Rethinking my yearly Roth conversions

[almost there]

I'm also 57 with an 18 year time frame and do Roth conversions in the 12% bracket. I am definitely trying to put more bonds/t-bills/cds into my IRA so it doesn't grow as fast as my Roth. My view is that with a larger Roth base to work from by the time I'm using SS at 70, I can use my Roth to essentially stay in 10/12/15% bracket.

Our current allocation is around 70/30, and used to be 85/15 before I retired. So my 30% bond/T-bills is being allocated more in my tIRA.

Other advantages of a larger Roth are:
* having to make unexpected expenses (like buying a new car, or medical emergencies) and not paying any taxes on it
* keeping ACA premiums minimized by withdrawing from Roth instead of tIRA or taxable accounts
* the ability to control your tax bracket from 59.5 to 75 when SS kicks in

Exactly. the key is controlling your tax bracket. Some just cant seem to see it. Boasting about a high tax bracket they cant get out of... Like it has anything at all to do with net worth. But to me its key. One of the advantages of putting off 401k taxes when working. Other wise, just do a Roth IRA and not worry about it.

 

[Koolau]

Here's my situation:


I'm 57 years old, retired and my plan (for now) is to take SS at 67.
I've been doing partial Roth conversions for the last four years to the top of the 12% bracket. I pay the taxes on the conversions out of my regular personal taxable brokerage account.



When I run my numbers I realize that RMDs won't be required until 75 and that and SS will have me still in the same tax bracket I am now. I liked the idea of having a large Roth in the future, but now I'm thinking why use my taxable brokerage account money to pay taxes when I can keep it invested by not doing Roth conversions?
I initially thought that years out my tax bracket would definitely be higher than it is now, but that might very well not be the case.


Thoughts or any insight would be welcome.


Thank you.

Sorry, I haven't read every post. This may have been covered.

IF everything else is equal (tax rate now and in the future) it is still potentially advantageous to convert to Roth IF you pay the taxes with taxable money. In effect, you increase the amount of your tax advantage by the amount you pay in taxes upon conversion. If you convert and pay taxes from the tIRA, your Roth is 12% lower in value than if you pay the taxes from some other source. From then on, that extra 12% can grow "tax free." YMMV

 

[sengsational]

About conversions and future tax rates...


If you simply look at demographics, it's very likely the rates we have now can't keep up. Solutions in the past haven't solved the problem by cutting spending too much, so I'm not assuming taxes will stay at today's rates. I was up against ACA for years and now I'm up against IRMAA.

 

[Koolau]

About conversions and future tax rates...


If you simply look at demographics, it's very likely the rates we have now can't keep up. Solutions in the past haven't solved the problem by cutting spending too much, so I'm not assuming taxes will stay at today's rates. I was up against ACA for years and now I'm up against IRMAA.

Yes and lots of talk of taxing the rich again. Guess who's rich? I know I am, though it certainly doesn't feel like it. Now might be a good time to Roth convert if anyone is seriously thinking about it. Having said that, who knows what will come? YMMV

 

[almost there]

Never a bad time to do conversions if your tax rate is below your working time tax rate. And I think most everyone knows what's coming. Seems pretty obvious. Higher tax rates and changes to SS. As the math no longer works out.
So yes, now is the time. If for some reason you have been waiting..

 

[Koolau]

Never a bad time to do conversions if your tax rate is below your working time tax rate. And I think most everyone knows what's coming. Seems pretty obvious. Higher tax rates and changes to SS. As the math no longer works out.
So yes, now is the time. If for some reason you have been waiting..

Yeah, what is it they say? "No present like the time."

 

[RetireBy90]

I agree that tax rates will be higher in the future without a doubt. I’ve converted so Roth has about 2/3 of IRA funds. I figure the money due in taxes for conversions is just an insurance against higher tax rates later. Only downside I see is if there is a change to apply a tax to Roth withdraws, perhaps for those over some income or if there is some sales or consumption tax. Either would tax funds I have already paid for. As long as it hasn’t been spent there will be some that want to get a piece of your $$.

 

[Koolau]

I agree that tax rates will be higher in the future without a doubt. I’ve converted so Roth has about 2/3 of IRA funds. I figure the money due in taxes for conversions is just an insurance against higher tax rates later. Only downside I see is if there is a change to apply a tax to Roth withdraws, perhaps for those over some income or if there is some sales or consumption tax. Either would tax funds I have already paid for. As long as it hasn’t been spent there will be some that want to get a piece of your $$.

Yeah, I also look for some sort of national sales or consumption tax with the "promise" that they will be w*rking toward replacing the income tax with it eventually. Of course, we can guess how that would go. No tax ever really goes away so...

 

[RetireBy90]

Yeah, I also look for some sort of national sales or consumption tax with the "promise" that they will be w*rking toward replacing the income tax with it eventually. Of course, we can guess how that would go. No tax ever really goes away so...

