Another Roth conversion question

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Topic Author
skitotrees
Posts: 6
Joined: Sun Mar 10, 2019 7:52 pm

Another Roth conversion question

Post by skitotrees » Sun Mar 10, 2019 11:42 pm

I've been lurking on the forum since the fall when my father died and I actually started to pay closer attention to my investments. It is an understatement to say that I have learned a lot in the last few months.

To date I have done a lot of work to consolidate my accounts, rebalance into an appropriate allocation for someone in their 40s, and focus on maximizing my retirement accounts. My question is about whether or not to convert a traditional IRA to a Roth now or at some point in the future. It was a small "custodial" IRA (~$50k) at Deutschbank that my father probably started when I was a lifeguard in my teens that I've now moved into a traditional IRA at Vanguard.

Me: 47, single
Child: pre-school, with ~$175k in a 529 that I probably won't contribute any more to.

W2 income ~$200k
Probably going to retire in 10 years, or at least move away from full time employment at the mother ship.
2018 tax bracket 32%, 2019 probably 35% due to RMDs, then dropping to no less than 24% from "retirement" to age 70, then RMDs kick in in full force and I'm probably back up to 35% or wherever the tax brackets have ended up in 30 years.
No state income tax.

Retirement accounts:
403b accounts - currently ~$550k. One 403b receives my mandatory pre-tax 7.5% plus equal match until I turn 50, then I have the option to increase to 10%. The other 403 is getting 19k tax deferred and I can max out in post-tax contributions to the total of $56k (including the 7.5% match). I can't do any conversions of these account until I separate from my employer.
457 account - just found out about this (!) - 19k tax deferred.
1st generation inherited IRA (~$1 mill) - RMDs starting next year for prob close to the rest of my life unless I choose to deplete it.
2nd generation inherited IRA (~$400k) - RMDs will force me to take this over next 6 years.

Taxable: ~$2 million.

I *think* my goal right now should be to maximize my tax deferrals. I'm also going to be donating a bunch of common stock that I inherited that has a low basis in order to honor my father, but that could possibly reduce my adjusted gross income back into the 32% bracket.

I'm really most interested in conversion in order to avoid future RMDs bumping me into even higher tax brackets and to be able to pass down the account tax free to the child. I know it represents a small part of the assets, but if I can do anything to minimize estate taxes, all the better (we live in a state with a low estate tax threshold). She's going to be well taken care of no matter what (and, yes, I have a will/trust set up).

Question
1) should I convert the IRA to a Roth now or wait to see if I actually do retire in 10 years and move into a lower bracket?
2) if I don't convert now, should I start now to contribute post-tax to that IRA?

I will probably play with the Retiree Portfolio Model simulations, but that looks a bit overwhelming at first glance, so I appreciate any thoughts you will have. Thanks in advance.
Last edited by skitotrees on Mon Mar 11, 2019 9:22 am, edited 1 time in total.

JoinToday
Posts: 798
Joined: Sat Mar 10, 2007 9:59 pm

Re: Another Roth conversion question

Post by JoinToday » Mon Mar 11, 2019 2:39 am

skitotrees wrote:
Sun Mar 10, 2019 11:42 pm
...
W2 income ~$200k
....

Taxable: ~$2 million.

I *think* my goal right now should be to maximize my tax deferrals. ......

...
Question
1) should I convert the IRA to a Roth now or wait to see if I actually do retire in 10 years and move into a lower bracket?
2) if I don't convert now, should I start now to contribute post-tax to that IRA?

.....
1. Wait until you retire to do the conversions. As a single person, $200K W-2 income plus approx $40K dividends from taxable account, you are in a high tax bracket. The decision to do Roth conversions (or Roth contributions) is almost entirely based on current vs future tax rates. You will have the ability after retiring to control your taxable income. That is the time to do Roth conversions

2. Are you considering contributing post-tax money to a traditional IRA? That is probably the worst possible option you can do -- you are paying tax today on contributions, and the gains are taxed as ordinary income when withdrawn.

