Advice on Roth IRA conversions
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Advice on Roth IRA conversions
Hello all,
I'm getting different recommendations about doing Roth conversions. I'm using two different retirement websites, Income Lab (through my financial advisor) and Boldin (formerly New Retirement). I've entered the same information into both and I get vastly different results for doing Roth conversions, both in the number of conversions to make, and amounts. A different advisor I've consulted with, about an annuity purchase, questions whether I need to do conversions at all, and recommends just taking RMDs.
My financial advisor says to just follow the recommendation in Income Lab's software, but I'm not sure that I should trust it. Another thing to consider is that Income Lab's "breakeven" for the conversions, as opposed to just an RMD strategy, is 2040. I'll be 85, assuming I live that long. Not sure how I feel about that.
Background on me:
- I'll turn 69 in early December
- I currently have $316,246 in traditional and rollover IRAs, and $134,284 in Roth IRAs
- I'm "mostly" retired, haven't started taking Social Security, and I have a part-time "gig" as an independent contractor, but I'll be in the lowest tax bracket this year. I plan on starting Social Security at the end of next year, when I turn 70.
- My big question at this point is, since the end of the year is fast approaching, would it make sense to do the recommended Roth conversion this year, and then revisit the strategy next year and have more time to consult about it? If I later decided to just do RMDs, will a conversion this year have been a waste of tax dollars?
Many thanks for your thoughts. Please let me know if you need additional information.
I'm getting different recommendations about doing Roth conversions. I'm using two different retirement websites, Income Lab (through my financial advisor) and Boldin (formerly New Retirement). I've entered the same information into both and I get vastly different results for doing Roth conversions, both in the number of conversions to make, and amounts. A different advisor I've consulted with, about an annuity purchase, questions whether I need to do conversions at all, and recommends just taking RMDs.
My financial advisor says to just follow the recommendation in Income Lab's software, but I'm not sure that I should trust it. Another thing to consider is that Income Lab's "breakeven" for the conversions, as opposed to just an RMD strategy, is 2040. I'll be 85, assuming I live that long. Not sure how I feel about that.
Background on me:
- I'll turn 69 in early December
- I currently have $316,246 in traditional and rollover IRAs, and $134,284 in Roth IRAs
- I'm "mostly" retired, haven't started taking Social Security, and I have a part-time "gig" as an independent contractor, but I'll be in the lowest tax bracket this year. I plan on starting Social Security at the end of next year, when I turn 70.
- My big question at this point is, since the end of the year is fast approaching, would it make sense to do the recommended Roth conversion this year, and then revisit the strategy next year and have more time to consult about it? If I later decided to just do RMDs, will a conversion this year have been a waste of tax dollars?
Many thanks for your thoughts. Please let me know if you need additional information.
Re: Advice on Roth IRA conversions
There isn't a clearcut case for Roth conversions with $316k in deferred income unless they're basically free, which might be the case for you. But honestly I'll guess conversions aren't going to matter much in a predictable way in your case. This is usually the point in the thread where the OP says something like "oh incidentally I have $3M in TIAA Traditional... does that matter?"psychopengy wrote: ↑Fri Nov 22, 2024 4:23 pm Hello all,
I'm getting different recommendations about doing Roth conversions. I'm using two different retirement websites, Income Lab (through my financial advisor) and Boldin (formerly New Retirement). I've entered the same information into both and I get vastly different results for doing Roth conversions, both in the number of conversions to make, and amounts. A different advisor I've consulted with, about an annuity purchase, questions whether I need to do conversions at all, and recommends just taking RMDs.
My financial advisor says to just follow the recommendation in Income Lab's software, but I'm not sure that I should trust it. Another thing to consider is that Income Lab's "breakeven" for the conversions, as opposed to just an RMD strategy, is 2040. I'll be 85, assuming I live that long. Not sure how I feel about that.
Background on me:
- I'll turn 69 in early December
- I currently have $316,246 in traditional and rollover IRAs, and $134,284 in Roth IRAs
- I'm "mostly" retired, haven't started taking Social Security, and I have a part-time "gig" as an independent contractor, but I'll be in the lowest tax bracket this year. I plan on starting Social Security at the end of next year, when I turn 70.
- My big question at this point is, since the end of the year is fast approaching, would it make sense to do the recommended Roth conversion this year, and then revisit the strategy next year and have more time to consult about it? If I later decided to just do RMDs, will a conversion this year have been a waste of tax dollars?
Many thanks for your thoughts. Please let me know if you need additional information.
Re: Advice on Roth IRA conversions
What are your plans for the retirement dollars? Needed to live on, trips, bequests, inheritance?
If I assume you are not married and in the 10 or 12% marginal bracket, and have sufficient after tax dollars on hand to pay the conversion tax, if I were you I'd fill up the 12% bracket this year and next with conversions before you have a full year of SS. We don't know your projected SS income, but it is sounds like your other income is low and thus perhaps much of your SS can be untaxed. Doing more conversions while drawing SS might incur more taxes than necessary. When the RMDs kick in at 73, they will also make more of the SS be taxed, but you are only talking about $10-15k per year of extra income and maybe $10k more of SS being taxed. There is a Retiree Portfolio Manager, viewtopic.php?t=97352, that can help you make an in-depth analysis.
