Heresy: Is It Worth Converting tIRAs to Roth?

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Sandi_k
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Heresy: Is It Worth Converting tIRAs to Roth?

Post by Sandi_k » Tue Jul 17, 2018 7:36 pm

So, DH is now in his mid-50's, and has ~ $85k in tIRA and a SEP-IRA. We're in the 24% Fed bracket, and ~ 9% state tax bracket.

80%+ of our savings are in tax-deferred accounts. We had planned to convert the IRAs to his Roth, now that the Fed tax brackets are lower. However, we only have ~ 7 years before retirement, and 15 years before RMDs for him. Our retirement income is likely to be very close to our working income, due to a generous pension and aggressive savings.

Is it worth taking the tax hit to convert to Roth? It won't help us with IRMAA premiums, we'll be subject to the hit regardless. Given that we have no kids to whom we want to leave a Roth...is there any reason why we should prioritize the conversion? Or should we just let them ride, as-is?

Thoughts? What are we missing?

rkhusky
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Re: Heresy: Is It Worth Converting tIRAs to Roth?

Post by rkhusky » Tue Jul 17, 2018 7:53 pm

I wouldn’t convert in 24% bracket if you will be in that bracket or higher in retirement.
Last edited by rkhusky on Tue Jul 17, 2018 7:55 pm, edited 1 time in total.

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Re: Heresy: Is It Worth Converting tIRAs to Roth?

Post by bloom2708 » Tue Jul 17, 2018 7:55 pm

Pay the tax 15, 20 years down the road if it comes to that. Many paths ahead.
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Re: Heresy: Is It Worth Converting tIRAs to Roth?

Post by tibbitts » Tue Jul 17, 2018 8:27 pm

rkhusky wrote:
Tue Jul 17, 2018 7:53 pm
I wouldn’t convert in 24% bracket if you will be in that bracket or higher in retirement.
Did you mean higher or lower? I might convert if I knew future taxes would be at a higher rate.

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Re: Heresy: Is It Worth Converting tIRAs to Roth?

Post by Sandi_k » Tue Jul 17, 2018 9:01 pm

rkhusky wrote:
Tue Jul 17, 2018 7:53 pm
I wouldn’t convert in 24% bracket if you will be in that bracket or higher in retirement.
At current tax rates, we do expect to still be in the 24% bracket at retirement. Pension alone puts us close to 24%, and with any SWR from investments added to income, yes, we'll be solidly in 24% bracket. After 2027, possibly higher, if the rates revert to 2017 brackets...

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Re: Heresy: Is It Worth Converting tIRAs to Roth?

Post by Sandi_k » Tue Jul 17, 2018 9:04 pm

bloom2708 wrote:
Tue Jul 17, 2018 7:55 pm
Pay the tax 15, 20 years down the road if it comes to that. Many paths ahead.
And that's why I asked for advice. In 10 years, tax brackets could revert to 2017 levels, which would be higher for us in retirement than now...

And in 15 years, we'll have RMDs, SocSecurity for one, plus pension. In 17 years, we'll have two SocSec incomes. And yes, we'd be paying substantial taxes at that time. Just wondering, given the tax bracket reversion and a solid pension, if it was better to bite the bullet now, even if it is a hit of 24% + 9%....

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Re: Heresy: Is It Worth Converting tIRAs to Roth?

Post by Sandi_k » Tue Jul 17, 2018 9:06 pm

tibbitts wrote:
Tue Jul 17, 2018 8:27 pm
rkhusky wrote:
Tue Jul 17, 2018 7:53 pm
I wouldn’t convert in 24% bracket if you will be in that bracket or higher in retirement.
Did you mean higher or lower? I might convert if I knew future taxes would be at a higher rate.
If they do revert to 2017 rates, in 10 years as currently planned, we'd go from 24% federal now, to 28% federal in 2027. Same state rate.

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munemaker
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Re: Heresy: Is It Worth Converting tIRAs to Roth?

Post by munemaker » Tue Jul 17, 2018 9:14 pm

I would download the RPM spreadsheet and experiment with Roth conversions, SS claiming ages and expiration dates.

In our case, the difference in our terminal value is almost $1M higher with the Roth conversions. Hey, with so much at stake, it is worth spending some time on it.

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Re: Heresy: Is It Worth Converting tIRAs to Roth?

Post by Tdubs » Tue Jul 17, 2018 9:17 pm

Can you delay SS after retirement and do conversions while income is in a lower bracket? Would obviously require a source of after tax savings to draw during the gap years.

Try running scenarios in I-ORP.
Last edited by Tdubs on Tue Jul 17, 2018 9:17 pm, edited 1 time in total.

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Re: Heresy: Is It Worth Converting tIRAs to Roth?

Post by KlangFool » Tue Jul 17, 2018 9:17 pm

Sandi_k wrote:
Tue Jul 17, 2018 9:06 pm
tibbitts wrote:
Tue Jul 17, 2018 8:27 pm
rkhusky wrote:
Tue Jul 17, 2018 7:53 pm
I wouldn’t convert in 24% bracket if you will be in that bracket or higher in retirement.
Did you mean higher or lower? I might convert if I knew future taxes would be at a higher rate.
If they do revert to 2017 rates, in 10 years as currently planned, we'd go from 24% federal now, to 28% federal in 2027. Same state rate.
Sandi_k,

Even if that is true, the tax bracket will be adjusted upward due to annual inflation adjustment. This does not look like a good bet. In the worst case, you pay 4% more.

