Who has not/will NOT do Roth Conversions?

[Which Roger]

Doesn't the benefit depend on the individual situation? Have you run any numbers?

Wow - next someone is going to claim that "when to take social security" also depends on one's specific circumstances.

 

[Dash man]

We’re doing Roth conversions. After using a spreadsheet to extrapolate our income, RMDs and taxes out to age 95, it was a no brainer to do large Roth conversions up until the TCJA act sunsets. 2026 will also be the year we turn 70. We used a conservative growth rate of 4%, so any faster growth justifies our decision even more. Paying more IRMAA for a few years is worth avoiding it for the years to come.
Considering the Estate Tax exemption will be cut in half after the TCJA sunsets, paying taxes on the conversions now will help keep us under the cap.

 

[FREE866]

I started doing them a few years ago and already have over 100K. I'm 55 years old so I plan to do 25-30K every year until I'm 70 ( I know things can change, but thats the plan for now).


I'm in 12% bracket now and I do conversions up to top of that. Between SS, which I plan to start taking at 70, and RMD's at 72 I think its a pretty good bet my tax rate will be higher then. Possible much higher. And the thought of most likely having several hundred thousand dollars in a tax free account in my 70s gives me much comfort.

 

[mountainsoft]

I won't be doing any more Roth conversions, simply because I converted the last of my traditional IRA in January. I've been converting to the top of my tax bracket for several years and am 100% Roth now.

We're still working, in the 12% tax bracket, and the "pay now vs pay later" was basically break even based solely on taxes paid on the savings. However, I converted for a variety of other reasons also.

1. Future tax rates will most likely be higher than today's rates. Might as well pay taxes now while they're cheaper and we have the extra income to pay them.

2. Deductions from a Roth aren't taxable, which will lower our taxable income in retirement. This provides a few benefits:

a. Pay less taxes in retirement when our income is fixed.
b. Less taxable income means less of our social security will be taxed.
c. Lower income will allow us to qualify for more ACA subsidies.
d. Lower income will allow us to qualify for property tax deductions (once I'm 62).

3. Eliminating my traditional IRA is one less account to manage. Less is always more in my book.

 

[Phroig]

I do, but like others, only in the 12% bracket.

Conversions in the 22% bracket might also be reasonable. As recently as 2017, incomes over $75K (married filing jointly) were taxed at 25%.

 

[Exchme]

This was very helpful to me. RE reserving funds for Long Term Care — why does this push to lower conversions?

We have a 9-year age difference. No heirs. Net worth $~4M+ between the two of us, and nearly all of it in tax deferred. It seems unlikely we would qualify for ACA credit. No desire in the near term to move tax jurisdictions. I am just now learning about how to plan a strategy for withdrawing money — it seems that our situation would benefit from conversions for tax savings. I do get that ultimately it is a math decision, but since some people have said at the 22 vs 24% tax rate it may not be much of a benefit (not worth the hassle I think someone said), I was curious if there were other perspectives like that before I go dig in to the math (once I find the right planning spreadsheet).

Once you get to age 63, then IRMAA tacks on basically another 5.7% on AGI above $182,000 (threshold is cut in half after one spouse passes). The TCJA is set to expire in 2026, that will add another 3-4 points. With a 9 year age gap, statistics say the younger spouse will have a lot of years filing single. With >$4M in tax deferred (which we would expect to grow some more), RMDs + SS for a single taxpayer are likely to be in the top one or two tax brackets (35% or 37% today). I would not sit by and let the tax train run over me, I would do some proactive planning.

 

[jebmke]

I did a few conversions in the early years of retirement but then my pension started and the financial case was less compelling. At one point we also concluded that we will probably QCD most of it away anyway then it really made no sense at all.

 

[COcheesehead]

I haven’t and likely will not. I was in the highest tax bracket so it did not make sense. Now the ACA subsidies balance out the tax advantage of the rollover so I don’t want to incur the income. AMT taxes come into play too. I encourage folks to look at the total picture of the cost of paying the taxes in advance vs paying them down the road. Use a good retirement planner tool like Fidelity’s and you can see what your RMD’s will be. Paying taxes early is not in my plan.

