Baby conversions tIRA->Roth worth it?

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michaeljc70
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Baby conversions tIRA->Roth worth it?

Post by michaeljc70 » Wed Mar 25, 2020 10:29 am

I am toying with converting a small amount (low 5 figures, ~2% of my tIRA balance) of tIRA to my Roth now because the market is down, I will have fewer capital gains/dividends in my taxable account this year and I expect my spouse will make less this year due to coronavirus. I've avoided it in the past due to higher income or ACA subsidy income limits. I am on the fence as to if converting a small amount per year is not worth it or if every little bit helps. Obviously the time/effort is minimal to do the conversion. I do have a relatively small basis in my tIRA which will make 2020 taxes more complicated.

As a bonus, my state doesn't tax the conversion. We will be in the 12% tax bracket for 2020. I am age 49 and retired.

I expect to do the bulk of my conversions age 65-69.

livesoft
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Re: Baby conversions tIRA->Roth worth it?

Post by livesoft » Wed Mar 25, 2020 10:56 am

Always worth it in my opinion. I had my spouse do a small conversion last Friday.
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retired@50
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Re: Baby conversions tIRA->Roth worth it?

Post by retired@50 » Wed Mar 25, 2020 10:59 am

michaeljc70 wrote:
Wed Mar 25, 2020 10:29 am
I am toying with converting a small amount (low 5 figures, ~2% of my tIRA balance) of tIRA to my Roth now because the market is down, I will have fewer capital gains/dividends in my taxable account this year and I expect my spouse will make less this year due to coronavirus. I've avoided it in the past due to higher income or ACA subsidy income limits. I am on the fence as to if converting a small amount per year is not worth it or if every little bit helps. Obviously the time/effort is minimal to do the conversion. I do have a relatively small basis in my tIRA which will make 2020 taxes more complicated.

As a bonus, my state doesn't tax the conversion. We will be in the 12% tax bracket for 2020. I am age 49 and retired.

I expect to do the bulk of my conversions age 65-69.
Good idea.
I got my feet wet the first time by converting $2,000 from Traditional to Roth IRA. It allowed me to see what new paperwork was generated, and allowed me to understand the changes in my 1040 tax form. In subsequent years I've tailored the conversions to suit my needs.

Regards,
Boggle - a game from Parker Brothers. Bogle - investor, founder of Vanguard.

Housedoc
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Re: Baby conversions tIRA->Roth worth it?

Post by Housedoc » Wed Mar 25, 2020 11:06 am

I have done a few 25k conversions so far this year. Mkt down, my taxes be higher in the future. I am in the sweet spot, over 59 1/2, retired, pension for income. No social security for 5 more years. Just my opinion on what works for me. Don't overthink it.

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WoodSpinner
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Re: Baby conversions tIRA->Roth worth it?

Post by WoodSpinner » Wed Mar 25, 2020 2:14 pm

michaeljc70 wrote:
Wed Mar 25, 2020 10:29 am
I am toying with converting a small amount (low 5 figures, ~2% of my tIRA balance) of tIRA to my Roth now because the market is down, I will have fewer capital gains/dividends in my taxable account this year and I expect my spouse will make less this year due to coronavirus. I've avoided it in the past due to higher income or ACA subsidy income limits. I am on the fence as to if converting a small amount per year is not worth it or if every little bit helps. Obviously the time/effort is minimal to do the conversion. I do have a relatively small basis in my tIRA which will make 2020 taxes more complicated.

As a bonus, my state doesn't tax the conversion. We will be in the 12% tax bracket for 2020. I am age 49 and retired.

I expect to do the bulk of my conversions age 65-69.
Can you help me understand your logic for targeting 65-69 for the bulk of your conversions?

I have the opposite plan, front loading conversions from 58-62 and then tapering till 72 when RMDs begin. Trying to take advantage of a number of factors:
- Lower Federal Tax Rates (scheduled to revert in 2026)
- Avoiding IRMAA penalties due to forces RMDs
- No NIIT impact during this period.

Wish CA didn’t tax Roth Conversions, that is an extra 9.5% Marginal Tax Rate I have to deal with!

WoodSpinner

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LilyFleur
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Re: Baby conversions tIRA->Roth worth it?

Post by LilyFleur » Wed Mar 25, 2020 2:20 pm

My 401k only allows one conversion per year. I don't know if that is a factor for you.

smitcat
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Re: Baby conversions tIRA->Roth worth it?