If I assume you are not married and in the 10 or 12% marginal bracket, and have sufficient after tax dollars on hand to pay the conversion tax, if I were you I'd fill up the 12% bracket this year and next with conversions before you have a full year of SS. We don't know your projected SS income, but it is sounds like your other income is low and thus perhaps much of your SS can be untaxed. Doing more conversions while drawing SS might incur more taxes than necessary. When the RMDs kick in at 73, they will also make more of the SS be taxed, but you are only talking about $10-15k per year of extra income and maybe $10k more of SS being taxed. There is a Retiree Portfolio Manager, viewtopic.php?t=97352, that can help you make an in-depth analysis.
Re: Advice on Roth IRA conversions
Do you donate to charity? If so, did your analysis take into account bunching deductions into every other year? What about future QCDs?
Last edited by livesoft on Fri Nov 22, 2024 5:34 pm, edited 1 time in total.
Re: Advice on Roth IRA conversions
So you know that either you've input things incorrectly or there are hidden assumptions/simplifications that you can't address and that at least one of them is wrong.
You didn't give us much to go on, so I will not feel bad about not running any numbers. I think you could do small conversions this year and next, perhaps up to the start of the LTCG phase-in (essentially the top of the 12% bracket minus any qualified dividends/LTCGs). Starting in 2026, you will have full years of SS benefits and the "tax torpedo" of the phase-in of SS taxes is your barrier to conversions. I would check with a tax calculator and only make conversions to around the top of the 10% bracket (which will actually be a 15% marginal cost on the last dollars converted as taxes on SS benefits will be phasing in). Once RMDs start, probably no more conversions.
Remember that having some $ in an IRA is very handy if you need long term care as those expenses will largely be deductible, so you can get the money out with minimal tax cost.
If your tools are recommending conversions much larger than those, I'd be skeptical about the validity of the answer you are getting from the tool. All tools have limitations but there are some that are truly awful and give completely wrong answers in certain situations. Can you give us an idea of the plans the tools are recommending?
You didn't give us much to go on, so I will not feel bad about not running any numbers. I think you could do small conversions this year and next, perhaps up to the start of the LTCG phase-in (essentially the top of the 12% bracket minus any qualified dividends/LTCGs). Starting in 2026, you will have full years of SS benefits and the "tax torpedo" of the phase-in of SS taxes is your barrier to conversions. I would check with a tax calculator and only make conversions to around the top of the 10% bracket (which will actually be a 15% marginal cost on the last dollars converted as taxes on SS benefits will be phasing in). Once RMDs start, probably no more conversions.
Remember that having some $ in an IRA is very handy if you need long term care as those expenses will largely be deductible, so you can get the money out with minimal tax cost.
If your tools are recommending conversions much larger than those, I'd be skeptical about the validity of the answer you are getting from the tool. All tools have limitations but there are some that are truly awful and give completely wrong answers in certain situations. Can you give us an idea of the plans the tools are recommending?
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Re: Advice on Roth IRA conversions
Thank you all for your time and your answers. Here's more information that may clarify my situation:
- I am unmarried, with no dependents.
- I have zero debt, I own my home which is paid off.
- I don't have an annuity (such as TIAA Traditional, although I'm strongly considering one, in fact that one in particular)
- Besides the IRAs, I have $125,000 in a liquid cash account with which to pay taxes on the conversions.
- As of now, the Social Security website calculator has me receiving a $2,163 monthly benefit, so about $26K/yr.
- My independent contractor work will pay $9,000 this year, and probably the same amount next year.
- Social Security plus the work would probably cover all of my baseline expenses (assuming my health holds out), but not leave much for enjoyment.
- I don't give to charity, and I don't plan to unless there's a very strong case that it would be a net tax saving.
- My goal is to reduce total taxes paid and funding as comfortable a retirement as possible, doing some travel and pursuing modest hobbies and interests. I'm not interested in leaving an inheritance to anyone.
Many thanks again.
- I am unmarried, with no dependents.
- I have zero debt, I own my home which is paid off.
- I don't have an annuity (such as TIAA Traditional, although I'm strongly considering one, in fact that one in particular)
- Besides the IRAs, I have $125,000 in a liquid cash account with which to pay taxes on the conversions.
- As of now, the Social Security website calculator has me receiving a $2,163 monthly benefit, so about $26K/yr.
- My independent contractor work will pay $9,000 this year, and probably the same amount next year.
- Social Security plus the work would probably cover all of my baseline expenses (assuming my health holds out), but not leave much for enjoyment.
- I don't give to charity, and I don't plan to unless there's a very strong case that it would be a net tax saving.
- My goal is to reduce total taxes paid and funding as comfortable a retirement as possible, doing some travel and pursuing modest hobbies and interests. I'm not interested in leaving an inheritance to anyone.
- Could you please explain how the conversions could be free?
Would you like the details of the overall retirement plans, or just the Roth conversions?
Many thanks again.
