In-plan Roth conversion?

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fposte
Posts: 1202
Joined: Mon Sep 02, 2013 1:32 pm

In-plan Roth conversion?

Post by fposte » Sat Nov 10, 2018 2:33 pm

I just discovered that my governmental 457 allows for in-plan Roth conversions. I'm deciding whether to convert my pre-tax 457b assets to Roth and would appreciate input.

Rough portfolio overview:
Taxable assets: $900k+
Roth assets in IRA, 403b, and 457: $220k+
Pretax assets in 403b (no IRR available) and 457: $370k, @$125k in the 457.
Inherited IRA: $230k
Tax bracket this year: Single, 24%; state tax, Illinois, 4.95%, with no tax on pensions, rollovers, or qualified withdrawals
Pension: @65k at start, COLA'd
No Social Security.

I'm planning to retire in 2021 at 58 and start immediately on the pension, which will also provide for health insurance so no need for ACA; I expect to supplement from my taxable account to be in roughly the same tax bracket. So there's no bracket drop prior to Social Security for me to take advantage of or anticipated lower bracket following retirement, either.

I'm low in the 24% bracket, so I'd have headroom to IRR about $60k this year. I could complete the rollover of the remaining 457 in 2019 or 2020 and then have headroom to convert the 403b in 2021 once I retire, if I wish. I have the liquidity to cover the taxes. Calculations I've run give me a slight advantage in converting to Roth, given the long timeline, but it's not a big one.

I confess that a big part of my drive is that I'd like to keep simplifying my portfolio for ease when I get older. Some of this will get taken care of when I retire and rollover the 403bs/457s to IRAs, but it seems a shame not to take advantage of the IRR opportunity. I get that hedging your bets with pretax assets may be a good plan, but is it advantageous enough to retain in the face of a small advantage to Roth?

retiredjg
Posts: 34177
Joined: Thu Jan 10, 2008 12:56 pm

Re: In-plan Roth conversion?

Post by retiredjg » Sat Nov 10, 2018 2:51 pm

If you do not see that your tax bracket will drop, then converting now at 24% is the same as withdrawing later at 24%. It's a wash and since you have the cash to pay the taxes, it seems reasonable to me.

I would not convert all that you have in tax-deferred accounts. There could be some unexpected benefit to keeping it. Some people have reported using tIRA for large medical bills and not having to pay tax on it at all.

fposte
Posts: 1202
Joined: Mon Sep 02, 2013 1:32 pm

Re: In-plan Roth conversion?

Post by fposte » Sat Nov 10, 2018 3:39 pm

The medical bills are a good point, retiredjg, thanks. It's that kind of thing that I was hoping people would know about.

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FiveK
Posts: 5722
Joined: Sun Mar 16, 2014 2:43 pm

Re: In-plan Roth conversion?

Post by FiveK » Sat Nov 10, 2018 7:47 pm

Because you can pay the conversion tax from cash on hand (aka taxable funds), converting at 24% now is somewhat better than withdrawing at 24% later.

See Maxing out your retirement accounts for more details, but in short the benefit comes from moving the tax amount from taxable to Roth.

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