Post by smitcat » Wed Mar 25, 2020 2:28 pm

WoodSpinner wrote:
Wed Mar 25, 2020 2:14 pm
michaeljc70 wrote:
Wed Mar 25, 2020 10:29 am
I am toying with converting a small amount (low 5 figures, ~2% of my tIRA balance) of tIRA to my Roth now because the market is down, I will have fewer capital gains/dividends in my taxable account this year and I expect my spouse will make less this year due to coronavirus. I've avoided it in the past due to higher income or ACA subsidy income limits. I am on the fence as to if converting a small amount per year is not worth it or if every little bit helps. Obviously the time/effort is minimal to do the conversion. I do have a relatively small basis in my tIRA which will make 2020 taxes more complicated.

As a bonus, my state doesn't tax the conversion. We will be in the 12% tax bracket for 2020. I am age 49 and retired.

I expect to do the bulk of my conversions age 65-69.
Can you help me understand your logic for targeting 65-69 for the bulk of your conversions?

I have the opposite plan, front loading conversions from 58-62 and then tapering till 72 when RMDs begin. Trying to take advantage of a number of factors:
- Lower Federal Tax Rates (scheduled to revert in 2026)
- Avoiding IRMAA penalties due to forces RMDs
- No NIIT impact during this period.

Wish CA didn’t tax Roth Conversions, that is an extra 9.5% Marginal Tax Rate I have to deal with!

WoodSpinner
I agree with your planning - except for paying state taxes as we will move prior.

Retired2013
Posts: 229
Joined: Sat Dec 12, 2015 2:53 pm

Re: Baby conversions tIRA->Roth worth it?

Post by Retired2013 » Wed Mar 25, 2020 2:54 pm

smitcat wrote:
Wed Mar 25, 2020 2:28 pm
WoodSpinner wrote:
Wed Mar 25, 2020 2:14 pm
michaeljc70 wrote:
Wed Mar 25, 2020 10:29 am
I am toying with converting a small amount (low 5 figures, ~2% of my tIRA balance) of tIRA to my Roth now because the market is down, I will have fewer capital gains/dividends in my taxable account this year and I expect my spouse will make less this year due to coronavirus. I've avoided it in the past due to higher income or ACA subsidy income limits. I am on the fence as to if converting a small amount per year is not worth it or if every little bit helps. Obviously the time/effort is minimal to do the conversion. I do have a relatively small basis in my tIRA which will make 2020 taxes more complicated.

As a bonus, my state doesn't tax the conversion. We will be in the 12% tax bracket for 2020. I am age 49 and retired.

I expect to do the bulk of my conversions age 65-69.
Can you help me understand your logic for targeting 65-69 for the bulk of your conversions?

I have the opposite plan, front loading conversions from 58-62 and then tapering till 72 when RMDs begin. Trying to take advantage of a number of factors:
- Lower Federal Tax Rates (scheduled to revert in 2026)
- Avoiding IRMAA penalties due to forces RMDs
- No NIIT impact during this period.

Wish CA didn’t tax Roth Conversions, that is an extra 9.5% Marginal Tax Rate I have to deal with!

WoodSpinner
I agree with your planning - except for paying state taxes as we will move prior.
It looks like you are on Obamacare so you have to weigh the increased income against the loss of subsidy, copays and deductible.

I'm like you, retired but don't elect to do any conversions until DW and I are both on Medicare. Just isn't worth it.

Topic Author
michaeljc70
Posts: 6376
Joined: Thu Oct 15, 2015 3:53 pm

Re: Baby conversions tIRA->Roth worth it?

Post by michaeljc70 » Wed Mar 25, 2020 3:15 pm

WoodSpinner wrote:
Wed Mar 25, 2020 2:14 pm
michaeljc70 wrote:
Wed Mar 25, 2020 10:29 am
I am toying with converting a small amount (low 5 figures, ~2% of my tIRA balance) of tIRA to my Roth now because the market is down, I will have fewer capital gains/dividends in my taxable account this year and I expect my spouse will make less this year due to coronavirus. I've avoided it in the past due to higher income or ACA subsidy income limits. I am on the fence as to if converting a small amount per year is not worth it or if every little bit helps. Obviously the time/effort is minimal to do the conversion. I do have a relatively small basis in my tIRA which will make 2020 taxes more complicated.

