Those Who don't/didn't do Roth Conversions

[punkinhead]

Right, or "not worth the effort." A few $grand is worth the effort IMHO but YMMV.

A few grand is well within the margin of error because of all the assumptions that go into the decision.

 

[Koolau]

A few grand is well within the margin of error because of all the assumptions that go into the decision.

Heh, heh, one person's "margin of error" is another person's added vacation. YMMV as always.

 

[LateToFIRE]

Heh, heh, one person's "margin of error" is another person's added vacation. YMMV as always.

Well stated. I think this gets completely lost in these "is it worth it" debates.

 

[Slim11]

I was not planning on doing any roth conversion. The math said it was almost a wash. But what I forgot to calculate in was the tax brackets. I dont need the money now. And didn't plan on touching it for 15 to 20 years, so say 65 or 70. The money would be a large sum then, and the mandatory distributions would be taxed at the next level, i am at 24 percent right now. So, my new thinking is to draw 20 or so thousand a year out of it to keep me under the 32 percent tax rate, and convert it to a roth. I know I need to pay taxes on that when I take it out. Then I can leave the roth to my daughter when I die. Or can use it much later in life. I have no idea what the taxes rates will be in the future, but this is a plan that might save me some taxes down the line. Or it may not . I really dont know. All I know is that after I retired, I needed to catch up on a lot of financial stuff I never knew about or bothered to learn. At least I am blessed to have this problem.

 

[punkinhead]

Heh, heh, one person's "margin of error" is another person's added vacation. YMMV as always.

My point was that it's pretty much impossible to know what the outcome of Roth conversions will be to +/- a few thousand dollars. There are just too many assumptions involved. You could very easily make Roth conversions thinking you'll get that vacation money and it ends up losing you thousands instead.

 

[RunningBum]

My point was that it's pretty much impossible to know what the outcome of Roth conversions will be to +/- a few thousand dollars. There are just too many assumptions involved. You could very easily make Roth conversions thinking you'll get that vacation money and it ends up losing you thousands instead.

Or you could get even thousand more than you thought you would.

 

[Sunset]

FYI, I've been running i-ORP frequently past few months. It's no longer dormant.

I'm a few years younger than you and not quite retired yet, but have similar thinking - the calculators are telling me that conversions won't make much $$$ difference over my lifespan in large part because the projections show our pension/SS combined with taxable savings will be sufficient to cover expenses, and because given our tax bracket, we would not be able to stuff enough into Roths to make much of a difference on RMD's (in other words we're gonna get slammed by taxes on RMD's no matter what).

But, after flipping and flopping on this topic, I've landed on splitting the difference. In other words, I think I will do some conversions in the 3-4 year window (prior to ss/pension) where I'll likely have minimal taxable income, in part as a hedge against future tax increases and widow(er) risk. The calculators do not fully take these risks into consideration.

We are at the bottom of the 22% bracket, possibly could do some careful changes and end up at the top of the 12% bracket.


So we decided to Convert to close to IRMAA , largely because of:

• future higher tax rates from legislation, SS, RMD's.
• Have an account even if same investments as IRA that can be withdrawn anytime without tax consequences.
• Widow risk.
• RMD's graduated increase which will push many into higher tax rates.
• IL currently has no State tax for IRA withdrawals/conversions, as they become more desperate for taxes someday this may change in some manner ie taxable if income over $30K. etc.

 

[FindingForward]

Apologies if this has already been mentioned - if so, just direct me to those posts - I searched thread and didn't see it. Given that huge medical/long term care costs are tax deductible (as of now) - including the medical needs portion of CCRC spend - couldn't that be a viable reason for someone with no legacy desires to keep a good chunk of monies in tax-deferred?

For seniors choosing to self-insure LTC, care costs in one's 70s/80s could eat up a big chunk of those taxable IRA funds right before or in RMD time. Rather than prepaying taxes now, Uncle Sam would share 12-25% or more of those costs.

Thoughts?

 

[Sunset]

Apologies if this has already been mentioned - if so, just direct me to those posts - I searched thread and didn't see it. Given that huge medical/long term care costs are tax deductible (as of now) - including the medical needs portion of CCRC spend - couldn't that be a viable reason for someone with no legacy desires to keep a good chunk of monies in tax-deferred?

For seniors choosing to self-insure LTC, care costs in one's 70s/80s could eat up a big chunk of those taxable IRA funds right before or in RMD time. Rather than prepaying taxes now, Uncle Sam would share 12-25% or more of those costs.

Thoughts?

I've always thought a person should keep approximately $300K in an IRA for the reason that medical expense over a threshold are deductible and could surpass the standard deduction once other itemized things are considered.

