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

[G-Man]

If you pay zero federal tax then you likely have some headroom to do Roth conversions and still pay no tax at all. In that case, that amount is a no-brainer to do at least that amount rather than let that headroom go wasted.

Absent Roth conversions we would pay no tax so we have an amount of headroom that we could convert and our tax bill would still be zero so that is a nobrainer.

Can you please illustrate your point of paying no taxes while doing a Roth conversion if you are living off of taxable income. Which marginal tax bracket could you fill up to pay zero taxes?

 

[G-Man]

Just retired this past summer but still looking at the possibility of conversions, perhaps starting next year. I've looked at it a number of different ways so far and I always come back to the same results: the benefit for our spending is marginal at best. Because the decision/analysis for Roth conversions always require some sort of prediction about the future, I'm worried that it wouldn't take much of a change to move the needle from "marginal" to "worse" when reality doesn't match predictions. Legacy/heirs are not a consideration for this for us.

Still, however, I'm not done looking at it.

Cheers.

Same here. However, I have not retired yet.

 

[Jerry1]

It comes down to how you feel about paying more tax now, versus what happens at RMD time.

With hard numbers entered into a spreadsheet, you can see the effect over time. Age is a significant factor.

If all someone is trying to do is manage taxes at RMD time, one can just withdraw money from their tax deferred accounts and put it in any account. Converting to a ROTH is a different question.

 

[Gumby]

We are in the 22% tax bracket right out of the gate with pension and social security income, so the potential tax arbitrage benefit is negligible. We also have no heirs, so that is not an issue. However, I think it wise to have a lump of money that we can access in an emergency without tax consequences. So we have been converting within the 22% bracket over the past 4 years to build up a modest Roth balance. We were almost never eligible for a Roth contribution while we were working and entered retirement with only very small Roth balances.

 

[Surewhitey]

We aren't there yet, but I've put a lot of thought into conversions vs ACA. My gut is telling me it may lean to the ACA as we already get ~$40k in annual taxable income in taxable accounts. We are 52&58 and we have plenty of "bridge money" so we'll have to just see when we get there.

Postponing SS, pension and 401k withdrawal until the latest time is going to be best financially, but SS@70 will be difficult with not super longevity in our families...

 

[Chuckanut]

I did small Roth conversions for several years but have now stopped doing so.

My pension and some earnings from investments did not give me the control over income I needed to keep the income low and convert up to 12% or 22% or whatever percent made sense. IOW, most of my conversions would have been at least partially or wholly above the 12% marginal rate. Thus I kept my conversions small.

I am toying with a small one later this year, especially if the market goes down and stays down. My theory is that if the market dives 20%, I will pay 20% less tax on the Roth Conversion assuming I convert the same number of shares. When the market goes back up, the profit will be in my Tax free Roth. Makes sense to me. I might even put up with IRMAA for a year to do it.

One good thing I noticed a few months ago is that my RegIRA/RothIRA ratio which used to be 70/30 is now about 55/45. Over time those small conversions have added up.

 

[RunningBum]

Because the decision/analysis for Roth conversions always require some sort of prediction about the future, I'm worried that it wouldn't take much of a change to move the needle from "marginal" to "worse" when reality doesn't match predictions.

It also wouldn't take much of a change to move the needle from "marginal" to "better". I agree it does require a prediction about the future, but my logic is to limit the unknowns about the future by taking action now and locking in the tax rate. It seems riskier to me to wait and very possibly pay a higher rate later.

Just a thought. The OP seems to be looking for justification from people doing what they want to do. There are some very good reasons some people are giving here for not converting, that may or may not apply to OP's situation. But since they are looking for confirmation bias, I'll stop here.

 

[Surewhitey]

Can you please illustrate your point of paying no taxes while doing a Roth conversion if you are living off of taxable income. Which marginal tax bracket could you fill up to pay zero taxes?

Married filing joint standard deduction 2024 is ~$29,200, so this amount is "tax free". If you have all your money in deferred accounts, you can withdraw this amount without paying anything. Add $23,200 if you want to pay 10% on that amount and so on.

Then there's long term capital gains harvesting & qualified dividends to get from the taxable accounts under a certain amount, unless I'm wrong...

 

[pacergal]

We are also 22% bracket with pension and SS. Our pensions are both 100% joint survivor. I have checked calculators and talked with our CPA/CFA, and for me, it just doesn't make sense. I circle back and check every few years
We don't have millions, but we have enough, hopefully we will not need LTC, but if so, $ from our IRAs would most likely qualify for medical deductions to reduce taxes.
And our kids will hopefully inherit some.
Roths were never offered at my work until I was close to retirement, so I never opened one.