As a bonus, my state doesn't tax the conversion. We will be in the 12% tax bracket for 2020. I am age 49 and retired.

I expect to do the bulk of my conversions age 65-69.
Can you help me understand your logic for targeting 65-69 for the bulk of your conversions?

I have the opposite plan, front loading conversions from 58-62 and then tapering till 72 when RMDs begin. Trying to take advantage of a number of factors:
- Lower Federal Tax Rates (scheduled to revert in 2026)
- Avoiding IRMAA penalties due to forces RMDs
- No NIIT impact during this period.

Wish CA didn’t tax Roth Conversions, that is an extra 9.5% Marginal Tax Rate I have to deal with!

WoodSpinner
I will be on Medicare and not have to worry about the ACA subsidy income limit. I will not be on SS or required to take RMDs either.

Your approach will work well if you don't need to worry about the ACA subsidy income limits.

Right now, according to my calculations in a normal year, any conversion winds up costing me around 22% (12% federal tax and 10% from subsidy). That is one reason I may skip it as even this year with lower income 22% is still not exactly low. I doubt I will have to worry about IRMAA even converting ages 65-69. The income limit is currently around $170k for a couple. Though I would have been over that working, retiring in my 40s probably saves me from worrying about IRMAA penalties :o.

Topic Author
michaeljc70
Posts: 6376
Joined: Thu Oct 15, 2015 3:53 pm

Re: Baby conversions tIRA->Roth worth it?

Post by michaeljc70 » Wed Mar 25, 2020 3:16 pm

Retired2013 wrote:
Wed Mar 25, 2020 2:54 pm
smitcat wrote:
Wed Mar 25, 2020 2:28 pm
WoodSpinner wrote:
Wed Mar 25, 2020 2:14 pm
michaeljc70 wrote:
Wed Mar 25, 2020 10:29 am
I am toying with converting a small amount (low 5 figures, ~2% of my tIRA balance) of tIRA to my Roth now because the market is down, I will have fewer capital gains/dividends in my taxable account this year and I expect my spouse will make less this year due to coronavirus. I've avoided it in the past due to higher income or ACA subsidy income limits. I am on the fence as to if converting a small amount per year is not worth it or if every little bit helps. Obviously the time/effort is minimal to do the conversion. I do have a relatively small basis in my tIRA which will make 2020 taxes more complicated.

As a bonus, my state doesn't tax the conversion. We will be in the 12% tax bracket for 2020. I am age 49 and retired.

I expect to do the bulk of my conversions age 65-69.
Can you help me understand your logic for targeting 65-69 for the bulk of your conversions?

I have the opposite plan, front loading conversions from 58-62 and then tapering till 72 when RMDs begin. Trying to take advantage of a number of factors:
- Lower Federal Tax Rates (scheduled to revert in 2026)
- Avoiding IRMAA penalties due to forces RMDs
- No NIIT impact during this period.

Wish CA didn’t tax Roth Conversions, that is an extra 9.5% Marginal Tax Rate I have to deal with!

WoodSpinner
I agree with your planning - except for paying state taxes as we will move prior.
It looks like you are on Obamacare so you have to weigh the increased income against the loss of subsidy, copays and deductible.

I'm like you, retired but don't elect to do any conversions until DW and I are both on Medicare. Just isn't worth it.
Yes, my comment above posted right after you posted this. In our case it is about a 10% "tax" (loss of subsidy) on top of the Federal tax.

HeelaMonster
Posts: 134
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Re: Baby conversions tIRA->Roth worth it?

Post by HeelaMonster » Wed Mar 25, 2020 3:24 pm

I believe "every little bit helps," and am doing the same. Smaller amount now to take advantage of depressed price per share, with larger amount to follow toward end of year, when I have clear picture of yearly income.

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WoodSpinner
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Re: Baby conversions tIRA->Roth worth it?

Post by WoodSpinner » Wed Mar 25, 2020 3:34 pm

Makes sense then, we are in different positions.

Retired2013
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Re: Baby conversions tIRA->Roth worth it?

