IRA Conversion

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VillageVanguard
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Joined: Sat Mar 28, 2020 9:30 pm

IRA Conversion

Post by VillageVanguard »

Is doing the IRA Conversion worth it?

Weighing the taxes you would pay now vs the taxes you would pay later...

Aren't most people in a very low tax bracket during their retirement years?

The white coat investor LOVES the IRA conversion and I wish I had done it while I was in professional school like he recommends, but alas I missed my chance.

During my practice years, I didn't consider it because I was in a high tax bracket.
But now COVID has taken me into a large income dip for 2020, so I am considering doing the conversion again.

But is it worth it?
I will be in the 22% federal tax bracket this year.
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David Jay
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Re: IRA Conversion

Post by David Jay »

I would consider “topping off” your 22% tax bracket with a Roth conversion. Tax rates are scheduled to revert to 25% in 2026 and It is unlikely that you will ever be in the 12%/15% tax bracket in retirement.

Having some Roth in early retirement provides a lot of flexibility to avoid means-tested penalties.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
McDougal
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Re: IRA Conversion

Post by McDougal »

David Jay wrote: Fri Aug 21, 2020 2:58 pm Having some Roth in early retirement provides a lot of flexibility to avoid means-tested penalties.
David could you explain this further or point me where to understand these points? Thanks!
tomd37
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Re: IRA Conversion

Post by tomd37 »

David - You mentioned to the OP to consider topping off your 22% tax bracket with a Roth conversion. I got the possible impression that the OP may be older and possibly even at the RMD stage of life. Topping off at the 22% bracket may have some implications for IRMAA and its effect on Medicare premiums if the OP is at that point in life. Maybe the OP will share more info as to their position.
Tom D.
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David Jay
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Re: IRA Conversion

Post by David Jay »

McDougal wrote: Fri Aug 21, 2020 3:59 pm
David Jay wrote: Fri Aug 21, 2020 2:58 pm Having some Roth in early retirement provides a lot of flexibility to avoid means-tested penalties.
David could you explain this further or point me where to understand these points? Thanks!
Qualified Roth distributions do not show up as Adjusted Gross Income or MAGI, so if you are close to an IRMAA level (Medicare) or, like me, are in early retirement using ACA (health care) you can take money from your Roth (instead of tIRA) and not affect their subsidy or penalty level.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
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David Jay
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Re: IRA Conversion

Post by David Jay »

tomd37 wrote: Fri Aug 21, 2020 4:22 pm David - You mentioned to the OP to consider topping off your 22% tax bracket with a Roth conversion. I got the possible impression that the OP may be older and possibly even at the RMD stage of life. Topping off at the 22% bracket may have some implications for IRMAA and its effect on Medicare premiums if the OP is at that point in life. Maybe the OP will share more info as to their position.
Yes, because he said his income was down I jumped to the conclusion that he was still in accumulation.

So V.V., if you reply and let us know your stage-of-life, we can correct our recommendations as necessary.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
Topic Author
VillageVanguard
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Joined: Sat Mar 28, 2020 9:30 pm

Re: IRA Conversion

Post by VillageVanguard »

I am getting older and my face has many more wrinkles than I would like. I really wish I had worn sunscreen when I was 19 and working outside all summer as a landscaper. I didn't even wear a hat.

Just like the IRA Conversion during school, wearing sunscreen is something I would tell my younger self.

I am going off on a tangent here; let me get back to the issues.

I am not near RMD age so that is not an issue for me. But that is an interesting nuance that I was unaware of. The posters on BH forums are well informed indeed.
Last edited by VillageVanguard on Fri Aug 21, 2020 4:42 pm, edited 1 time in total.
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FiveK
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Re: IRA Conversion

Post by FiveK »

VillageVanguard wrote: Fri Aug 21, 2020 2:53 pm Is doing the IRA Conversion worth it?

Weighing the taxes you would pay now vs the taxes you would pay later...

Aren't most people in a very low tax bracket during their retirement years?
Have you estimated your future marginal tax rate after you retire? There is some guesswork needed for doing so, but otherwise any t vs. R decision today is a complete guess.