Your goal of maximizing tax deferrals is correct at this point based on the information presented in my opinion.
I wish I had learned about index funds 25 years ago

SGM
Posts: 2879
Joined: Wed Mar 23, 2011 4:46 am

Re: Another Roth conversion question

Post by SGM » Mon Mar 11, 2019 4:02 am

I paid taxes on a little over 90% of the conversions because of many years of non-deductible IRA contributions for the two of us. We made our conversions over a 6 year period while working very part-time or retired completely. I delayed SS while converting. After the law changed in 2010 allowing conversions regardless of income we began the conversions. In 2010 a lot of my earned income was not received until 2011 so it was a good year for the first conversion.

I-orp agreed with my plan to convert over a substantial time frame although I did a little different schedule than suggested by the program. Having no RMDs is good for our situation.

JW-Retired
Posts: 7056
Joined: Sun Dec 16, 2007 12:25 pm

Re: Another Roth conversion question

Post by JW-Retired » Mon Mar 11, 2019 7:39 am

skitotrees wrote:
Sun Mar 10, 2019 11:42 pm
............... I'm also going to be donating a bunch of common stock that I inherited that has a low basis in order to honor my father, but that could possibly reduce my adjusted gross income back into the 32% bracket.
You may have that low basis wrong? You said your father died in "the fall". Usually his common stock basis would get a reset to it's value on his date of death. Has it taken off since then?

Usually best to sell soon before it has a high basis so you can put the proceeds in something you are content to keep long term.
JW
Retired at Last

Topic Author
skitotrees
Posts: 6
Joined: Sun Mar 10, 2019 7:52 pm

Re: Another Roth conversion question

Post by skitotrees » Mon Mar 11, 2019 9:25 am

JoinToday wrote:
Mon Mar 11, 2019 2:39 am
skitotrees wrote:
Sun Mar 10, 2019 11:42 pm
...
W2 income ~$200k
....

Taxable: ~$2 million.

I *think* my goal right now should be to maximize my tax deferrals. ......

...
Question
1) should I convert the IRA to a Roth now or wait to see if I actually do retire in 10 years and move into a lower bracket?
2) if I don't convert now, should I start now to contribute post-tax to that IRA?

.....
1. Wait until you retire to do the conversions. As a single person, $200K W-2 income plus approx $40K dividends from taxable account, you are in a high tax bracket. The decision to do Roth conversions (or Roth contributions) is almost entirely based on current vs future tax rates. You will have the ability after retiring to control your taxable income. That is the time to do Roth conversions

2. Are you considering contributing post-tax money to a traditional IRA? That is probably the worst possible option you can do -- you are paying tax today on contributions, and the gains are taxed as ordinary income when withdrawn.

Your goal of maximizing tax deferrals is correct at this point based on the information presented in my opinion.

re: #2 - That's true if I don't convert, but I thought I would be able to just move that money into the Roth if I convert everything that is currently in the IRA (pre-tax). I just need to keep track and fill out a form with my tax return for the next few years - is that not correct?

Topic Author
skitotrees
Posts: 6
Joined: Sun Mar 10, 2019 7:52 pm

Re: Another Roth conversion question

Post by skitotrees » Mon Mar 11, 2019 9:27 am

JW-Retired wrote:
Mon Mar 11, 2019 7:39 am
skitotrees wrote:
Sun Mar 10, 2019 11:42 pm
............... I'm also going to be donating a bunch of common stock that I inherited that has a low basis in order to honor my father, but that could possibly reduce my adjusted gross income back into the 32% bracket.
You may have that low basis wrong? You said your father died in "the fall". Usually his common stock basis would get a reset to it's value on his date of death. Has it taken off since then?