Of course a person is forced to do the RMD's while waiting to get really ill

Some folks will do this by default, as keeping Roth conversions in a reasonable tax bracket means money will be left in the IRA

 

[dknighd]

I like the 50/50 concept. I'd like to have more in Roth. I'm about at about 25%

 

[pb4uski]

Apologies if this has already been mentioned - if so, just direct me to those posts - I searched thread and didn't see it. Given that huge medical/long term care costs are tax deductible (as of now) - including the medical needs portion of CCRC spend - couldn't that be a viable reason for someone with no legacy desires to keep a good chunk of monies in tax-deferred?

For seniors choosing to self-insure LTC, care costs in one's 70s/80s could eat up a big chunk of those taxable IRA funds right before or in RMD time. Rather than prepaying taxes now, Uncle Sam would share 12-25% or more of those costs.

Thoughts?

I think it is well recognized by Roth conversion advocates that in some cases it might be prudent to keep some money in tIRAs for qualified chartiable distributions or medical/LTC costs. OTOH for many of us even with reasonably aggressive Roth conversions we need have no fear of draining out tIRAs.

 

[RunningBum]

Apologies if this has already been mentioned - if so, just direct me to those posts - I searched thread and didn't see it. Given that huge medical/long term care costs are tax deductible (as of now) - including the medical needs portion of CCRC spend - couldn't that be a viable reason for someone with no legacy desires to keep a good chunk of monies in tax-deferred?

For seniors choosing to self-insure LTC, care costs in one's 70s/80s could eat up a big chunk of those taxable IRA funds right before or in RMD time. Rather than prepaying taxes now, Uncle Sam would share 12-25% or more of those costs.

Thoughts?

Because medical expenses that equal the first 7.5% of your income are not deductible, you will almost certainly still be paying some taxes and won't be able to deduct all expenses. It's worth running a tax simulation to see how this might play out for you under current tax rules. Not that this make it a bad idea, but it is a consideration, along with the chance that you may never have LTC expenses. Having them in your 70s seems doubtful. 80s, maybe. My mother started at age 83 with dementia and mobility issues. My father at 89 is still in independent living.

I didn't realize so much of the initial cost of a CCRC could be written off until someone started a thread on moving to a CCRC. I'm not sure a CCRC is for me but if you are considering one it's worthwhile to come up with a strategy for that.

I'm hedging my bets by leaving highly appreciated MFs/ETFs in my taxable account that I can sell if I ever need LTC care or go into a CCRC. My tIRA is almost under $100K now and I'm still converting.

 

[Exchme]

A few grand is well within the margin of error because of all the assumptions that go into the decision.

The poster said a few thousand more per year (iorp gives results as how much you can spend to exhaust your portfolio at the end of the simulation) sounds significant over a lifetime.

 

[Koolau]

I think it is well recognized by Roth conversion advocates that in some cases it might be prudent to keep some money in tIRAs for qualified chartiable distributions or medical/LTC costs. OTOH for many of us even with reasonably aggressive Roth conversions we need have no fear of draining out tIRAs.

I have gotten rid of my tIRAs so assume I can convert some 401(k) money to a new tIRA at some point if I want to do a QCD. Am I thinking right on this?

 

[pb4uski]

Yes, I think you can. I rolled over my 401k into my tIRA long ago so I don't even give 401ks a thought anymore.

 

[Exchme]

I have gotten rid of my tIRAs so assume I can convert some 401(k) money to a new tIRA at some point if I want to do a QCD. Am I thinking right on this?

Yes, you can roll 401Ks to tIRAs. About 4 years ago, I rolled nearly all the balance of my 401k to my IRA so I had better fund selection. It was an in-service rollover (meaning I was still working), but since I was over 59.5, there was no tax withholding.

In retrospect, that was expensive. The money was out of the market for a week and during that week, the market went up so much it cost me 4% in lost gains.

Also, I have an after-tax basis in the IRA and I diluted that. Technically, my 401K accepts roll-ins, to where I could transfer all the money back to my 401k except the after-tax basis and then make a non-taxable conversion to Roth, getting rid of the dreaded 8606 form and the pro-rata rule, but that would mean moving even more money around with the risk that the days out of the market were big days.

 

[Koolau]

In retrospect, that was expensive. The money was out of the market for a week and during that week, the market went up so much it cost me 4% in lost gains.

I guess that's why they say it's more important to be IN the market than trying to time the market.


I did know I could open a tIRA from my 401(k). Just making sure I could then do the QCD right away. (IOW open a tIRA just for the purpose of doing a QCD.) My research suggests that I can do that with no issues. Thanks to all.

 

[SecondCor521]

I guess that's why they say it's more important to be IN the market than trying to time the market.


I did know I could open a tIRA from my 401(k). Just making sure I could then do the QCD right away. (IOW open a tIRA just for the purpose of doing a QCD.) My research suggests that I can do that with no issues. Thanks to all.

There is no waiting period before doing a QCD.

Of course, you must be over 70.5 when you make the QCD, the money needs to go directly to the charity, and you are supposed to get a receipt from the charity. And QCDs are limited to $100K per taxpayer per year.

Those are the main rules; @cathy63 might chime in with more if I forgot any.

