Who has not/will NOT do Roth Conversions?

[HealthyFuture]

From reading the forums, Roth conversions are pretty popular. We are preparing to do our first set of them, but I get the impression our retirement company advisor doesn’t think they make much difference (and/ or no guarantee the rules won’t change, etc.).

Before we move forward…Curious who out there (with lots in tax-deferred) has decided to NOT do conversions, and why?

We have LOTS in tax deferred. (Well, we had lots more in tax deferred before the last couple of months! My account alone has taken a $250K hit since Dec 31. Ouch!)

 

[pb4uski]

From what I've read on this forum, many who decide not to do conversions are in higher tax brackets and, for example, would be converting at 22% now to avoid paying 24% later... and that 2% difference doesn't result in a lot of savings.

OTOH, if you are arbitraging the difference between 12% and 22% or 24% and 32% then it makes more sense.

 

[Dtail]

We are doing Roth conversions for the DGF. However for myself, the controlling of MAGI for medical tax subsidies is worth more than the Roth conversions currently. At age 66, will start Roth conversions.

 

[VanWinkle]

We are doing Roth conversions for the DGF. However for myself, the controlling of MAGI for medical tax subsidies is worth more than the Roth conversions currently. At age 66, will start Roth conversions.

Agree with this, waited to get past ACA before I started any significant Roth conversions. I am converting in the 12% brkt now so it makes sense before RMDs for me.

VW

 

[BeachOrCity]

One thing alot of working people don't realize is you end up w/ a bigger tax advantaged basket if your choices are maxing out reg 401K vs maxing out Roth 401K.
In both cases the contribution is the same, but the Roth is already taxed so in essence you have a bigger basket to work with.

As for myself, I have a healthy mix of Roth, Non Roth, and taxable....so I can optimize as I withdraw.

 

[Jerry1]

I do conversions, but the main thing I’m doing in managing my withdrawals to max out the 12% tax bracket. Personally, I think getting my 401K/IRA balances down in a tax efficient manner and lowering my RMD’s are the main focus. Putting it in a ROTH is just a bonus. If the brackets go up when they expire and my other income streams bring me to the top of the 12/15% tax bracket, I’ll probably stop converting to ROTH.

 

[Aerides]

We weren't able to contribute to ROTH's while working. And now retired we have small business and other income enough to keep us right at the (old) ACA cap, so we don't have a huge amount of wiggle room to convert, and any conversion means higher ACA costs, so that offsets some tax savings.

So at present, we don't convert.

 

[Magus]

One thing alot of working people don't realize is you end up w/ a bigger tax advantaged basket if your choices are maxing out reg 401K vs maxing out Roth 401K.
In both cases the contribution is the same, but the Roth is already taxed so in essence you have a bigger basket to work with.

Yes, but you can invest your tax savings in regular 401k and grow it along side your 401k. If you are in the 32% fed + 6% state bracket, you'll save $7,790 you can invest in a regular account as well on $20.5k in traditional.

People overwhelmingly overestimate the value of Roths - Probably 95-97% are either better off with traditional or no difference due to how taxes are structured but there are indeed exceptions. If you can convert at 12% or less its a no-brainer most of the time. At 22%% with a nice pension probably also makes sense. At 22%+ with no pension, generally will not.

Plus, always the risk Roth's won't be tax free on withdraw.

I have converted some to a Roth in the past at 24% tax rate while working....won't do that again but once I retire if I can get some at 12% I will.

 

[freedomatlast]

Haven't done Roth conversions yet because every year since retirement, between my wife's income and my income from consulting, it puts us over the IRS limit where there's a tax advantage to doing so. But I do keep an eye on these threads and am planning to do Roth conversions when there's a tax advantage to do it.

 

[pjm-7]

I do Roth conversions to expand my tax diversification. I am managing the amount I currently convert because of ACA subsidies. That will change next year. I want my tax diversification spread among taxable, tax-free ( Roth and municipals) and tax deferred. That gives me the flexibility to draw from the most efficient type at my choosing. Don't let the idea of "the tax laws may change" to prevent you from doing something you know today. The tax laws will always change.