Post by Retired2013 » Wed Mar 25, 2020 4:05 pm

What I did Monday was exchanged in my 401(k) $xxx sold S&P 500 and bought Stable Value. Then in my Vanguard Account (Roth accounts) I exchanged $xxx sold an equal amount of MM and purchased the same amount of S&P 500. The loss in my 401(k) has now been transferred to my Roth so as the market regains back to the highs, the gains will be tax free. This will help lower my 401(k) balance which will help with RMD down the road. No conversion so no effect on ACA. Win - Win.
Last edited by Retired2013 on Wed Mar 25, 2020 4:17 pm, edited 1 time in total.

smitcat
Posts: 5149
Joined: Mon Nov 07, 2016 10:51 am

Re: Baby conversions tIRA->Roth worth it?

Post by smitcat » Wed Mar 25, 2020 4:06 pm

Retired2013 wrote:
Wed Mar 25, 2020 2:54 pm
smitcat wrote:
Wed Mar 25, 2020 2:28 pm
WoodSpinner wrote:
Wed Mar 25, 2020 2:14 pm
michaeljc70 wrote:
Wed Mar 25, 2020 10:29 am
I am toying with converting a small amount (low 5 figures, ~2% of my tIRA balance) of tIRA to my Roth now because the market is down, I will have fewer capital gains/dividends in my taxable account this year and I expect my spouse will make less this year due to coronavirus. I've avoided it in the past due to higher income or ACA subsidy income limits. I am on the fence as to if converting a small amount per year is not worth it or if every little bit helps. Obviously the time/effort is minimal to do the conversion. I do have a relatively small basis in my tIRA which will make 2020 taxes more complicated.

As a bonus, my state doesn't tax the conversion. We will be in the 12% tax bracket for 2020. I am age 49 and retired.

I expect to do the bulk of my conversions age 65-69.
Can you help me understand your logic for targeting 65-69 for the bulk of your conversions?

I have the opposite plan, front loading conversions from 58-62 and then tapering till 72 when RMDs begin. Trying to take advantage of a number of factors:
- Lower Federal Tax Rates (scheduled to revert in 2026)
- Avoiding IRMAA penalties due to forces RMDs
- No NIIT impact during this period.

Wish CA didn’t tax Roth Conversions, that is an extra 9.5% Marginal Tax Rate I have to deal with!

WoodSpinner
I agree with your planning - except for paying state taxes as we will move prior.
It looks like you are on Obamacare so you have to weigh the increased income against the loss of subsidy, copays and deductible.

I'm like you, retired but don't elect to do any conversions until DW and I are both on Medicare. Just isn't worth it.
"It looks like you are on Obamacare so you have to weigh the increased income against the loss of subsidy, copays and deductible."
Interesting deduction - not sure how you reached that conclusion.

Retired2013
Posts: 229
Joined: Sat Dec 12, 2015 2:53 pm

Re: Baby conversions tIRA->Roth worth it?

Post by Retired2013 » Wed Mar 25, 2020 4:10 pm

smitcat wrote:
Wed Mar 25, 2020 4:06 pm
Retired2013 wrote:
Wed Mar 25, 2020 2:54 pm
smitcat wrote:
Wed Mar 25, 2020 2:28 pm
WoodSpinner wrote:
Wed Mar 25, 2020 2:14 pm
michaeljc70 wrote:
Wed Mar 25, 2020 10:29 am
I am toying with converting a small amount (low 5 figures, ~2% of my tIRA balance) of tIRA to my Roth now because the market is down, I will have fewer capital gains/dividends in my taxable account this year and I expect my spouse will make less this year due to coronavirus. I've avoided it in the past due to higher income or ACA subsidy income limits. I am on the fence as to if converting a small amount per year is not worth it or if every little bit helps. Obviously the time/effort is minimal to do the conversion. I do have a relatively small basis in my tIRA which will make 2020 taxes more complicated.

As a bonus, my state doesn't tax the conversion. We will be in the 12% tax bracket for 2020. I am age 49 and retired.

I expect to do the bulk of my conversions age 65-69.
Can you help me understand your logic for targeting 65-69 for the bulk of your conversions?

I have the opposite plan, front loading conversions from 58-62 and then tapering till 72 when RMDs begin. Trying to take advantage of a number of factors:
- Lower Federal Tax Rates (scheduled to revert in 2026)
- Avoiding IRMAA penalties due to forces RMDs
- No NIIT impact during this period.

Wish CA didn’t tax Roth Conversions, that is an extra 9.5% Marginal Tax Rate I have to deal with!

