less considering. That some think it's universally unfavorable to convert to a Roth shows how uninformed they are about the range of resources and situations for an early retiree.

I've been able to move low->mid $xxx,xxx over the last 4 years at -0- tax, and expect to add to that at minimal tax for the next few years. Happy with the flexibility a larger Roth balance gives me in terms of tax-free cash for me and heirs.