 

[RunningBum]

A change much, much more likely than a future tax on Roth withdrawals is an increase in tax rates on regular income. Unless Congress takes action, rates will go back to previous levels in 2026. I like taking the bird in the hand of converting at current rates rather than risking higher rates in the future.

 

[Winemaker]

My current line of thinking, as we are currently in the 22-24% bracket, is to covert all DW's tIRA into a Roth. This will eliminate her taking RMDs at 72, and cover us from the future tax brackets 25-28%, on her portion. We will still be in that bracket later but just barely.

 

[Magus]

A change much, much more likely than a future tax on Roth withdrawals is an increase in tax rates on regular income. Unless Congress takes action, rates will go back to previous levels in 2026. I like taking the bird in the hand of converting at current rates rather than risking higher rates in the future.

Completely disagree. There hasn't been a rate increase on the bottom 90% of taxpayers in many, many decades - it's been nearly straight down. It's one of the very few things both Dems and Reps agree on it. If you are in the 32-37% tax bracket yours may go up - but you are also the least likely to convert to a Roth since you save 40%+ with state and income. We were within a few votes just 6 months ago of our first Roth tax. I'll be happy to make a wager with 5:1 odds in your favor that Roth gets a tax first before anyone below current 32% federal gets a tax increase for any amount you want.

 

[FLSUnFIRE]

I do not currently plan to. As a single FIREe, managing my MAGI for ACA is difficult if I realize any additional income and the cost of lost subsidy plus income tax is not worth the possible future tax savings.



I intend to start SEPP based off life expectancy in a few years (depending on portfolio balance, cashflow needs, tax considerations, etc). The SEPP will either fund most of my expenses or be BTD if I am lucky and another bull follows the current chaotic market.

 

[Midpack]

From reading the forums, Roth conversions are pretty popular. We are preparing to do our first set of them, but I get the impression our retirement company advisor doesn’t think they make much difference (and/ or no guarantee the rules won’t change, etc.).

Before we move forward…Curious who out there (with lots in tax-deferred) has decided to NOT do conversions, and why?

We have LOTS in tax deferred. (Well, we had lots more in tax deferred before the last couple of months! My account alone has taken a $250K hit since Dec 31. Ouch!)

From what I've read on this forum, many who decide not to do conversions are in higher tax brackets and, for example, would be converting at 22% now to avoid paying 24% later... and that 2% difference doesn't result in a lot of savings.

OTOH, if you are arbitraging the difference between 12% and 22% or 24% and 32% then it makes more sense.

WADR Your post reads like you've made up your mind already, and you're just looking for others to reinforce your decision. If not...

...it's not a question of "popular" or not, you do the math for yourself and make some assumptions about future tax rates over the next 20-30 years, along with ramifications for widow, etc. - and do what's to your advantage.

pb4uski gave the data based answer, the rest is irrelevant IMO.

Your retirement investment advisor is incompetent if he/she can't show you on paper what the benefits and risks are. The rules will change, no one knows exactly when or how, but you have to decide if "rules" will stay the same, improve for retirees or make Roth conversions even more beneficial based on what we know today.

I skipped Roth conversions for years because the online calculators showed it would a wash either way - online calculators aren't worth the time. It wasn't until I actually did the math in full detail that I could see we'd save money and greatly increase our withdrawal options once RMDs kick in that I started aggressively converting to level off tax rates before and after. It will save a ton in taxes, though it won't increase our residual that much - HOWEVER if tax rates become more confiscatory in the decades ahead, we'll save even more on taxes and improve our residual.

And if you're concerned about IRMAA limits now, make sure you look at what you're IRMAA impact will be in the decades ahead as RMDs push you into higher income brackets. I am paying an IRMAA penalty with current Roth conversions, but I would have been paying IRMAA penalties through much of my retirement later because of RMDs - with no recourse...