Usually best to sell soon before it has a high basis so you can put the proceeds in something you are content to keep long term.
JW
I was hoping for that too originally. It turns out that, because the stock was originally in my mother's trust, that it keeps the basis from her death a decade ago, even though it didn't pass to me until last year.

cherijoh
Posts: 5314
Joined: Tue Feb 20, 2007 4:49 pm
Location: Charlotte NC

Re: Another Roth conversion question

Post by cherijoh » Mon Mar 11, 2019 9:43 am

skitotrees wrote:
Sun Mar 10, 2019 11:42 pm
I *think* my goal right now should be to maximize my tax deferrals. I'm also going to be donating a bunch of common stock that I inherited that has a low basis in order to honor my father, but that could possibly reduce my adjusted gross income back into the 32% bracket.

I'm really most interested in conversion in order to avoid future RMDs bumping me into even higher tax brackets and to be able to pass down the account tax free to the child. I know it represents a small part of the assets, but if I can do anything to minimize estate taxes, all the better (we live in a state with a low estate tax threshold). She's going to be well taken care of no matter what (and, yes, I have a will/trust set up).

Question
1) should I convert the IRA to a Roth now or wait to see if I actually do retire in 10 years and move into a lower bracket?
2) if I don't convert now, should I start now to contribute post-tax to that IRA?

I will probably play with the Retiree Portfolio Model simulations, but that looks a bit overwhelming at first glance, so I appreciate any thoughts you will have. Thanks in advance.
Are you familiar with donor advised funds (DAFs)? One could be an excellent tax-planning tool for you in your circumstances, since you can take a donation in one year and spread out the grants over several years. Check out this article in the Boglehead wiki.

I would be hesitant to do the Roth Conversion now in your tax bracket. But I would look for an opportunity to do one the next time the stock market makes a major correction to save a bit on taxes (assuming you could pay the extra taxes out of cashflow).

JoinToday
Posts: 798
Joined: Sat Mar 10, 2007 9:59 pm

Re: Another Roth conversion question

Post by JoinToday » Mon Mar 11, 2019 10:26 am

skitotrees wrote:
Mon Mar 11, 2019 9:25 am
JoinToday wrote:
Mon Mar 11, 2019 2:39 am
skitotrees wrote:
Sun Mar 10, 2019 11:42 pm
...
W2 income ~$200k
....

Taxable: ~$2 million.

I *think* my goal right now should be to maximize my tax deferrals. ......

...
Question
1) should I convert the IRA to a Roth now or wait to see if I actually do retire in 10 years and move into a lower bracket?
2) if I don't convert now, should I start now to contribute post-tax to that IRA?

.....
1. Wait until you retire to do the conversions. As a single person, $200K W-2 income plus approx $40K dividends from taxable account, you are in a high tax bracket. The decision to do Roth conversions (or Roth contributions) is almost entirely based on current vs future tax rates. You will have the ability after retiring to control your taxable income. That is the time to do Roth conversions

2. Are you considering contributing post-tax money to a traditional IRA? That is probably the worst possible option you can do -- you are paying tax today on contributions, and the gains are taxed as ordinary income when withdrawn.

Your goal of maximizing tax deferrals is correct at this point based on the information presented in my opinion.

re: #2 - That's true if I don't convert, but I thought I would be able to just move that money into the Roth if I convert everything that is currently in the IRA (pre-tax). I just need to keep track and fill out a form with my tax return for the next few years - is that not correct?
Any possibility of rolling the current IRA to your 403b? That is what I did. You cannot do this with inherited IRAs, but you may be able to do this with traditional IRAs in your name if your employer alows it..
I wish I had learned about index funds 25 years ago

Topic Author
skitotrees
Posts: 6
Joined: Sun Mar 10, 2019 7:52 pm

Re: Another Roth conversion question

Post by skitotrees » Mon Mar 11, 2019 11:51 am

cherijoh wrote:
Mon Mar 11, 2019 9:43 am
skitotrees wrote:
Sun Mar 10, 2019 11:42 pm
I *think* my goal right now should be to maximize my tax deferrals. I'm also going to be donating a bunch of common stock that I inherited that has a low basis in order to honor my father, but that could possibly reduce my adjusted gross income back into the 32% bracket.