My forecast is that the individual income tax will go down and replace by a VAT/Sales Tax/Consumption tax. This is the global trend.

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Svensk Anga
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Re: Heresy: Is It Worth Converting tIRAs to Roth?

Post by Svensk Anga » Tue Jul 17, 2018 9:26 pm

A marginal case when you are both alive may well become advantageous for conversion should one be widowed and have to file at single rates. You ought to look at your income and tax picture for both cases of one out-living the other.

In any case, I would like to have a stash of funds available without tax consequence should an unusual need arise.

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Re: Heresy: Is It Worth Converting tIRAs to Roth?

Post by 2comma » Tue Jul 17, 2018 9:35 pm

I've been mulling over this and our situation - two decent pensions and my DW is still working. Besides sitting down and doing the hard work of trying to figure out what is best for you don't forget about unknowns like one of you outliving the other by many years and paying taxes as a single person. My opinion is I don't know what taxes will do in the future but when/if we are both pulling our pensions and SS and RMDs it probably makes sense to do some Roth conversions.
If I am stupid I will pay.

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Re: Heresy: Is It Worth Converting tIRAs to Roth?

Post by phantom0308 » Tue Jul 17, 2018 10:34 pm

I think if you’re expecting the same tax rate with a possibility of a higher tax rate should tax rates revert then conversion makes sense. Roth IRAs have the additional benefit of their principal being liquid after 5 years. (google Roth IRA conversion ladder) in case of emergency or early retirement.

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Re: Heresy: Is It Worth Converting tIRAs to Roth?

Post by Miriam2 » Tue Jul 17, 2018 10:56 pm

Sandi_k wrote: So, DH is now in his mid-50's, and has ~ $85k in tIRA and a SEP-IRA. We're in the 24% Fed bracket, and ~ 9% state tax bracket.

80%+ of our savings are in tax-deferred accounts. We had planned to convert the IRAs to his Roth, now that the Fed tax brackets are lower. However, we only have ~ 7 years before retirement, and 15 years before RMDs for him. Our retirement income is likely to be very close to our working income, due to a generous pension and aggressive savings.

Is it worth taking the tax hit to convert to Roth? It won't help us with IRMAA premiums, we'll be subject to the hit regardless. Given that we have no kids to whom we want to leave a Roth...is there any reason why we should prioritize the conversion? Or should we just let them ride, as-is?

Thoughts? What are we missing?
We are in the situation of being retired yet having our tax bracket actually go UP a bracket from when we were working - the opposite of what we expected way back when we began our tIRAs in the 1980's :shock: So yes, that does happen. Our pensions, social security, RMDs and husband working part time at a job he loves propelled us deep into a higher tax bracket.

I am slowly converting my tIRA to a Roth and paying some extra tax to do so, but there will never be a better time to do so in the near future. At least the money gets into the Roth and starts working its magic sooner rather than later. I want the Roth for tax & account diversification and for inheritance purposes.

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Re: Heresy: Is It Worth Converting tIRAs to Roth?

Post by hawkfan55 » Tue Jul 17, 2018 11:13 pm

I would recommend using www.i-orp.com , Extended Version. It will allow you to see if Roth Conversions will benefit you and give you tax information as well. Since I'm a few years older than my DW, odds are she will outlive me and face taxes as a single taxpayer. We are both retired, doing Roth Conversions and paying the taxes from our tIRA while staying in the 22% bracket and under the IRMAA limit of $170k. No one knows for sure how income will be taxed in the future. We're comfortable with using our tIRA to live on and convert to Roth while holding off on SS.
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Re: Heresy: Is It Worth Converting tIRAs to Roth?

Post by jerryk68 » Tue Jul 17, 2018 11:15 pm

Sandi_k wrote:
Tue Jul 17, 2018 7:36 pm
So, DH is now in his mid-50's, and has ~ $85k in tIRA and a SEP-IRA. We're in the 24% Fed bracket, and ~ 9% state tax bracket.

80%+ of our savings are in tax-deferred accounts. We had planned to convert the IRAs to his Roth, now that the Fed tax brackets are lower. However, we only have ~ 7 years before retirement, and 15 years before RMDs for him. Our retirement income is likely to be very close to our working income, due to a generous pension and aggressive savings.

Is it worth taking the tax hit to convert to Roth? It won't help us with IRMAA premiums, we'll be subject to the hit regardless. Given that we have no kids to whom we want to leave a Roth...is there any reason why we should prioritize the conversion? Or should we just let them ride, as-is?

Thoughts? What are we missing?
The one mistake I made was not converting to a Roth. My RMD contributes to my total income which affects my part B Medicare payment. There is no requirement to take a distribution with a Roth. It you are concerned about taxes do a percentage of the total each year.

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Re: Heresy: Is It Worth Converting tIRAs to Roth?

Post by MrBeaver » Tue Jul 17, 2018 11:59 pm

Sandi_k wrote:
Tue Jul 17, 2018 7:36 pm
We're in the 24% Fed bracket, and ~ 9% state tax bracket.

…Our retirement income is likely to be very close to our working income, due to a generous pension and aggressive savings.

…Given that we have no kids to whom we want to leave a Roth...is there any reason why we should prioritize the conversion? Or should we just let them ride, as-is?

