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

There's a flow chart on this site built by a member.

I may even have it saved on my computer!
 
pb4uski said:
I guess that I look at it too simply. The funds that I have converted over the last 10 years were converted at about 10% on average ( a mix of 0%, 10% and 12%).

If I live long, I'll be paying a mix of 12% and 22% on RMDs, probably averaging about 18%.

If I die early and DW lives long, she will be paying more than that because she'll be filing as a single unless she remarries.

If we both die early, then our kids will be paying the tax. One kid has good income and is already in the 22% tax bracket and the other kid is already in the 12% tax bracket.

So for example, on my 2023 conversion I'll pay about 11.5%. Given all of the above, how can we (and our heirs) possibly not benefit?

It seems to me that no matter what the benefit will be positive, it is just a matter of degree. In some cases the benefit will be small and in others it might be substantial, only time will tell. It seems like a chance worth taking and I don't need no stinking payback analysis.
Click to expand...

I look at it the same simple way.

Vast majority of tIRA was deferred at 25%-30%+ taxes. So, anything less than that is a positive.
 
When push comes to shove and Roth conversions seem totally confusing, just as yourself: WWESD?

(What Would Ed Slott Do?)
 
pb4uski said:
Given all of the above, how can we (and our heirs) possibly not benefit?
Click to expand...

I generally agree with you and am in a similar camp - that Roth conversions are beneficial.

I think your question may have mostly been rhetorical. That being said, I still think it's good to try to answer it anyway. I think there are very few slam dunks in personal finance, so it's good to look at the negatives even when we're 99% sure they won't happen.

So:

1a. You decide to leave your traditional IRA to charity. 0% tax, and any Roth conversions taxed at 10% were uneconomical.

1b. You decide to be charitable and QCD all of your RMDs.

2. Your traditional IRA loses 95% (or whatever) of it's value and you end up having a hard time filling the standard deduction with your RMDs.

3. VAT, Roth tax, yadda yadda.

I know, I know, you have ready replies for all of these. And I agree with you. But other posters may have exposure to some of the above.
 
SecondCor521 point #3 may be more than just a 1% possibility.

Tax laws & regulations can change dramatically over the years. Social Security benefits were free from income tax under the original 1935 Social Security Act, but 1970's retirement plans counting on that continuing got a rude shock in the 1980's. As the total pool of taxpayer funds in 'tax-free' Roth accounts grow & the National Debt balloons to ever higher record levels (both in absolute $$$ & as a % of GDP) it is quite plausible to fear the Feds find a way to get at some of that $$$$, either directly or indirectly.
 
Last edited:
We retired at 59.5, sold our large home and moved into our vacation home. Used that cash to fund conversions for 4 years to supplement our workplace Roths. We will now scale conversion back to avoid significant IRMAA multiples. Legislation that lowered Federal marginal tax rates expires in 2 years. Our country's spending and debt service is at its zenith. I don't see tax rates ever being lower in my lifetime. I have half of my retirement savings now growing tax free and available without tax consequences. Having not personally seen LTC insurance as a good investment for us, our Roths are ready to handle that task or flow tax-free to our heirs.
 
Other considerations

We retired at 59.5, sold our large home and moved into our vacation home. Used that cash to fund conversions for 4 years to supplement our workplace Roths. We will now scale conversion back to avoid significant IRMAA multiples. Legislation that lowered Federal marginal tax rates expires in 2 years. Our country's spending and debt service is at its zenith. I don't see tax rates ever being lower in my lifetime. I have half of my retirement savings now growing tax free and available without tax consequences. Having not personally seen LTC insurance as a good investment for us, our Roths are ready to handle that task or flow tax-free to our heirs.
 