I'm really most interested in conversion in order to avoid future RMDs bumping me into even higher tax brackets and to be able to pass down the account tax free to the child. I know it represents a small part of the assets, but if I can do anything to minimize estate taxes, all the better (we live in a state with a low estate tax threshold). She's going to be well taken care of no matter what (and, yes, I have a will/trust set up).

Question
1) should I convert the IRA to a Roth now or wait to see if I actually do retire in 10 years and move into a lower bracket?
2) if I don't convert now, should I start now to contribute post-tax to that IRA?

I will probably play with the Retiree Portfolio Model simulations, but that looks a bit overwhelming at first glance, so I appreciate any thoughts you will have. Thanks in advance.
Are you familiar with donor advised funds (DAFs)? One could be an excellent tax-planning tool for you in your circumstances, since you can take a donation in one year and spread out the grants over several years. Check out this article in the Boglehead wiki.

I would be hesitant to do the Roth Conversion now in your tax bracket. But I would look for an opportunity to do one the next time the stock market makes a major correction to save a bit on taxes (assuming you could pay the extra taxes out of cashflow).
Thanks, yes I have thought about using a donor-advised fund, though with all of my consolidation and choosing to get out of funds with high expense ratios, it sort of rubs me the wrong way to pay someone to manage that. In 2019, I'm hoping to max what I can donate in stock (30% of AGI, I believe) to this single scholarship fund in my father's name, but I haven't closed the door to a DAF in the future.

I'll be getting not quite $100k in RMDs this year. I may need to use some of that to max out the tax-deferred retirement accounts (i.e. less of my W2 income will come into my bank account for annual expenses), but I'm pretty sure I could pay the taxes on converting the full IRA if that's what I wanted to do this year.

Topic Author
skitotrees
Posts: 6
Joined: Sun Mar 10, 2019 7:52 pm

Re: Another Roth conversion question

Post by skitotrees » Mon Mar 11, 2019 11:54 am

JoinToday wrote:
Mon Mar 11, 2019 10:26 am
skitotrees wrote:
Mon Mar 11, 2019 9:25 am
JoinToday wrote:
Mon Mar 11, 2019 2:39 am
skitotrees wrote:
Sun Mar 10, 2019 11:42 pm
...
W2 income ~$200k
....

Taxable: ~$2 million.

I *think* my goal right now should be to maximize my tax deferrals. ......

...
Question
1) should I convert the IRA to a Roth now or wait to see if I actually do retire in 10 years and move into a lower bracket?
2) if I don't convert now, should I start now to contribute post-tax to that IRA?

.....
1. Wait until you retire to do the conversions. As a single person, $200K W-2 income plus approx $40K dividends from taxable account, you are in a high tax bracket. The decision to do Roth conversions (or Roth contributions) is almost entirely based on current vs future tax rates. You will have the ability after retiring to control your taxable income. That is the time to do Roth conversions

2. Are you considering contributing post-tax money to a traditional IRA? That is probably the worst possible option you can do -- you are paying tax today on contributions, and the gains are taxed as ordinary income when withdrawn.

Your goal of maximizing tax deferrals is correct at this point based on the information presented in my opinion.

re: #2 - That's true if I don't convert, but I thought I would be able to just move that money into the Roth if I convert everything that is currently in the IRA (pre-tax). I just need to keep track and fill out a form with my tax return for the next few years - is that not correct?
Any possibility of rolling the current IRA to your 403b? That is what I did. You cannot do this with inherited IRAs, but you may be able to do this with traditional IRAs in your name if your employer alows it..

Could you explain to me your thinking on why I would want to do this? I had been thinking it's great to have a small IRA that is separate from my 403b accounts so that I could convert it all if/when I wanted to (the 403b's represent a much larger chunk of assets). Is it so I could put a much smaller amount into another IRA to do a back-door Roth and have paid taxes on just $6K instead of $56k?

