Can I justify converting $66K TIPS in TIRA to a Roth IRA?

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Browser
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Can I justify converting $66K TIPS in TIRA to a Roth IRA?

Post by Browser » Tue Oct 13, 2015 1:19 pm

I presently have $66,000 in a 6-year TIPS ladder that mature annually from 2024-2029. Having them in a TIRA is a bit of a pain because I must take my RMDs from this account. The interest paid out by the TIPS isn't sufficient to cover the RMDs, so I would need to sell a small amount of the TIPS each year to generate the capital for the RMD. This sort of defeats the purpose of the TIPS ladder, which was to provide some inflation-protected income during the period in which they mature. I'd love to move these things to a Roth IRA. I've estimated the income tax I'd have to pay if I converted the entire TIRA this year and it would be about 33% of the $66K both Federal and State. I'd be able to pay the additional tax from other funds sitting around in cash earning no interest anyway, so I'd be able to move the entire TIPs ladder to my Roth intact.

Paying $22K in income tax to move the TIPS to a Roth seems like a chunk of money, so needless to say I'd need to justify doing it in my own mind. Of course, I have to pay tax on the TIPS as they are liquidated and distributed from the TIRA down the road and there's also the real benefit simplifying my investments by getting rid of the TIRA and not having to manage the RMDs every year. Part of my motivation is to simplify things as much as possible so that I don't have tricky matters to manage as I age.

Would appreciate any insights and comments.
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Re: Can I justify converting $66K TIPS in TIRA to a Roth IRA?

Post by DSInvestor » Tue Oct 13, 2015 1:28 pm

Do you have other TIRA/Rollover IRA/SEP-IRA/SIMPLE-IRA accounts? I believe RMD rules for IRA require that you calculate the RMD for each account but you can take the RMD total amount from any of the IRAs. If there is another IRA, you can side step the issue of selling TIPS by taking the RMD from another IRA account.

IRS RMD FAQ:
https://www.irs.gov/Retirement-Plans/Re ... ibutions#5
IRS RMD FAQ wrote:Can an account owner just take a RMD from one account instead of separately from each account?

An IRA owner must calculate the RMD separately for each IRA that he or she owns, but can withdraw the total amount from one or more of the IRAs. Similarly, a 403(b) contract owner must calculate the RMD separately for each 403(b) contract that he or she owns, but can take the total amount from one or more of the 403(b) contracts.

However, RMDs required from other types of retirement plans, such as 401(k) and 457(b) plans have to be taken separately from each of those plan accounts.
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Re: Can I justify converting $66K TIPS in TIRA to a Roth IRA?

Post by TomatoTomahto » Tue Oct 13, 2015 1:44 pm

Paying $22K in income tax to move the TIPS to a Roth seems like a chunk of money, so needless to say I'd need to justify doing it in my own mind.
Roth Shmoth, if you do this, will you have enough liquid cash to buy your SUV when you finally find an acceptable one? Or is that a 2024 event in any case? Sorry, couldn't resist after Tesla comments. :D

I have bogged down in reading about the magic of Roth accounts (can't recall the title now, will see it when I go inside, but that will have to wait on this lovely day). We have some Roth money already but more tIRA, and I want to believe, but I just can't seem to wrap my head around paying the taxes.

Could you liquidate, i.e., cash some in, without losing much when the time comes?
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Re: Can I justify converting $66K TIPS in TIRA to a Roth IRA?

Post by TomatoTomahto » Tue Oct 13, 2015 4:27 pm

The book I referenced above was James Lange's Retire Secure, 3rd edition. I think it's still available cheaply viewtopic.php?f=10&t=171935
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Re: Can I justify converting $66K TIPS in TIRA to a Roth IRA?

Post by RCL » Tue Oct 13, 2015 5:00 pm

Browser, If you did the conversion, how much would your RMD amount change?

I'm considering doing a few conversions from IRA to ROTH while in my "low" tax years in an attempt to lessen the RMD amounts due in the few years.
Haven't been able as yet to determine if doing the conversions will have any bearing on my future tax bracket though
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Re: Can I justify converting $66K TIPS in TIRA to a Roth IRA?

Post by Artsdoctor » Tue Oct 13, 2015 6:30 pm

Browser wrote:I presently have $66,000 in a 6-year TIPS ladder that mature annually from 2024-2029. Having them in a TIRA is a bit of a pain because I must take my RMDs from this account. The interest paid out by the TIPS isn't sufficient to cover the RMDs, so I would need to sell a small amount of the TIPS each year to generate the capital for the RMD. This sort of defeats the purpose of the TIPS ladder, which was to provide some inflation-protected income during the period in which they mature. I'd love to move these things to a Roth IRA. I've estimated the income tax I'd have to pay if I converted the entire TIRA this year and it would be about 33% of the $66K both Federal and State. I'd be able to pay the additional tax from other funds sitting around in cash earning no interest anyway, so I'd be able to move the entire TIPs ladder to my Roth intact.

