Who has not/will NOT do Roth Conversions?

[SecondCor521]

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 [A]mericans is lower than your peak years.

[Capitalization changed.]

Many people here understand taxes pretty well.

I think your statements above are misleading.

Yes, income in any given year always fills up brackets from the lower to the upper. However, when making a decision whether to Roth convert on the margin, those additional Roth conversion dollars are either added at the top in the current year or added at the top in a future year. So it's marginal rate now versus marginal rate later.

And many posters here, including me, will have our highest marginal rates in retirement due to SS, RMDs, investment income, inheritances, and any other income sources. Having enough to retire early, living on 4% or less, having average investment luck over a few decades, and not doing Roth conversions can create very high marginal rates.

Finally, the comparison for Roth conversions doesn't have to be peak earning years versus RMD years. It's early retirement years versus RMD years. So personally I made a lot of tax deductible 401(k) contributions during my peak years and am doing Roth conversions in my early retirement years. These conversions are thus done at a 0% federal income tax cost compared to 24%+ during either peak or RMD years.

 

[Jenna]

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

For more info on this, Check out a blog called Go Curry Cracker

Never Pay Taxes Again-he walks you through the simple math behind this. And he retired early using this stategy

 

[Out-to-Lunch]

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.

I believe that I did back in post #40:

Well, the way that you structured your question, I am not supposed to respond. However, I think such a limited discussion would be of little use. Feel free to ignore this if you truly only wanted to hear from people who have decided not to convert.

I am doing Roth conversions until the scheduled expiration of the TCJA rates to the top of the 22% bracket. We are MFJ and have decent pensions.
My goals are:
-limit RMDs, of course, but especially with an eye towards if either I or my wife passes away, and the survivor is filing single.
-IRMAA brackets
-a chance for a small amount of tax-rate arbitrage between 22% and 25%.
-flexibility for possible large lump-sum distribution (i.e., for a house).

 

[Yoheadden]

I don't plan to do any conversions because my projected RMDs don't push me into a higher tax bracket plus I want to control my income for ACA subsidies and eventually IRMMA. That may change after this year when the ACA subsidy cap drops back to 4X poverty because then I won't qualify for anything and it won't be part of my conversion equation. Even then Roth conversions don't really move the needle much for me as far as tax savings. The one thing that might make me do it is a huge market drop, but it would have to be a 40-50% drop for me to bother.

+1

 

[RetMD21]

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.
....

right, you aren't one of those years ago folks living off your taxable accounts and paying zero income tax

 

[Phroig]

For more info on this, Check out a blog called Go Curry Cracker



Never Pay Taxes Again-he walks you through the simple math behind this. And he retired early using this stategy

Thanks! I’d forgotten about the 0% rate for qualified dividends and long-term cap gains on taxable incomes of $80K or less.

 

[pb4uski]

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.

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

Ordinary income is offset by deductions, so any ordinary income (interest or non-qualified dividends) under your standard deduction is tax-free. In addition, preferenced income like qualified dividends and LTCG are tax free/0% tax rate for a married couple filing jointly as long as your total taxable income is less than $83,350 in 2022.... so someone could have a six-figure income and have $0 tax if the income is structured properly.

 

[TheWizard]

Ordinary income is offset by deductions, so any ordinary income (interest or non-qualified dividends) under your standard deduction is tax-free. In addition, preferenced income like qualified dividends and LTCG are tax free/0% tax rate for a married couple filing jointly as long as your total taxable income is less than $83,350 in 2022.... so someone could have a six-figure income and have $0 tax if the income is structured properly.

SomeCOUPLE, not someONE.

From someone who's filed Single for last 20+ years...

 

[pb4uski]

Excu-use me! Fair point, but go back to the OP, it is for a married couple but the princes still apply to a single. Get over it.

 

[ducky911]

Being in California, state tax 10+%...takes all the fun out of conversions.

 

[RunningBum]

Being in California, state tax 10+%...takes all the fun out of conversions.

Will you be moving? Current vs. future state certainly is a big factor. If you're likely to stay, none at all unless you have some insight on tax rates in that state.

 

[skyking1]

The generalizations don't address specific conditions.
I am 4 years older than DW, and will likely do the conversions so the tax torpedo of her having to keep up the same basic set of costs in a higher tax bracket is minimized.
If we are both healthy and doing well, it would not pay off so much.

 

[RockLife]

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.

This is the situation I'm in. I can do conversions and continue to do them, but it's not making a huge difference because the ACA subsidies cap the benefits of the Roth conversions.

 

[maestro]

[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.

+1. I say take the tax hit. [mod edit] I believe the tax rates will be 'eye opening' in the years ahead. Now that ACA is behind me, I'm going all out on Roth conversions this year. I don't think they will EVER penalize those that have been doing this 'twice', although it seems we wake up every day to another "I don't believe it...."

