converting some traditional IRA to Roth

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Charon
Posts: 75
Joined: Thu May 03, 2018 12:08 pm

converting some traditional IRA to Roth

Post by Charon » Mon Jun 11, 2018 11:20 am

I'm planning on converting $10-20k of traditional IRA to Roth IRA this year. This wouldn't affect my asset allocation, and the taxes due would be paid out of cash on hand. I have some arguments for it, but was interested in hearing other views before pulling the trigger (particularly since this can no longer be undone!).

Time to retirement: 25-30 years
Marginal tax rate: federal 22%, state 0% (conversion would be capped to keep in this bracket)
Current retirement allocation in terms of annual salary: ~1x in Roth IRA, ~1x in traditional IRA (rolled over from an old 403b), and ~1x in my current 403b.
Job: secure, with relatively modest potential for salary growth

I max out my Roth IRA contributions every year, but my dominant retirement contribution now goes to my current 403b (7.5% me, 7.5% employer, then max out the rest myself). Some additional income this year will go to a state 457b DCP, but I won't be able to keep that up in future years.

So most of my retirement funds will be in tax deferred accounts even after this shift to the Roth, and most of my future additions will be in tax deferred. I think this is good, because I don't expect my income to be too high in retirement. I just like the tax-free growth of the Roth, the lack of RMDs, and the hedge on future tax rates.

Assuming 3% real return over 25 years, the money will double in the Roth... and I have a hard time believing I'll be below 11% tax rate in retirement. I would think the marginal rate in retirement to be the most relevant, because I'd be using the Roth as icing on the cake - a base from tax deferred and Social Security, with Roth to avoid hitting the next bracket.

Of course much of this depends on tax brackets in 30-40 years, or the implementation of an income tax in my state, which none of us have a clue about, but...

User avatar
David Jay
Posts: 5779
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: converting some traditional IRA to Roth

Post by David Jay » Mon Jun 11, 2018 11:28 am

The math is simple, if tax rate is lower today than retirement, do some conversions. If tax rate is higher today than in retirement, wait.

Knowing the facts of your retirement finances 25-30 years out, not so simple.

Wiki here: https://www.bogleheads.org/wiki/Traditional_versus_Roth
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

Charon
Posts: 75
Joined: Thu May 03, 2018 12:08 pm

Re: converting some traditional IRA to Roth

Post by Charon » Mon Jun 11, 2018 11:35 am

Yeeeeeees, but the simple advice isn't really useful (no offense). Tax brackets haven't been steady or predictable over these time scales at any point in US history: https://www.vox.com/policy-and-politics ... ears-chart

And of course you have to keep in mind what's being paid at the overall tax rate vs. the marginal rate. The entire conversion is at the marginal rate. Withdrawal might well not be (although I think it probably will be, in my circumstance).

JW-Retired
Posts: 6997
Joined: Sun Dec 16, 2007 12:25 pm

Re: converting some traditional IRA to Roth

Post by JW-Retired » Mon Jun 11, 2018 11:41 am

I don't think you will regret having more Roth retirement money and less tax deferred, but the Roth conversion tax cost is going to be 22%. What you said here about the 11% tax isn't the correct math.
Assuming 3% real return over 25 years, the money will double in the Roth... and I have a hard time believing I'll be below 11% tax rate in retirement.
The pre-tax IRA funds would have also doubled and they would not have been reduced by the 22% tax right off the bat. What David Jay said uses the correct math.
JW
Last edited by JW-Retired on Mon Jun 11, 2018 11:44 am, edited 1 time in total.
Retired at Last

Charon
Posts: 75
Joined: Thu May 03, 2018 12:08 pm

Re: converting some traditional IRA to Roth

Post by Charon » Mon Jun 11, 2018 11:44 am

I guess there's a more focused question, and it's an opinion poll. Would you

1) Convert $20k to Roth and pay $4400 from cash, or
2) keep $20k in traditional and put an extra $5600 into a 457b plan (post tax cost ~$4400), or
3) keep the $20k in traditional and spend an extra $4400 on an awesome vacation?

(I think these are all valid choices, but to be clear I'm already planning an awesome vacation this year :) )

Charon
Posts: 75
Joined: Thu May 03, 2018 12:08 pm

Re: converting some traditional IRA to Roth

Post by Charon » Mon Jun 11, 2018 11:48 am

JW-Retired wrote:
Mon Jun 11, 2018 11:41 am
The pre-tax IRA funds would have also doubled and they would not have been reduced by the 22% tax right off the bat. What David Jay said uses the correct math.
The pre-tax funds and the Roth funds would be the exact same amount (unless I put the cash into the 457b). So nothing's necessarily being reduced by 22% right off the bat. Options are $20k in Roth or $20k in traditional.

Consider the example of someone who has maxed out all tax-advantaged space, but has extra cash. The conversion there obviously gets them more for retirement, and in that case you're not using the correct math. (In my case I haven't maxed out tax-advantaged space because I just discovered that 457s and 403bs have independent limits... but the point remains in general.)

JW-Retired
Posts: 6997
Joined: Sun Dec 16, 2007 12:25 pm

Re: converting some traditional IRA to Roth

Post by JW-Retired » Mon Jun 11, 2018 12:57 pm

Charon wrote:
Mon Jun 11, 2018 11:48 am
JW-Retired wrote:
Mon Jun 11, 2018 11:41 am
The pre-tax IRA funds would have also doubled and they would not have been reduced by the 22% tax right off the bat. What David Jay said uses the correct math.
The pre-tax funds and the Roth funds would be the exact same amount (unless I put the cash into the 457b). So nothing's necessarily being reduced by 22% right off the bat. Options are $20k in Roth or $20k in traditional.
The 22% is the extra tax you paid. You could have invested that.
JW
Retired at Last

Charon
Posts: 75
Joined: Thu May 03, 2018 12:08 pm

Re: converting some traditional IRA to Roth

Post by Charon » Mon Jun 11, 2018 1:17 pm

JW-Retired wrote:
Mon Jun 11, 2018 12:57 pm
The 22% is the extra tax you paid. You could have invested that.
Not tax free I couldn't have. [Edit: to clarify, the cash was either going to pay these taxes or it was going to sit there as cash. So my calculation was correct. But if I do decide to put the cash into a 457b instead, then you're right that of course this changes the math.]

To make my point simpler, consider new contributions to a traditional IRA vs. Roth IRA. Both have caps of $5500, but the Roth allows you to save more for retirement because $5500 invested post tax and free from all future taxes is clearly worth more than $5500 invested pre tax.

If your choice is instead investing $5500 pre tax or $5500*(1-x%) post tax, and your tax rate will also be x% in retirement, then this would be a wash. (Although you still have to consider marginal rate vs. average rate, which you haven't. This is discussed on the wiki page...)