WoodSpinner
I agree with your planning - except for paying state taxes as we will move prior.
It looks like you are on Obamacare so you have to weigh the increased income against the loss of subsidy, copays and deductible.

I'm like you, retired but don't elect to do any conversions until DW and I are both on Medicare. Just isn't worth it.
"It looks like you are on Obamacare so you have to weigh the increased income against the loss of subsidy, copays and deductible."
Interesting deduction - not sure how you reached that conclusion.
Not that you are on Obamacare but that the OP is.

asif408
Posts: 1857
Joined: Sun Mar 02, 2014 8:34 am
Location: Florida

Re: Baby conversions tIRA->Roth worth it?

Post by asif408 » Wed Mar 25, 2020 4:15 pm

I have to laugh a little at your first sentence, OP, because I've been converting a small amount for several years (did another recently), but my "small amount" is much smaller than your "small amount". So it shouldn't suprise you that I will say that I do think it is worth it, as long as you just do it up to the point where it doesn't bring you into a higher marginal bracket or affect other deductions/credits. It just so happens that it's also an opportune time to do some conversions, especially for any equity holdings. My conversion is up almost 20% since I did the conversion, so not sure if the timing will be perfect in retrospect, but I'm happy to convert something that has fallen 30%+ almost anytime.

smitcat
Posts: 5149
Joined: Mon Nov 07, 2016 10:51 am

Re: Baby conversions tIRA->Roth worth it?

Post by smitcat » Wed Mar 25, 2020 4:17 pm

Retired2013 wrote:
Wed Mar 25, 2020 4:10 pm
smitcat wrote:
Wed Mar 25, 2020 4:06 pm
Retired2013 wrote:
Wed Mar 25, 2020 2:54 pm
smitcat wrote:
Wed Mar 25, 2020 2:28 pm
WoodSpinner wrote:
Wed Mar 25, 2020 2:14 pm


Can you help me understand your logic for targeting 65-69 for the bulk of your conversions?

I have the opposite plan, front loading conversions from 58-62 and then tapering till 72 when RMDs begin. Trying to take advantage of a number of factors:
- Lower Federal Tax Rates (scheduled to revert in 2026)
- Avoiding IRMAA penalties due to forces RMDs
- No NIIT impact during this period.

Wish CA didn’t tax Roth Conversions, that is an extra 9.5% Marginal Tax Rate I have to deal with!

WoodSpinner
I agree with your planning - except for paying state taxes as we will move prior.
It looks like you are on Obamacare so you have to weigh the increased income against the loss of subsidy, copays and deductible.

I'm like you, retired but don't elect to do any conversions until DW and I are both on Medicare. Just isn't worth it.
"It looks like you are on Obamacare so you have to weigh the increased income against the loss of subsidy, copays and deductible."
Interesting deduction - not sure how you reached that conclusion.
Not that you are on Obamacare but that the OP is.
Ah OK! - it was on my post so I could not figure it out.

boglefannyc
Posts: 43
Joined: Fri May 06, 2016 2:10 pm

Re: Baby conversions tIRA->Roth worth it?

Post by boglefannyc » Wed Mar 25, 2020 4:56 pm

michaeljc70 wrote:
Wed Mar 25, 2020 10:29 am
I am toying with converting a small amount (low 5 figures, ~2% of my tIRA balance) of tIRA to my Roth now because the market is down, I will have fewer capital gains/dividends in my taxable account this year and I expect my spouse will make less this year due to coronavirus. I've avoided it in the past due to higher income or ACA subsidy income limits. I am on the fence as to if converting a small amount per year is not worth it or if every little bit helps. Obviously the time/effort is minimal to do the conversion. I do have a relatively small basis in my tIRA which will make 2020 taxes more complicated.

As a bonus, my state doesn't tax the conversion. We will be in the 12% tax bracket for 2020. I am age 49 and retired.

I expect to do the bulk of my conversions age 65-69.
We're in a similar position as you but I'm age 59 and spouse is age 51. We were going to be at the cusp of the 12% bracket but my spouse's income is going to be affected by the virus. My tax deferred balance was about $600k before the drop and the spouse's $275k. I have a pension and company healthcare coverage.

We did our first two Roth conversions on my wife's SEP during the past two weeks for about $25k and we also live in a state that is tax free. If the market had not dropped so much I'm not sure if it would have been worth it.

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