JoinToday
Posts: 798
Joined: Sat Mar 10, 2007 9:59 pm

Re: Another Roth conversion question

Post by JoinToday » Wed Mar 13, 2019 2:42 am

skitotrees wrote:
Mon Mar 11, 2019 11:54 am
JoinToday wrote:
Mon Mar 11, 2019 10:26 am
skitotrees wrote:
Mon Mar 11, 2019 9:25 am
JoinToday wrote:
Mon Mar 11, 2019 2:39 am
skitotrees wrote:
Sun Mar 10, 2019 11:42 pm
...
W2 income ~$200k
....

Taxable: ~$2 million.

I *think* my goal right now should be to maximize my tax deferrals. ......

...
Question
1) should I convert the IRA to a Roth now or wait to see if I actually do retire in 10 years and move into a lower bracket?
2) if I don't convert now, should I start now to contribute post-tax to that IRA?

.....
1. Wait until you retire to do the conversions. As a single person, $200K W-2 income plus approx $40K dividends from taxable account, you are in a high tax bracket. The decision to do Roth conversions (or Roth contributions) is almost entirely based on current vs future tax rates. You will have the ability after retiring to control your taxable income. That is the time to do Roth conversions

2. Are you considering contributing post-tax money to a traditional IRA? That is probably the worst possible option you can do -- you are paying tax today on contributions, and the gains are taxed as ordinary income when withdrawn.

Your goal of maximizing tax deferrals is correct at this point based on the information presented in my opinion.

re: #2 - That's true if I don't convert, but I thought I would be able to just move that money into the Roth if I convert everything that is currently in the IRA (pre-tax). I just need to keep track and fill out a form with my tax return for the next few years - is that not correct?
Any possibility of rolling the current IRA to your 403b? That is what I did. You cannot do this with inherited IRAs, but you may be able to do this with traditional IRAs in your name if your employer alows it..

Could you explain to me your thinking on why I would want to do this? I had been thinking it's great to have a small IRA that is separate from my 403b accounts so that I could convert it all if/when I wanted to (the 403b's represent a much larger chunk of assets). Is it so I could put a much smaller amount into another IRA to do a back-door Roth and have paid taxes on just $6K instead of $56k?
You mentioned contributing post tax to the traditional IRA, and then doing a back-door Roth conversion. You can't exactly do that -- pro rata apply, meaning: If you have a $50K traditional IRA, and you contribute $6K after tax, the total is now $56K. If you do a $6K Roth conversion, $6K x ($6/$56) of the conversion will be after tax money, and $6K x ($50/$56) of the conversion will be from pre-tax money. You cannot do the Roth conversion on only the after tax money.

If you move your entire traditional IRA to your 403b, your IRA will have no assets. Then any after tax contributions to a traditional IRA can be fully converted to a Roth.
I wish I had learned about index funds 25 years ago

Topic Author
skitotrees
Posts: 6
Joined: Sun Mar 10, 2019 7:52 pm

Re: Another Roth conversion question

Post by skitotrees » Wed Mar 13, 2019 6:15 pm

JoinToday wrote:
Wed Mar 13, 2019 2:42 am
skitotrees wrote:
Mon Mar 11, 2019 11:54 am
JoinToday wrote:
Mon Mar 11, 2019 10:26 am
skitotrees wrote:
Mon Mar 11, 2019 9:25 am
JoinToday wrote:
Mon Mar 11, 2019 2:39 am


1. Wait until you retire to do the conversions. As a single person, $200K W-2 income plus approx $40K dividends from taxable account, you are in a high tax bracket. The decision to do Roth conversions (or Roth contributions) is almost entirely based on current vs future tax rates. You will have the ability after retiring to control your taxable income. That is the time to do Roth conversions

2. Are you considering contributing post-tax money to a traditional IRA? That is probably the worst possible option you can do -- you are paying tax today on contributions, and the gains are taxed as ordinary income when withdrawn.