In the case where you max out either account, your are paying more for the Roth. You could have invested the difference, but the point is that the additional money is money that's already been taxed and its earnings will be taxed. Bogleheads say to max tax-advantaged space first for a reason... (And yes, we can get into capital gains tax vs. income tax, but I don't think that's relevant.)

So we can be in an equivalent situation with a conversion where the taxes on the conversion don't come from the retirement account, either directly or as an opportunity cost. This is also discussed on the wiki page.

In addition, in my case the fees on the Roth are slightly less (~0.15% less) than the fees on the 457b, which is where that cash might otherwise be going. A small consideration, but not entirely negligible.

Charon
Posts: 75
Joined: Thu May 03, 2018 12:08 pm

Re: converting some traditional IRA to Roth

Post by Charon » Mon Jun 11, 2018 1:27 pm

In retrospect I think this was a stupid question to ask. The answer depends mostly on the unknowable factors of future federal and state tax rates decades from now, the possibility of a VAT, etc. Part of the point of having both Roth and tax-deferred is to hedge bets against possible futures. But it was good to confirm there wasn't some obvious problem I was overlooking.

Personally I don't see how the US can continue with such low income tax rates, so I'm betting on Roth conversion this year being worthwhile. But my income should be low enough in retirement that having most of my retirement savings in tax deferred should make sense.

Thanks to David Jay and JW-Retired for contributing to the discussion, even if we were talking past each other some of the time :)

User avatar
David Jay
Posts: 5779
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: converting some traditional IRA to Roth

Post by David Jay » Mon Jun 11, 2018 1:31 pm

Charon wrote:
Mon Jun 11, 2018 11:44 am
I guess there's a more focused question, and it's an opinion poll. Would you

1) Convert $20k to Roth and pay $4400 from cash, or
2) keep $20k in traditional and put an extra $5600 into a 457b plan (post tax cost ~$4400), or
3) keep the $20k in traditional and spend an extra $4400 on an awesome vacation?

(I think these are all valid choices, but to be clear I'm already planning an awesome vacation this year :) )
On balance, not knowing any additional specifics about your situation, I would select #1

a) I think that personal income tax rates may be at historic lows. Current law calls for 22% bracket to return to 25% in 9 years.
b) As I prepare for retirement next year, I find I need to do a lot of Roth conversions to keep RMD from pushing me into higher brackets later in retirement.

Your specifics may shift the case.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

User avatar
FiveK
Posts: 5833
Joined: Sun Mar 16, 2014 2:43 pm

Re: converting some traditional IRA to Roth

Post by FiveK » Mon Jun 11, 2018 1:31 pm

Charon wrote:
Mon Jun 11, 2018 11:35 am
And of course you have to keep in mind what's being paid at the overall tax rate vs. the marginal rate.
Actually you don't, unless you are committing to do in all subsequent years what you choose to do this year. You could do that, but why would you?

The overall tax rate is irrelevant because it includes the effect of past years' decisions on traditional vs. Roth, future pensions, dividends, etc.

Based on what you know now, take your best guess at the marginal rate you'll pay when withdrawing amounts (e.g., 4%/yr) from whatever balance you expect from this year's decision amount. E.g., you will pay 22% to convert $10K this year. If that doubles in real terms, what rate do you expect to pay on $20K * 4% = $800 if you leave the money in the traditional account?

Paying the conversion tax out of taxable funds does make the conversion slightly favorable even if current and future marginal rates are identical. See either of the two spreadsheets mentioned in Maxing out your retirement accounts to quantify "slightly" for your situation.

Chip
Posts: 2371
Joined: Wed Feb 21, 2007 4:57 am

Re: converting some traditional IRA to Roth

Post by Chip » Mon Jun 11, 2018 1:37 pm

Charon wrote:
Mon Jun 11, 2018 1:17 pm
Not tax free I couldn't have. [Edit: to clarify, the cash was either going to pay these taxes or it was going to sit there as cash. So my calculation was correct. But if I do decide to put the cash into a 457b instead, then you're right that of course this changes the math.]

To make my point simpler, consider new contributions to a traditional IRA vs. Roth IRA. Both have caps of $5500, but the Roth allows you to save more for retirement because $5500 invested post tax and free from all future taxes is clearly worth more than $5500 invested pre tax.

If your choice is instead investing $5500 pre tax or $5500*(1-x%) post tax, and your tax rate will also be x% in retirement, then this would be a wash. (Although you still have to consider marginal rate vs. average rate, which you haven't. This is discussed on the wiki page...)

In the case where you max out either account, your are paying more for the Roth. You could have invested the difference, but the point is that the additional money is money that's already been taxed and its earnings will be taxed. Bogleheads say to max tax-advantaged space first for a reason... (And yes, we can get into capital gains tax vs. income tax, but I don't think that's relevant.)

So we can be in an equivalent situation with a conversion where the taxes on the conversion don't come from the retirement account, either directly or as an opportunity cost. This is also discussed on the wiki page.
You're still doing the math wrong. If the comparison is max tIRA contribution (deductible) vs. max Roth contribution, the fair comparison is to invest the tax savings from the tIRA contribution in a taxable account. Yes, it will grow more slowly due to tax drag from dividends. But to ignore the tax savings completely is just plain wrong.

And in your particular situation, since you haven't maxed the 457b, the only fair comparison is to put the tax savings in the 457b, as noted by JW-Retired.

Charon
Posts: 75
Joined: Thu May 03, 2018 12:08 pm

Re: converting some traditional IRA to Roth

Post by Charon » Mon Jun 11, 2018 1:54 pm

Chip wrote:
Mon Jun 11, 2018 1:37 pm
Charon wrote:
Mon Jun 11, 2018 1:17 pm
to clarify, the cash was either going to pay these taxes or it was going to sit there as cash. So my calculation was correct.
You're still doing the math wrong.
No, I wasn't. But thanks for playing.

retiredjg
Posts: 34382
Joined: Thu Jan 10, 2008 12:56 pm

Re: converting some traditional IRA to Roth

Post by retiredjg » Mon Jun 11, 2018 1:56 pm

I would not contribute regularly to both the 403b and the 457b. Or I guess what I mean is I would not put more than $18.5k total between the two of them every year. To me, going much over the $18.5k limit year after year is just too much tax-deferral. Doing it for a few years is probably harmless.

It also sounds like you are in a position that may have a pension. That comes into the mix as well.

I might be tempted to do a bit of conversion unless you see your way to being in a lower tax rate later. For example, it sounds like you are probably single. If you are getting married any time soon, you could drop into a lower bracket. That might be an even better time to do Roth conversions.