Thoughts? What are we missing?
I hope I’m not becoming a broken record and annoying people here, but being far from retirement, I am confused by those near to it trying to maximize income by tax strategies rather than maximize meeting your overall financial goals.

Your situation is simpler than many (no kids), though I suppose there might be some grand nieces or nephews you might want to assist with education expenses. But if we ignore that possibility, what do you want to do with your money?

Spend it all and get maximum usage of it? Conversions might help, but moving to a low state income tax state after retirement would probably help more. If that’s not an option because of community ties and relationships, then…

Maintain a particular standard of living while giving excess away to the community or non-profit organizations you care about? Conversions will only help if your target standard of living is at a level of income that requires distributions from tax-deferred accounts at a marginal rate higher than your current rate. If you end up converting money past this threshold, your conversions are only paying tax which those nonprofits would never pay were you to give to them through QCDs.

Even if it’s not the people that keep you there, but the location, wildlife, etc., are there not nonprofits set up to maintain those benefits you value who could preserve it for others?

The more threads I read, the more I think the big transition challenge of a bogglehead from accumulation to retirement is going from an investment policy statement (IPS) to a ‘how do I want to use the money I’ve accumulated’ statement, or maybe term it a ‘Legacy Goals Statement’. In truth, that statement should be about more than money (it also involves time), but money is a big part of it.

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Re: Heresy: Is It Worth Converting tIRAs to Roth?

Post by BL » Wed Jul 18, 2018 12:36 am

If you choose to donate to charities, the QCD available after age 70.5 lets you donate some/all of your RMD and not pay any tax on that part.

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Re: Heresy: Is It Worth Converting tIRAs to Roth?

Post by SGM » Wed Jul 18, 2018 4:41 am

One reason we are in a higher bracket in retirement is that we don't make large tax deferred contributions to a solo 401k anymore. I was glad to pay the additional taxes due to conversions out of my taxable account. We started conversions 8 years ago in 2010 and completed them over 6 years. There are deductions we cannot take now due to the new tax law. We still get hit by IRMMA Medicare premiums and additional taxes on investment income due to laws enacted with the alternative care act.


The result is that since 2010 are that the taxable and Roth accounts have both grown considerably. We have other income streams that are increasing with inflationary adjustments so we would be in a higher bracket if we had not converted.


Moving to a low cost tax state was not an option. Using tax deferred accounts for charity is a good idea, but was nixed by DW who was disenchanted with several charities that seemed to waste a lot of money and others that pestered us for more. As I knew would happen DW decided to continue charitable donations out of our taxable account. It adds a little simplification to not have to take unneeded RMDs too.

Simplification will become more important as we age and turn the reins over to the next generation.

I-orp confirmed my own calculations that we would be better off with the conversions. The new tax law only makes a minor difference with the other add-ons. No one knows what other changes are ahead. I also used a BH supplied spreadsheet that was essentially in agreement with my plan.

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Re: Heresy: Is It Worth Converting tIRAs to Roth?

Post by Tamarind » Wed Jul 18, 2018 5:57 am

Look, you could get the best tax deal by having your husband stop work immediately so you have years of low income to convert. But you say he loves the job. Life is not about getting the absolute best tax rate.

Let him know he can quit if he ever wants and prepare to pay taxes with equanimity, knowing you've been very successful.


ETA: I mixed up a reply with the OPs information, rendering this post nonsense. The more general idea that one should not work "one more year" when one already has enough plus ample safety margin, unless one loves the job, is still something I believe strongly but may not be relevant to this thread.
Last edited by Tamarind on Thu Jul 19, 2018 7:03 am, edited 1 time in total.

JBTX
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Re: Heresy: Is It Worth Converting tIRAs to Roth?

Post by JBTX » Wed Jul 18, 2018 11:20 am

One question is will you retire in the same state? Given your 24% federal rate and your situation I would consider a partial conversion at 24, but adding another 9% state raises the threshold substantially.

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Re: Heresy: Is It Worth Converting tIRAs to Roth?

Post by FiveK » Wed Jul 18, 2018 4:11 pm

If you are attempting a quantitative guess at this, you might put your current and then expected retirement income numbers into the personal finance toolbox spreadsheet.

That can show you your current and projected marginal tax rates for tIRA withdrawals. Marginal rates may or may not be the same as the nominal bracket rates.

That spreadsheet has excellent tax calculations, but not the multi-year look RPM and i-orp have. RPM and i-orp have excellent multi-year looks but cut some corners on the tax calculations.

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Re: Heresy: Is It Worth Converting tIRAs to Roth?

Post by Sandi_k » Wed Jul 18, 2018 7:18 pm

Tdubs wrote:
Tue Jul 17, 2018 9:17 pm
Can you delay SS after retirement and do conversions while income is in a lower bracket? Would obviously require a source of after tax savings to draw during the gap years.

Try running scenarios in I-ORP.
This already includes delaying of SS - to 67 for DH and 70 for me, as the higher earner. And our only source (right now) of after-tax savings is the current Roth accounts. We have a liquid e-fund, but not enough to live on for 10 years post-retirement.

And i-ORP scares me. :-)

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Re: Heresy: Is It Worth Converting tIRAs to Roth?

