Why ROTH conversion is a bad idea for me.

[tenant13]

We spend a lot of time on this forum discussing the math and general wisdom of ROTH conversions. I'm as big a fan of lower taxes as we all are so I keep going back to the idea - which I definitely like as a concept - but every time I do, I come back convinced that in my case conversions would neither increase my financial well being nor happiness and would not improve my lifestyle. There is a chance that in some scenarios they would increase my bottom line - but that in itself has never been my priority.

1. I'm single and I have no heirs so estate planning is not part of my financial plan (I don't even have a will because I can't come up with any ideas)

2. Because I'm single I'm not that concerned with RMDs increases after one of the spouse's death

3. I don't see myself surviving beyond my early 80s (57 now) but even if I do, I have enough money to live twice as well as I'm used to up until 95 and beyond. In other words: I don't need more money that the conversions could produce.

4. I will very likely move out of US or at least change state residency to something warmer with no state taxes (FL?) And state taxes rarely come up when ROTH conversions are discussed. I suppose what I'm saying is that now is not a good time - maybe later when state taxes are not in play.

5. Speaking of timing - while the standard advice is to take advantage of the current lower tax rates we really have no idea what the future changes in the tax code may bring (except for the upcoming 2025 reverse/hike). It's possible that there will be some kind of indirect ROTH taxation introduced.

 

[sengsational]

State income tax reduction/removal is a completely legit thing to model, and it's part of many calculators, including i-orp.

Obviously, if you don't care about your bottom line increasing, then you probably can ignore most conversations on the board

But there's really nothing else you mentioned that I'd disagree with. It's all that "prediction is hard, especially when it's about the future" thing.

 

[steelyman]

Your point about being single with no heirs is a good one, I think. Many people choose conversions to provide a better legacy but not all situations are identical.

 

[Midpack]

All makes perfect sense to me, Roth conversions aren't beneficial for everyone. I'm doing conversions but it might be a wash in one sense for us. After a detailed study, assuming TCJA now and reverting to 2017 brackets for taxes in 2025 (have to start with some assumption) - although we'll save $400K in Fed & State taxes, much to my surprise our residual $ estate at end of plan (age 95) wouldn't be appreciably different. It seems that's mostly because I'm forfeiting future compounded returns on the taxes I voluntarily pay earlier. However, I expect taxes will only become more confiscatory in the decades ahead in which case we'll save even more in taxes and our residual will improve somewhat through Roth conversions. Everyone should carefully model their situation and even then most of us can't know for sure...

 

[walkinwood]

You should write a simple will. If you don't have a relative or friend that you feel is worthy, give it all to a charity or some institution that you admire. Otherwise, the state just gives it to someone based on their rules.

 

[RetireBy90]

I agree with the points except the one about the future of taxes. Almost every day I read another proposal to increase taxes either at the federal or state level. Your situation does seem to negate many of my reasons for Roth conversions. I do agree that like a decision on when to take SS is dependent on individual circumstances Roth conversions are also very individual. In your case, it is your pile and you got it by managing it prudently. While I certainly feel the need to being open to other points of view and conclusions I trust that what got us to FI will serve us well in future financial decisions and actions. Trust what got you to FI.

 

[Out-to-Lunch]

I would tend to agree that you don't have many of the factors that favor Roth conversion.

The only one that I can think of that you didn't cross off was IRMAA. Will your RMD+SS put you in a higher IRMAA tier?

 

[pb4uski]

I agree that converions may not be so useful to you. Do you have any charities or causes that you are passionate about or any close friends or family that you would like whatever is left to go to?

State income taxes were a definite consideration for us. We have done Roth conversions while we paid state income taxes, but now that we are FL residents we may do more than we nornally would.

For your situation, IF your current federal and state income tax cost of Roth conversions is higher than what your marginal federal and state marginal tax rate will be when RMDs come in then it may not be of benefit to you.

I'm skeptical that any kind of Roth taxation would be introduced, but if it was I could easily sidestep it by withdrawing all the Roth money and putting it in municipal bonds.

 

[pb4uski]

.... Almost every day I read another proposal to increase taxes either at the federal or state level. ...

Yup, you can read about potential tax hikes every day for the last 20 years... but what has happened? Talk is cheap. Congresscritters introduce bills that they know have no chance of ever becoming law all the time to curry favor with certain constituencies.

 

[Markola]

You should write a simple will. If you don't have a relative or friend that you feel is worthy, give it all to a charity or some institution that you admire. Otherwise, the state just gives it to someone based on their rules.

I’d add that leaving it to a major national charity that has lots of attorneys, and informing them when you do, will help prevent shenanigans by whatever attorneys end up handling your estate who, unsupervised, are incentivized to burn up all the billable hours they can. I’ve seen it happen repeatedly during my career in philanthropy, unfortunately. If you want to give locally, seek out a large “community foundation”, again with many attorneys who will keep things moving, to receive your estate. If you don’t care what happens after you’re gone, well, thank you for paying unnecessary taxes and attorney fees to feed the general economy .

 

[Gumby]

I think your reasoning is sound. We don't have any heirs and we have more than enough money to last us to the end. The only reason we're really doing Roth conversions is to maximize the tax arbitrage play that comes from having put money in a tIRA/401k in the first place. All of the money we put in was when we were in the 24%+ federal tax bracket, and a very large portion was at 35%+. I figure that if we're already in the 22% bracket in retirement, we might as well go to the top of it and capture the difference. I don't like leaving free money on the table.

