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

[Gumby]

Maybe trying to stem the outflow of well-heeled retirees

I figure we're better off without the people who leave.

 

[ExPatKiwi]

The $100k cliff for pension income and tIRA withdrawal exemptions is going away starting in tax year 2024. https://www.cl-law.com/news-events/...-of-the-2024-2025-connecticut-biannual-budget and https://ctmirror.org/2023/08/14/ct-...,annuities and individual retirement accounts.

Yes and no, the cliff ends but it's a black diamond steep slope to no exemption, for example earn $120k and exemption is only 25%. https://www.cga.ct.gov/2023/rpt/pdf/2023-R-0129.pdf


General Pension and Annuity Exemption and
IRA Exemption Phase-Out Schedule, Beginning With 2024 Tax Year
Federal AGI ($)
Deduction (%)
Single, Married Filing
Separately, or Head of
Household
Married Filing Jointly
< 75,000 < 100,000 100.0
75,000 to 77,499 100,000 to 104,999 85.0
77,500 to 79,999 105,000 to 109,999 70.0
80,000 to 82,499 110,000 to 114,999 55.0
82,500 to 84,999 115,000 to 119,999 40.0
85,000 to 87,499 120,000 to 124,999 25.0
87,500 to 89,999 125,000 to 129,999 10.0
90,000 to 94,999 130,000 to 139,999 5.0
95,000 to 99,999 140,000 to 149,999 2.5
> 100,000 > 150,000 0.0

 

[Gumby]

Better than the cliff.

 

[PERSonalTime]

Here's another wrinkle, both DW and I both have some T-IRA funds that were made with non-deductable contributions. How are these funds handled when RMD's come around?

 

[SevenUp]

Here's another wrinkle, both DW and I both have some T-IRA funds that were made with non-deductable contributions. How are these funds handled when RMD's come around?

Using Form 8606. Do you have that form from the year(s) you made the n-d contributions?

 

[LateToFIRE]

Here's another wrinkle, both DW and I both have some T-IRA funds that were made with non-deductable contributions. How are these funds handled when RMD's come around?

My understanding is that your distributions will contain a pro-rata portion of both taxable and a nontaxable funds. The non-taxable part is based on your after-tax contributions (which should have been reported on form 8606). The taxable part is based on the accumulated earnings. I'm sure more knowledgeable folks can elaborate further.

In hindsight wish I had understood all the future (negative) implications of tax-deferred investing. When the party ends, the hangover's gonna be painful.

 

[DrRoy]

If I hit the 22% tax bracket, I skip them. If I am below that, I do them.

 

[Alan]

My understanding is that your distributions will contain a pro-rata portion of both taxable and a nontaxable funds. The non-taxable part is based on your after-tax contributions (which should have been reported on form 8606). The taxable part is based on the accumulated earnings. I'm sure more knowledgeable folks can elaborate further.

Yes, and it is across all of one's IRAs. When I retired I had a non-deductible IRA of around $50k, $40k of it was after-tax contributions. The year I retired my income was a fraction of what it had been and I had a large tax deferred 401k. 401ks don't count when withdrawing money from IRAs so I let my 401k sit for a year and converted my IRA to a Roth IRA so that I paid tax on that $10k in a single year and it set my basis to zero making future Roth conversions very simple. The following year I rolled my 401k to an IRA where I had a lot better choice of funds, and lower expenses. (A rollover is a non-taxable event).

 

[CRLLS]

Yes, and it is across all of one's IRAs. When I retired I had a non-deductible IRA of around $50k, $40k of it was after-tax contributions. The year I retired my income was a fraction of what it had been and I had a large tax deferred 401k. 401ks don't count when withdrawing money from IRAs so I let my 401k sit for a year and converted my IRA to a Roth IRA so that I paid tax on that $10k in a single year and it set my basis to zero making future Roth conversions very simple. The following year I rolled my 401k to an IRA where I had a lot better choice of funds, and lower expenses. (A rollover is a non-taxable event).

When I first started contributing to IRAs, I had only deposited deferred money in it. Not because of some major plan, but because that is all I had available to invest. Later when I rolled over a 401K Fido would not add it to my tIRA. They opened a "Rollover IRA". They said it was cleaner to do that,. Later, I still had that tIRA with only deferred money. We rolled over that tIRA into the Rollover IRA. That is the only IRA I currently have.

IMO, keeping deferred and taxable money in separate accounts is easier than trying to keep those mixed accounts straight.

 

[Alan]

When I first started contributing to IRAs, I had only deposited deferred money in it. Not because of some major plan, but because that is all I had available to invest. Later when I rolled over a 401K Fido would not add it to my tIRA. They opened a "Rollover IRA". They said it was cleaner to do that,. Later, I still had that tIRA with only deferred money. We rolled over that tIRA into the Rollover IRA. That is the only IRA I currently have.