 

[rrs26ja]

I did my first Roth conversion last year and will another soon. Taxes will only get more expensive as time goes on. I am trying to drive down my RMD before I get 72.

 

[rick55]

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.

Ditto. DW is currently getting healthcare on the exchange, and we wont be able to do roth conversions til next year. I’ll be 67 in may, but We also get the NYS STAR tax exemption and the over 65 exemption, so we need to watch our income. I believe our SS income does not count for purposes of the STAR exemption, which is great. I also have EPIC thru nys for help with RX. Dont want to lose that cause i pay a lot for my Jardiance.

 

[samcat]

Being in California, state tax 10+%...takes all the fun out of conversions.

We are in California also. Right now, we are not doing conversions because we may move to a tax free state or a state with lower taxes. We just don't know!

 

[cb2008]

I have also done the math

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!

I agree doing the math, especially looking at what happens when one spouse dies makes the case for Roth conversions

 

[joedila]

No conversion for me

I've got a regular IRA of $415K and a Roth of $256K and I've looked at converting anywhere from $10 to 30K a year, but I just hate the notion of paying 22% (our current tax bracket) of my conversion to Uncle Sam. I am 69, currently getting a spousal SS benefit (next year I will start to collect on my own) and I realize that with my SS of $3200 per month and then RMDs on the Regular IRA (plus another 300K in a 457B) at age 72, we will likely move up a tax bracket or two, but I will deal with it...this may be short sighted, but I am comfortable with it.

I am still working part time (first as a communications consultant and now as an ebay seller) and I have been putting the max into my roth so as to increase the Roth IRA proportionate to the Regular IRA -- a small step, but i guess I am an incremental kind of guy.

But I have looked into it for several years, but just hate the notion of writing those big conversion checks to the IRS

 

[pb4uski]

.... But I have looked into it for several years, but just hate the notion of writing those big conversion checks to the IRS

I hear you, but how are you gonna feel when you're writing even bigger checks to the IRS because of RMDs?

You can use https://www.irscalculators.com/tax-calculator or Turbo Tax What-If Worksheet to get an idea of the rate of tax that you will pay on RMDs once you are on SS.

 

[eyenitnoy]

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!)

I am a big fan of Roth conversions, but there are downsides. Take, for example, my rollover at the first of the year. Well, guess what, my Roth funds invested in stocks went *down*. And I don't get the taxes paid returned because of my losses!

Now, I get it that, over time, the value will probably go back up. But paying tax and then getting a loss really stinks.

I'm mainly rolling over and paying the tax now to reduce the future RMD's and the potential for having to pay higher Medicare premiums down the road. I still think its a good plan, but rolling, paying income tax, and then losing account value REALLY hurts.

 

[Out-to-Lunch]

I am a big fan of Roth conversions, but there are downsides. Take, for example, my rollover at the first of the year. Well, guess what, my Roth funds invested in stocks went *down*. And I don't get the taxes paid returned because of my losses!

Now, I get it that, over time, the value will probably go back up. But paying tax and then getting a loss really stinks.

I'm mainly rolling over and paying the tax now to reduce the future RMD's and the potential for having to pay higher Medicare premiums down the road. I still think its a good plan, but rolling, paying income tax, and then losing account value REALLY hurts.

Another way to look at this is that you (likely inadvertently) changed your exposure to equities when you made the conversion you did. It would have been possible to rearrange your overall holdings to make it irrelevant (on an after-tax basis) whether you had made a conversion or not: https://www.bogleheads.org/wiki/Tax-adjusted_asset_allocation

 

[Gumby]

When I have converted, I have always bought the exact same thing in the Roth that I held in the IRA. I pay the taxes out of my after tax cash (which is the only asset I hold in my after tax account), not out of the conversion. For now, it helps keep things simple from an asset allocation perspective. Once I am forced to take RMDs, I will probably hold other assets in my after tax account and therefore will look to adjust allocations to maximize tax efficiency.

 

[herstous]

We have been doing Roth conversations for several years because our strategy to stretch our iras for hopefully several generations went out the window with the 10 year rule. To try to make it less of a tax burden for our heirs we started doing Roth conversions. Unfortunately. This was after we both had to pay for Medicare. I would advise to take the tax bite b4 you start Medicare so you can control your Medicare costs if you can.

 

[FREE866]

When I have converted, I have always bought the exact same thing in the Roth that I held in the IRA. I pay the taxes out of my after tax cash (which is the only asset I hold in my after tax account), not out of the conversion. For now, it helps keep things simple from an asset allocation perspective. Once I am forced to take RMDs, I will probably hold other assets in my after tax account and therefore will look to adjust allocations to maximize tax efficiency.

I just convert the shares from the taxable IRA to the Roth. I thought that is the simplest way to do it?