JW-Retired
Posts: 6997
Joined: Sun Dec 16, 2007 12:25 pm

Re: converting some traditional IRA to Roth

Post by JW-Retired » Mon Jun 11, 2018 1:57 pm

Charon wrote:
Mon Jun 11, 2018 1:27 pm
Personally I don't see how the US can continue with such low income tax rates, so I'm betting on Roth conversion this year being worthwhile. But my income should be low enough in retirement that having most of my retirement savings in tax deferred should make sense.

Thanks to David Jay and JW-Retired for contributing to the discussion, even if we were talking past each other some of the time :)
You are very welcome!

I do wish I had done some Roth conversions when it would have been a fairly even cost thing. Note I did start out by saying "I don't think you will regret having more Roth retirement money and less tax deferred."
JW
Retired at Last

User avatar
FiveK
Posts: 5833
Joined: Sun Mar 16, 2014 2:43 pm

Re: converting some traditional IRA to Roth

Post by FiveK » Mon Jun 11, 2018 2:10 pm

Charon wrote:
Mon Jun 11, 2018 1:17 pm
(Although you still have to consider marginal rate vs. average rate, which you haven't. This is discussed on the wiki page...)
Hmm - which wiki page is that? We'll have to correct it if that is what it says. :?

Jack FFR1846
Posts: 8082
Joined: Tue Dec 31, 2013 7:05 am

Re: converting some traditional IRA to Roth

Post by Jack FFR1846 » Mon Jun 11, 2018 2:20 pm

retiredjg wrote:
Mon Jun 11, 2018 1:56 pm
I would not contribute regularly to both the 403b and the 457b. Or I guess what I mean is I would not put more than $18.5k total between the two of them every year. To me, going much over the $18.5k limit year after year is just too much tax-deferral. Doing it for a few years is probably harmless.
Please explain why you wouldn't put more than $18.5k in every year. I ask because I've done that plus the over 50 catch up and don't plan to stop. I'm 61. I have too much in a tIRA to do back door roths (2 commas worth) and make too much to do a normal roth.
Bogle: Smart Beta is stupid

User avatar
Peter Foley
Posts: 4611
Joined: Fri Nov 23, 2007 10:34 am
Location: Lake Wobegon

Re: converting some traditional IRA to Roth

Post by Peter Foley » Mon Jun 11, 2018 2:21 pm

I won't challenge any of the math because I really can't tell what you are trying to do.

Case #1: You are in the 12% tax bracket and intend to convert up to the 22% bracket. You intend to work until age 67 and then start drawing SS benefits and tax deferred savings. (In other words you are not planning on retiring early and having a few low income years where you could convert some tax deferred at a lower rate and when conversions would not impact the taxation of SS benefits.)

Case #2: You are already in the 22% bracket even after contribution to a 457b. You plan on retiring early and delaying SS benefits for at least a couple years and are likely to have a couple 12% tax bracket years.

Case #3: Some other combination.

My advice, if case #1 go ahead and convert. If case #2, don't convert. Lots of moving parts here . . .

Unrelated to the above: with the risk of high medical expenses some year(s) in retirement, it is not a bad idea to retain some tax deferred funds. Such funds could potentially be withdrawn tax free in a year with high medical expenses.

tenkuky
Posts: 579
Joined: Sun Dec 14, 2014 4:28 pm

Re: converting some traditional IRA to Roth

Post by tenkuky » Mon Jun 11, 2018 2:25 pm

Peter Foley wrote:
Mon Jun 11, 2018 2:21 pm

Unrelated to the above: with the risk of high medical expenses some year(s) in retirement, it is not a bad idea to retain some tax deferred funds. Such funds could potentially be withdrawn tax free in a year with high medical expenses.
Incorrect. Penalty-free, but not tax-free.
https://www.irs.gov/retirement-plans/pl ... tributions

retiredjg
Posts: 34382
Joined: Thu Jan 10, 2008 12:56 pm

Re: converting some traditional IRA to Roth

Post by retiredjg » Mon Jun 11, 2018 2:42 pm

Jack FFR1846 wrote:
Mon Jun 11, 2018 2:20 pm
retiredjg wrote:
Mon Jun 11, 2018 1:56 pm
I would not contribute regularly to both the 403b and the 457b. Or I guess what I mean is I would not put more than $18.5k total between the two of them every year. To me, going much over the $18.5k limit year after year is just too much tax-deferral. Doing it for a few years is probably harmless.
Please explain why you wouldn't put more than $18.5k in every year. I ask because I've done that plus the over 50 catch up and don't plan to stop. I'm 61. I have too much in a tIRA to do back door roths (2 commas worth) and make too much to do a normal roth.
First, I'll just say that I'm all for tax-deferral. However, I've come to believe there can be too much unless one has a plan to handle it.

A very large tax-deferred account will start coming home to roost at age 70.5 when RMDs start. The larger the account, the higher the RMDs. This can push a person into tax brackets equal to or higher than when they actually earned the money. No, probably not the first year of RMDs, but some years later.

Another thing that happens is that couples often lose one member somewhere along the line. The survivor will likely go up a tax bracket when that happens.

A third factor is that so many people are putting off taking their SS until about age 70.

It can be a perfect storm - RMDs, SS, and death or divorce - that can cause people to pay higher tax rates on their RMD income than when they deferred the taxes in the first place.

This can be avoided if people can retire early enough to have many years to do Roth conversions at lower tax rates. This reduces the amount of money subject to RMDs. But some of these people don't want to retire!

For all these reasons, I often suggest that people defer $18.5 (per worker) and fill a Roth IRA if possible (for each) and put other savings into a taxable account rather than another tax-deferred account.

Obviously everybody's situation is different. It is just no longer a no-brainer for me to suggest filling every tax-deferred account available.

megabad
Posts: 828
Joined: Fri Jun 01, 2018 4:00 pm

Re: converting some traditional IRA to Roth

Post by megabad » Mon Jun 11, 2018 3:13 pm

retiredjg wrote:
Mon Jun 11, 2018 2:42 pm
First, I'll just say that I'm all for tax-deferral. However, I've come to believe there can be too much unless one has a plan to handle it.

A very large tax-deferred account will start coming home to roost at age 70.5 when RMDs start. The larger the account, the higher the RMDs. This can push a person into tax brackets equal to or higher than when they actually earned the money. No, probably not the first year of RMDs, but some years later.

Another thing that happens is that couples often lose one member somewhere along the line. The survivor will likely go up a tax bracket when that happens.

A third factor is that so many people are putting off taking their SS until about age 70.

It can be a perfect storm - RMDs, SS, and death or divorce - that can cause people to pay higher tax rates on their RMD income than when they deferred the taxes in the first place.