DW & I both have 401ks. DW is the sole beneficiary of My 401k. I'm about to figure out how much roth conversion I can do for this year. DW does not yet have a Roth. We can convert hers or mine. It's all gonna be hers anyway. Is there any benefit for DW as the survivor, of converting some of mine or starting a Roth for DW and converting hers?
 
thatguy said:
DW & I both have 401ks. DW is the sole beneficiary of My 401k. I'm about to figure out how much roth conversion I can do for this year. DW does not yet have a Roth. We can convert hers or mine. It's all gonna be hers anyway. Is there any benefit for DW as the survivor, of converting some of mine or starting a Roth for DW and converting hers?
Click to expand...

In our situation, D
DW is 3 years older so any RMD for her would hit first. I converted hers first then started working on mine after hers was all converted.
If she inherits yours, it becomes hers and would be treated the same as her non inherited account(s).
 
pb4uski said:
Let's assume that the $12k is cash so there is no basis difference or even you sold somehting at a capital gain to generate the $12k that the capital gains tax would be nil if you are in the 12% tax bracket for ordinary income. ....

Looking at the value of the $12k after 30 years in isolation:

With conversion: $51,863 = 12000*(1+5%)^30
No conversion: $43,671 = 12000*(1+5%*(1-12%))^30
Taxes avoided as a result of conversions: $8,192

If the $12k didn't effectively end up in the Roth then there would be no additional benefit.
Get it now?
Click to expand...

I'm not ignoring this, just haven't had the time to dig through those numbers again. Maybe this w/e. I appreciate your efforts.

-ERD50
 
pb4uski said:
Not Z3Dreamer but he is not doing big Roth conversions to keep income low the benefit from ACA health insurance premium subsidies... typically until the you turn 65 and go on Medicare.
Click to expand...

Yes that is what I am doing for my brother and I to the tune of ~23k a year.
 
AlmostThoreau said:
Can you provide a bit more detail here? Thanks.
Click to expand...

Do what I did in my earlier post - go to healthcare.gov and see what your ACA subsidy reductions will be if you increase your income by doing Roth conversions. For me there's an almost 9% penalty on top of my marginal tax rate. That makes Roth conversions a non-starter for me but your situation might be different.
 
Just completed my final Roth conversion of the year last Thursday which should bring me to the top of the 12% bracket. Only an additional $20K as the brackets aren't too wide for us singles. I figured since the market was being so uncooperative lately and my Roth conversions are accomplished "in kind" I might as well do a little market timing to squeeze as much as I can from each conversion. I start RMDs in 2026 so the little I can convert before that won't substantially change my RMDs but it will give me a larger stash of tax free money to play with as I wish.
 
ERD50 said:
If you are already taking pensions that meet your spending, you probably aren't really in a position to benefit from Roth conversions. So don't. It's not one-size-fits-all.
Click to expand...

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 :cool: -- 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.
 
Robert the Red said:
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.
Click to expand...

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".
 
RunningBum said:
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".
Click to expand...
I would agree with RunningBum. We are in a similar situation to you where we find ourselves at lower end of the 22% bracket today with only one SS today. In 3 years we will add 2nd SS and move to higher end of 22%. I'm converting to IRMAA limits. In my mind, even if I pay 22% today and 22% tomorrow that money paid in taxes isn't mine today, it only takes the gummt share out of our account. Do you see any chance of taxes being reduced when you start SS and start RMDs ? Why not convert up to IRMAA limit (about $194K for 2023) ? Not questioning your decision, just want to ensure I understand why you won't convert if it would save you paying more taxes in the future.
 
Robert the Red said:
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 :cool: -- 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.
Click to expand...

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.
 
You must log in or register to reply here.

Similar threads

S
Not much point in Roth conversions?
2 3 4
Replies
85
Views
5K
SevenUp
SevenUp
F
Forgot Roth Conversion in Tax Return
Replies
12
Views
693
Wetfly93
W
R
Backdoor Roth All At Once - Single Tax Year Pain
Replies
20
Views
1K
pb4uski
pb4uski
R
Asset Allocation and Fund Location for Early Retirement
2
Replies
39
Views
2K
TB1960
TB1960
G
Roth Conversions and How Dividend Income are Taxed in Roth IRA
Replies
15
Views
1K
TheWizard
TheWizard

Latest posts

Back
Top Bottom