Re: Advice on Roth IRA conversions
Conversions at a 0% tax rate, due to a year of sufficiently low income, would be basically free (not accounting for any possible state tax liability or other impacts on tax credits, etc.)psychopengy wrote: ↑Sun Nov 24, 2024 1:24 pm- Could you please explain how the conversions could be free?
Re: Advice on Roth IRA conversions
Welcome to the forum.
Ordinarily $316k in tax-deferral does not trigger a need to do Roth conversions. But if your total income this year will be about $9k, a Roth conversion is essentially a no brainer.
The $9k does not even overcome the standard deduction - so you have no taxable income (although I assume there is a small amount of interest income from your $125k in cash.) Some money would be converted with no tax at all. The rest at a very low tax rate.
Can you confirm your total income from all sources in 2024?
How much are the calculators suggesting that you convert?
An annuity might make some sense for you, but I'm not sure the one you are looking at is a good choice (not sure it isn't either). That is a question for someone else (probably Stinky).
One thing that does concern me is that you apparently have a financial advisor. If this is someone you are paying 1% or 1.35% a year, the best thing you can do for your portfolio is probably to stop using the advisor.
Ordinarily $316k in tax-deferral does not trigger a need to do Roth conversions. But if your total income this year will be about $9k, a Roth conversion is essentially a no brainer.
The $9k does not even overcome the standard deduction - so you have no taxable income (although I assume there is a small amount of interest income from your $125k in cash.) Some money would be converted with no tax at all. The rest at a very low tax rate.
Can you confirm your total income from all sources in 2024?
How much are the calculators suggesting that you convert?
An annuity might make some sense for you, but I'm not sure the one you are looking at is a good choice (not sure it isn't either). That is a question for someone else (probably Stinky).
One thing that does concern me is that you apparently have a financial advisor. If this is someone you are paying 1% or 1.35% a year, the best thing you can do for your portfolio is probably to stop using the advisor.
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Re: Advice on Roth IRA conversions
I would do the conversion this year, since one conversion is relatively so small that the tax cost isn't onerous. Then you have a year to choose about doing the next one.
These days, deep in my RMD years, I am so pleased with the tax-free growth in my all-stock RIRA, with the additional tax cost of each annual conversion being a faded memory.
If your tIRA only has a five digit balance, maybe your future RMDs are not a problem, but that does not describe the account size of retired Bogleheads' tIRAs.
These days, deep in my RMD years, I am so pleased with the tax-free growth in my all-stock RIRA, with the additional tax cost of each annual conversion being a faded memory.
If your tIRA only has a five digit balance, maybe your future RMDs are not a problem, but that does not describe the account size of retired Bogleheads' tIRAs.
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Re: Advice on Roth IRA conversions
Thank you for your replies.
A rough calculation of my total income this year is $14,628.00
Thank you all again for your time and feedback.
A rough calculation of my total income this year is $14,628.00
I hired the advisor for a one-time financial plan. I'm not paying any ongoing fees.
The Boldin (formerly New Retirement) "Roth conversion explorer" essentially suggests no conversions, since I would end up with a greater lifetime tax liability than just taking RMDs, but when I modeled conversions using different parameters, the conversion amounts were about $22,000 a year. The Income Lab calculator suggests a 2024 conversion of $94,232, all the way up to my IRMAA bracket. The next several years' conversions are similarly huge. I've tried as best I can to enter the same income, expense, and other data into each program as close to the same as possible.
I actually have a 6 figure balance in my tIRA - $316,000
Thank you all again for your time and feedback.
Re: Advice on Roth IRA conversions
I am pleased with having done my previous Roth conversions, now with only stock index funds stored in that account for the long term, since my small pension and delayed-to-70 SS cover my daily expenses. I too did the to-the-top-of-the-tax-bracket amount on each annual conversion. No, I don't have the math to state whether to continue or not, I'm just happy with the results, and wishing that I had done a little more every year prior to my age 70.
Re: Advice on Roth IRA conversions
Is any of this long term capital gain or qualified dividends?psychopengy wrote: ↑Tue Nov 26, 2024 2:09 pm Thank you for your replies.A rough calculation of my total income this year is $14,628.00
This is good news.I hired the advisor for a one-time financial plan. I'm not paying any ongoing fees.
No conversions makes no sense because you have unused space in the "income that won't trigger any tax" category.The Boldin (formerly New Retirement) "Roth conversion explorer" essentially suggests no conversions, since I would end up with a greater lifetime tax liability than just taking RMDs, but when I modeled conversions using different parameters, the conversion amounts were about $22,000 a year.
"Greater lifetime tax liability" is not what you should be paying attention to. Believe it or not, that is irrelevant . What is important is the number of dollars you end up with in the end....and paying less tax does not necessarily mean more money in the end.
In short, it is the tax rate, not the tax amount that matters.
Edit: Psychopenegy, applolgies. I looked at the standard deduction for a married couple instead of for a single person.
With a total income of $14,628, you have at least $16,122 worth of a liitle space that would not be taxed. Your standard deduction for 2024 is $30,750 $16.550 minus $14,628. It could be more if some of your income is LTCG or QDs. That is why it is important to know exactly where all your income dollars come from.