 

[HealthyFuture]

This was exceptionally helpful to me as the OP. I appreciate all of the responses! I’m going to run numbers this weekend, and this filled in a couple of gaps in my knowledge for how to better understand what I’ll be looking at.

 

[pb4uski]

On other thing to factor in is the taxes on your heirs. If I die and DW inherits my tIRA, she will be in a much higher tax bracket than we are as a couple. Same thing for my kids when they inherit it from her. DD and DSIL are high earners in a high income tax bracket

 

[Magus]

Conversions in the 22% bracket might also be reasonable. As recently as 2017, incomes over $75K (married filing jointly) were taxed at 25%.

You'd need to adjust for inflation and adjust for standard deduction at a minimum. Someone retiring in 15 years even if we went back to the old brackets (we won't, at least not the bottom 90% and likely not the bottom 97%) you'd need ~$200-$250k income to have *any* income taxed at 25%. People massively over-estimate how much they will owe in taxes. Typical family making even top 30% income has an effective tax rate at 6% or below and middle 50% (married couple making about $75-80k) has an average effective tax rate of 2%.

 

[ShokWaveRider]

We cannot because of DW's ACA. 2 more years to go, then the current tax level expire. Who knows what after that?

 

[RunningBum]

People massively over-estimate how much they will owe in taxes. Typical family making even top 30% income has an effective tax rate at 6% or below and middle 50% (married couple making about $75-80k) has an average effective tax rate of 2%.

Marginal rate is what's important, not effective tax rate. And one should calculate their own current taxes, and estimate their own future taxes, and not pay attention to "typical" or "average" cases. What is the average 401K/tIRA balance at 65 here compared to the general population?

My effective rate on $53K AGI in 2021 was 0.77%. But my marginal rate on the next $273 was 12%, and after than 27% due to pushing QDivs into being taxed, until all were taxed. Add in another 8.5% for lost ACA and that's a 20.5% marginal rate quickly increasing to 35.5% marginal, which is why I only converted about $15K last year.

I've done the math and expect to see the same kind of factors to make the marginal rate on my RMDs much higher than my effective rate. The QDiv tax impact will still be there. ACA concerns are gone, but I may be pushing some of my SS into being taxable, which has a huge effect, albeit for a small window. If you already have enough income for SS to be fully taxed, you may have to worry about IRMAA levels. So I will probably have a very low effective tax rate at age 72, but if I have RMDs the marginal rate on those would be quite a bit higher, as high as 49.95% if I'm in that SS tax hump.

I'm glad that I was able to convert most of my tIRA before ACA subsidies changed the math. Between 65 and 72 I may take a year or two to blow through that 27% marginal rate and continue converting to the top of 22% or 24% (but maybe not if they go back to 25% and 28%) to get my tIRA fully converted. Or I may leave some for QCDs. Like I do every year, I will look at my situation for the current year, and my projections for my later years, and make my decision for that year then.

 

[Phroig]

You'd need to adjust for inflation and adjust for standard deduction at a minimum. Someone retiring in 15 years even if we went back to the old brackets (we won't, at least not the bottom 90% and likely not the bottom 97%) you'd need ~$200-$250k income to have *any* income taxed at 25%. People massively over-estimate how much they will owe in taxes. Typical family making even top 30% income has an effective tax rate at 6% or below and middle 50% (married couple making about $75-80k) has an average effective tax rate of 2%.

The amount that you'll withdraw in 15 years will also be quite bit more than the amount you convert today if it continues to grow in a tax-deferred account.

 

[Magus]

Marginal rate is what's important, not effective tax rate.

This is true, but due to the way our taxes work, this nearly always works against Roth's since the contribution/conversion is always at the highest marginal rate in a given year while incomes in retirement always are starting at the lowest marginal rate. The overwhelming majority of folks are better off ignoring Roth's for that reason and the fact that that your highest marginal tax rates in retirement for the overwhelming majority of americans is lower than your peak years. But absolutely should always do the math, but for the very lazy and the very average, you are better off ignoring Roth. Folks who will inherit a fortune or have huge pensions exceptions.