Post by Sandi_k » Wed Jul 18, 2018 7:20 pm

Svensk Anga wrote:
Tue Jul 17, 2018 9:26 pm
A marginal case when you are both alive may well become advantageous for conversion should one be widowed and have to file at single rates. You ought to look at your income and tax picture for both cases of one out-living the other.

In any case, I would like to have a stash of funds available without tax consequence should an unusual need arise.
The single rate is an *excellent* point. Thank you - all my spreadsheets are for us as a couple. And we will take my pension with a 100% survivor benefit, so income will be affected by death only insofar as the SS income is changed to survivor benefits instead of two claimants.

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Re: Heresy: Is It Worth Converting tIRAs to Roth?

Post by Sandi_k » Wed Jul 18, 2018 7:22 pm

jerryk68 wrote:
Tue Jul 17, 2018 11:15 pm

The one mistake I made was not converting to a Roth. My RMD contributes to my total income which affects my part B Medicare payment. There is no requirement to take a distribution with a Roth. It you are concerned about taxes do a percentage of the total each year.
I am sure that we will have a high Part B payment as well, since our investment income plus pension will be six figures annually, regardless of Roth conversions.

And the tax brackets are wide enough that I can convert the entire $86k in tIRA now and still not go into the next bracket - no need to phase in the conversions. If anything, there's a logic for one year of pain, and a longer horizon for the Roth to grow tax-free. Plus to start the 5 year window now.

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Re: Heresy: Is It Worth Converting tIRAs to Roth?

Post by Sandi_k » Wed Jul 18, 2018 7:27 pm

MrBeaver wrote:
Tue Jul 17, 2018 11:59 pm

I hope I’m not becoming a broken record and annoying people here, but being far from retirement, I am confused by those near to it trying to maximize income by tax strategies rather than maximize meeting your overall financial goals.
Umm, maybe because we already have met our goals, but we want to optimize execution?
MrBeaver wrote:
Tue Jul 17, 2018 11:59 pm
Your situation is simpler than many (no kids), though I suppose there might be some grand nieces or nephews you might want to assist with education expenses. But if we ignore that possibility, what do you want to do with your money?
We've already funded 529's for our nieces and nephew.
MrBeaver wrote:
Tue Jul 17, 2018 11:59 pm
Spend it all and get maximum usage of it? Conversions might help, but moving to a low state income tax state after retirement would probably help more. If that’s not an option because of community ties and relationships, then…
We can't until after age 65 - my retiree health care requires me to stay in the same state I work in currently.
MrBeaver wrote:
Tue Jul 17, 2018 11:59 pm
The more threads I read, the more I think the big transition challenge of a boglehead from accumulation to retirement is going from an investment policy statement (IPS) to a ‘how do I want to use the money I’ve accumulated’ statement, or maybe term it a ‘Legacy Goals Statement’. In truth, that statement should be about more than money (it also involves time), but money is a big part of it.
Thanks for your thoughts.

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Re: Heresy: Is It Worth Converting tIRAs to Roth?

Post by Sandi_k » Wed Jul 18, 2018 7:29 pm

Tamarind wrote:
Wed Jul 18, 2018 5:57 am
Look, you could get the best tax deal by having your husband stop work immediately so you have years of low income to convert. But you say he loves the job. Life is not about getting the absolute best tax rate.

Let him know he can quit if he ever wants and prepare to pay taxes with equanimity, knowing you've been very successful.
What post are you reading? I never said anything about DH working (or not), nor did I say anything about him "loving the job." Could you be more rude in lecturing me about a situation that is not at all what I posted about? Sheesh!

FWIW, he already is pretty much retired, and I'm the one working FT. That has NOTHING to do with my question.

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Re: Heresy: Is It Worth Converting tIRAs to Roth?

Post by ExitStageLeft » Wed Jul 18, 2018 7:59 pm

Sandi_k wrote:
Wed Jul 18, 2018 7:29 pm
...
What post are you reading? I never said anything about DH working (or not), nor did I say anything about him "loving the job." Could you be more rude in lecturing me about a situation that is not at all what I posted about? Sheesh!

FWIW, he already is pretty much retired, and I'm the one working FT. That has NOTHING to do with my question.
It looks like a combination of
Sandi_k wrote:
Tue Jul 17, 2018 7:36 pm
...
However, we only have ~ 7 years before retirement, and 15 years before RMDs for him. Our retirement income is likely to be very close to our working income, due to a generous pension and aggressive savings.
..
and
Miriam2 wrote:
Tue Jul 17, 2018 10:56 pm
...
Our pensions, social security, RMDs and husband working part time at a job he loves propelled us deep into a higher tax bracket.
...
Misattributing a quote is not unheard of in internet forums. Reading more into it than was ever intended is not unheard of either. Having a thick skin on the internet is a good way to maximize the helpful comments one might get from friendly volunteers.

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Re: Heresy: Is It Worth Converting tIRAs to Roth?

Post by randomguy » Wed Jul 18, 2018 9:00 pm

Sandi_k wrote:
Tue Jul 17, 2018 7:36 pm
So, DH is now in his mid-50's, and has ~ $85k in tIRA and a SEP-IRA. We're in the 24% Fed bracket, and ~ 9% state tax bracket.

80%+ of our savings are in tax-deferred accounts. We had planned to convert the IRAs to his Roth, now that the Fed tax brackets are lower. However, we only have ~ 7 years before retirement, and 15 years before RMDs for him. Our retirement income is likely to be very close to our working income, due to a generous pension and aggressive savings.