This can be avoided if people can retire early enough to have many years to do Roth conversions at lower tax rates. This reduces the amount of money subject to RMDs. But some of these people don't want to retire!

For all these reasons, I often suggest that people defer $18.5 (per worker) and fill a Roth IRA if possible (for each) and put other savings into a taxable account rather than another tax-deferred account.

Obviously everybody's situation is different. It is just no longer a no-brainer for me to suggest filling every tax-deferred account available.
I agree with most of this. I would just add that since, in many cases, a Roth 403b or a Roth 457 contribution is a possibility then this would allow you to balance tax-deferred with Roth space. So as a prior poster hinted, I still think it can be advantageous to contribute to both 457 and 403b and would argue that this is one of the greatest but least (fully) used benefits to some government employees.

retiredjg
Posts: 34382
Joined: Thu Jan 10, 2008 12:56 pm

Re: converting some traditional IRA to Roth

Post by retiredjg » Mon Jun 11, 2018 3:34 pm

Well, yes....if Roth 403b or Roth 457b is available, that would certainly be preferable to putting money into a taxable account.

User avatar
Peter Foley
Posts: 4611
Joined: Fri Nov 23, 2007 10:34 am
Location: Lake Wobegon

Re: converting some traditional IRA to Roth

Post by Peter Foley » Mon Jun 11, 2018 4:46 pm

Tenkuky wrote:
Peter Foley wrote: ↑Mon Jun 11, 2018 2:21 pm

Unrelated to the above: with the risk of high medical expenses some year(s) in retirement, it is not a bad idea to retain some tax deferred funds. Such funds could potentially be withdrawn tax free in a year with high medical expenses.
Incorrect. Penalty-free, but not tax-free.
https://www.irs.gov/retirement-plans/pl ... tributions
Clarification to my earlier post regarding leaving some funds in a tax deferred account for medical expenses in retirement.
My mother in law, age 97, has been in assisted living for the past two years. Her medical expenses by themselves exceed her gross income, let alone her taxable income. Her IRA withdrawals are not taxed. She pays no income tax whatsoever.

I perhaps should have bolded "in retirement."

User avatar
FiveK
Posts: 5833
Joined: Sun Mar 16, 2014 2:43 pm

Re: converting some traditional IRA to Roth

Post by FiveK » Mon Jun 11, 2018 5:10 pm

Jack FFR1846 wrote:
Mon Jun 11, 2018 2:20 pm
Please explain why you wouldn't put more than $18.5k in every year. I ask because I've done that plus the over 50 catch up and don't plan to stop. I'm 61. I have too much in a tIRA to do back door roths (2 commas worth) and make too much to do a normal roth.
If one in a relatively high bracket while working, contributing $37K/yr every year to traditional accounts may be a great idea.

If one is in a low to middle bracket while working, it is possible to put "too much" into traditional accounts.

What really matters is the marginal tax rate you would save be making a traditional contribution, vs. the marginal rate at which you expect to be taxed when withdrawing from that contribution and its growth.

Thus, "it depends...".

User avatar
changingtimes
Posts: 55
Joined: Mon Jul 24, 2017 9:28 am

Re: converting some traditional IRA to Roth

Post by changingtimes » Mon Jun 11, 2018 7:20 pm

retiredjg wrote:
Mon Jun 11, 2018 2:42 pm
First, I'll just say that I'm all for tax-deferral. However, I've come to believe there can be too much unless one has a plan to handle it.

A very large tax-deferred account will start coming home to roost at age 70.5 when RMDs start. The larger the account, the higher the RMDs. This can push a person into tax brackets equal to or higher than when they actually earned the money. No, probably not the first year of RMDs, but some years later.

Another thing that happens is that couples often lose one member somewhere along the line. The survivor will likely go up a tax bracket when that happens.

A third factor is that so many people are putting off taking their SS until about age 70.

It can be a perfect storm - RMDs, SS, and death or divorce - that can cause people to pay higher tax rates on their RMD income than when they deferred the taxes in the first place.

This can be avoided if people can retire early enough to have many years to do Roth conversions at lower tax rates. This reduces the amount of money subject to RMDs. But some of these people don't want to retire!

For all these reasons, I often suggest that people defer $18.5 (per worker) and fill a Roth IRA if possible (for each) and put other savings into a taxable account rather than another tax-deferred account.

Obviously everybody's situation is different. It is just no longer a no-brainer for me to suggest filling every tax-deferred account available.
Your scenario above is me, and has me thinking about moiving to Roth 401k contributions as long as I continue to work. I know it's heresy in these parts to suggest that I have "enough" in tax-deferred, but I kind of think I do. :D

With DH's death, I have tax-deferred accounts currently worth $1.5 million, at age 52, as well as taxable savings of over $300k. And no direct heirs.

I have virtually no Roth monies--joint incomes were too high to contribute. I plan to work another couple years, and my salary is plenty for me to live on, and I also get a small pension from DH. I will have my own pension at 65, and either survivor's or my own SS, whichever is higher. And possibly more RMDs from my father's estate.

At 70, I could be looking at annual income, including RMDs, of over $200k, and continuing to rise each year.

I will probably be in the 24% bracket this year thanks to some cap gains, and will be flirting with the very top of the 22% as long as I work.

I certainly will be ready to do some Roth conversions between retirement and the onset of pension/SS/RMDs, but I am thinking I should start contributing to my Roth 401k just for the diversification and ability to have another source of funds that won't be taxed as income, even if it is not 1000% optimal from the tax standpoint. I did convert a small amount this year, and plan to max at the very least my Roth IRA contributions, so the 5-year clock has now started.

All "good" problems to have (better this than living hand to mouth as a widow), but it is a good example of what can happen when funds that are enough for two people to retire early become funds for one person.

TwstdSista
Posts: 987
Joined: Thu Nov 16, 2017 4:03 am

Re: converting some traditional IRA to Roth

Post by TwstdSista » Tue Jun 12, 2018 4:55 am

I get what the OP is saying. And I agree that some Roth conversions might be a very good idea. It's a personal decision base on one's own circumstances.
Last edited by TwstdSista on Tue Jun 12, 2018 2:42 pm, edited 1 time in total.

retiredjg
Posts: 34382
Joined: Thu Jan 10, 2008 12:56 pm

Re: converting some traditional IRA to Roth

Post by retiredjg » Tue Jun 12, 2018 6:54 am

changingtimes wrote:
Mon Jun 11, 2018 7:20 pm
Your scenario above is me, and has me thinking about moiving to Roth 401k contributions as long as I continue to work. I know it's heresy in these parts to suggest that I have "enough" in tax-deferred, but I kind of think I do. :D

With DH's death, I have tax-deferred accounts currently worth $1.5 million, at age 52, as well as taxable savings of over $300k. And no direct heirs.