Paying $22K in income tax to move the TIPS to a Roth seems like a chunk of money, so needless to say I'd need to justify doing it in my own mind. Of course, I have to pay tax on the TIPS as they are liquidated and distributed from the TIRA down the road and there's also the real benefit simplifying my investments by getting rid of the TIRA and not having to manage the RMDs every year. Part of my motivation is to simplify things as much as possible so that I don't have tricky matters to manage as I age.

Would appreciate any insights and comments.
This is tough. To recap: you're saying that your TIRA is filled with a 6-year TIPS ladder and that's it.

Where's the rest of your tax-deferred money? Do you have a 401k or 403b that you can rollover into that TIRA? Those assets may make more sense to sell once they're in your TIRA and can meet your RMDs.

I'm suspicious that you could have more tax-deferred assets but I could be wrong. Also, some of those TIPS are most likely selling at a substantial premium so you could find yourself paying income tax on some bonds that would actually decrease in value in the short run (after conversion).

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Re: Can I justify converting $66K TIPS in TIRA to a Roth IRA?

Post by DSInvestor » Tue Oct 13, 2015 7:06 pm

If you are going to do a Roth conversion of the TIRA assets, make sure you have taken your RMD first (from any of your TIRA accounts) before conversion. See Fairmark's RMD and Roth conversion:
http://fairmark.com/rothira/10011501-ro ... ersion.htm

I like Artsdoctor's idea to rollover from workplace plan into TIRA. It help make it easier to handle the RMDs going forward. This assumes you only have this one IRA. If there are other IRA accounts, just withdraw from the other accounts to satisfy RMD.
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Re: Can I justify converting $66K TIPS in TIRA to a Roth IRA?

Post by Browser » Tue Oct 13, 2015 9:40 pm

I have only one TIRA. The bulk of my assets are in my TIAA 403(b) where I am currently earning between 3% - 4% in Traditional and have no wish to transfer anything to my TIRA and roll the dice over there. The TIRA has only the TIPS ladder. Before I started taking social security and was in a lower bracket I converted a good part of the TIRA to a Roth and paid the tax. The TIPS ladder is left. It would be great if I could pool the 403(b) and TIRA for purposes of paying the RMD, but that's not allowed. I could transfer the RMD amount every year from the 403(b) to the TIRA to cover the RMD, but the problem is that this just gets too complex when what I want to do is make things simpler for myself and anyone else who might be dealing with this.
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Re: Can I justify converting $66K TIPS in TIRA to a Roth IRA?

Post by DSInvestor » Tue Oct 13, 2015 10:10 pm

Thanks for the additional information. With TIAA traditional earning 3-4% and only 1 TIRA account, you don't really have many options.
1) deal with the complexity of raising cash from the TIPS ladder or
2) convert it all to Roth paying 22K in taxes making sure that you've first satisfied your TIRA RMD for tax year 2015.

I don't think you can rollover the 403b RMD into the TIRA. You can take the 403b RMD and then rollover any amount of what's left in the 403b into TIRA.
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Re: Can I justify converting $66K TIPS in TIRA to a Roth IRA?

Post by SGM » Wed Oct 14, 2015 4:08 am

James Lange also has a book titled The Roth Revolution which goes into considerable detail about conversions. I made 100% conversions from 401ks and tIRAs except for a TIAA-CREF account. I wanted to avoid higher taxes when RMDs began and to avoid additional complexity for my spouse.

Tax rates go up for a widow. RMDs increase as one gets older. Roth IRAs are better to inherit than tIRAs. The advantage for a Roth increases if you pay the taxes from a taxable account.

Arguments against conversions may be relevant. If your tax rate goes down late in life due to nursing home stays then a tIRA could have low tax withdrawals. Ed Slott and James Lange have discussed the possible use of insurance products if the law changes concerning emptying Roth inherited Roth accounts within 5 years. Roth conversions could later go down in value although recharacterization is possible up to October 15 in the following year. The conversion is less valuable the longer you wait to make the conversion.

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Re: Can I justify converting $66K TIPS in TIRA to a Roth IRA?

Post by #Cruncher » Wed Oct 14, 2015 8:01 am

Browser in original post wrote:I've estimated the income tax I'd have to pay if I converted the entire TIRA this year and it would be about 33% of the $66K both Federal and State.
The interplay between SS benefits and other ordinary income can create some very high marginal Federal tax rates. Make sure you use a tool like TaxCaster to estimate your taxes with and without the conversion. You can also use two spreadsheets to view a graph of possible marginal tax rate "humps" that can occur for Social Security recipients: PapaGeek's discussed here or mine, discussed here. The Wiki's Taxation of Social Security benefits explains the issue with a couple of examples.