 

[Koolau]

There is no waiting period before doing a QCD.

Of course, you must be over 70.5 when you make the QCD, the money needs to go directly to the charity, and you are supposed to get a receipt from the charity. And QCDs are limited to $100K per taxpayer per year.

Those are the main rules; @cathy63 might chime in with more if I forgot any.

Heh, heh, and works to lower IRMAA MAGI as well! Win/win/win.

 

[PERSonalTime]

We are 69 and 67. Our pensions plus Social Security plus dividends (etc.) thrown off by mutual funds put us into the middle 22% bracket -- even before I take SS next year. Conversions don't make a lot of sense for us, IMHO.

The only argument I've seen that I considered seriously is preparing for widow(er)-hood, when one of us will be vaulted up into the tax bracket stratosphere. I've decided that's far enough off to not be a worry now. I-ORP (before it went dormant) agreed with me -- the difference between aggressive Roth conversions and none at all was very minor (a few $1000 per year).

In other words, we have too much income -- not the worst situation.

I can see the value of conversions if your pre-RMD / pre-SS income is in the 12% bracket, and you'll be pushed up when those income sources hit.

That's our situation as well. With the exception of a few small experimental conversions, I think we'll just deal with the RMD issues when they occur.

 

[PERSonalTime]

So if you're in the middle of the 22% bracket now without SS, will you still be in the 22% bracket when you start SS and have to take RMDs? The difference between 22% and 24% isn't that much, but those brackets could revert back to 25% and 28% in 2026 where it becomes a little more. I would be looking to convert to the top of 22% or to the edge of an IRMAA tier if I were you. If you don't want to bother with it, that's your business, but to say it doesn't make a lot of sense really doesn't seem true. In my opinion "won't make a big difference" is not the same as "don't make a lot of sense".

In our case, our IRMAA is fully subsidized.

 

[RunningBum]

In our case, our IRMAA is fully subsidized.

I don't know what that means. IRMAA is a Medicare Parts B&D surcharge for higher income people. If you don't have enough income to trigger the first tier, you simply aren't charged that extra. That's not a subsidy.

No matter. Do what you want.

 

[Gumby]

I don't know what that means. IRMAA is a Medicare Parts B&D surcharge for higher income people. If you don't have enough income to trigger the first tier, you simply aren't charged that extra. That's not a subsidy....

It is possible that PERSonalTime has a deal like mine. Part of my retirement package from my final employer is that when I start Medicare in January, my pension will be increased by the amount of Medicare Part B and D payments, including the amount of any IRMAA increase, if I should trigger that. I have always thought of it as a subsidy that allows me to ignore IRMAA thresholds when determining whether I should do Roth conversions.

 

[LateToFIRE]

Apologies if this has already been mentioned - if so, just direct me to those posts - I searched thread and didn't see it. Given that huge medical/long term care costs are tax deductible (as of now) - including the medical needs portion of CCRC spend - couldn't that be a viable reason for someone with no legacy desires to keep a good chunk of monies in tax-deferred?

For seniors choosing to self-insure LTC, care costs in one's 70s/80s could eat up a big chunk of those taxable IRA funds right before or in RMD time. Rather than prepaying taxes now, Uncle Sam would share 12-25% or more of those costs.

Thoughts?

I've mentioned this tax hack in other discussion threads, maybe not this one. When I was helping handle finances and tax filings for our elderly parent in a LTC facility, this is exactly what I saw - huge med-related tax ded's. Made me wish I'd had the foresight to do some Roth conversions from their IRA's to minimize the inherited IRA component of the estate. But, when you're in that kind of situation that's the last thing you're thinking about and other heirs probably would have ignorantly seen such a move as shady.

At any rate, hard to know the timing of LTC or whether it will be utilized at all. So many unknowns, which is what lead to my "split the difference" comment earlier. I'll do some conversions, but won't go crazy with it as already have a decent-sized Roth from DW's backdoor conversions, as well as enough taxable account funds to meet our expected needs well into our post-RMD years.

Even if I aggressively optimized conversions, I will have the 1st class problem of having a multi-$MM amount tax-deferred accounts by the time I hit RMD's. There just isn't a whole lot I can do to chop that beast down to a manageable size without incurring a huge tax bill far earlier than I'd like to. I fully recognize these are problems most people would like to have - not complaining, just thinking thru how to apply all this info to my own ret strategy.

 

[RunningBum]

It is possible that PERSonalTime has a deal like mine. Part of my retirement package from my final employer is that when I start Medicare in January, my pension will be increased by the amount of Medicare Part B and D payments, including the amount of any IRMAA increase, if I should trigger that. I have always thought of it as a subsidy that allows me to ignore IRMAA thresholds when determining whether I should do Roth conversions.

Oh wow, that's a nice perk, one I never thought of. Even beyond the $ benefit it would be nice to not have to deal with the income planning of going over an IRMAA tier.