Not much point in Roth conversions?

[pb4uski]

The big opportunity for Roth converisions is betwen when you stop working and when pensions if any, SS and RMDs start. Typically, dutring those years you are in a lo tax bracket. The biggest bang for the buck is where you can arbitrage between 12% and 22%. If your situation is to pay 22% now to save 24% later then Roth conversions are much less compelling.

 

[pb4uski]

no, I mean that, when you're at the age of having to take money out of a retirement account, that amount is calculated based on age/other factors, and since you do not know what those amounts are in the future, you may be converting more money than you should, therefore paying taxes now on money you may never have to take. Does that help clarify my previous comment?

There are really only two factors... your age and your tax-deferred balance as of 12/31 of the previous year. Your tax-deferred balance will be a function of investment returns, any withdrawals and Roth conversions, all of which are reasonably estimabl e.

Unless you are planning on donating your leftover tax-deferred money to charity then someone will eventually have to pay taxes on that money. If it isn't you then it will be your heirs.

 

[stepford]

The big opportunity for Roth converisions is betwen when you stop working and when pensions if any, SS and RMDs start. Typically, dutring those years you are in a lo tax bracket. The biggest bang for the buck is where you can arbitrage between 12% and 22%. If your situation is to pay 22% now to save 24% later then Roth conversions are much less compelling.

And that is precisely my situation. Pension plus returns on my taxable accounts put me into the 22% range. I have $2M+ in my tIRA/401K. How much of that could I realistically convert before RMD time without going into the 24% bracket?

If I bit the bullet and converted to the top of the 24% bracket, however, I could knock down much of my tIRA by age 75. The resulting $50K+ annual tax bills would be a tough pill to swallow (though I recognize I'm just putting off a similar hit later in life). So I may just continue my nominal conversions to the top of 22%, but for me at least, I don't think that'll be a particularly big help.

 

[TheWizard]

There's nothing wrong with being a higher income retiree, paying higher taxes. I'm something like that.
Roth conversions aren't going to make you a low income retiree but they might help you avoid the next higher IRMAA tier...

 

[pb4uski]

And that is precisely my situation. Pension plus returns on my taxable accounts put me into the 22% range. I have $2M+ in my tIRA/401K. How much of that could I realistically convert before RMD time without going into the 24% bracket?

If I bit the bullet and converted to the top of the 24% bracket, however, I could knock down much of my tIRA by age 75. The resulting $50K+ annual tax bills would be a tough pill to swallow (though I recognize I'm just putting off a similar hit later in life). So I may just continue my nominal conversions to the top of 22%, but for me at least, I don't think that'll be a particularly big help.

The spread between the start and top of the 22% tax bracket for a married couple is $106,750 for 2024, so it depends on how deep into the 22% tax bracket you are with no Roth conversions.

What tax brackets are your heirs in? Do you plan on doing substantial charitable contributions? Both factors to consider before converting for a measly 2%.

 

[CardsFan]

And that is precisely my situation. Pension plus returns on my taxable accounts put me into the 22% range. I have $2M+ in my tIRA/401K. How much of that could I realistically convert before RMD time without going into the 24% bracket?

If I bit the bullet and converted to the top of the 24% bracket, however, I could knock down much of my tIRA by age 75. The resulting $50K+ annual tax bills would be a tough pill to swallow (though I recognize I'm just putting off a similar hit later in life). So I may just continue my nominal conversions to the top of 22%, but for me at least, I don't think that'll be a particularly big help.

We are pretty much in the same place. At 69, we will continue to convert just below the IRMAA level, which really puts us at about the same level as we will have when RMD's kick in.

JMHO, but I think we sometimes get too hung up on this. In MOST cases, 90%?, the ultimate impact of conversions (or not conversions) is not going to matter much in the grand scheme of things.

 

[TheWizard]

The spread between the start and top of the 22% tax bracket for a married couple is $106,750 for 2024, so it depends on how deep into the 22% tax bracket you are with no Roth conversions.

What tax brackets are your heirs in? Do you plan on doing substantial charitable contributions? Both factors to consider before converting for a measly 2%.

Umm, there's more to Roth conversions than simply tax arbitrage...

 

[RunningBum]

When you're in the 28% tax bracket and climbing up the IRMAA tiers once RMDs start, remember that you had a way to dampen your situation but chose not to do much about it.

People complain about having to pay taxes now, but look how much money you'll have freed up to use or let grow tax free by doing conversions. You don't actually have $2M in your tIRA/401K. You have $2M minus a large deferred tax liability.

My mental problem is the reverse. I see this deferred tax liability in my tIRA and I want to wipe it all out ASAP. I have to stay disciplined to not convert beyond where the math tells me to stop.

 

[RetireBy90]

My situation is similar in that I get anxious about the IRS money embedded in my TIRA. I plan 2 more conversions, this year and next and then plan to distribute most or all RMDs via QCDs. That should ice the tax man out but I still get anxious about the potential taxes. Crazy I know ?