 

[ncbill]

Doing Roth conversions to the top of the 12% bracket.

Hopefully our kids will inherit our untapped Roth accounts.

Spouse could live another 30+ years, with our kids deferring payout for another decade past that should they choose.

 

[Whisper66]

My Mom and Dad made no Roth conversions in their lifetime. They were content paying as little in taxes each year as they legally could and just didn't give it much thought.

In the final couple years of Dad's life, I was involved in doing his taxes. His income from a pension plus investment dividends plus social security would have landed him and my mom in the 12% tax bracket for 2022.
However, RMDs kicked in about 20 years ago and my mom passed a few years later. That bumped Dad into higher tax brackets. In 2022 his other income plus RMDs plus being in the single tax filer bracket put him in the upper end of the 32% (vs 12% mentioned above). In his specific case, he was quite unhappy that he had not considered Roth conversions in his earlier years.

As a side note, he passed with still a significant amount in his IRA. Those inherited IRA assets must now be distributed out of the beneficiary's IRA within 10 years and taxes paid on them. If one was trying to optimize taxes over the generations, it probably would have made sense for Mom / Dad to do Roth conversions to fill up the lower tax brackets in their earlier years.

 

[target2019]

If all someone is trying to do is manage taxes at RMD time, one can just withdraw money from their tax deferred accounts and put it in any account. Converting to a ROTH is a different question.

The OP's question(s) is about why you (or I) didn't convert.

Taxes is one of several factors for Roth conversion that most look at. I didn't imply that RMD was the only factor. What I was pointing out to the OP to is that they can enter hard numbers in a calculator, and see what effect this has on them over a longer time period.

So, it's interesting to read opinions for many situations, and find what factors influenced the decision. But as we know from many conversations here about ROth conversion, how it affects your situation over time is most important.

 

[Montecfo]

It comes down to how you feel about paying more tax now, versus what happens at RMD time.

With hard numbers entered into a spreadsheet, you can see the effect over time. Age is a significant factor.

Well, it takes a long time for smaller RMDs to "pay back" in tax savings the tax paid early.

This is what folks mean by paying tax they may never end up owing.

 

[Jerry1]

The OP's question(s) is about why you (or I) didn't convert.

Taxes is one of several factors for Roth conversion that most look at. I didn't imply that RMD was the only factor. What I was pointing out to the OP to is that they can enter hard numbers in a calculator, and see what effect this has on them over a longer time period.

So, it's interesting to read opinions for many situations, and find what factors influenced the decision. But as we know from many conversations here about ROth conversion, how it affects your situation over time is most important.

I understand that you were going beyond RMDs. I was just pointing out that if RMDs are your main concern, it doesn’t matter whether you do a conversion or just take the money out and put it in a taxable account. Both will reduce the amount in a deferred account and thus reduce RMDs.

 

[LateToFIRE]

I understand that you were going beyond RMDs. I was just pointing out that if RMDs are your main concern, it doesn’t matter whether you do a conversion or just take the money out and put it in a taxable account. Both will reduce the amount in a deferred account and thus reduce RMDs.

This is where I get a bit hung up on the conversion question. I suppose the advantage of conversion is the tax-free growth - if you don't need to use the funds the tax avoidance on gains/dividends over time could add up to a hefty figure. This makes sense for those where pension/SS cover most of their expenses. In my case my spending will be fairly "fat" in the early years and I will be drawing significantly from portfolio, so maybe will just balance my WD's between taxable and tIRA accounts up to to a certain tax bracket.

 

[rk911]

I and DW have significant amounts of T-IRA/401K funds. Pension meets our day-to-day needs, and we have not done any Roth conversions.

At this stage in life, we really don't want to be bothered with doing the conversions. I'm interested in hearing from others who have NOT done Roth conversions and do NOT plan to do so. Why did you make that choice, and do you lose sleep worrying about potential or current RMD issues?

We haven't and don't plan on doing ony conversions. Why?

- Our three govt. pension and two SS checks provide more income than we spend on a month-month basis. We are still living way beneath our means.

- In '06 our net worth was in the very low 7-figures. By 2020 it had essentially doubled. It doubled again in 2021 due to an inheritance.

- Our annual IRA RMD's plus extra cash from our investments go to charity via a DAF and QCD.

 

[rk911]

We stopped doing Roth conversions when we reached a point where we decided that all of our estate would go to charity.