I have virtually no Roth monies--joint incomes were too high to contribute. I plan to work another couple years, and my salary is plenty for me to live on, and I also get a small pension from DH. I will have my own pension at 65, and either survivor's or my own SS, whichever is higher. And possibly more RMDs from my father's estate.

At 70, I could be looking at annual income, including RMDs, of over $200k, and continuing to rise each year.

I will probably be in the 24% bracket this year thanks to some cap gains, and will be flirting with the very top of the 22% as long as I work.

I certainly will be ready to do some Roth conversions between retirement and the onset of pension/SS/RMDs, but I am thinking I should start contributing to my Roth 401k just for the diversification and ability to have another source of funds that won't be taxed as income, even if it is not 1000% optimal from the tax standpoint. I did convert a small amount this year, and plan to max at the very least my Roth IRA contributions, so the 5-year clock has now started.

All "good" problems to have (better this than living hand to mouth as a widow), but it is a good example of what can happen when funds that are enough for two people to retire early become funds for one person.
It is heresy, but....

Unless you remarry, I don't think you will ever be in a lower tax bracket than now. If tax brackets revert in a few years, you will certainly be at least in the 25% bracket - working or retired. If tax brackets do not revert, you will still never be in a lower bracket than now (24% this year and 22% other years).

I'd agree that your choice to use Roth 401k and Roth IRA (if still eligible) at this point is correct. In fact, with such a large tax deferred account, I'd consider doing Roth conversions even while working at least until tax rates revert (if they do revert). It appears to me you would come out ahead or even by converting into the 24% bracket - if your bracket goes back up to 25%.

At 52 years old, you should use the money in your taxable account to pay the taxes. I don't know how much you want to deplete that account so that may be a limiting factor until you are 59.5.

All of this is speculation of course. You could remarry and your tax bracket drop in retirement because of that. Or taxes could go down again. Seems unlikely, but what happened to taxes just recently seemed unlikely too, so nothing is impossible.

cherijoh
Posts: 4989
Joined: Tue Feb 20, 2007 4:49 pm
Location: Charlotte NC

Re: converting some traditional IRA to Roth

Post by cherijoh » Tue Jun 12, 2018 10:30 am

retiredjg wrote:
Mon Jun 11, 2018 2:42 pm
First, I'll just say that I'm all for tax-deferral. However, I've come to believe there can be too much unless one has a plan to handle it.

A very large tax-deferred account will start coming home to roost at age 70.5 when RMDs start. The larger the account, the higher the RMDs. This can push a person into tax brackets equal to or higher than when they actually earned the money. No, probably not the first year of RMDs, but some years later.

Another thing that happens is that couples often lose one member somewhere along the line. The survivor will likely go up a tax bracket when that happens.

A third factor is that so many people are putting off taking their SS until about age 70.

It can be a perfect storm - RMDs, SS, and death or divorce - that can cause people to pay higher tax rates on their RMD income than when they deferred the taxes in the first place.

This can be avoided if people can retire early enough to have many years to do Roth conversions at lower tax rates. This reduces the amount of money subject to RMDs. But some of these people don't want to retire!

For all these reasons, I often suggest that people defer $18.5 (per worker) and fill a Roth IRA if possible (for each) and put other savings into a taxable account rather than another tax-deferred account.

Obviously everybody's situation is different. It is just no longer a no-brainer for me to suggest filling every tax-deferred account available.
+1

I am in the position of having over half (~59%) of my retirement nest egg in traditional (rollover IRA and 401k). I have taken advantage of the 401k catch-up provisions since turning 50, but I also invested for many years where my contributions were restricted to only 15% of my salary (which corresponded to many years of contributions far less than today's more generous limits). I did a substantial amount of after-tax investing as well, which I strongly recommend for anyone thinking to retire before 59.5.

I did do some Roth conversions in the 2007 - 2009 time frame and in retrospect I wish I had done more. My modest Roth conversions have rebounded nicely during the extended bull market. The OP should consider doing his/her Roth Conversions when the stock market is down a bit more than it is today - especially if he/she doesn't anticipate jumping up to a higher marginal bracket. I know I'll likely get scolded for "market timing" but I ended up with the same asset mix and a lower tax-bill than had I not done the Roth conversion at all.

Now that I'm retired, I am working on my own Roth conversion strategy. I can use my after-tax funds to keep my taxable income low while doing a fair amount of conversions before RMDs and SS lead to higher taxes as outlined by retiredjg. (I'm single so I don't need to worry about losing MFJ filing status).

MathIsMyWayr
Posts: 211
Joined: Mon Mar 27, 2017 10:47 pm
Location: CA

Re: converting some traditional IRA to Roth

Post by MathIsMyWayr » Tue Jun 12, 2018 11:07 am

retiredjg wrote:
Mon Jun 11, 2018 2:42 pm
A very large tax-deferred account will start coming home to roost at age 70.5 when RMDs start. The larger the account, the higher the RMDs. This can push a person into tax brackets equal to or higher than when they actually earned the money. No, probably not the first year of RMDs, but some years later.

Another thing that happens is that couples often lose one member somewhere along the line. The survivor will likely go up a tax bracket when that happens.

A third factor is that so many people are putting off taking their SS until about age 70.

It can be a perfect storm - RMDs, SS, and death or divorce - that can cause people to pay higher tax rates on their RMD income than when they deferred the taxes in the first place.

This can be avoided if people can retire early enough to have many years to do Roth conversions at lower tax rates. This reduces the amount of money subject to RMDs. But some of these people don't want to retire!
I read many times "to retire early to have many years to do Roth conversions at lower tax rates". In the strictly financial sense and if you do not mind working, is it more advantageous to retire than to keep working/earning to do Roth conversion? Yes, you pay more taxes, but your net worth may be higher by earning more - am I wrong? The ultimate goal should be not to pay the least amount of tax, but to keep most.

cherijoh
Posts: 4989
Joined: Tue Feb 20, 2007 4:49 pm
Location: Charlotte NC

Re: converting some traditional IRA to Roth

Post by cherijoh » Tue Jun 12, 2018 11:54 am

changingtimes wrote:
Mon Jun 11, 2018 7:20 pm
Your scenario above is me, and has me thinking about moiving to Roth 401k contributions as long as I continue to work. I know it's heresy in these parts to suggest that I have "enough" in tax-deferred, but I kind of think I do. :D

With DH's death, I have tax-deferred accounts currently worth $1.5 million, at age 52, as well as taxable savings of over $300k. And no direct heirs.