IMO RMD's impacts are also very overrated. Taking out 4-6% is fairly minor to fairly moderate for overwhelming # of folks unless you are pushing mid 7 digit account balance, in which case you are talking top 0.5% account balance for one. Especially as more and more folks retire without high pensions (continues to grow as a % of the pie), Roths value will continue to decline.

it's easy to forget for a lot of people the average median household income is around $75k (Much lower for retirees) with a median federal tax burden is about $1.5k. If you are way over that, especially in retirement, you are not remotely close to average/typical. Advice on these type sites are better suited to "normal" except where the situation is obviously not normal. but just my two cents.

 

[Magus]

The amount that you'll withdraw in 15 years will also be quite bit more than the amount you convert today if it continues to grow in a tax-deferred account.

Very likely - certainly hope so - but do the math on what you'd need to have saved in order to hit way over $200k in income in 15 years at a 3-5% withdraw rate. You'd need a ~$5m nut to have any income taxed at 25% in that time frame (which again assumes the sunset goes into effect for all brackets - which won't happen). And ~double that to have a huge impact on your overall taxes. That will certainly not be typical, especially to someone in a sub 25% marginal tax bracket today. For folks in the 32-37% marginal tax bracket today - yeah a lot more likely. Folks with a large pension the #s are more favorable with roths (or inherit a fortune) but for most folks, Roths are way overrated.

(That said, I still think having some Roth is helpful in case you ever have a year you need higher than normal withdraws)

 

[SnowballCamper]

Who has not/will NOT do Roth Conversions? Me.

I used the I-ORP calculator to evaluate my situation and learned that the benefit of doing Roth conversions is quite small and would take many years to materialize, yet with substantial up front costs. I did go ahead and start a SEPP as a means of leveling out income, and thus taxes. This has the added benefit of enabling more spending earlier, when we have the mobility to enjoy more activities.

I highly recommend www.i-orp.com as a robust tool to get you thinking in terms of your particular situation. As with all calculators, there are limitations.

 

[Winemaker]

Very likely - certainly hope so - but do the math on what you'd need to have saved in order to hit way over $200k in income in 15 years at a 3-5% withdraw rate. You'd need a ~$5m nut to have any income taxed at 25% in that time frame (which again assumes the sunset goes into effect for all brackets - which won't happen). And ~double that to have a huge impact on your overall taxes. That will certainly not be typical, especially to someone in a sub 25% marginal tax bracket today. For folks in the 32-37% marginal tax bracket today - yeah a lot more likely. Folks with a large pension the #s are more favorable with roths (or inherit a fortune) but for most folks, Roths are way overrated.

(That said, I still think having some Roth is helpful in case you ever have a year you need higher than normal withdraws)

But if the shoe fits.......

 

[RunningBum]

This is true, but due to the way our taxes work, this nearly always works against Roth's since the contribution/conversion is always at the highest marginal rate in a given year while incomes in retirement always are starting at the lowest marginal rate. The overwhelming majority of folks are better off ignoring Roth's for that reason and the fact that that your highest marginal tax rates in retirement for the overwhelming majority of americans is lower than your peak years. But absolutely should always do the math, but for the very lazy and the very average, you are better off ignoring Roth. Folks who will inherit a fortune or have huge pensions exceptions.

A very common situation on this board is people who have early retired, and are not yet taking SS or subject to RMDs. You've only been here for about 6 months, so maybe you aren't aware of this. I found another thread where the OP is 50 and probably looking to retire this year so this definitely applies to them. The name of the site is "early-retirement" so it's not a reach to assume we're talking about early retirement situations rather than the average American household's situation.

The first reply to the OP in this thread brought up tax arbitrage, doing conversions at a lower rate now than you expect you'll be in when taking RMDs. This is a given in any conversation discussion, so much so that we usually mention it upfront and then discuss the subtleties in response to questions. Maybe we gloss over it too much for new people, so let me be clear: You do not want to convert now if your marginal rate is higher than you expect it to be with RMDs later. I don't think anyone here is saying differently, unless it's some fringe condition.

Right now my only income is interest and dividends on my taxable investments. In 5 years I'll have a small pension, in 10 I'll start SS, and in 12 I have RMDs. My marginal rate will definitely be higher if I have some RMDs to take at age 72, even with the ACA subsidy effect gone. Many who retire early and don't immediately start SS or an early pension are in the same boat.