The goal of this calculator seems to be to convert all of your IRA at the best possible cost. I do not think that is a worthy goal. You have no financial need to convert the entire account.The Income Lab calculator suggests a 2024 conversion of $94,232, all the way up to my IRMAA bracket. The next several years' conversions are similarly huge.
Unless I''m overlooking something, it is clear that a conversion in 2024 is a good idea.. Whether a conversion is a good idea or not depends on how much of your income is long term capital gains or qualified dividends. And whether you wish to convert to the top of the 10% bracket (which I think is probably a good idea).
When you start SS next year, things will be different because of how SS is taxed.
Last edited by retiredjg on Thu Nov 28, 2024 3:34 pm, edited 1 time in total.
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Re: Advice on Roth IRA conversions
if he's on an ACA plan, doing a conversion will reduce his subsidy thus increasing his effective taxes paid. with a tIRA with a balance around 300k I don't see a ton of benefit for doing conversions. RMDs would be in a fairly low bracket and they keep moving back the RMD age.
if the tIRA is mostly bonds (with a low expected return) that would be an additional reason to not convert.
Re: Advice on Roth IRA conversions
Doing a conversion will trigger a tax event. I wouldn't do anything and simply continue to let the Iras grow tax deffered. Pay the tax as you withdraw it. Your only going to lose earnings on your tax payment along with bet worth.
Re: Advice on Roth IRA conversions
Your conversion will trigger some type of tax payment. All you will do is lose the earnings on your payment and lose net worth as well. Let the ira balances continue to grow tax-deferred.
Re: Advice on Roth IRA conversions
Could be true for someone else, but this poster is 69...probably on Medicare.chrisdds98 wrote: ↑Thu Nov 28, 2024 11:25 amif he's on an ACA plan, doing a conversion will reduce his subsidy thus increasing his effective taxes paid. with a tIRA with a balance around 300k I don't see a ton of benefit for doing conversions. RMDs would be in a fairly low bracket and they keep moving back the RMD age.
if the tIRA is mostly bonds (with a low expected return) that would be an additional reason to not convert.
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Re: Advice on Roth IRA conversions
If income is less than standard deduction? Am I overlooking something?
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Re: Advice on Roth IRA conversions
Perhaps that some people are virulently anti-conversion, regardless of how the complete math actually works.
psychopengy, see the Roth conversion wiki article. If you can use Excel, see in particular the Using a spreadsheet section of that article.
If you do that and generate your own marginal tax rate chart, what does it suggest to you?
Last edited by FiveK on Thu Nov 28, 2024 6:14 pm, edited 1 time in total.
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Re: Advice on Roth IRA conversions
I believe OP is filing Single, not MFJ. Income is barely below standard deduction.
In our situation, I'm planning Roth conversions to the top of the 10% bracket prior to SS and later RMDs. I started guestimating by looking at where unavoidable income like SS and RMDs would push my tax level. I should Roth convert to that level, too, to keep the tIRAs from growing even more in the years before RMDs kick in. We've got 12 years to SS and 17 to RMDs, so a more fuzzy picture of future balances and tax brackets than for OP looking at SS next year.
Re: Advice on Roth IRA conversions
He is not married, so his standard deduction should be $16,550 if he is single and over 65 in 2024 . So not a lot of headroom in the 0% tax bracket. He could maybe convert through the 10% bracket which lets him do $11,000 more. But he may never be above the 12% tax bracket even with SS and RMDs if he stops working.retiredjg wrote: ↑Thu Nov 28, 2024 10:24 am With a total income of $14,628, you have at least $16,122 worth of space that would not be taxed. Your standard deduction for 2024 is $30,750 minus $14,628. It could be more if some of your income is LTCG or QDs. That is why it is important to know exactly where all your income dollars come from.
If he has extra money and since he's working, he could make up to an $8000 Roth contribution too if the money is laying around in a taxable account. No break even calculation required for that one.
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Re: Advice on Roth IRA conversions
He could make a $2k IRA contribution (trad or Roth) to be eligible for the saver's credit, which could offset the tax of some of a Roth conversion. Just needs to limit the total AGI to stay in range for the credit, and manage which tier he is eligible for.suemarkp wrote: ↑Thu Nov 28, 2024 12:11 pmHe is not married, so his standard deduction should be $16,550 if he is single and over 65 in 2024 . So not a lot of headroom in the 0% tax bracket. He could maybe convert through the 10% bracket which lets him do $11,000 more. But he may never be above the 12% tax bracket even with SS and RMDs if he stops working.retiredjg wrote: ↑Thu Nov 28, 2024 10:24 am With a total income of $14,628, you have at least $16,122 worth of space that would not be taxed. Your standard deduction for 2024 is $30,750 minus $14,628. It could be more if some of your income is LTCG or QDs. That is why it is important to know exactly where all your income dollars come from.
If he has extra money and since he's working, he could make up to an $8000 Roth contribution too if the money is laying around in a taxable account. No break even calculation required for that one.
