Roth conversion or not

[averagebum]

Hi everyone. I retired in August, 23. Thank God for the retirement decision (aided by some very wise advice on this board--a big thank you!). The thought that I might have been tied down by a job for the past two years if I didn't retire sends shivers through me. Two valuable years saved and filled with travel and new experiences--no job or money can beat that!
If I may, I would like to respectfully seek some advice from the board. I am 66 and 3 months. Not collecting social security yet. Been living on a pension about $2000 after tax a month plus $3000 after tax dividends from my taxable account and part time work averaging about $4000 a month after tax, enough to allow me to do what I wish so far. I have $1.6 million in a taxable account, $2.7 million in an IRA account, and $70,000 in Roth IRA. I am single with no dependents. Last year's taxable income was about $138,000 (including about $10,000 in capital gains). I am in 24% tax bracket, the cap for which is about $197,000 for 2025. So I have about $60,000 gap before getting into the next tax bracket. Should I do Roth conversion for $50,000 a year till I am 70 when I plan to collect social security (estimated at $4600 a month)?
The amount of the conversion will not make a material difference to the remaining balance in the IRA account (all in stocks), which will likely grow further over the next 7 years till I am 73 when RMD kicks in. Is it even worth bothering with the conversion and having to pay the taxes upfront for about $200,000 spread over 4 years?
Thank you for any advice the board can kindly give me.

 

[Al18]

It doesn’t seem Roth conversion is worth it.

Why do you have 100% stocks in your IRA? Most retirees have most of their fixed income in their IRA.

 

[MarieIG]

Take a look at what your projected brackets will be when RMDs kick in and keep IRMMA in mind. Due to the size of your IRA I don't think conversions of 50k a year will make a significant impact but don't let perfect be the enemy of the good.

In your scenario you may also wish to explore software regarding optimizing conversions before the end of this year.

 

[TheWizard]

Yes, Roth convert $50k or so per year, keeping an eye on IRMAA tiers.
I'm in similar situation at age 75, single and close to top of 24% bracket without Roth conversions.

You'll be able to do QCDs from that IRA after age 70.5, so that can be helpful also.

And I'm also 95+% stocks in all my accounts due to excess retirement income without drawing down investments...

 

[Dash man]

As of yet the TC&JA has not been extended and will expire after this year. You may want to consider that in your planning.

 

[RunningBum]

I would do that ~$50K conversion. If you're only looking for huge different makers, there probably aren't any. Instead do the little things and if you find enough of them they will add up, and if you don't you still get a little gain. To say it's not worth it seems to imply this takes a lot of effort and the payoff is small, but the effort is pretty trivial. Watch the IRMAA tiers and leave some buffer to stay short of going into the next one. Paying taxes upfront vs. paying later on a growing IRA is a wash if the tax rates are the same.

Exceptions:
- If you are leaving your IRA to heirs who are in a lower tax bracket, they might end with more money if they inherit the tIRA and pay the taxes are their rate. With your IRA size and the 10 year rule it would probably need to be spread among multiple heirs.
- If you plan to leave to charities, don't convert since they won't have to pay taxes on the IRA they are bequeathed. Likewise in your lifetime QCDs are probably the best way to donate to charities, though if you itemize deductions and have large unrealized gains in taxable, donating the funds with the highest % of unrealized cap gains, perhaps through a DAF, could be more to your advantage.

You probably have enough in the IRAs even with these small conversions so I don't think leaving it all in the tIRA to pay for possible LTC costs is necessary.

 

[SecondCor521]

I recommend you check with tax software what your actual marginal rate is. ACA subsidies, IRMAA, NIIT, tax credits and all sorts of other things can affect what you actually pay, which is what matters. Simply looking at taxable income and the tax bracket charts is too simplistic.

Given your numbers, though, it probably doesn't matter either way. And to the extent it matters, it might just be a slight tax preference on the part of your heirs. (I saw you have no dependents, but you might be leaving money to your nieces or nephews or something like that.)

Actually, if you have significant charitable intentions or have a strange or uncommon estate plan, those two things can affect whether or not you should do Roth conversions. What are you planning to do with your assets when you are gone?

 

[Jerry1]

Agree with the others about doing whatever you can. It may not make a big difference, but the general framework of getting as much out at the lowest possible tax bracket still applies.