 

[Which Roger]

I agree that Roth conversions aren't for everyone, myself included. I'm hoping to be in a position to donate a significant portion of my RMDs, which significantly changes the "tax bracket when RMDs kick in" part of the equation.


It seems from the discussions that most members of this group do (or plan on doing) Roth conversions, but I'm thinking that impression is skewed because the people who aren't doing them tend not to participate in those discussions.

 

[tenant13]

I would tend to agree that you don't have many of the factors that favor Roth conversion.

The only one that I can think of that you didn't cross off was IRMAA. Will your RMD+SS put you in a higher IRMAA tier?

It's really hard to tell at this point. I have 15 more years before they kick in and so much could happen between now and then that any guessing would be just that: guessing. One example: I invested a small amount of my IRA in bitcoin - "play money" amount that I was fine with losing (which is till possible of course). Now that "play money" is around 15% of my net worth and it will likely affect RMDs since it grows in the tax deferred account. What will happen with it in the next 15 years is anyone's guess. In any case I don't include that in my retirement calculations.

 

[tenant13]

You should write a simple will. If you don't have a relative or friend that you feel is worthy, give it all to a charity or some institution that you admire. Otherwise, the state just gives it to someone based on their rules.

My friends are my age, so are the members of my somewhat distant family that I know (I haven't met the next generation). I'm not a fan of charities - I feel like administrative costs of running these things are the main purpose of their existence. I know I really should do it - I had a heart attack in March - but without a clear idea of what to do it's really not easy.

 

[Markola]

I'm not a fan of charities - I feel like administrative costs of running these things are the main purpose of their existence.

Wow, ok. Best wishes finding your desired alternative.

 

[Gumby]

My friends are my age, so are the members of my somewhat distant family that I know (I haven't met the next generation). I'm not a fan of charities - I feel like administrative costs of running these things are the main purpose of their existence. I know I really should do it - I had a heart attack in March - but without a clear idea of what to do it's really not easy.

You might look on Charity Navigator to find charities that devote their resources to program instead of overhead.

 

[RunningBum]

Moving to a low/no tax state is a valid consideration. Fed+state now vs. later is the right comparison to make.

Otherwise even as a single I look at what would be the best outcome for me if I did use all of my money in a long lifetime, and for me that says to do conversions now. Your situation may be different.

 

[RetireBy90]

Yup, you can read about potential tax hikes every day for the last 20 years... but what has happened? Talk is cheap. Congresscritters introduce bills that they know have no chance of ever becoming law all the time to curry favor with certain constituencies.

well we do have the current law will revert taxes higher after 2025. If we don't speculate on future critters passing increases then we probably shouldn't speculate on repealing of that. All in I expect higher taxes. Just my take.

 

[frank2009]

I'm in a similar situation. I've done some small back door Roth conversions over the years but am considering not doing them anymore. Also, I've read that law makers are considering raising the RMD age to 75. I would think that would reduce the need for conversions for people without heirs.

 

[RetireBy90]

I'm in a similar situation. I've done some small back door Roth conversions over the years but am considering not doing them anymore. Also, I've read that law makers are considering raising the RMD age to 75. I would think that would reduce the need for conversions for people without heirs.

forgive me if I'm mistaken, but does 't that just make it more expensive as RMDs will be more and potentially place you in a higher bracket ? As you get older and have not taken withdraws you will have more funds and less years to take them.

 

[Animorph]

I think the diversification into tIRA and Roth accounts may be useful. It will be for me.

I really don't feel like giving more to the IRS than I have to. I'd probably be doing the same Roth conversions even if I was single with no heirs. And you never know if that extra money may come in handy.

If you don't have significant taxable and tIRA assets, and your tax bracket never dips below the marginal rate your RMD's will be taxed at, then Roth conversions are most likely not a big deal.

 

[dmpi]

There's a very good post called "The important "trigger" income levels 2020". Everybody's situation is different. A Roth conversion lets you move future income to present income. Essentially you get to load level your income. That's important if you're trying to avoid some of these nasty triggers in your later years. Also a Roth provides after tax dollars that you can live off without counting as income.

 

[frank2009]

forgive me if I'm mistaken, but does 't that just make it more expensive as RMDs will be more and potentially place you in a higher bracket ? As you get older and have not taken withdraws you will have more funds and less years to take them.

You may be right. My thinking is at 75 I will be 3 years closer to my demise so it doesn't matter as much as I'm not married and don't plan to be.

I also have a problem with paying extra taxes now with money that could be invested instead.

Of course I could be entirely wrong about all of this.

 

[Midpack]

You may be right. My thinking is at 75 I will be 3 years closer to my demise so it doesn't matter as much as I'm not married and don't plan to be.

I also have a problem with paying extra taxes now with money that could be invested instead.

Of course I could be entirely wrong about all of this.

All of us could be wrong, like most financial planning way too many variables/unknowns - You pays your money and you takes your chances...

 

[tenant13]

forgive me if I'm mistaken, but does 't that just make it more expensive as RMDs will be more and potentially place you in a higher bracket ? As you get older and have not taken withdraws you will have more funds and less years to take them.

They key word in RMDs is "mandatory". We are free to withdraw/distribute our IRAs penalty free much earlier - which would effectively control the amount of taxes due over the years. RMDs are only a "problem" if the objective is not to touch IRA at all. Or minimally.

Which leads me to the conclusion that a lot of thinking that goes into tax planning (and consequently ROTH conversions) is estate related. A certainly valid approach but of limited value to people such myself.