Re: Advice on Roth IRA conversions
Thanks. You are right. I looked at the wrong section of the chart. Corrected above.teen persuasion wrote: ↑Thu Nov 28, 2024 12:09 pm I believe OP is filing Single, not MFJ. Income is barely below standard deduction.
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Re: Advice on Roth IRA conversions
But he wrote he'd pay the tax from taxable. So that means 100% of the conversion stays invested rather than a portion of it going to taxes. So let's say he converts 50,000 and pays 10,000 in tax. Then 50,000 grows tax free. And when he withdraws it, it's tax free. But had he not paid tax from taxable but from out of the conversion, 40,000 would be in the Roth growing tax free, and that 10,000 in taxable would grow subject to having its dividends taxed, and when sold, being subject to cap gains tax. Which would make the total return of that 10,000 less than if it had remained in the Roth. That's my understanding, am I wrong about that?
"The Quality of the Answer Depends on the Quality of Your Question."
Re: Advice on Roth IRA conversions
Not wrong.Mullins wrote: ↑Fri Nov 29, 2024 11:03 am But he wrote he'd pay the tax from taxable. So that means 100% of the conversion stays invested rather than a portion of it going to taxes. So let's say he converts 50,000 and pays 10,000 in tax. Then 50,000 grows tax free. And when he withdraws it, it's tax free. But had he not paid tax from taxable but from out of the conversion, 40,000 would be in the Roth growing tax free, and that 10,000 in taxable would grow subject to having its dividends taxed, and when sold, being subject to cap gains tax. Which would make the total return of that 10,000 less than if it had remained in the Roth. That's my understanding, am I wrong about that?
You are describing the difference between the Simplest situation and "Traditional plus taxable" vs. Roth.
The effect of tax drag is something that may not be obvious at first glance. And sometimes people forget the commutative property of multiplication they learned in third(?) grade.
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Re: Advice on Roth IRA conversions
Thank you all again. Lots of info! I'll get around to reading the articles you linked to as soon as possible.
Many thanks.
All of my $14,628 2024 income comes from my independent contractor job and interest on savings accounts. None of it is from long term capital gain or qualified dividends.
Yes, I'm on Medicare, and my tax filing status is single.
I asked Fidelity and Vanguard, the two firms I have assets with, whether they offer Roth accounts for independent contractors, but neither of them do. Does anyone know of a firm that offers that, or does that option simply not exist?teen persuasion wrote: ↑Thu Nov 28, 2024 12:21 pm He could make a $2k IRA contribution (trad or Roth) to be eligible for the saver's credit, which could offset the tax of some of a Roth conversion. Just needs to limit the total AGI to stay in range for the credit, and manage which tier he is eligible for.
Many thanks.
Re: Advice on Roth IRA conversions
In that case, you can convert very little without triggering any tax.psychopengy wrote: ↑Fri Nov 29, 2024 1:33 pm Thank you all again. Lots of info! I'll get around to reading the articles you linked to as soon as possible.All of my $14,628 2024 income comes from my independent contractor job and interest on savings accounts. None of it is from long term capital gain or qualified dividends.
It could still be wise to consider converting to the top of the 10% bracket or near the top of the 12% bracket. You could convert about $11,600 at only 10% tax. And about another $35k at 12%. These are very low tax brackets for a single person with assets.
Once you start SS, you may not be able to convert much of anything at low rates. That does not mean that you "need" to do conversions though. Some people actually need to do conversions to avoid high tax rates once RMDs start, but your RMDs should not be all that large.
They both certainly offer Roth IRAs which you could use. If you are looking for Roth Solo 401k, Fido does not offer Roth (yet - coming soon did I hear somewhere?) and Vanguard has gotten out of the Solo 401k business. Schwab might.I asked Fidelity and Vanguard, the two firms I have assets with, whether they offer Roth accounts for independent contractors, but neither of them do. Does anyone know of a firm that offers that, or does that option simply not exist?
Many thanks.
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Re: Advice on Roth IRA conversions
Fidelity, Schwab, Vanguard, etc., all offer Roth IRAs.psychopengy wrote: ↑Fri Nov 29, 2024 1:33 pm I asked Fidelity and Vanguard, the two firms I have assets with, whether they offer Roth accounts for independent contractors, but neither of them do. Does anyone know of a firm that offers that, or does that option simply not exist?
Whether they offer Designated Roth accounts within a solo 401k is a different question. See that wiki and references therein for what brokerages do and don't offer for a solo 401k.
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Re: Advice on Roth IRA conversions
I'm speaking of a Roth IRA here. Vanguard, Fidelity, Schwab, etc., all offer Roth IRAs. Mine and my DH's are at Vanguard. You are certainly not over the income limitation for contributing to a Roth IRA, and have earned income, so you should be eligible to open a Roth IRA if you do not already have one.psychopengy wrote: ↑Fri Nov 29, 2024 1:33 pmI asked Fidelity and Vanguard, the two firms I have assets with, whether they offer Roth accounts for independent contractors, but neither of them do. Does anyone know of a firm that offers that, or does that option simply not exist?teen persuasion wrote: ↑Thu Nov 28, 2024 12:21 pm He could make a $2k IRA contribution (trad or Roth) to be eligible for the saver's credit, which could offset the tax of some of a Roth conversion. Just needs to limit the total AGI to stay in range for the credit, and manage which tier he is eligible for.