IMO, keeping deferred and taxable money in separate accounts is easier than trying to keep those mixed accounts straight.

Yes, that’s how it usually works, a Rollover IRA is created. But if you make distributions from an IRA that has after tax contributions in it then the proportion of tax free money in that distribution is calculated as if all the IRAs are in a single pot so a much smaller fraction of the distribution is tax free.

 

[Gumby]

We also foolishly contributed after tax funds to a tIRA back in the 1990s. Just as others have said, that establishes a basis across all IRAs, so when you withdraw or Roth convert from your tIRA, a certain percentage is tax free (for me, about 3%). It's a paperwork hassle.

Last year, we Roth converted all of the young wife's tIRA. This coming year, we will rollover (trustee to trustee) her 457 account to a tIRA. The new tIRA will have a zero basis, which will greatly simplify things.

Sadly for me, I took the advice to roll my then existing 401k into a separate "rollover IRA" when I changed jobs back in 2001. I will never be able to empty my tIRAs entirely between now and RMDs, so I'm stuck with a basis and the Form 8606 calculation every year.

 

[thod]

In 2019, while talking with a Fidelity rep about something, he noticed I had a substantial amount of after tax money in my 401k. I think it was just many years I would go over the contribution limit for the year to a 401k and my paycheck would just keep adding more that would go in as after tax till the end of the year.

The rep suggested that I roll the after tax portion out of the 401k and into a Roth IRA.

Doing something like that might be an option here. However, it might have only been an option because it was a 401k with after tax money and not an IRA with after tax money.

 

[LateToFIRE]

In 2019, while talking with a Fidelity rep about something, he noticed I had a substantial amount of after tax money in my 401k. I think it was just many years I would go over the contribution limit for the year to a 401k and my paycheck would just keep adding more that would go in as after tax till the end of the year.

The rep suggested that I roll the after tax portion out of the 401k and into a Roth IRA.

Doing something like that might be an option here. However, it might have only been an option because it was a 401k with after tax money and not an IRA with after tax money.

Sounds like same thing as taking $ from any taxable brokerage account to contribute to a Roth.

 

[LateToFIRE]

We also foolishly contributed after tax funds to a tIRA back in the 1990s. Just as others have said, that establishes a basis across all IRAs, so when you withdraw or Roth convert from you tIRA, a certain percentage is tax free (for me, about 3%). It's a paperwork hassle.

Last year, we Roth converted all of the young wife's tIRA. This coming year, we will rollover (trustee to trustee) her 457 account to a tIRA. The new tIRA will have a zero basis, which will greatly simplify things.

Sadly for me, I took the advice to roll my then existing 401k into a separate "rollover IRA" when I changed jobs back in 2001. I will never be able to empty my tIRAs entirely between now and RMDs, so I'm stuck with a basis and the Form 8606 calculation every year.

Exact same situation!

[with respect to the after-tax tIRA contributions + the 401k rollover to tIRA = everlasting paperwork headache]

 

[RE2Boys]

We also foolishly contributed after tax funds to a tIRA back in the 1990s. Just as others have said, that establishes a basis across all IRAs, so when you withdraw or Roth convert from you tIRA, a certain percentage is tax free (for me, about 3%). It's a paperwork hassle.

Last year, we Roth converted all of the young wife's tIRA. This coming year, we will rollover (trustee to trustee) her 457 account to a tIRA. The new tIRA will have a zero basis, which will greatly simplify things.

Sadly for me, I took the advice to roll my then existing 401k into a separate "rollover IRA" when I changed jobs back in 2001. I will never be able to empty my tIRAs entirely between now and RMDs, so I'm stuck with a basis and the Form 8606 calculation every year.

I would not call a non-deductible TIRA contribution as foolish. Roth IRA did not exist prior to 1997 so if one wished to contribute to a retirement plan, a TIRA may have been the only game available. My 401k at the time (early 1990s) had a low max % contribution so a non -deductible contributions to a TIRA was my only option.

I converted all my wife TIRA to Roth about ten years ago and eliminated the basis and her 8606.

I have been retired for 23 years and have yet to roll my 401k into a TIRA for exactly the situation you described, part of each RMD is considered a fractional return of my non-deductible contributions made nearly 30 years ago, about 4%, I've got my basis down to about $7K.

 

[SecondCor521]

Here's another wrinkle, both DW and I both have some T-IRA funds that were made with non-deductable contributions. How are these funds handled when RMD's come around?

As others have already said, you'll fill out part I of Form 8606 to do the pro rata calculations.

The additional wrinkle I wanted to mention is that in your case you will fill out two Form 8606s - one for all of your traditional IRAs and one for all of your wife's traditional IRAs. You each will have your own basis in your own IRAs and each of your basis(es?) will be tracked separately.