 

[omni550]

Another argument against converting is that you can pay for any long-term care from a tIRA as an allowable medical expense on your taxes.

https://www.thestreet.com/retirement/a-creative-way-to-pay-the-long-term-care-bill-14526278

With Publication 502 naming long-term care expenses as allowable medical costs, the next step is figuring out which account to take this money from that will provide the greatest tax advantage. A traditional IRA will utilize money in the most effective way. Taking the full amount needed to cover qualified long-term care costs from this account will result in your adjusted gross income and your deductions almost canceling each other out. This basically turns that IRA into a tax-free Health Savings Account.

Let's look back at the earlier example. Ellen needs to cover her $72,000 income gap, most of it going to cover her long-term care costs. When she pulls that from her IRA, her AGI is going to be $96,000 (Social Security benefit + IRA withdrawals). Since currently she can deduct qualified medical expenses which exceed 7.5% of her AGI, her deduction becomes $88,800, meaning her taxable income is reduced to $7,200 (7.5% of $96,000). The majority of the money being used to pay LTC costs is now with untaxed dollars.

Remember this strategy will only work with a traditional IRA, as the money goes in tax-free and must be taxed upon withdrawal. With a Roth IRA, the money goes in after taxes are paid, meaning money is tax free on withdrawal. If the money is tax free, it will not count towards your adjusted gross income, meaning you won't get the deductions.

omni

 

[Waynew]

Hi everyone. I retired in August, 23. Thank God for the retirement decision (aided by some very wise advice on this board--a big thank you!). The thought that I might have been tied down by a job for the past two years if I didn't retire sends shivers through me. Two valuable years saved and filled with travel and new experiences--no job or money can beat that!
If I may, I would like to respectfully seek some advice from the board. I am 66 and 3 months. Not collecting social security yet. Been living on a pension about $2000 after tax a month plus $3000 after tax dividends from my taxable account and part time work averaging about $4000 a month after tax, enough to allow me to do what I wish so far. I have $1.6 million in a taxable account, $2.7 million in an IRA account, and $70,000 in Roth IRA. I am single with no dependents. Last year's taxable income was about $138,000 (including about $10,000 in capital gains). I am in 24% tax bracket, the cap for which is about $197,000 for 2025. So I have about $60,000 gap before getting into the next tax bracket. Should I do Roth conversion for $50,000 a year till I am 70 when I plan to collect social security (estimated at $4600 a month)?
The amount of the conversion will not make a material difference to the remaining balance in the IRA account (all in stocks), which will likely grow further over the next 7 years till I am 73 when RMD kicks in. Is it even worth bothering with the conversion and having to pay the taxes upfront for about $200,000 spread over 4 years?
Thank you for any advice the board can kindly give me.

I agree with those who say that doing the ROTH conversion is worth the time and taxes. I am less concerned about the IRMAA, as I am married and I don't want my wife to get hit with a huge annual tax bill if (when) I die before her. I have a spreadsheet I use to track my withdrawals, and I am also old enough to take advantage of the QCD giving directly from my traditional IRA. Last year I gave over $100K using QCDs and did ROTH conversions. That bumped me into the next IRMAA bracket, but the extra cost is well worth the future benefit. I retired in 2014 and I am a dividend growth investor and trade options. My options income exceeds my dividend income.
Summary: Do the conversions. I'm 74 and I am still doing them after I satisfy my RMD using QCDs.

 

[Midpack]

Roth conversions always come down to:

A Roth conversion is most effective if the tax rate on the conversion now is less than what the tax rate will be when you eventually withdraw those funds in retirement.

Each of us has to determine that for ourselves as you have to make assumptions about future tax brackets/rates - no one knows for sure. IRMAA is another consideration. Once you determine what what tax bracket you want to convert into, check IRMAA thresholds as you might want to limit conversions to an IRMAA tier, a little below a tax bracket.

Three Questions To Consider Before a Roth Conversion

Looking to reap the benefits of a Roth conversion? First, answer these three important questions.

www.bairdwealth.com

 

[SecondCor521]

Agree with the others about doing whatever you can. It may not make a big difference, but the general framework of getting as much out at the lowest possible tax bracket still applies.

I agree with this in general. But OP is probably in a case where future uncertainties dwarf the predicted tax savings. I tend to only Roth convert up to the point where the probability of that next dollar being a good idea is a 60%+ probability. It's highly subjective at a certain point. I just take the obvious wins and that's going to be good enough for me. I'll Roth convert at 12% all day long, but if it's 22%/24% and there's uncertainty about when I die, future tax policy, and IRMAA thresholds in 20 years, then I'll shrug and pass.