 

[RetiredHappy]

My situation is similar in that I get anxious about the IRS money embedded in my TIRA. I plan 2 more conversions, this year and next and then plan to distribute most or all RMDs via QCDs. That should ice the tax man out but I still get anxious about the potential taxes. Crazy I know ?

Why do you get anxious? I look at IRA money as gravy and when we have to withdraw to meet RMD, we are still getting more money to spend than when it's sitting there!

 

[jollystomper]

We also have a large amount (about 59%) in 401K/IRAs, but I am doing Roth conversions. While I cannot predict future tax rates, I know for sure the future tax rate for the survivor of us will be higher than our current 22% rate. Plus why not move as much as I can into Roth IRAs for their future tax free growth, even beyond our lives for our kids (yes they must take the money out within 10 years of inheritance, but up to 10 years of continued tax free growth is nothing to sneeze at ).

There is no way to covert all of it before SS at 70 and them RMD at 73, but I will do what I can, and not really sweat things if it is not the optimal outcome.

 

[Chuckanut]

I did Roth conversions here and there as they made sense. None were big due to a small pension, and being able to tap my former wife’s SS account from 66 to 70. But over time they add up. I suspect I will be able to avoid spending much time with Aunt IRMAA thanks to the conversions. RMDs will be what they will be.

 

[Midpack]

Why do you get anxious? I look at IRA money as gravy and when we have to withdraw to meet RMD, we are still getting more money to spend than when it's sitting there!

You don’t need to be anxious as long as you’re comfortable paying (significantly) more in income taxes unnecessarily - but why waste “gravy?” With our assumptions, our Roth conversions project to reduce our lifetime Federal taxes by about $400K, leave us paying IRMAA for 7 years instead of 23, and reduce the surviving spouses tax liabilities. Willful ignorance is not a good plan.

 

[RetireBy90]

Why do you get anxious? I look at IRA money as gravy and when we have to withdraw to meet RMD, we are still getting more money to spend than when it's sitting there!

I meant to convey an unreasonable response. I don't like having a future obligation. I deal with it no problems, but I realize that I have this obligation and that adds to my reasons for doing conversions, if I can remove the obligation and pay the tax today while smoothing out the remaining taxes.

 

[marko]

Ambivalent? It's too late to consider Roth conversions once all your (passive) income sources have kicked in, you don't need any calculations or accountants to advise (meant for other posters in this thread). If you have a significant TIRA, for many the ideal time to convert is between the year you retire (marginal tax bracket drops) and the year ....

I used my accountant's advice because at the time of my RE, I didn't even know what a Roth was. Until RE I never paid much attention to financials. I've come a long way since then, much of it thanks to this forum. Regardless, it doesn't matter at this point.

 

[RetiredHappy]

You don’t need to be anxious as long as you’re comfortable paying (significantly) more in income taxes unnecessarily - but why waste “gravy?” With our assumptions, our Roth conversions project to reduce our lifetime Federal taxes by about $400K, leave us paying IRMAA for 7 years instead of 23, and reduce the surviving spouses tax liabilities. Willful ignorance is not a good plan.

It is not ignorance but since we can't do anything about it because we got caught with being in the 24% tax bracket almost immediately after retirement, we just not worry about it.

 

[MarieIG]

We also have a large amount (about 59%) in 401K/IRAs, but I am doing Roth conversions. While I cannot predict future tax rates, I know for sure the future tax rate for the survivor of us will be higher than our current 22% rate. Plus why not move as much as I can into Roth IRAs for their future tax free growth, even beyond our lives for our kids (yes they must take the money out within 10 years of inheritance, but up to 10 years of continued tax free growth is nothing to sneeze at ).

There is no way to covert all of it before SS at 70 and them RMD at 73, but I will do what I can, and not really sweat things if it is not the optimal outcome.

Precisely. Don't let perfect be the enemy of good.

 

[RunningBum]

Why do you get anxious? I look at IRA money as gravy and when we have to withdraw to meet RMD, we are still getting more money to spend than when it's sitting there!

I think it's kind of like having a mortgage. Holding a low-interest mortgage can be a smart money strategy, but a lot of people don't like having that debt hanging over their heads. Somewhat similarly, I don't like having a debt to the IRS on a major financial account. But like I said in my post, I have the patience and discipline to whittle it down rather than knock it out with larger tax payments than I should make.

 

[Midpack]

It is not ignorance but since we can't do anything about it because we got caught with being in the 24% tax bracket almost immediately after retirement, we just not worry about it.

Right or wrong a post sharing another view may be for the benefit of other readers, more than the original source of the quote. However, not worrying about Roth conversions once the opportunity has passed is not at all the same as considering it when the window is open. Many here including this thread still have the opportunity, evidently you don't, which is an entirely different situation. Roth conversions are a great tool for some, a wash for some, and not advantageous for others - it takes a little work to figure out where you belong, more than some quick and dirty online Roth calculators provide.

 

[Route246]

I've mentioned before that converting and paying the taxes from already-taxed funds increases the "value" of the Roth over the tIRA by the amount of the taxes paid. That extra value goes on growing and is never taxed (under current law.)