Is it worth taking the tax hit to convert to Roth? It won't help us with IRMAA premiums, we'll be subject to the hit regardless. Given that we have no kids to whom we want to leave a Roth...is there any reason why we should prioritize the conversion? Or should we just let them ride, as-is?

Thoughts? What are we missing?
Is 85k really the right number? 4k of RMDs versus your 185k/year+ pensions makes it seem like a choice that will not change your financial future at all. You might be able to get say 5% more money out but you have to make a lot of assumptions to pick a winner. Even doubling the money for 7 more years of savings, doesn't really change the math much.

The the first reason I can come up with is what is the tax rate when one of you dies? Maybe you go from the 24% up to the 32%. Most of the time, from what is written I expect it to be 24% versus 24% so there is little difference (some tax drag issues potentially). You would have to think about what your situation is (what is pensions/ss/.. in this case) and if it is something to that is worth planning for.

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Re: Heresy: Is It Worth Converting tIRAs to Roth?

Post by Sandi_k » Thu Jul 19, 2018 1:34 am

ExitStageLeft wrote:
Wed Jul 18, 2018 7:59 pm

Misattributing a quote is not unheard of in internet forums. Reading more into it than was ever intended is not unheard of either. Having a thick skin on the internet is a good way to maximize the helpful comments one might get from friendly volunteers.
Thanks for the condescension. I've been on the internet since Usenet days, and my skin is plenty thick - the tone was just ridiculously patronizing - not "friendly" at all, IMO. FWIW.

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Re: Heresy: Is It Worth Converting tIRAs to Roth?

Post by SirRunsabit » Thu Jul 19, 2018 2:33 am

How much we pay in taxes right now is something we can control, how much we pay in 2029 is known solely to the clairvoyant among us :wink: That puts me in the pay it now crew.
This assumes the Roth withdrawal rules remain similar. Guess I’m a bit contrary.
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Re: Heresy: Is It Worth Converting tIRAs to Roth?

Post by jalbert » Thu Jul 19, 2018 3:02 am

I would not convert it. If you ever require long-term care or have large medical expenses, you may be able to withdraw and spend the assets tax-free. Converting now gives up that option without much compensating benefit. Just contribute the funds you would have used to pay the tax on conversions to a tax-efficient investment in a taxable account.
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Re: Heresy: Is It Worth Converting tIRAs to Roth?

Post by Tamarind » Thu Jul 19, 2018 6:07 am

Sandi_k wrote:
Thu Jul 19, 2018 1:34 am
ExitStageLeft wrote:
Wed Jul 18, 2018 7:59 pm

Misattributing a quote is not unheard of in internet forums. Reading more into it than was ever intended is not unheard of either. Having a thick skin on the internet is a good way to maximize the helpful comments one might get from friendly volunteers.
Thanks for the condescension. I've been on the internet since Usenet days, and my skin is plenty thick - the tone was just ridiculously patronizing - not "friendly" at all, IMO. FWIW.
Hmm, sorry about the mix-up and for offending you, Sandi_k. ESL is quite right that I was reading and writing too fast. I went back and reread the thread.

Given the relatively small size of your pre-tax retirement accounts ($85k) and the large pension holding you in a higher tax bracket in retirement, it doesn't make sense to me to convert unless you can arrange to have a low income year.

That's where I was going in my confusion re: Miriam's reply - if you had leeway to introduce a gap between stopping work and starting pension income, that would be a natural time to convert. Since you are expecting to have ample funds to retire on and have 100% survivor benefits on the pension, you might choose to do this even if you were giving up more in income than you'd save in taxes, in order to get the tax diversification now.
Last edited by Tamarind on Thu Jul 19, 2018 6:56 am, edited 1 time in total.

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Re: Heresy: Is It Worth Converting tIRAs to Roth?

Post by bradpevans » Thu Jul 19, 2018 6:25 am

Sandi_k wrote:
Thu Jul 19, 2018 1:34 am
ExitStageLeft wrote:
Wed Jul 18, 2018 7:59 pm

Misattributing a quote is not unheard of in internet forums. Reading more into it than was ever intended is not unheard of either. Having a thick skin on the internet is a good way to maximize the helpful comments one might get from friendly volunteers.
Thanks for the condescension. I've been on the internet since Usenet days, and my skin is plenty thick - the tone was just ridiculously patronizing - not "friendly" at all, IMO. FWIW.
ah, the irony: Reading more into it than was ever intended is not unheard of either.

cherijoh
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Re: Heresy: Is It Worth Converting tIRAs to Roth?

Post by cherijoh » Thu Jul 19, 2018 6:28 am

Sandi_k wrote:
Wed Jul 18, 2018 7:29 pm
Tamarind wrote:
Wed Jul 18, 2018 5:57 am
Look, you could get the best tax deal by having your husband stop work immediately so you have years of low income to convert. But you say he loves the job. Life is not about getting the absolute best tax rate.

Let him know he can quit if he ever wants and prepare to pay taxes with equanimity, knowing you've been very successful.
What post are you reading? I never said anything about DH working (or not), nor did I say anything about him "loving the job." Could you be more rude in lecturing me about a situation that is not at all what I posted about? Sheesh!