If you decide not to convert to a Roth, you could simplify life by selling two entire rungs from the ladder this year and putting the proceeds into a TIPS fund with an equivalent average maturity. This should provide enough to fund RMDs through 2023 by just liquidating part of the fund each year. You wouldn't have to sell partial rungs each year to meet RMDs. As time passes, you could exchange to a TIPS fund with a shorter duration to continue to (approximately) match the time to maturity of the sold-off rungs.
Artsdoctor in [url=https://www.bogleheads.org/forum/viewtopic.php?p=2654743#p2654743]this post[/url] wrote:... some of those TIPS are most likely selling at a substantial premium so you could find yourself paying income tax on some bonds that would actually decrease in value in the short run (after conversion).
It makes no real difference for bonds held in a tax deferred account. He'll pay the same tax on the entire market value of the bonds, whether they sell at a premium or not. And while the price of a premium bond will decline as it approaches maturity, this is offset by its greater coupon interest compared to a par or discount bond of the same term.

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Re: Can I justify converting $66K TIPS in TIRA to a Roth IRA?

Post by Artsdoctor » Wed Oct 14, 2015 5:30 pm

^^ Yes, true. I was making (a poor) attempt at cautioning him that if he were to convert some bonds (not the entire ladder), that the bonds trading at a high premium could force a higher tax than he'd need to pay. For example, one of the 2029 bonds has a coupon well over 3% and is trading close to 200; however, some of the 2025 bonds are trading far lower. He'd pay tax on the value of the bond at the time of the conversion if he converted it "in kind" so there could be an opportunity to minimize taxes if he were to convert a portion of the ladder.

The explanation above, though, clarifies that there is very little left to do about the RMD. For me, I'd have a hard time justifying paying $22,000 in taxes for a conversion and would probably sell one of the bonds to make way for RMDs.

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Re: Can I justify converting $66K TIPS in TIRA to a Roth IRA?

Post by Browser » Thu Oct 15, 2015 8:12 am

The problem I have with selling one of the bonds to provide cash for the RMDs is that cash earns nada for me while it's sitting there to fund my RMDs. I can, of course, sell just a few bonds each year just enough to cover the RMD but that's the hassle I'd like to eliminate for myself as I grow older. #crunchers idea to sell enough bonds to cover RMDs and put the proceeds into a TIPs fund has the concern that the fund doesn't really provide the locked-down inflation and deflation protection that holding TIPs to maturity does. Frankly, it's the inflation "insurance" aspect of owning TIPs that is my main reason to own them at all.
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Re: Can I justify converting $66K TIPS in TIRA to a Roth IRA?

Post by grabiner » Fri Oct 16, 2015 9:21 pm

You don't need to lose the inflation protection of the TIPS ladder with your RMDs. If you have to sell a TIPS in the IRA to take an RMD that you don't need for spending, you can buy the same TIPS in your taxable account, keeping the same ladder but split between two accounts.

Are you always going to be in a 33% (or close) tax bracket? If so, then converting to a Roth is a good move; the IRS and state already own 33% of your IRA, and you are just paying the tax early, and getting more tax-deferred space because you own 100% of the Roth. But if you expect to be in a 15% tax bracket when these TIPS mature, then you want to keep the traditional IRA as long as possible.
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Re: Can I justify converting $66K TIPS in TIRA to a Roth IRA?

Post by Browser » Fri Oct 16, 2015 10:32 pm

grabiner wrote:You don't need to lose the inflation protection of the TIPS ladder with your RMDs. If you have to sell a TIPS in the IRA to take an RMD that you don't need for spending, you can buy the same TIPS in your taxable account, keeping the same ladder but split between two accounts.

Are you always going to be in a 33% (or close) tax bracket? If so, then converting to a Roth is a good move; the IRS and state already own 33% of your IRA, and you are just paying the tax early, and getting more tax-deferred space because you own 100% of the Roth. But if you expect to be in a 15% tax bracket when these TIPS mature, then you want to keep the traditional IRA as long as possible.
What makes it so tricky to figure is the sliding scale for taxation of SS benefits. In order to figure out your likely tax rate in the future you have to guesstimate your benefit amount and your other income. It's the fact that the 66K conversion makes so much of my SS benefit taxable that it gets taxed at an effective 33% rate now if I do the conversion. Otherwise, some - but not all - would only be in the 25% bracket for me. In 9-15 years (when the TIPS are maturing) my RMDs plus SS benefits could well put the TIPS proceeds into the 33% marginal bracket at that time as they are distributed from the IRA. Hard to figure because of all the moving parts.
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