That's us as well although we will be sending some $ to my nephew and wife and, if there ever is one, their child or children.

 

[G-Man]

We are in the 22% tax bracket right out of the gate with pension and social security income, so the potential tax arbitrage benefit is negligible. We also have no heirs, so that is not an issue. However, I think it wise to have a lump of money that we can access in an emergency without tax consequences. So we have been converting within the 22% bracket over the past 4 years to build up a modest Roth balance. We were almost never eligible for a Roth contribution while we were working and entered retirement with only very small Roth balances.

Sounds very similar to our situation when I retire soon.

 

[pb4uski]

Can you please illustrate your point of paying no taxes while doing a Roth conversion if you are living off of taxable income. Which marginal tax bracket could you fill up to pay zero taxes?

Sure. What you're filling up is the standard deduction.

The standard deduction for MFJ both over 65 for 2023 is $30,700. Let's say that you have started SS and have $24,000/year of SS. You could have as much as $27,133 of ordinary income and pay zero tax. With $27,133 of ordinary income, $3,567 of your $24,000 in SS would be taxable, resulting in $30,700 of income and $0 taxable income after the $30,700 standard deduction.

So if you have $5,000 of interest from taxable accounts that uses $5,000 of your $27,133 so you could still do $22,133 Roth conversion and pay $0 in tax.

https://www.irscalculators.com/tax-calculator is useful in testing scenarios

 

[easysurfer]

Same here. Don't want to be bothered. Plus, IMO traditional isn't such a bad deal in the first place.

I'm not in disagreement with Kings Over Queens' CPA's view.

 

[pb4uski]

Married filing joint standard deduction 2024 is ~$29,200, so this amount is "tax free". If you have all your money in deferred accounts, you can withdraw this amount without paying anything. Add $23,200 if you want to pay 10% on that amount and so on.

Then there's long term capital gains harvesting & qualified dividends to get from the taxable accounts under a certain amount, unless I'm wrong...

Nailed it.

 

[Exchme]

Not sure why OP would only want an echo chamber of people that don't like the idea of Roth Conversions. How about just some factors that might make you less likely to do conversions:

Factors that would make you unlikely to do significant Roth Conversions:
+Never getting above the 12% bracket
+Never getting below the top bracket or two
+MFJ with IRA balance below $1M
+Planning on QCDs
+Planning to move to a country that doesn't recognize Roth Accounts as different from traditional IRAs

Factors that would reduce, but maybe not eliminate Roth Conversions
+Planning to bequest IRAs to charity
+Having plenty of assets so you're unlikely to need the money in your lifetime and have no close heirs
+Heirs that will have low tax rates, even after inheriting
+Planning to move to low a tax state from high tax one
+Fear of long stays in Long Term Care
+Younger than 55 (401K) or 59.5 (t-IRA) with a low balance in taxable account so short of cash flow
+Low balance in a taxable account so no meaningful tax drag reduction
+Having to sell taxable assets with high unrealized capital gains to pay the conversion taxes, particularly as you get older and closer to getting a step-up basis when you or your spouse pass
+Already of age to collect SS but income range is where SS taxes are still being phased-in
+On ACA and able to get a large subsidy
+Convinced that tax rates will go down in the future or that Roths will be taxed in spite of today's promises

The lists could go on, but you get the idea, it's complicated, personal and involves guesses about the future.

 

[stevenr]

I am converting my SEP over the next 4 years on the advice of our CFP. We fill up the 22% bracket, complete it before it reverts to 25% (maybe), and be in a lower bracket as our RMDs kick in down the road.

 

[GoodWishes]

We retired about 8 years ago in our early fifties. We looked into Roth conversion a couple times and decided not to do any.

Reasons:
- We bought some individual stocks in taxable accounts long ago and they have performed so well that they are a good percentage of our portfolio now. We have been selling some of those stocks every year to reduce risk.
- Due to selling those stocks, we are in a high tax bracket.
- We are doing well financially and want to enjoy life. We don’t want to bother with more work that may or may not benefit us. If our children are unhappy about taxes due to inheritance, too bad for them.

 

[ksr]

For those that mention paying no tax on their Roth conversions, do you not end up paying state tax? Even in the years when I converted at the zero percent Fed tax level, I always ended up paying state tax on the full amount. So, state taxes along with impact on my ACA subsidy have to be factored in every year.
I do currently live in a fairly tax-unfriendly state, so maybe my experience is more of an outlier. I expect to eventually move to another, hopefully more tax friendly, state.