Many thanks.
Re: Advice on Roth IRA conversions
A Roth IRA isn't an employer retirement plan; it doesn't matter for contribution purposes if you're an independent contractor or an employee. You confused the reps by specifying "independent contractor."psychopengy wrote: ↑Fri Nov 29, 2024 1:33 pm I asked Fidelity and Vanguard, the two firms I have assets with, whether they offer Roth accounts for independent contractors, but neither of them do. Does anyone know of a firm that offers that, or does that option simply not exist?
Many thanks.
Re: Advice on Roth IRA conversions
You would lose the earnings on the amount you withdrew from taxable account.Mullins wrote: ↑Fri Nov 29, 2024 11:03 amBut he wrote he'd pay the tax from taxable. So that means 100% of the conversion stays invested rather than a portion of it going to taxes. So let's say he converts 50,000 and pays 10,000 in tax. Then 50,000 grows tax free. And when he withdraws it, it's tax free. But had he not paid tax from taxable but from out of the conversion, 40,000 would be in the Roth growing tax free, and that 10,000 in taxable would grow subject to having its dividends taxed, and when sold, being subject to cap gains tax. Which would make the total return of that 10,000 less than if it had remained in the Roth. That's my understanding, am I wrong about that?
Re: Advice on Roth IRA conversions
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Re: Advice on Roth IRA conversions
Will you have any business expenses or take any self-employed (s/e) deductions, such as the s/e healthcare deduction, that will reduce s/e income included in AGI?psychopengy wrote: ↑Fri Nov 29, 2024 1:33 pm All of my $14,628 2024 income comes from my independent contractor job and interest on savings accounts. None of it is from long term capital gain or qualified dividends.
If yes, you will have more room to make Roth conversions at 0-10-12% marginal tax rate. AGI of $38.250 or less will qualify you for a Tax Savers Credit for eligible retirement contributions.
Re: Advice on Roth IRA conversions
But by not paying the tax out of the conversion, then the entire conversion amount, which includes the portion which would've otherwise been withheld for tax, is invested in the Roth. So that portion continues to earn, but now all tax free.Cah wrote: ↑Fri Nov 29, 2024 11:07 pmYou would lose the earnings on the amount you withdrew from taxable account.Mullins wrote: ↑Fri Nov 29, 2024 11:03 am
But he wrote he'd pay the tax from taxable. So that means 100% of the conversion stays invested rather than a portion of it going to taxes. So let's say he converts 50,000 and pays 10,000 in tax. Then 50,000 grows tax free. And when he withdraws it, it's tax free. But had he not paid tax from taxable but from out of the conversion, 40,000 would be in the Roth growing tax free, and that 10,000 in taxable would grow subject to having its dividends taxed, and when sold, being subject to cap gains tax. Which would make the total return of that 10,000 less than if it had remained in the Roth. That's my understanding, am I wrong about that?
If the tax is withheld out of the conversion, then yes the taxable account remains as is and earning but then a lesser amount of the conversion went to the Roth.
So it seems to me that paying the tax from taxable in effect swaps the same amount into non-taxable.
"The Quality of the Answer Depends on the Quality of Your Question."
Re: Advice on Roth IRA conversions
Maybe I'm not making my point clear. Whatever account you make your tax payment from will reduce your net worth by the amount of the tax payment as well as any future earnings you might make on the tax payment.Mullins wrote: ↑Sat Nov 30, 2024 10:47 amBut by not paying the tax out of the conversion, then the entire conversion amount, which includes the portion which would've otherwise been withheld for tax, is invested in the Roth. So that portion continues to earn, but now all tax free.
If the tax is withheld out of the conversion, then yes the taxable account remains as is and earning but then a lesser amount of the conversion went to the Roth.
So it seems to me that paying the tax from taxable in effect swaps the same amount into non-taxable.
Re: Advice on Roth IRA conversions
That is, however, only half the story.
Understanding the commutative property of multiplication description in that wiki section might be helpful to understand why "paying tax now" is only half the story.
Is that point clear?
Re: Advice on Roth IRA conversions
+1FiveK wrote: ↑Sat Nov 30, 2024 7:25 pmThat is, however, only half the story.
Understanding the commutative property of multiplication description in that wiki section might be helpful to understand why "paying tax now" is only half the story.
Is that point clear?
- teen persuasion
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Re: Advice on Roth IRA conversions
Just rereading, trying to get all the bits together.
OP, how are you funding your expenses now? That is, where are you drawing from, since you say SS + employment income would probably cover baseline expenses? And how much more do you want to withdraw for wants?
How much will your SS + RMDs be in a few years? More or less than your desired spending?