I have virtually no Roth monies--joint incomes were too high to contribute. I plan to work another couple years, and my salary is plenty for me to live on, and I also get a small pension from DH. I will have my own pension at 65, and either survivor's or my own SS, whichever is higher. And possibly more RMDs from my father's estate.

At 70, I could be looking at annual income, including RMDs, of over $200k, and continuing to rise each year.

I will probably be in the 24% bracket this year thanks to some cap gains, and will be flirting with the very top of the 22% as long as I work.

I certainly will be ready to do some Roth conversions between retirement and the onset of pension/SS/RMDs, but I am thinking I should start contributing to my Roth 401k just for the diversification and ability to have another source of funds that won't be taxed as income, even if it is not 1000% optimal from the tax standpoint. I did convert a small amount this year, and plan to max at the very least my Roth IRA contributions, so the 5-year clock has now started.

All "good" problems to have (better this than living hand to mouth as a widow), but it is a good example of what can happen when funds that are enough for two people to retire early become funds for one person.
Are you familiar with QCDs? They allow taxpayers who are subject to RMDs to use part or all of the calculated RMD amount to make a qualified charitable distribution instead. It does not require you to itemize your deductions - the money just isn't taxed.

This might be a better idea for you rather than trying to maximize Roth assets by switching to a Roth 401k while you are still working. If your residual Roth assets end up going to charities then you would have paid extra taxes for nothing!

User avatar
FiveK
Posts: 5833
Joined: Sun Mar 16, 2014 2:43 pm

Re: converting some traditional IRA to Roth

Post by FiveK » Tue Jun 12, 2018 12:24 pm

MathIsMyWayr wrote:
Tue Jun 12, 2018 11:07 am
I read many times "to retire early to have many years to do Roth conversions at lower tax rates". In the strictly financial sense and if you do not mind working, is it more advantageous to retire than to keep working/earning to do Roth conversion? Yes, you pay more taxes, but your net worth may be higher by earning more - am I wrong? The ultimate goal should be not to pay the least amount of tax, but to keep most.
In the sense that "the one who dies with the highest net worth wins" then one should never stop working.

If one does wish to retire, it is worthwhile to consider the space (number of years times amount per year) one will have for Roth conversions at relatively low tax rates, and factor that into the traditional vs. Roth choice while working.

User avatar
changingtimes
Posts: 55
Joined: Mon Jul 24, 2017 9:28 am

Re: converting some traditional IRA to Roth

Post by changingtimes » Tue Jun 12, 2018 2:21 pm

cherijoh wrote:
Tue Jun 12, 2018 11:54 am

Are you familiar with QCDs? They allow taxpayers who are subject to RMDs to use part or all of the calculated RMD amount to make a qualified charitable distribution instead. It does not require you to itemize your deductions - the money just isn't taxed.

This might be a better idea for you rather than trying to maximize Roth assets by switching to a Roth 401k while you are still working. If your residual Roth assets end up going to charities then you would have paid extra taxes for nothing!
Thanks, yes, I am familiar with QCDs, and also with Donor Advised Funds. I imagine that once I hit RMDs I will be taking advantage of that, but I still think that moving to Roth 401k donations at this point, with what I have in my stash, is not completely ridiculous.

User avatar
changingtimes
Posts: 55
Joined: Mon Jul 24, 2017 9:28 am

Re: converting some traditional IRA to Roth

Post by changingtimes » Tue Jun 12, 2018 2:29 pm

retiredjg wrote:
Tue Jun 12, 2018 6:54 am
It is heresy, but....

Unless you remarry, I don't think you will ever be in a lower tax bracket than now. If tax brackets revert in a few years, you will certainly be at least in the 25% bracket - working or retired. If tax brackets do not revert, you will still never be in a lower bracket than now (24% this year and 22% other years).

I'd agree that your choice to use Roth 401k and Roth IRA (if still eligible) at this point is correct. In fact, with such a large tax deferred account, I'd consider doing Roth conversions even while working at least until tax rates revert (if they do revert). It appears to me you would come out ahead or even by converting into the 24% bracket - if your bracket goes back up to 25%.

At 52 years old, you should use the money in your taxable account to pay the taxes. I don't know how much you want to deplete that account so that may be a limiting factor until you are 59.5.

All of this is speculation of course. You could remarry and your tax bracket drop in retirement because of that. Or taxes could go down again. Seems unlikely, but what happened to taxes just recently seemed unlikely too, so nothing is impossible.
Thanks so much for this. I think that I will try to convert at least up to the top of 22% in the next few years, while I'm still working, and will also probably use some charitable donations to help tamp down the taxes. I do want to be a little careful in not draining too much of my taxable account, but the DH inherited IRA is always there as an emergency option (since I can withdraw without penalty).

I could be at the top of the 12% bracket in the years I stop working and before pension/SS, and will definitely try to convert a lot at that point. I had hoped to actually retire early this year, but for now, work is not desperately awful, so I'll enjoy making a little more money for a little longer.

And I doubt I'll get married again. I know, never say never, but I'm saying never. :)

GAAP
Posts: 687
Joined: Fri Apr 08, 2016 12:41 pm

Re: converting some traditional IRA to Roth

Post by GAAP » Tue Jun 12, 2018 3:13 pm

David Jay wrote:
Mon Jun 11, 2018 11:28 am
The math is simple, if tax rate is lower today than retirement, do some conversions. If tax rate is higher today than in retirement, wait.

Knowing the facts of your retirement finances 25-30 years out, not so simple.

Wiki here: https://www.bogleheads.org/wiki/Traditional_versus_Roth
True. However, if you're going to plan anything, you have to use some assumptions.

I generally assume that in the absence of other information, the general environment is consistent. For this case, that means current tax law won't change. That in turn means you can pretty much count on the tax rate to increase in 7 years. The decision today should be based upon, or at least influenced by, those rates.

If you're good at saving for retirement, and (like OP) have started early, then expecting your tax bracket to go down in retirement may be a shaky bet -- especially with RMDs considered. My personal emphasis is first on net-new savings, then utilizing whatever remains in the tax law for Roth conversions -- in my case, limiting income to the Roth Phaseout start.

retiredjg
Posts: 34382
Joined: Thu Jan 10, 2008 12:56 pm

Re: converting some traditional IRA to Roth

Post by retiredjg » Tue Jun 12, 2018 4:22 pm

changingtimes wrote:
Tue Jun 12, 2018 2:29 pm
Thanks so much for this. I think that I will try to convert at least up to the top of 22% in the next few years, while I'm still working, and will also probably use some charitable donations to help tamp down the taxes. I do want to be a little careful in not draining too much of my taxable account, but the DH inherited IRA is always there as an emergency option (since I can withdraw without penalty).