See the rest of that wiki article for more.
neilpilot
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Location: Memphis area

Re: IRA Conversion

Post by neilpilot »

FiveK wrote: Fri Aug 21, 2020 4:40 pm
VillageVanguard wrote: Fri Aug 21, 2020 2:53 pm Is doing the IRA Conversion worth it?

Weighing the taxes you would pay now vs the taxes you would pay later...

Aren't most people in a very low tax bracket during their retirement years?
Have you estimated your future marginal tax rate after you retire? There is some guesswork needed for doing so, but otherwise any t vs. R decision today is a complete guess.

See the rest of that wiki article for more.
I also was expecting that our income would drop in retirement. I've been fully retired since 2017 but just started my SS last month.

Once our RMDs start in 2022, that along with 2 SS checks and 3 small pensions will result in an estimated income 30-50% higher than the years before I retired. I wish I had started conversions earlier, since Roth represents only about 10% of our retirement accounts.

Also, without discussing future legislation I'll just say that the current tax rates are at historical lows. Convert while current rates remain low!
CenTexan
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Re: IRA Conversion

Post by CenTexan »

I wondered if it was worth it, too, since my crude projection of taxes when I attain RMD age is virtually the same as now. But when I sat back and thought it through, the great benefit of doing the conversion now (I've done it for 3 years now) is that the EARNINGS on the amount you convert is tax free. That alone convinced me to continue with the conversions.
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FiveK
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Re: IRA Conversion

Post by FiveK »

CenTexan wrote: Fri Aug 21, 2020 5:29 pm I wondered if it was worth it, too, since my crude projection of taxes when I attain RMD age is virtually the same as now. But when I sat back and thought it through, the great benefit of doing the conversion now (I've done it for 3 years now) is that the EARNINGS on the amount you convert is tax free. That alone convinced me to continue with the conversions.
For equal marginal rates now vs. later, there is no benefit to convert now if taxes are paid from the traditional withdrawal - see the Simplest situation.

For equal marginal rates now vs. later, there may be a small benefit to convert now if taxes are paid from cash on hand, due to reduced tax drag on the tax amount (which effectively moves from taxable to Roth). See the first of the More complicated situations.

Of course, if for whatever reason (tax law, personal situation, etc.) marginal rates are higher later, then converting now is good.
tomd37
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Location: Middle Tennessee

Re: IRA Conversion

Post by tomd37 »

I am now in my 83rd year of life and as I think about my financial life since retirement 18 years ago there are two things I would have done in a different manner. #1 I would have delayed drawing social security benefits from 65 to 70. #2 I would have done more conversions to a Roth IRA than I did in that 65 to 70 age range.

Now that I am at this age I have looked more closely into my/our financial situation when one of us pass, which hopefully will not be for a while. Assuming our financial situation remains stable as I estimate it will, the survivor will definitely step up to what is now the 24% marginal tax bracket and will likely by higher after 2026, something like the former 28% bracket. For those readers approaching retirement I would recommend that you take a hard and detailed look at all financial aspects of retirement and don't limit yourself.
Tom D.
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WoodSpinner
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Re: IRA Conversion

Post by WoodSpinner »

VillageVanguard wrote: Fri Aug 21, 2020 2:53 pm Is doing the IRA Conversion worth it?

Weighing the taxes you would pay now vs the taxes you would pay later...

Aren't most people in a very low tax bracket during their retirement years?

The white coat investor LOVES the IRA conversion and I wish I had done it while I was in professional school like he recommends, but alas I missed my chance.

During my practice years, I didn't consider it because I was in a high tax bracket.
But now COVID has taken me into a large income dip for 2020, so I am considering doing the conversion again.

But is it worth it?
I will be in the 22% federal tax bracket this year.
Well ...... it depends!

We need to know a lot more details.

How does your marginal rate today compare to when RMDs begin? How about at age 80?
Same question but assume you are Single when RMDs are required.
Do you have funds in Taxable to pay the taxes for conversions?
What does your Cashflow look like through Retirement? How much do you need from your portfolio?
How about plans for charitable giving?
Plans for beneficiaries?

The short answer is it can make a great deal of sense if the circumstances are right.

WoodSpinner
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