Reasons I'm asking these questions :
1. If you are already withdrawing from your tIRA or Roth IRA, you probably won't be eligible for the Saver's credit.
2. Your tIRA balance isn't that large, your RMDs may be manageable, depending on your desired spending.
3. How quickly will you deplete your savings supplementing SS income at your desired spending rate? What happens then?
4. Your earned income plus interest income is near the standard deduction, so there's just a little space to Roth convert for free. Your earned income also makes you eligible to contribute to a Roth IRA now - you could effectively transfer $8k from savings to Roth IRA in working years, to shift those $$ from taxable to tax free forever, reducing your interest income a bit, increasing Roth conversion space a bit, and once you start SS reducing how much of SS is taxable a bit (you are right on the cusp of SS taxation kicking in). But these are all just nibbling around the edges, especially with SS next year and RMDs a few more away.
If there's not much difference once SS + RMDs begin, it's simpler to not bother.
- I'll turn 69 in early December
- I currently have $316,246 in traditional and rollover IRAs, and $134,284 in Roth IRAs
- I'm "mostly" retired, haven't started taking Social Security, and I have a part-time "gig" as an independent contractor, but I'll be in the lowest tax bracket this year. I plan on starting Social Security at the end of next year, when I turn 70.
So you ALREADY have a Roth IRA!Besides the IRAs, I have $125,000 in a liquid cash account with which to pay taxes on the conversions.
- As of now, the Social Security website calculator has me receiving a $2,163 monthly benefit, so about $26K/yr.
- My independent contractor work will pay $9,000 this year, and probably the same amount next year.
- Social Security plus the work would probably cover all of my baseline expenses (assuming my health holds out), but not leave much for enjoyment.
OP, how are you funding your expenses now? That is, where are you drawing from, since you say SS + employment income would probably cover baseline expenses? And how much more do you want to withdraw for wants?
How much will your SS + RMDs be in a few years? More or less than your desired spending?
Reasons I'm asking these questions :
1. If you are already withdrawing from your tIRA or Roth IRA, you probably won't be eligible for the Saver's credit.
2. Your tIRA balance isn't that large, your RMDs may be manageable, depending on your desired spending.
3. How quickly will you deplete your savings supplementing SS income at your desired spending rate? What happens then?
4. Your earned income plus interest income is near the standard deduction, so there's just a little space to Roth convert for free. Your earned income also makes you eligible to contribute to a Roth IRA now - you could effectively transfer $8k from savings to Roth IRA in working years, to shift those $$ from taxable to tax free forever, reducing your interest income a bit, increasing Roth conversion space a bit, and once you start SS reducing how much of SS is taxable a bit (you are right on the cusp of SS taxation kicking in). But these are all just nibbling around the edges, especially with SS next year and RMDs a few more away.
If there's not much difference once SS + RMDs begin, it's simpler to not bother.
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Re: Advice on Roth IRA conversions
I do ROTH conversions for the following reasons:
1) they will lower my future RMD amounts
2) right now taxes are likely lower than sometime in the future
3) more dollars inside a ROTH will be beneficial in the future
How much to convert each year? Depends......
I try to stay under the IRMAA threshold.
1) they will lower my future RMD amounts
2) right now taxes are likely lower than sometime in the future
3) more dollars inside a ROTH will be beneficial in the future
How much to convert each year? Depends......
I try to stay under the IRMAA threshold.
Re: Advice on Roth IRA conversions
+2!RetiredAL wrote: ↑Sat Nov 30, 2024 7:43 pm+1FiveK wrote: ↑Sat Nov 30, 2024 7:25 pm That is, however, only half the story.
Understanding the commutative property of multiplication description in that wiki section might be helpful to understand why "paying tax now" is only half the story.
Is that point clear?
Re: Advice on Roth IRA conversions
Absolutely not.FiveK wrote: ↑Sat Nov 30, 2024 7:25 pmThat is, however, only half the story.
Understanding the commutative property of multiplication description in that wiki section might be helpful to understand why "paying tax now" is only half the story.
Is that point clear?
Re: Advice on Roth IRA conversions
Thus you are saying that you do not believe A * B * C = A * C * B. While there is room for disagreement on some things, basic math is not one of them. Do you understand that?Cah wrote: ↑Sun Dec 01, 2024 6:57 amAbsolutely not.FiveK wrote: ↑Sat Nov 30, 2024 7:25 pm That is, however, only half the story.
Understanding the commutative property of multiplication description in that wiki section might be helpful to understand why "paying tax now" is only half the story.
Is that point clear?
Re: Advice on Roth IRA conversions
Sorry nothing i read in the link you attached was basic math. My simple mind didn't understand a bit of it. All over my head. We will have to agree to disagree that if you pay a tax on your conversion no matter whether you pay it out of account A or account B you will lose the net worth immediately and loss of earnings forever on the tax payment.
Re: Advice on Roth IRA conversions
It's difficult to be more basic than A * B * C = A * C * B. If that is over your head, it would be best that you discontinue providing advice in this forum.Cah wrote: ↑Sun Dec 01, 2024 7:04 pmSorry nothing i read in the link you attached was basic math. My simple mind didn't understand a bit of it. All over my head. We will have to agree to disagree that if you pay a tax on your conversion no matter whether you pay it out of account A or account B you will lose the net worth immediately and loss of earnings forever on the tax payment.
If, however, you are legitimately interested to learn so that you can understand it, there are people here who may be willing to engage to that end.