Do the math!

 

[RunningBum]

We were within a few votes just 6 months ago of our first Roth tax.

Somehow I missed this. Can you please post a link to this bill that contained a tax on Roths?

 

[RunningBum]

Oh, was it this? https://www.cnbc.com/2021/09/17/hou...ter-thiel-to-pull-5-billion-from-his-ira.html

The House Ways and Means Committee passed a tax package on Wednesday that would require withdrawals from retirement accounts worth more than $10 million.

This would not affect the bottom 90+%, which was the same metric you [Magus] are using for regular tax rates.

I'll stick with my opinion/forecast, but yes, a tax on Roths could happen.

 

[Magus]

Somehow I missed this. Can you please post a link to this bill that contained a tax on Roths?

https://www.cnbc.com/2021/11/05/bil...g-ira-tax-bill-in-build-back-better-plan.html

https://www.propublica.org/article/house-bill-would-blow-up-the-massive-iras-of-the-superwealthy

 

[Magus]

Oh, was it this? https://www.cnbc.com/2021/09/17/hou...ter-thiel-to-pull-5-billion-from-his-ira.html
This would not affect the bottom 90+%, which was the same metric you [Magus] are using for regular tax rates.

I'll stick with my opinion/forecast, but yes, a tax on Roths could happen.

Once they get a foot in the door on Roth's for "fairness" it will only go one direction. It's a lot like the original income tax was only 1% and only on millionaire equivalents. That changed quick! And you are conflating income bottom 90% vs Roth wealth level - $1 million+ in a Roth would be well into the top 10% of Roths. And frankly if its less than $1 million, you are almost universally better off with traditional 401k/IRAs.

It's simply quantity of impacted problem for politicians. # of people with Roths > $1m is low - so very little power politicial. those making less than $100k a year is ~80% of the population, and thus the politicians are far, far more likely to tax high balance Roths in the name of fairness than touch regular taxes. People have been saying we'd see tax increases since the early 2000s but all we've seen are tax rates go down except for the top 1% and since the 60s, tax rates on the bottom 80% have been down, down, down.

 

[pb4uski]

Completely disagree. There hasn't been a rate increase on the bottom 90% of taxpayers in many, many decades - it's been nearly straight down. It's one of the very few things both Dems and Reps agree on it. If you are in the 32-37% tax bracket yours may go up - but you are also the least likely to convert to a Roth since you save 40%+ with state and income. We were within a few votes just 6 months ago of our first Roth tax. I'll be happy to make a wager with 5:1 odds in your favor that Roth gets a tax first before anyone below current 32% federal gets a tax increase for any amount you want.

[mod edit]

It is likely that rates will revert to higher 2017 rates in 2026... that's almost in the bank... so everyone, including those below the current 32% federal rate will get a tax increase.

There never was any proposed Roth tax. What they had considered was requiring people with really big Roths to no longer be able to contribute and imposed minimum distributions on really big Roths, but there was no proposal that those Roth withdrawals be taxed. It was more imposing limits on tax-free growth for really big Roths and would only have impacted 818 taxpayers.

Congress never intended for Roths to be misused as a mechanism for sheltering such vast amounts from income taxes.

... Wealthy individuals with retirement accounts exceeding $10 million would be prohibited from contributing extra savings and would have a new required minimum distribution each year, according to an outline of tax legislation unveiled Monday by the House Ways and Means Committee. ...

... There are very few people with vast Roth accounts — just 818 taxpayers had Roth accounts worth more than $10 million in 2019, the Joint Committee on Taxation said in July. They hold about $25.7 billion. ...

... Thiel wouldn’t owe any tax up front and no early withdrawal penalties would apply, but he’d be required to move billions out of the tax-advantaged account. And any gains on investments made with that money would no longer be sheltered from taxes, ...