As an additional side note, when either of you passes away, if you still have a balance in your traditional IRA, its basis is inheritable by the beneficiaries of the account(s). As you might guess, it is in proportion to the percentage of the account(s) they inherit. The beneficiaries can use the final filed 8606 to get the information they need.

 

[Sunset]

We also foolishly contributed after tax funds to a tIRA back in the 1990s. Just as others have said, that establishes a basis across all IRAs, so when you withdraw or Roth convert from you tIRA, a certain percentage is tax free (for me, about 3%). It's a paperwork hassle.

Last year, we Roth converted all of the young wife's tIRA. This coming year, we will rollover (trustee to trustee) her 457 account to a tIRA. The new tIRA will have a zero basis, which will greatly simplify things.

Sadly for me, I took the advice to roll my then existing 401k into a separate "rollover IRA" when I changed jobs back in 2001. I will never be able to empty my tIRAs entirely between now and RMDs, so I'm stuck with a basis and the Form 8606 calculation every year.

While I don't like it, I use tax software so it carries it over year to year, so no extra effort on my part.

 

[Midpack]

While I don't like it, I use tax software so it carries it over year to year, so no extra effort on my part.

+1. With TurboTax I don't have to remember anything, it carries my new TIRA basis and balances over from year to year. I keep records on a spreadsheet in case I quit using TT one day, but otherwise I don't need any TIRA records at all...

 

[PERSonalTime]

Using Form 8606. Do you have that form from the year(s) you made the n-d contributions?

Yes

 

[PERSonalTime]

As others have already said, you'll fill out part I of Form 8606 to do the pro rata calculations.



The additional wrinkle I wanted to mention is that in your case you will fill out two Form 8606s - one for all of your traditional IRAs and one for all of your wife's traditional IRAs. You each will have your own basis in your own IRAs and each of your basis(es?) will be tracked separately.



As an additional side note, when either of you passes away, if you still have a balance in your traditional IRA, its basis is inheritable by the beneficiaries of the account(s). As you might guess, it is in proportion to the percentage of the account(s) they inherit. The beneficiaries can use the final filed 8606 to get the information they need.

Yes, we both completed 8606’s each time a nondeductible tIRA contribution was made. When RMD’s start, will a portion of the withdrawal not be subject to taxation?

 

[Sunset]

Yes, we both completed 8606’s each time a nondeductible tIRA contribution was made. When RMD’s start, will a portion of the withdrawal not be subject to taxation?

Yes, for RMD's or just plain withdrawals, a tiny portion of the total will be non-taxable.
That amount of non-taxable money then goes down, while the total amount increases over the next year. This will carry on until the all IRA's are depleted.

 

[AlmostThoreau]

ACA healthcare can add 10-30% to one's "tax bracket" before Medicare kicks in. Worth considering when deciding on Roth conversions while working, even if your tax bracket is higher.

 

[ERD50]

+1. With TurboTax I don't have to remember anything, it carries my new TIRA basis and balances over from year to year. I keep records on a spreadsheet in case I quit using TT one day, but otherwise I don't need any TIRA records at all...

And as a back up, but mostly to remind myself just what is happening 'under the hood', I print and save copies of the 8606 with my copy of my tax return. Without that, I sometimes find myself scratching my head over the numbers I see from the tax software, especially if a few years pass between this calculation (and I try to remember to add a copy of the most recent one to each year's copies, so I don't need to dig back in time).

-ERD50

 

[SecondCor521]

Yes, we both completed 8606’s each time a nondeductible tIRA contribution was made. When RMD’s start, will a portion of the withdrawal not be subject to taxation?

Correct. The thing to know is that your RMD prorata calculation will be based on your Form 8606 data, and your spouse's RMD prorata calculation will be based on their Form 8606 data. Ditto on inherited IRA calculations; the basis will be inherited individually, not jointly.

 

[Koolau]

Forget the basic tax issues (more than likely, it's a wash when you convert.) I like the idea that my Roths are actually "bigger" than the tIRAs they used to be because I paid the taxes from "loose" cash rather than taking more tIRA money to pay the taxes. It's a stealth bump up in "funds under the Roth heading that will never be taxed."



Second reason I found was that I no longer have any tIRAs so my RMDs are strictly from my 401(k). Only one RMD to remember (though Megacorp dutifully reminds me each year.)


Third reason - and this was strictly luck: If I need more cash (and this year, I think I do,) I can take some Roth cash and not exceed the IRMAA limits.


Not trying to talk anyone into Roths. Just hoping to suggest some subtle advantages not always spoken of (in the news or by a CPA.)


Very much a YMMV decision. Good luck.