I could be at the top of the 12% bracket in the years I stop working and before pension/SS, and will definitely try to convert a lot at that point. I had hoped to actually retire early this year, but for now, work is not desperately awful, so I'll enjoy making a little more money for a little longer.

And I doubt I'll get married again. I know, never say never, but I'm saying never. :)
Wow. You've got the perfect storm for your 70's - pension, SS, large RMDs, and RMDs from inherited IRAs in addition to being single. Your tax rate later on could be significantly higher than now. I'd guess the 28% bracket if taxes do revert in 2026. A good example of why I no longer suggest using all the tax-advantaged accounts that are available for some individuals.

Once you are past age 59.5, you can convert and pay taxes out of the tIRA so your taxable account is not entirely gone. You would simply be giving Uncle Sam his money earlier rather than later to avoid paying 28% on it later.

A caution - your conversions may need to be limited once you hit age 63 - find out about IRMAA. If your IRMAA MAGI taxable income goes over $85k, your Medicare Part B rates will go up significantly. Of course the number will be higher than $85k when you get there, but this is a stumbling block for many who don't know about it.

My IRA is small compared to yours, but I'm converting up to about $84k each year just so I won't have the 28% problem in my 70's. Good luck. Retire early. :happy
Last edited by retiredjg on Tue Jun 12, 2018 6:46 pm, edited 1 time in total.

retiredjg
Posts: 34382
Joined: Thu Jan 10, 2008 12:56 pm

Re: converting some traditional IRA to Roth

Post by retiredjg » Tue Jun 12, 2018 4:47 pm

Charon, I feel we've wandered a bit from your question(s). Did you get the information you were looking for?

danaht
Posts: 541
Joined: Sun Oct 18, 2015 11:28 am

Re: converting some traditional IRA to Roth

Post by danaht » Tue Jun 12, 2018 5:37 pm

Until I reach 60% deferred, and 40% Roth among my IRA/401k accounts - I will keep converting as long as the tax brackets currently stay in place. 60/40 is a great hedge on any future outcomes. I don't think I'll have enough time to finish converting - since I probably will only have 6 years for this opportunity.

RCL
Posts: 310
Joined: Sat Jul 05, 2014 2:48 am

Re: converting some traditional IRA to Roth

Post by RCL » Tue Jun 12, 2018 6:37 pm

retiredjg wrote:
Tue Jun 12, 2018 4:22 pm

A caution - your conversions may need to be limited once you hit age 63 - find out about IRMAA. If your taxable income goes over $85k, your Medicare Part B rates will go up significantly. Of course the number will be higher than $85k when you get there, but this is a stumbling block for many who don't know about it.
Just a quick question about IRMAA.
The income that is means tested for IRMAA is the amount on form 1040 line 43, correct?
It Is Best To Consult Others Before Taking Unusual Actions

retiredjg
Posts: 34382
Joined: Thu Jan 10, 2008 12:56 pm

Re: converting some traditional IRA to Roth

Post by retiredjg » Tue Jun 12, 2018 6:44 pm

RCL wrote:
Tue Jun 12, 2018 6:37 pm
retiredjg wrote:
Tue Jun 12, 2018 4:22 pm

A caution - your conversions may need to be limited once you hit age 63 - find out about IRMAA. If your taxable income goes over $85k, your Medicare Part B rates will go up significantly. Of course the number will be higher than $85k when you get there, but this is a stumbling block for many who don't know about it.
Just a quick question about IRMAA.
The income that is means tested for IRMAA is the amount on form 1040 line 43, correct?
No. It is not line 43. It is an MAGI which is line 37 (AGI) plus some things. One of the things added back in is tax-exempt interest (such as from muni bonds).

Thanks for asking. What I said above needs improvement. :oops:

RCL
Posts: 310
Joined: Sat Jul 05, 2014 2:48 am

Re: converting some traditional IRA to Roth

Post by RCL » Tue Jun 12, 2018 8:12 pm

retiredjg wrote:
Tue Jun 12, 2018 6:44 pm
RCL wrote:
Tue Jun 12, 2018 6:37 pm
retiredjg wrote:
Tue Jun 12, 2018 4:22 pm

A caution - your conversions may need to be limited once you hit age 63 - find out about IRMAA. If your taxable income goes over $85k, your Medicare Part B rates will go up significantly. Of course the number will be higher than $85k when you get there, but this is a stumbling block for many who don't know about it.
Just a quick question about IRMAA.
The income that is means tested for IRMAA is the amount on form 1040 line 43, correct?
No. It is not line 43. It is an MAGI which is line 37 (AGI) plus some things. One of the things added back in is tax-exempt interest (such as from muni bonds).

Thanks for asking. What I said above needs improvement. :oops:
No problem, glad I asked.
Makes a big difference on how much conversions can be done this year. (I was pretty happy there for a moment, but after your clarification, now, not so much) :(
Trying to keep all these different terms the IRS uses squared away is a daunting task for sure! :?
Thanks!
It Is Best To Consult Others Before Taking Unusual Actions

User avatar
changingtimes
Posts: 55
Joined: Mon Jul 24, 2017 9:28 am

Re: converting some traditional IRA to Roth

Post by changingtimes » Tue Jun 12, 2018 8:19 pm

retiredjg wrote:
Tue Jun 12, 2018 4:22 pm
Wow. You've got the perfect storm for your 70's - pension, SS, large RMDs, and RMDs from inherited IRAs in addition to being single. Your tax rate later on could be significantly higher than now. I'd guess the 28% bracket if taxes do revert in 2026. A good example of why I no longer suggest using all the tax-advantaged accounts that are available for some individuals.

Once you are past age 59.5, you can convert and pay taxes out of the tIRA so your taxable account is not entirely gone. You would simply be giving Uncle Sam his money earlier rather than later to avoid paying 28% on it later.

A caution - your conversions may need to be limited once you hit age 63 - find out about IRMAA. If your IRMAA MAGI taxable income goes over $85k, your Medicare Part B rates will go up significantly. Of course the number will be higher than $85k when you get there, but this is a stumbling block for many who don't know about it.

My IRA is small compared to yours, but I'm converting up to about $84k each year just so I won't have the 28% problem in my 70's. Good luck. Retire early. :happy
And I didn't even mention the roughly $800k in real estate equity. :)

I've only recently starting paying attention when people talk about IRMAA, but I've got 11 years until I get there (if I get there!), so who knows what the landscape will be like.

Again, thanks for your thoughts. It's certainly not a scenario that comes up on message boards a lot, and isn't exactly something I'm going to talk about with my friends.