 

[Qs Laptop]

Originally Posted by RunningBum
Somehow I missed this. Can you please post a link to this bill that contained a tax on Roths?

https://www.cnbc.com/2021/11/05/bil...g-ira-tax-bill-in-build-back-better-plan.html

https://www.propublica.org/article/house-bill-would-blow-up-the-massive-iras-of-the-superwealthy

Just read both articles and didn't see anything in there about taxing Roth IRA's.

 

[Magus]

Total BS. I'll take that bet because you are woefully misinformed on both counts.

It is likely that rates will revert to higher 2017 rates in 2026... that's almost in the bank... so everyone, including those below the current 32% federal rate will get a tax increase.

There never was any proposed Roth tax. What they had considered was requiring people with really big Roths to no longer be able to contribute and imposed minimum distributions on really big Roths, but there was no proposal that those Roth withdrawals be taxed. It was more imposing limits on tax-free growth for really big Roths and would only have impacted 818 taxpayers.

Congress never intended for Roths to be misused as a mechanism for sheltering such vast amounts from income taxes.

1) Want to bet $10k that rates below 32% do not go up in 2026? I'll even give a 25% chance some of the lower ones drop even further
2) The first several versions of the Roth bill was indeed going to end up making Thiel end up paying a multiple billion in tax. After many versions later they watered it down and then shelved it when they realized they didn't have the 50 votes in the senate for any of it.
3) Again, once they start taxing anything for wealth in Roths, it'll just expand from there. This is how its always been with taxes. Taxing high wealth is one of the key things large parts of the country are focusing on rather than income and folks with 7 digit roths are a great target.

 

[Magus]

Just read both articles and didn't see anything in there about taxing Roth IRA's.

it required every dollar over $20 million to be immediate withdrawn. Guess what happens if you aren't already 59.5?

https://www.cnbc.com/2021/09/17/hou...ter-thiel-to-pull-5-billion-from-his-ira.html
The House Ways and Means Committee passed a tax package on Wednesday that would require withdrawals from retirement accounts worth more than $10 million.
Peter Thiel, billionaire co-founder of PayPal, would likely need to withdraw all but $20 million of his Roth IRA, reportedly valued at $5 billion.
Thiel, 53, would owe income tax on any investment earnings he withdraws due to current retirement distribution rules.

 

[Exchme]

HealthyFuture:

The discussion would be more useful with better information about your situation. But let’s try to frame the discussion a bit for your circumstance. Since markets are down ~12% from the start of the year and you are down $250K, then if you were 100% stock, that would be >$2M just in your own tax deferred account. Since bonds are down less than that, I think we can safely say you have well in excess of that amount, plus whatever your spouse has, plus your taxable accounts.

Your advisor needs to understand your life situation, goals, health, expectations, fears and projections and then incorporate those into a set of models to show you the impact of Roth conversions. Vague statements from the advisor that conversions won’t help raise red flags as to whether the advisor has done any analysis for you or is just blowing hot air.

Some considerations that push to higher conversions
+Estate planning to optimize value to heirs
+Age differences or health issues that would increase the years where the surviving spouse files single.
+Projections that your tax bracket will increase (such as with expiration of TCJA after 2025)
+Enough NW that estate taxes would be a concern
+Projecting high future returns

Some considerations that push to lower conversions
-Maximizing gifts to charity rather than heirs
-Reserving funds for Long Term Care
-Holding your bonds preferentially in your tax deferred

In a given year, there are tactical considerations such as obtaining an ACA premium credit, staying under an IRMAA tier, avoiding various effective high marginal rate humps in the tax code, moving to a different tax jurisdiction, etc. In spite of tactical considerations, the lifetime optimum is largely determined by the big picture assumptions.

 

[Which Roger]

No Roth conversions for DW and I. ACA subsidies are too good to pass up for the next few years. If/when the tax torpedo hits later on, it will mean that (1) we're still alive, and (2) our investments have done well and we've more than won the game. If we get to that point, we plan to start giving a lot away while we're still living, which will negate a good part of the tax torpedo.