FWIW, he already is pretty much retired, and I'm the one working FT. That has NOTHING to do with my question.
As often happens, someone else (Miriam) posted about her own situation and tamarind didn't notice the author change. That's why it is a good idea to reply to a specific post rather than adding another post to the thread.
Last edited by cherijoh on Thu Jul 19, 2018 7:00 am, edited 2 times in total.

cherijoh
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Re: Heresy: Is It Worth Converting tIRAs to Roth?

Post by cherijoh » Thu Jul 19, 2018 6:54 am

Sandi_k wrote:
Wed Jul 18, 2018 7:20 pm
Svensk Anga wrote:
Tue Jul 17, 2018 9:26 pm
A marginal case when you are both alive may well become advantageous for conversion should one be widowed and have to file at single rates. You ought to look at your income and tax picture for both cases of one out-living the other.

In any case, I would like to have a stash of funds available without tax consequence should an unusual need arise.
The single rate is an *excellent* point. Thank you - all my spreadsheets are for us as a couple. And we will take my pension with a 100% survivor benefit, so income will be affected by death only insofar as the SS income is changed to survivor benefits instead of two claimants.
Sandi, if you are on the fence about Roth conversions one thing you could consider doing is an opportunistic Roth conversion. I think I'm safe in saying that there will be a significant stock market correction sometime in the future. That is an ideal time to convert some stock funds in your tIRA and reinvest in the same funds in the Roth. They can then recover in the Roth. You end up paying less tax per share of your stock fund than you would at the current lofty levels of the stock market.

I did some of this in 2007-09 and it boosted my Roth balances with a very small tax cost. I actually wish I had been more aggressive with these conversions. I'm retired now and planning to do some modest Roth conversions each year prior to taking SS at 70, but will consider accelerating my Roth conversions from 22% into 24% marginal tax bracket if there is a major stock market correction. Especially if it happens in the next couple years before it would impact any Medicare surcharges (I'm currently 59).

It may not be as effective if you are having to sell more of your tIRA to cover the taxes, but you could sell a less volatile fund (e.g., bonds) to cover the taxes.

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Re: Heresy: Is It Worth Converting tIRAs to Roth?

Post by Sandi_k » Thu Jul 19, 2018 8:27 am

cherijoh wrote:
Thu Jul 19, 2018 6:54 am
Sandi_k wrote:
Wed Jul 18, 2018 7:20 pm
Svensk Anga wrote:
Tue Jul 17, 2018 9:26 pm
A marginal case when you are both alive may well become advantageous for conversion should one be widowed and have to file at single rates. You ought to look at your income and tax picture for both cases of one out-living the other.

In any case, I would like to have a stash of funds available without tax consequence should an unusual need arise.
The single rate is an *excellent* point. Thank you - all my spreadsheets are for us as a couple. And we will take my pension with a 100% survivor benefit, so income will be affected by death only insofar as the SS income is changed to survivor benefits instead of two claimants.
Sandi, if you are on the fence about Roth conversions one thing you could consider doing is an opportunistic Roth conversion. I think I'm safe in saying that there will be a significant stock market correction sometime in the future. That is an ideal time to convert some stock funds in your tIRA and reinvest in the same funds in the Roth. They can then recover in the Roth. You end up paying less tax per share of your stock fund than you would at the current lofty levels of the stock market.

I did some of this in 2007-09 and it boosted my Roth balances with a very small tax cost. I actually wish I had been more aggressive with these conversions. I'm retired now and planning to do some modest Roth conversions each year prior to taking SS at 70, but will consider accelerating my Roth conversions from 22% into 24% marginal tax bracket if there is a major stock market correction. Especially if it happens in the next couple years before it would impact any Medicare surcharges (I'm currently 59).

It may not be as effective if you are having to sell more of your tIRA to cover the taxes, but you could sell a less volatile fund (e.g., bonds) to cover the taxes.
Thanks, cherijoh, I appreciate the perspective.

Given the conversational points of preparing for a single taxpayer, and the experience you note, I think the plan going forward is this:

- Sometime in 2019, convert the outstanding tIRA balance into the Roth. DH is working very little, and I can max out both 403(b) and 457 plans, which should reduce our taxable income enough that the tax hit on the $8k small account will be negligible.

- Starting in 2020, begin stashing cash in a savings account, sufficient to pay the federal and state tax bill out of pocket. This will not deplete our EF, nor will we have to use proceeds from the remaining SEP-IRA to pay the taxes.

- In early 2021, convert the remaining amount ($80k or so, in the SEP-IRA) knowing that the tax hit will be 24% + 9% = $28k. Then file an extension for taxes in April 2022, and make sure we have the full amount in hand in October 2022, from the conversation in 2021.

If the stock market corrects prior to that, we can choose to convert more at that time.

Thank you all! It's helpful having a clear rationale, and a clear plan going forward.

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Re: Heresy: Is It Worth Converting tIRAs to Roth?

Post by bsteiner » Thu Jul 19, 2018 9:04 am

Sandi_k wrote:
Tue Jul 17, 2018 7:36 pm
So, DH is now in his mid-50's, and has ~ $85k in tIRA and a SEP-IRA. We're in the 24% Fed bracket, and ~ 9% state tax bracket.

80%+ of our savings are in tax-deferred accounts. We had planned to convert the IRAs to his Roth, now that the Fed tax brackets are lower. However, we only have ~ 7 years before retirement, and 15 years before RMDs for him. Our retirement income is likely to be very close to our working income, due to a generous pension and aggressive savings.