(and apologies to OP for the thread hijack)

User avatar
FiveK
Posts: 5833
Joined: Sun Mar 16, 2014 2:43 pm

Re: converting some traditional IRA to Roth

Post by FiveK » Tue Jun 12, 2018 8:57 pm

RCL wrote:
Tue Jun 12, 2018 8:12 pm
No problem, glad I asked.
Makes a big difference on how much conversions can be done this year. (I was pretty happy there for a moment, but after your clarification, now, not so much) :(
Trying to keep all these different terms the IRS uses squared away is a daunting task for sure! :?
Thanks!
The tax chart in the personal finance toolbox spreadsheet will show when one crosses the various IRMAA tiers, in addition to various other cliffs, phaseouts, etc.

RCL
Posts: 310
Joined: Sat Jul 05, 2014 2:48 am

Re: converting some traditional IRA to Roth

Post by RCL » Wed Jun 13, 2018 12:46 am

FiveK wrote:
Tue Jun 12, 2018 8:57 pm
RCL wrote:
Tue Jun 12, 2018 8:12 pm
No problem, glad I asked.
Makes a big difference on how much conversions can be done this year. (I was pretty happy there for a moment, but after your clarification, now, not so much) :(
Trying to keep all these different terms the IRS uses squared away is a daunting task for sure! :?
Thanks!
The tax chart in the personal finance toolbox spreadsheet will show when one crosses the various IRMAA tiers, in addition to various other cliffs, phaseouts, etc.
Sorry, After opening the spreadsheet in the Personal finance toolbox, and going through all the tabs in the spreadsheet, I don't see a tax chart. Oddly, the name of the spreadsheet is Copy of CashFlow.xls
I must be looking at the wrong thing?
It Is Best To Consult Others Before Taking Unusual Actions

The Wizard
Posts: 12437
Joined: Tue Mar 23, 2010 1:45 pm
Location: Reading, MA

Re: converting some traditional IRA to Roth

Post by The Wizard » Wed Jun 13, 2018 3:53 am

changingtimes wrote:
Tue Jun 12, 2018 8:19 pm
retiredjg wrote:
Tue Jun 12, 2018 4:22 pm
Wow. You've got the perfect storm for your 70's - pension, SS, large RMDs, and RMDs from inherited IRAs in addition to being single. Your tax rate later on could be significantly higher than now. I'd guess the 28% bracket if taxes do revert in 2026. A good example of why I no longer suggest using all the tax-advantaged accounts that are available for some individuals.

Once you are past age 59.5, you can convert and pay taxes out of the tIRA so your taxable account is not entirely gone. You would simply be giving Uncle Sam his money earlier rather than later to avoid paying 28% on it later.

A caution - your conversions may need to be limited once you hit age 63 - find out about IRMAA. If your IRMAA MAGI taxable income goes over $85k, your Medicare Part B rates will go up significantly. Of course the number will be higher than $85k when you get there, but this is a stumbling block for many who don't know about it.

My IRA is small compared to yours, but I'm converting up to about $84k each year just so I won't have the 28% problem in my 70's. Good luck. Retire early. :happy
And I didn't even mention the roughly $800k in real estate equity. :)

I've only recently starting paying attention when people talk about IRMAA, but I've got 11 years until I get there (if I get there!), so who knows what the landscape will be like.

Again, thanks for your thoughts. It's certainly not a scenario that comes up on message boards a lot, and isn't exactly something I'm going to talk about with my friends.

(and apologies to OP for the thread hijack)
There are five Medicare IRMAA tiers, maybe even six.
Rather than focus strictly on keeping MAGI below $85k per person, I would first look at your expected MAGI for age 70 and beyond with zero Roth conversions at that age.

If, for example, you're looking at a $100k MAGI in the out years, then forget $85k for now. Next IRMAA tier goes up to $107k, I think, so do Roth conversions to get somewhere close to, but not over, that number.
This is the sort of thing I'm doing in my last two pre-70 years...
Attempted new signature...

User avatar
FiveK
Posts: 5833
Joined: Sun Mar 16, 2014 2:43 pm

Re: converting some traditional IRA to Roth

Post by FiveK » Wed Jun 13, 2018 12:22 pm

RCL wrote:
Wed Jun 13, 2018 12:46 am
FiveK wrote:
Tue Jun 12, 2018 8:57 pm
RCL wrote:
Tue Jun 12, 2018 8:12 pm
No problem, glad I asked.
Makes a big difference on how much conversions can be done this year. (I was pretty happy there for a moment, but after your clarification, now, not so much) :(
Trying to keep all these different terms the IRS uses squared away is a daunting task for sure! :?
Thanks!
The tax chart in the personal finance toolbox spreadsheet will show when one crosses the various IRMAA tiers, in addition to various other cliffs, phaseouts, etc.
Sorry, After opening the spreadsheet in the Personal finance toolbox, and going through all the tabs in the spreadsheet, I don't see a tax chart. Oddly, the name of the spreadsheet is Copy of CashFlow.xls
I must be looking at the wrong thing?
It is the chart starting ~cell F81 of the Calculations tab. I believe Excel is required, e.g., it doesn't work in Google Sheets. See this post in Long-term gains and Tax Bracket - Bogleheads.org for a couple of examples.

User avatar
Peter Foley
Posts: 4611
Joined: Fri Nov 23, 2007 10:34 am
Location: Lake Wobegon

Re: converting some traditional IRA to Roth

Post by Peter Foley » Wed Jun 13, 2018 1:32 pm

retiredjg wrote:
First, I'll just say that I'm all for tax-deferral. However, I've come to believe there can be too much unless one has a plan to handle it.

A very large tax-deferred account will start coming home to roost at age 70.5 when RMDs start. The larger the account, the higher the RMDs. This can push a person into tax brackets equal to or higher than when they actually earned the money. No, probably not the first year of RMDs, but some years later.

Another thing that happens is that couples often lose one member somewhere along the line. The survivor will likely go up a tax bracket when that happens.

A third factor is that so many people are putting off taking their SS until about age 70.

It can be a perfect storm - RMDs, SS, and death or divorce - that can cause people to pay higher tax rates on their RMD income than when they deferred the taxes in the first place.
So true. It is the problem my wife and I created. In our defense, we retired shortly after coming out of the 2009 recession so our deferred account balances were significantly lower. Also I did not have a Roth 457b account available until a couple years before I retired.

QCD's have become a critical part of our plan. We have been funding various charities through a donor advised fund and have "prefunded" a couple years worth of donations. When I turn 70.5 we will begin funding the largest donations via qualified charitable donations. That will keep our income lower and is actually a preferred option under the new tax law. My plan is to have my traditional IRA funded so that the entire RMD will go to charity at our current donation levels. I will have to move money from my 457 account to make this work but that is no big deal.

Post Reply