I’ve thought about that also, and I list it on the side of reasons not to convert. We would have to pay the tax two times. However I think it would take years for that to happen so I’m thinking it wouldn’t have a big impact. I guess we could just take IRA distribution and move to after tax assets but then there is the talk of wealth tax. Ya know, those seeking to tax are as sneaky and crafty as the tax lawyers trying to avoid them. Wow, perhaps a new sport league between them with playoffs on TV around tax season

 

[almost there]

Double taxation

I have my doubts they would / could tax existing Roth accounts. That would fall under double taxation. But going forward changing the rules on new Roth accounts or positions? I could see that. Or doing away with the program all together. Have contributed in the program since 1991, then conversions. No Regerts...

 

[JOBO]

Future tax rates wont necessarily be higher. For ~60% of this century rates have been lower than anyone would have predicted during the 1990's due to the Bush/Trump tax cuts.

 

[Sunset]

Yeah, I also look for some sort of national sales or consumption tax with the "promise" that they will be w*rking toward replacing the income tax with it eventually. Of course, we can guess how that would go. No tax ever really goes away so...

A consumption tax would not affect Roth conversions, as it's a tax on spending.

Whether a person has $100 in a Roth or $100 in wallet , either way it will be taxed when spent.

 

[almost there]

A consumption tax would not affect Roth conversions, as it's a tax on spending.

Whether a person has $100 in a Roth or $100 in wallet , either way it will be taxed when spent.

Agree, but only one can grow tax free.

 

[Koolau]

I’ve thought about that also, and I list it on the side of reasons not to convert. We would have to pay the tax two times. However I think it would take years for that to happen so I’m thinking it wouldn’t have a big impact. I guess we could just take IRA distribution and move to after tax assets but then there is the talk of wealth tax. Ya know, those seeking to tax are as sneaky and crafty as the tax lawyers trying to avoid them. Wow, perhaps a new sport league between them with playoffs on TV around tax season

Only if they use their OWN money in the game!

 

[Koolau]

A consumption tax would not affect Roth conversions, as it's a tax on spending.

Whether a person has $100 in a Roth or $100 in wallet , either way it will be taxed when spent.

All true, but you're Roth money will then be taxed twice - just in a different way and unavoidably so.

 

[almost there]

I don't get it. The 100 in the wallet was taxed when earned. And the Roth taxed when converted. So how was the Roth taxed twice and the 100 in the wallet any different? Also, any growth on the 100 in the wallet was shown as taxable income, if it was prev. invested. Thanks in advance.

 

[TheWizard]

I don't get it. The 100 in the wallet was taxed when earned. (in my case at a higher tax rate than today) And the Roth taxed when converted. So how was the Roth taxed twice and the 100 in the wallet any different? Thanks.

Sales tax, perhaps, once spent on certain things...

 

[almost there]

Sales tax, perhaps, once spent on certain things...

I re-worded it. In my mind both would have to pay the same taxes when spent. I must be missing something here.

 

[Exchme]

I re-worded it. In my mind both would have to pay the same taxes when spent. I must be missing something here.

I think the concern is sometimes the idea is floated to do away with the income tax in favor of a sales/VAT tax as that has theoretical benefits of not inhibiting folks from investing and earning money. In that circumstance, everyone would have to pay the new sales tax, but folks that did Roth Conversions had also paid income taxes vs folks holding the funds in tax deferred accounts.

Governments are always hungry for more revenue sources so a sales tax could be in our future. However, I feel quite certain we will never be rid of an income tax, especially on tax deferred funds - that would cause an uproar - so it's a pretty small worry.

 

[RetireBy90]

You’re correct, if you earn $100 you pay tax unless you put it in an IRA and take deduction. If tax free in my IRA, then I pay the Dax when drawn or converted. Same same. Tax due on the initial $100 and the conversion/draw could be different amounts but still gotta pay the man.
I think of the money converted as tax unburdened, which it is but my focus is on income taxes and all the other costs that play off those numbers. If a national sales tax were to be imposed the thinking is that it would replace income taxes. If so, then the tIRA money would be the same as the Roth, and I already paid income tax on it.
So $100 in an IRA with sales tax ofsay 12%, I get $88 of spending. If I convert today, pay 12% income tax, I have $88 to spend. If there is a sales tax of say 12%, $100 in IRA gets $88 of goods and $88 in my Roth gets me $77.44 to spend.
Lots of assumptions there but this is one way you could loser if you convert today.

 

[almost there]

You’re correct, if you earn $100 you pay tax unless you put it in an IRA and take deduction. If tax free in my IRA, then I pay the Dax when drawn or converted. Same same. Tax due on the initial $100 and the conversion/draw could be different amounts but still gotta pay the man.
I think of the money converted as tax unburdened, which it is but my focus is on income taxes and all the other costs that play off those numbers. If a national sales tax were to be imposed the thinking is that it would replace income taxes. If so, then the tIRA money would be the same as the Roth, and I already paid income tax on it.
So $100 in an IRA with sales tax ofsay 12%, I get $88 of spending. If I convert today, pay 12% income tax, I have $88 to spend. If there is a sales tax of say 12%, $100 in IRA gets $88 of goods and $88 in my Roth gets me $77.44 to spend.
Lots of assumptions there but this is one way you could loser if you convert today.

A lot of possible assumptions being made there. None of which are on my radar.
12% National sales tax being one of them. If I am reading this right.

 

[pb4uski]

Given that they are no serious proposals for a national sales tax or VAT, why are we wasting posts on very unlikely scenarios?