 

[Palmtree]

On other thing to factor in is the taxes on your heirs. If I die and DW inherits my tIRA, she will be in a much higher tax bracket than we are as a couple.

Thank you. I was wondering when someone was going to bring this up.
It's one of the major reasons we are doing Roth conversions to the upper limit of our current tax bracket.

 

[RetMD21]

Wow - next someone is going to claim that "when to take social security" also depends on one's specific circumstances.

Lol, apparently, you can post something vague on either topic and stand back. I looked over the responses more this time, somebody had already pointed out OP's assumption that conversions are the default.

Still there are things to learn. I hadn't thought about the death of a spouse and filing as single.

The biggest difference between the 2022 and 2017 tax brackets imo is the rate in the top bracket and the income division between the 35% rate and the higher one (for mfj)

Years ago people used to post about living off only their taxable account and paying zero income tax. Maybe that was on Bogleheads. Anyway, people that post here are aware of the tax torpedo.

 

[RunningBum]

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.).

One reason the advisor might be against them is that they reduce your gross portfolio amount. Even though you will come out ahead by paying taxes on deferred income at a lower rate now than later, you're total assets under management dollar amount will be lower, so they'll get less if they are charging you a % of AUM.

A second reason is that they probably don't want to go to the work of figuring out how much you should convert, because it's not a simple calculation. So they just wave their hands and say it won't make much of a difference, whether it's true or not.

To me, go back to post #2 and convert at least as much as seems like a no-brainer. Figuring beyond that does take more work. I like math and doing spreadsheets so I take it as a challenge to squeeze the most out of conversions. If you don't want to do that, fine, because that little bit won't make much of a difference. On the other hand, if you overshoot conversions a little bit, that won't make much of a difference either, so I don't mind being aggressive with conversions.

 

[pb4uski]

...Years ago people used to post about living off only their taxable account and paying zero income tax. ...

No, that would be us and many others here that have early retired before SS and/or pensions start. In 2022, a married couple under 65 living off their taxable account could have up to $25,900 of interest and unqualified dividends and up to $83,550 of qualified dividends and long-term capital gains and pay $0 in tax... that's $109,450 of income on Form 1040 and pay $0 tax as long as the income is of the right types.

For every year since we retired in 2011, if we didn't do any Roth conversions our federal income tax would have been $0 each year. It has been more because we have chosen to do low-tax cost Roth conversions... we've converted over $.5m and paid $51k in federal tax... better to pay 9.4% now than 22% or more later.

 

[Exchme]

This is true, but due to the way our taxes work, this nearly always works against Roth's since the contribution/conversion is always at the highest marginal rate in a given year while incomes in retirement always are starting at the lowest marginal rate. The overwhelming majority of folks are better off ignoring Roth's for that reason and the fact that that your highest marginal tax rates in retirement for the overwhelming majority of americans is lower than your peak years. But absolutely should always do the math, but for the very lazy and the very average, you are better off ignoring Roth. Folks who will inherit a fortune or have huge pensions exceptions.

IMO RMD's impacts are also very overrated. Taking out 4-6% is fairly minor to fairly moderate for overwhelming # of folks unless you are pushing mid 7 digit account balance, in which case you are talking top 0.5% account balance for one. Especially as more and more folks retire without high pensions (continues to grow as a % of the pie), Roths value will continue to decline.

it's easy to forget for a lot of people the average median household income is around $75k (Much lower for retirees) with a median federal tax burden is about $1.5k. If you are way over that, especially in retirement, you are not remotely close to average/typical. Advice on these type sites are better suited to "normal" except where the situation is obviously not normal. but just my two cents.

Later in the thread, OP clarified that there is $4M in tax deferred. Folks accumulating that much probably have a goodly sum in SS coming too, so there will be a healthy tax bill when RMDs start and some Roth Conversions to level that out may well make sense. Some folks are addressing OP's situation, some are sharing their own situation (as invited in the thread title) and some are discussing average/typical situations. No wonder the posts are all over the map!

As you said, everyone has to take into account their situation and calculate.

 

[Phroig]

Pb4uski: Would you explain the bit about $0 tax? Thanks!