Your goal of maximizing tax deferrals is correct at this point based on the information presented in my opinion.

re: #2 - That's true if I don't convert, but I thought I would be able to just move that money into the Roth if I convert everything that is currently in the IRA (pre-tax). I just need to keep track and fill out a form with my tax return for the next few years - is that not correct?
Any possibility of rolling the current IRA to your 403b? That is what I did. You cannot do this with inherited IRAs, but you may be able to do this with traditional IRAs in your name if your employer alows it..
Could you explain to me your thinking on why I would want to do this? I had been thinking it's great to have a small IRA that is separate from my 403b accounts so that I could convert it all if/when I wanted to (the 403b's represent a much larger chunk of assets). Is it so I could put a much smaller amount into another IRA to do a back-door Roth and have paid taxes on just $6K instead of $56k?
You mentioned contributing post tax to the traditional IRA, and then doing a back-door Roth conversion. You can't exactly do that -- pro rata apply, meaning: If you have a $50K traditional IRA, and you contribute $6K after tax, the total is now $56K. If you do a $6K Roth conversion, $6K x ($6/$56) of the conversion will be after tax money, and $6K x ($50/$56) of the conversion will be from pre-tax money. You cannot do the Roth conversion on only the after tax money.

If you move your entire traditional IRA to your 403b, your IRA will have no assets. Then any after tax contributions to a traditional IRA can be fully converted to a Roth.

The idea would be to convert the whole thing, and it seems like 10 years from now would be the correct time regardless of whether I contribute the $6000 to it for the next 10 years. In 10 years, I *think* I will just need to pay taxes on the $50,000 and the gains on it (and not the $60,000 I contribute and those gains)?

My main point in thinking about Roth is to have money that grows untouched, doesn't force me to take RMDs, and gets passed down to child without contributing to my estate. Though I live in a state without income tax, it has a very low threshold for estate tax, and I'm likely to be above the federal threshold at that point too.

One part of me thinks I should really stop worrying about this little IRA is that it's less than 1% of my assets. It turns out that my post-tax contributions to my 403b can be automatically rolled over into a Roth IRA when I retire, so I'll have a still small but much larger chunk there.

The other part of me thinks that I should just roll it over now and be done with it so I can stop thinking about it. And then I can do the small yearly post-tax contributions and backdoor them each year.

JoinToday
Posts: 798
Joined: Sat Mar 10, 2007 9:59 pm

Re: Another Roth conversion question

Post by JoinToday » Wed Mar 13, 2019 9:07 pm

skitotrees wrote:
Wed Mar 13, 2019 6:15 pm

.....

In 10 years, I *think* I will just need to pay taxes on the $50,000 and the gains on it (and not the $60,000 I contribute and those gains)?

My main point in thinking about Roth is to have money that grows untouched, doesn't force me to take RMDs, and gets passed down to child without contributing to my estate. Though I live in a state without income tax, it has a very low threshold for estate tax, and I'm likely to be above the federal threshold at that point too.

One part of me thinks I should really stop worrying about this little IRA is that it's less than 1% of my assets. It turns out that my post-tax contributions to my 403b can be automatically rolled over into a Roth IRA when I retire, so I'll have a still small but much larger chunk there.

The other part of me thinks that I should just roll it over now and be done with it so I can stop thinking about it. And then I can do the small yearly post-tax contributions and backdoor them each year.
1. When the money is withdrawn or converted in 10 years, you would pay taxes on the $50,000 plus the gains on it, plus the gains on the after tax contribution. Only the after tax amount is untaxed.

2. What do you mean
and gets passed down to child without contributing to my estate. Though I live in a state without income tax, it has a very low threshold for estate tax,...
All money in your IRAs, 401ks, etc are part of your estate.
I wish I had learned about index funds 25 years ago

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