 

[Exchme]

You are going to leave this earth with a large pile of unspent money. If you do not have heirs you care about, then tax deferred money is the most useful account for QCDs and charitable bequests. If you do have heirs you care about, then you should include them in your plans and might want to consider the modest conversions you outlined.

It sounds like you do not have heirs to plan for, and in that case, you are in the odd position that though you will eventually be in a higher tax bracket than currently, the extra IRMAA surcharges to do any significant Roth Conversions pretty much wipe out the savings. I would consider filling the IRMAA tier I was in but no more.

 

[averagebum]

Thank you very much for all the thoughtful suggestions everyone! I really appreciate them. I shall play around with these focusing on the cap in income for 24% tax bracket and the IRMAA cap issue. With the federal debt level, I fear a hike in the tax rates sometime in the future. Keeping fingers crossed.

 

[38Chevy454]

If you stopped the part time work, you could convert more. You don't need the income, and it just increases future tax issues. You will have tax torpedo as it looks now.

My suggestion is become fully retired, use withdrawals from 401k to supplement as needed to enjoy retirement doing travel or whatever you want that isn't working. Any income room above the withdrawals can be considered for Roth conversion, with respect to tax brackets and additional IRMMA or similar penalties.

 

[Midpack]

You are going to leave this earth with a large pile of unspent money. If you do not have heirs you care about, then tax deferred money is the most useful account for QCDs and charitable bequests. If you do have heirs you care about, then you should include them in your plans and might want to consider the modest conversions you outlined.

It sounds like you do not have heirs to plan for, and in that case, you are in the odd position that though you will eventually be in a higher tax bracket than currently, the extra IRMAA surcharges to do any significant Roth Conversions pretty much wipe out the savings. I would consider filling the IRMAA tier I was in but no more.

Probably the best answer, better than mine...

 

[RetireBy90]

I would add that although $50K a year conversions may not have a meaningful impact on taxes, it does give you a small pot of money you can draw from without impacting your taxes or other income related levies. In current described situation if you wanted to buy a new car or truck that cost say $60-70K it could bump you into higher levies for IRMAA or other levies. I like having a bit in both grad IRA and Roth so I can use which ever is best.

 

[Koolau]

One other small wrinkle to consider. Roth conversions are even better if you have free cash to pay the taxes on the conversion. In this way, you essentially buy extra Roth (vs tIRA) with the tax money.

 

[explanade]

I started converting in the 2023 tax year, in my 401k, which is 100% in a Vanguard Bond Trust. Appears to have lower ER than VG's Total Bond fund.

It's a big chunk of the fixed income part of my AA.

In the 10 years since I've retired, it's gone up about 19.45%. But I would imagine it won't appreciate much in the next 10 years, if not go down with higher interest rates.

So I've converted about 20% of it to Roth in the past 2 years and as I do my taxes, it's taken my AGI from about the bottom 1/3 of the 24% bracket to almost the top, converting $50k and $60k.

It's good that I won't be paying taxes when I finally withdraw but I'm paying more taxes now. I'm not getting Social Security yet so certainly my taxes could be higher if I withdraw approximately 10% a year or whatever the RMD will be.

I just checked the IRMAA tiers for 2025, probably going to jump me 2 tiers to do this conversion in 2024. I will be enrolling in Medicare later this year and looks like because of these conversions, I would pay maybe $200-250 more in premiums a month.

It still seems to make sense to do some conversions?

If I wait until I'm 70 to start SSA, it would be about $48k a year.

 

[TheWizard]

One other small wrinkle to consider. Roth conversions are even better if you have free cash to pay the taxes on the conversion. In this way, you essentially buy extra Roth (vs tIRA) with the tax money.

Correct.
Those of us without Earned Income cannot contribute to an IRA of either type.
But if you do a $10,000 Roth conversion and pay the $2500 tax with $$ from your taxable account, you've effectively done a $2500 contribution to your Roth IRA.

Note: people with limited math skills may not be able to accurately understand this transaction...

 

[PlayinwithFIRE]

Yea-it doesn't seem like you really have to optimize anything. If you plan to die with zero...leave it alone and start learning how to spend faster