Is it worth taking the tax hit to convert to Roth? It won't help us with IRMAA premiums, we'll be subject to the hit regardless. Given that we have no kids to whom we want to leave a Roth...is there any reason why we should prioritize the conversion? Or should we just let them ride, as-is?

Thoughts? What are we missing?
Unless you're leaving the IRAs to charity there's no "tax hit." You can't get money out without paying tax. By converting and paying the tax out of other money you're effectively making an additional contribution to your IRA.

In other words, if your bracket will always be 33%, if you convert and pay the $28,050 tax (which I'll round to $28,000 for simplicity) out of other money you'll have an $85,000 Roth IRA. Suppose it doubles to $170,000. You'll have a $170,000 Roth IRA. If you don't convert, you'll have a $170,000 traditional IRA. You'll pay $56,000 tax, and you'll have $114,000 left. You'll still have the $28,000 that you didn't have to pay in taxes on the conversion. But it won't double to $56,000, since the income and gains on it will have been taxed each year. The actual numbers are likely to be much greater, since you're fairly young and the Roth IRA will likely more than double during your lifetime. There are also no required distributions from a Roth IRA after age 70 1/2.

So it generally makes sense to convert to the extent you can do so at a tax rate less than, equal to, or not too much higher than the tax rate that would otherwise apply to distributions.

However, there are some countervailing factors. You could move to a state with a lower state income tax, or no state income tax. You could have high medical expenses later one which you could offset against withdrawals or conversions. Under the new tax law, if you don't itemize, you could make qualified charitable distributions (QCDs) out of your traditional IRA after age 70 1/2. However, if most of your assets are in tax-deferred accounts, you may be able to roll them over into IRAs at some point, which will give you other IRAs to use for QCDs if that makes sense.

See my article on Roth conversions under the 2012 tax law in the April 2013 issue of Trusts & Estates: https://www.kkwc.com/wp-content/uploads ... r_ATRA.pdf. I have an updated article reflecting the Tax Cuts and Jobs Act changes in the June 2018 issue of Trusts & Estates, which will be online next month.

Finally, the provisions of the Tax Cuts and Jobs Act for individuals are scheduled to expire at the end of 2025. There's no way to predict what Congress may do in 2026.

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Re: Heresy: Is It Worth Converting tIRAs to Roth?

Post by nolesrule » Thu Jul 19, 2018 9:17 am

Sandi_k wrote:
Thu Jul 19, 2018 8:27 am

- In early 2021, convert the remaining amount ($80k or so, in the SEP-IRA) knowing that the tax hit will be 24% + 9% = $28k. Then file an extension for taxes in April 2022, and make sure we have the full amount in hand in October 2022, from the conversation in 2021.
The taxes are still due in April even if you file an extension or you will be paying interest on the unpaid amounts.

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Re: Heresy: Is It Worth Converting tIRAs to Roth?

Post by pkcrafter » Thu Jul 19, 2018 9:49 am

bsteiner wrote:
Thu Jul 19, 2018 9:04 am
Sandi_k wrote:
Tue Jul 17, 2018 7:36 pm
So, DH is now in his mid-50's, and has ~ $85k in tIRA and a SEP-IRA. We're in the 24% Fed bracket, and ~ 9% state tax bracket.

80%+ of our savings are in tax-deferred accounts. We had planned to convert the IRAs to his Roth, now that the Fed tax brackets are lower. However, we only have ~ 7 years before retirement, and 15 years before RMDs for him. Our retirement income is likely to be very close to our working income, due to a generous pension and aggressive savings.

Is it worth taking the tax hit to convert to Roth? It won't help us with IRMAA premiums, we'll be subject to the hit regardless. Given that we have no kids to whom we want to leave a Roth...is there any reason why we should prioritize the conversion? Or should we just let them ride, as-is?

Thoughts? What are we missing?
Unless you're leaving the IRAs to charity there's no "tax hit." You can't get money out without paying tax. By converting and paying the tax out of other money you're effectively making an additional contribution to your IRA.

In other words, if your bracket will always be 33%, if you convert and pay the $28,050 tax (which I'll round to $28,000 for simplicity) out of other money you'll have an $85,000 Roth IRA. Suppose it doubles to $170,000. You'll have a $170,000 Roth IRA. If you don't convert, you'll have a $170,000 traditional IRA. You'll pay $56,000 tax, and you'll have $114,000 left. You'll still have the $28,000 that you didn't have to pay in taxes on the conversion. But it won't double to $56,000, since the income and gains on it will have been taxed each year. The actual numbers are likely to be much greater, since you're fairly young and the Roth IRA will likely more than double during your lifetime. There are also no required distributions from a Roth IRA after age 70 1/2.

So it generally makes sense to convert to the extent you can do so at a tax rate less than, equal to, or not too much higher than the tax rate that would otherwise apply to distributions.

However, there are some countervailing factors. You could move to a state with a lower state income tax, or no state income tax. You could have high medical expenses later one which you could offset against withdrawals or conversions. Under the new tax law, if you don't itemize, you could make qualified charitable distributions (QCDs) out of your traditional IRA after age 70 1/2. However, if most of your assets are in tax-deferred accounts, you may be able to roll them over into IRAs at some point, which will give you other IRAs to use for QCDs if that makes sense.