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Re: Advice on Roth IRA conversions
I am pretty low on the math index myself but...Cah wrote: ↑Sun Dec 01, 2024 7:04 pmSorry nothing i read in the link you attached was basic math. My simple mind didn't understand a bit of it. All over my head. We will have to agree to disagree that if you pay a tax on your conversion no matter whether you pay it out of account A or account B you will lose the net worth immediately and loss of earnings forever on the tax payment.
I think the principal here is that while Yes you do lose those tax dollars in whatever account you pull them from, you also retain an equivalent of those dollars in the Roth account and subsequently gain a return on those dollars. So even though one account is diminishing and losing earning power, the other (Roth) account is gaining both value and earning power.
The next good thing that happens is that I get to put a few more dollars from my taxable checking account into a tax advantaged account.
At least that is what I tell myself every time I make a Roth conversion paying taxes from my W2 withholdings.
Re: Advice on Roth IRA conversions
Your point about a drop in your net worth is accurate depending on what has been discussed in some other threads: whether net worth should be calculated taking into consideration likely(?) future tax liability, or not.Cah wrote: ↑Sun Dec 01, 2024 7:04 pmSorry nothing i read in the link you attached was basic math. My simple mind didn't understand a bit of it. All over my head. We will have to agree to disagree that if you pay a tax on your conversion no matter whether you pay it out of account A or account B you will lose the net worth immediately and loss of earnings forever on the tax payment.
Re: Advice on Roth IRA conversions
Yes, lower wealth to start. And then in many cases gain a significant amount of wealth which is 'spendable' and 'useable' after taxes as opposed to wealth which only exists on paper for some specific periods of time.Cah wrote: ↑Sun Dec 01, 2024 7:04 pmSorry nothing i read in the link you attached was basic math. My simple mind didn't understand a bit of it. All over my head. We will have to agree to disagree that if you pay a tax on your conversion no matter whether you pay it out of account A or account B you will lose the net worth immediately and loss of earnings forever on the tax payment.
So if Cah is planning on spending much of their funds for charity you have made the best choice.
If you are not spending much of your funds on charity then you do not have not calculated your situation and have no idea of the results.
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Re: Advice on Roth IRA conversions
I'm currently funding expenses with my independent contractor's salary and withdrawing from the cash savings account. I'm not withdrawing anything from my IRAs. I'm very frugal, so that's been working so far, but I'd like to fund some travel and other activities which might be about 10K a year, as a ballpark figure. I think I could live comfortably on about 45K a year.teen persuasion wrote: ↑Sat Nov 30, 2024 8:02 pm OP, how are you funding your expenses now? That is, where are you drawing from, since you say SS + employment income would probably cover baseline expenses? And how much more do you want to withdraw for wants?
The Income Lab retirement website says that my RMDs will be about $12.5K a year in a few years, and I'll just guesstimate that my monthly social security payment with a modest COLA will be $2,200/mo., so in a few years SS + RMDs might be $26,400 + $12,500/yr. = $38,900. A little below my desired spending level. $6,100 is the differenceteen persuasion wrote: ↑Sat Nov 30, 2024 8:02 pm How much will your SS + RMDs be in a few years? More or less than your desired spending?
I currently have $574,594 saved across all accounts - tIRAs, Roths, cash savings. A rough calculation of total RMDs through the probable end of my life is $196,181. $574,594 - $196,181 = $378,413 from which to draw from to reach my desired spending level. Withdrawing $6,100/yr. from $378,413 would take 62 years, so I'd be good there. I know these calculations don't account for inflation and lots of other factors. Feel free to criticize!teen persuasion wrote: ↑Sat Nov 30, 2024 8:02 pm 3. How quickly will you deplete your savings supplementing SS income at your desired spending rate? What happens then?
Thanks again.
Re: Advice on Roth IRA conversions
Although often skipped over by Bogleheads, true Net Worth should be decreased by known liabilities, such as the 22% tax on those IRA $, assuming 22% is your incremental rate.tibbitts wrote: ↑Mon Dec 02, 2024 8:35 amYour point about a drop in your net worth is accurate depending on what has been discussed in some other threads: whether net worth should be calculated taking into consideration likely(?) future tax liability, or not.Cah wrote: ↑Sun Dec 01, 2024 7:04 pm
Sorry nothing i read in the link you attached was basic math. My simple mind didn't understand a bit of it. All over my head. We will have to agree to disagree that if you pay a tax on your conversion no matter whether you pay it out of account A or account B you will lose the net worth immediately and loss of earnings forever on the tax payment.
Re: Advice on Roth IRA conversions
Agree. Paying taxes now is a decrease in the money in your accounts, but it is not a decrease in your net worth. Some of that money is not yours in the first place. Some of your tax-deferred dollars actually belong to Uncle Sam.
Link to Asking Portfolio Questions
Re: Advice on Roth IRA conversions
And...the earnings on Uncle Sam's portion also belong to Uncle Sam.
It seems to me the majority of the Roth/no Roth discussions are about how to reduce to Uncle Sam's cut (the tax rate) but unless you give it all to charity, taxes are due sooner or later.