There are also some inheritance advantages (to your heirs.) YMMV as always.

I have never done any conversions, perhaps out of disinterest and laziness. That said, what if OP has many times FI (he didn't say how much his total assets are, just 60%, I believe) and he is in a high bracket. Would it be worth it? I have a wealthy friend who has a large cash position (10M) that throws off 500K AGI so he is comfortable but does Roth make sense to someone like him who is always going to be in a high bracket?

 

[Exchme]

OP seems to be 65ish now and has not said anything about a spouse, so assuming OP is single. If the IRA has a lot of stocks in it, it could nearly double by RMD time. That's about $160K RMDs in the first year, on top of future SS and at least $62K dividends + pension today. So OP could easily be in the 32% bracket at the start of RMDs and go up from there.

Plus, the current tax system expires after 2025, sending the marginal tax rates up 3-4 percentage points. OP will also be paying IRMAA fees, so that is another 4-5% marginal cost for future RMDs. OP could also have NIIT and possibly AMT taxes (the old AMT system caught a lot of folks). I think OP is leaving money on the table by not converting to at least the top of the base IRMAA tier, it would require a thorough review of assumptions and a good model to really look under the hood.

 

[RunningBum]

I have never done any conversions, perhaps out of disinterest and laziness. That said, what if OP has many times FI (he didn't say how much his total assets are, just 60%, I believe) and he is in a high bracket. Would it be worth it? I have a wealthy friend who has a large cash position (10M) that throws off 500K AGI so he is comfortable but does Roth make sense to someone like him who is always going to be in a high bracket?

OP says what their tax bracket is so they don't have many times FI.

If that's all of your wealthy friend's income then there is a little room before the top tax bracket and the last IRMAA tier, but I suspect there's more income. They may also want to convert at current rates before they go back up, unless Congress takes action. And then there's the slight benefit of converting at the same tax brackets if you pay the conversion taxable, which they clearly can do.

Also look at their estate when they pass. Depending on how many other assets they have, and whether the estate tax exemption returns to lower values, they could be paying 40% on the excess. Converting to Roth gives them the same spending power, but with the tax paid the estate value is reduced with respect to estate tax. But maybe they have a trust set up to handle this issue.

If their heirs will be in lower brackets, maybe they don't do any conversions and let the heirs receive a larger value after they pay the taxes.

So I don't have an answer about your wealthy friend given only partial information.

 

[NgineER]

I have never done any conversions, perhaps out of disinterest and laziness. That said, what if OP has many times FI (he didn't say how much his total assets are, just 60%, I believe) and he is in a high bracket. Would it be worth it? I have a wealthy friend who has a large cash position (10M) that throws off 500K AGI so he is comfortable but does Roth make sense to someone like him who is always going to be in a high bracket?

You are still working right and enjoying high pay I believe. In your situation it doesn't make sense to do the conversion unless you'd be in a higher bracket later. What happens when you go from MFJ to filing as single, will there be a benefit there to doing conversions once you retire? The window will be pretty narrow for you since I recall that you won't be an early retiree.
Your wealthy friend is likely always going to be in the highest bracket if his cash position of $10M likely is a much bigger source of income than his tax deferred.

 

[ERhoosier]

The core benefit to a Roth conversion depends upon paying tax now at a lower rate on funds vs a higher predicted effective tax rate in the future. The latter cannot be predicted with certainty as tax laws change, sometimes in dramatic and unpredictable ways. Might Roth funds (especially large balances) be subject to some future wealth tax? Might one's State eliminate or significantly decrease their current income tax (by raising other taxes)? Might one die pre-RMD and pass those potential Roth funds to a number of heirs who are all in low tax brackets? Liquidating equities in an IRA to fund a backdoor conversion just before a prolonged severe bear market could lead to paying income tax on evaporated capial gains (reverse of the backdoor DURING a bear market strategy to minimize future CG taxes). As my tax pro reminds at times- there are plausible scenarios, although less likely, in which backdoor Roth conversions result in MORE tax being paid. That said, properly planned backdoor Roth conversions do make sense for many so long as tax laws (and rates) don't change too dramatically.

 

[SevenUp]

The core benefit to a Roth conversion depends upon paying tax now at a lower rate on funds vs a higher predicted effective tax rate in the future. The latter cannot be predicted with certainty as tax laws change, sometimes in dramatic and unpredictable ways. Might Roth funds (especially large balances) be subject to some future wealth tax? Might one's State eliminate or significantly decrease their current income tax (by raising other taxes)? Might one die pre-RMD and pass those potential Roth funds to a number of heirs who are all in low tax brackets? Liquidating equities in an IRA to fund a backdoor conversion just before a prolonged severe bear market could lead to paying income tax on evaporated capial gains (reverse of the backdoor DURING a bear market strategy to minimize future CG taxes). As my tax pro reminds at times- there are plausible scenarios, although less likely, in which backdoor Roth conversions result in MORE tax being paid. That said, properly planned backdoor Roth conversions do make sense for many so long as tax laws (and rates) don't change too dramatically.

The backdoor Roth process is a little different from a Roth conversion.