See my article on Roth conversions under the 2012 tax law in the April 2013 issue of Trusts & Estates: https://www.kkwc.com/wp-content/uploads ... r_ATRA.pdf. I have an updated article reflecting the Tax Cuts and Jobs Act changes in the June 2018 issue of Trusts & Estates, which will be online next month.

Finally, the provisions of the Tax Cuts and Jobs Act for individuals are scheduled to expire at the end of 2025. There's no way to predict what Congress may do in 2026.
Nice! +1 and "on the money." :thumbsup

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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Re: Heresy: Is It Worth Converting tIRAs to Roth?

Post by rkhusky » Thu Jul 19, 2018 12:28 pm

tibbitts wrote:
Tue Jul 17, 2018 8:27 pm
rkhusky wrote:
Tue Jul 17, 2018 7:53 pm
I wouldn’t convert in 24% bracket if you will be in that bracket or higher in retirement.
Did you mean higher or lower? I might convert if I knew future taxes would be at a higher rate.
I meant 24% or lower. Thanks for the correction.

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Leif
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Re: Heresy: Is It Worth Converting tIRAs to Roth?

Post by Leif » Thu Jul 19, 2018 12:52 pm

None of us know the tax rates in the future. But we do know that under current law taxes will go back up to the pre-2018 levels. Extended or not, again we don't know.

My tax brackets are similar to the OP. I recently retired. I've decided I want to take advantage of the current tax rates. So I'm converting some tIRA to Roth every year. I'm converting up to the same AGI that I had pre-retirement. I would rather have tax free money in a Roth for the long term. So, I'm converting my equities from my tIRA to a Roth. My lower expected return bonds can stay in the tIRA. I'll be doing that until 70 when my SS and RMDs (now reduced) kick in.

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Re: Heresy: Is It Worth Converting tIRAs to Roth?

Post by Tdubs » Thu Jul 19, 2018 7:31 pm

Sandi_k wrote:
Wed Jul 18, 2018 7:18 pm
Tdubs wrote:
Tue Jul 17, 2018 9:17 pm
Can you delay SS after retirement and do conversions while income is in a lower bracket? Would obviously require a source of after tax savings to draw during the gap years.

Try running scenarios in I-ORP.
This already includes delaying of SS - to 67 for DH and 70 for me, as the higher earner. And our only source (right now) of after-tax savings is the current Roth accounts. We have a liquid e-fund, but not enough to live on for 10 years post-retirement.

And i-ORP scares me. :-)
Yeah, the idea of doing those huge conversion early on, as ORP advises, is not for the faint of heart. Not sure I will be so daring when I get there.

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Peter Foley
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Re: Heresy: Is It Worth Converting tIRAs to Roth?

Post by Peter Foley » Thu Jul 19, 2018 7:59 pm

I have run a number of scenarios in both i-orp and RPM. Per the scenarios it is best to convert early as it takes many years to gain back the tax money you have paid out.

I personally would be inclined to do a smallish conversion now just to get the clock rolling on your Roth accounts. Also, having some Roth funds available after you retire might offer you some flexibility in terms of managing your tax obligation prior to RMD's. At your levels of income $5k to $10K is no big deal. Perhaps you could set up a donor advised fund and fund it with multiple years of charitable donations to offset the additional taxes. Then return (perhaps) to standard deductions for a few years.

Contrary to one suggestion, I think it would be best to wait for a market correction and then do a more substantial Roth conversion. You would be converting a higher percentage of your TIRA's and let them grow tax free in the Roth.

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Re: Heresy: Is It Worth Converting tIRAs to Roth?

Post by heyyou » Thu Jul 19, 2018 10:21 pm

For most, it is good to convert some when in a lower tax bracket prior to SS and RMD age. For you, the OP, not so much, since your retirement may not cause a reduction in your annual incomes. It is a good dilemma to have.

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Re: Heresy: Is It Worth Converting tIRAs to Roth?

Post by randomguy » Thu Jul 19, 2018 11:05 pm

Peter Foley wrote:
Thu Jul 19, 2018 7:59 pm
I have run a number of scenarios in both i-orp and RPM. Per the scenarios it is best to convert early as it takes many years to gain back the tax money you have paid out.

I personally would be inclined to do a smallish conversion now just to get the clock rolling on your Roth accounts. Also, having some Roth funds available after you retire might offer you some flexibility in terms of managing your tax obligation prior to RMD's. At your levels of income $5k to $10K is no big deal. Perhaps you could set up a donor advised fund and fund it with multiple years of charitable donations to offset the additional taxes. Then return (perhaps) to standard deductions for a few years.

Contrary to one suggestion, I think it would be best to wait for a market correction and then do a more substantial Roth conversion. You would be converting a higher percentage of your TIRA's and let them grow tax free in the Roth.
Can you show us the math on how this works? Both the earning the money back and the waiting for a market correction. I think there must be some unstated assumptions in there.

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Re: Heresy: Is It Worth Converting tIRAs to Roth?

Post by Sandi_k » Fri Jul 20, 2018 12:48 am

heyyou wrote:
Thu Jul 19, 2018 10:21 pm
For most, it is good to convert some when in a lower tax bracket prior to SS and RMD age. For you, the OP, not so much, since your retirement may not cause a reduction in your annual incomes. It is a good dilemma to have.
Agreed. ;)

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