Roth conversions... tax speculation?

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LivingTheDream
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Roth conversions... tax speculation?

Post by LivingTheDream »

I've been trying to get my head around Roth conversions, and understand the rationale. But I am having a hard time with the concept of tax speculation. While taxes are certain, tax rates & rules are not. The general consensus that market timing is bad seems to be in conflict (at least to me) with the general consensus that Roth conversions are good.

The tax-free status of Roth IRAs could conceivably change (admittedly not likely). RMD rates/calculations might change (or I might not live long enough for them to matter). Just because I currently project higher tax rates in the future, isn't that just speculation (similar to market timing)?

I'd appreciate input/feedback/perspectives (I genuinely want to become comfortable with Roth conversions, especially if advantageous... I'm just struggling with assumptions relating to taxes).
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Re: Roth conversions... tax speculation?

Post by daektr »

I think with market timing you have to understand the sheer number of intelligent participants taking the "other side of the bet", or "already out in front of that", so to speak. Have you heard this notion that anything you read about in the newspaper has already been "priced in"? Our company was public for a few years, and the intelligence of the Wall street analysts asking us tricky questions trying to glean some slight information/modeling advantage about the company is terrifying. Or perhaps comforting, I'm not sure.

Anyway - I believe that attempting to time the market isn't like forecasting the weather or, I suppose, guessing at future tax policies - even though there seems like an element of chance to it. You're not *only* trying to predict the future, you are also trying to outsmart (as it were) everyone else trying to predict that future by getting there first.

Think about how the market recovered earlier this year -- "everyone" was predicting the market would crash -- but it shot back up suddenly, possibly because a bunch of folks were trying to guess the bottom 'in front' of everyone else. And even that is just guesswork - probably we cannot truly know why.


Anyway - I don't believe in market timing but I do believe that there are some future things you can take a reasonable guess at, even though there is obviously a chance of being wrong. Certainly my CPA, estate attorney & any wealth advisor I interview (haven't pulled the trigger on that -- expensive!) have all gone out of the way to tell me they believe taxes are headed up in the future.
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Re: Roth conversions... tax speculation?

Post by midareff »

LivingTheDream wrote: Sun Nov 29, 2020 9:51 am I've been trying to get my head around Roth conversions, and understand the rationale. But I am having a hard time with the concept of tax speculation. While taxes are certain, tax rates & rules are not. The general consensus that market timing is bad seems to be in conflict (at least to me) with the general consensus that Roth conversions are good.

The tax-free status of Roth IRAs could conceivably change (admittedly not likely). RMD rates/calculations might change (or I might not live long enough for them to matter). Just because I currently project higher tax rates in the future, isn't that just speculation (similar to market timing)?

I'd appreciate input/feedback/perspectives (I genuinely want to become comfortable with Roth conversions, especially if advantageous... I'm just struggling with assumptions relating to taxes).
IMHO at 73 and in RMD country... if the CARES Act is extended and again includes RMD waiver I will take my regular RMD and more, up to the top of our current tax bracket, and roll it to my Roth (again). .. any money made in the Roth regardless if capital, dividends or capital gains, are now tax exempt when withdraw. That same money made or left in an tIRA, regardless if capital, dividends or capital gains, are taxable when withdrawn. The real question becomes; Will you live long enough for the funds in the Roth to grow beyond what you paid the IRS to move them there? If we assume stock funds grow an average talking head amount of 6% annually, and the conversion is done at a 22% tax rate of AGI, it looks like payback equality at about 3.5 years. If the tax rate is raised a point or two it might take a month or two less for parity. I''m willing to bet I will live longer than 3.5 years from now.
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Re: Roth conversions... tax speculation?

Post by willthrill81 »

LivingTheDream wrote: Sun Nov 29, 2020 9:51 am I've been trying to get my head around Roth conversions, and understand the rationale. But I am having a hard time with the concept of tax speculation. While taxes are certain, tax rates & rules are not. The general consensus that market timing is bad seems to be in conflict (at least to me) with the general consensus that Roth conversions are good.

The tax-free status of Roth IRAs could conceivably change (admittedly not likely). RMD rates/calculations might change (or I might not live long enough for them to matter). Just because I currently project higher tax rates in the future, isn't that just speculation (similar to market timing)?

I'd appreciate input/feedback/perspectives (I genuinely want to become comfortable with Roth conversions, especially if advantageous... I'm just struggling with assumptions relating to taxes).
I don't think that there is any evidence that Roth IRAs are at higher risk of disadvantageous changes to the tax code than any other tax-advantaged account. IIRC, only about 10% of the total amount held in tax-advantaged retirement accounts is in Roth accounts of all forms. The rest is in tax-deferred accounts.

I'm not sure how much we can discuss in this thread without running afoul of forum rules that prohibit speculation about future legislation.
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Re: Roth conversions... tax speculation?

Post by prairieman »

Like many things, it depends on your financial situation. If a person’s taxable portfolio is doubling every ten years then they’ll have 4+ times the taxable income (due to RMDs) in 20 years. Roth conversions make sense in such cases. If, however, they are drawing down through retirement, their taxable income could drop and Roth conversions would be a mistake. Most retirees are somewhere in between these extremes and so it the strategy becomes less obvious.
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Re: Roth conversions... tax speculation?

Post by jeffyscott »

LivingTheDream wrote: Sun Nov 29, 2020 9:51 am I've been trying to get my head around Roth conversions, and understand the rationale. But I am having a hard time with the concept of tax speculation. While taxes are certain, tax rates & rules are not. The general consensus that market timing is bad seems to be in conflict (at least to me) with the general consensus that Roth conversions are good.
Yes, things could change but not converting is a decision that could be wrong to. Without going it to details why, for me converting to top of 12%, seems very likely to be advantageous but going beyond that would be more questionable.
The tax-free status of Roth IRAs could conceivably change (admittedly not likely). RMD rates/calculations might change (or I might not live long enough for them to matter).
If there were a move to change the tax free status, this would presumably apply only to any gains on which taxes have not already been paid. If those gains were to occur in a TIRA, they will also be taxed upon withdrawal by you or your heirs. In addition, perhaps if this were coming you would have time to pull all your Roth money out before it were to go into effect? Note that your heirs would now have to withdraw all the money from IRAs within 10 years of your death, that tends to make converting more likely to be beneficial.
Just because I currently project higher tax rates in the future, isn't that just speculation (similar to market timing)?
I am not converting based on speculation of higher tax rates in the future, I am converting based on assuming tax rates remaining what they are today. I would also consider the tax differential. By this I mean converting at 12% when this is likely to avoid 22% (a 10% differential) but maybe not converting at 22% when this is only likely to avoid 24% (only a 2% differential).
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Re: Roth conversions... tax speculation?

Post by LadyGeek »

A few words about tax speculation - discussions about future legislation is prohibited by forum policy, see: Unacceptable Topics
Politics and Religion

In order to avoid the inevitable frictions that arise from these topics, political or religious posts and comments are prohibited. The only exceptions to this rule are:
  • Common religious expressions such as sending your prayers to an ailing member.
  • Usage of factual and non-derogatory political labels when necessary to the discussion at hand.
  • Discussions about enacted laws or regulations that affect the individual investor. Note that discussions of proposed legislation are prohibited.
  • Proposed regulations that are directly related to investing may be discussed if and when they are published for public comments.
This forum is focused on investing that is directly actionable to personal investors. We don't hold debates on conjecture.

The whole point of the policy is to (1) eliminate contentious disagreements that result from these discussions and (2) keep investors from making bad decisions. Proposed legislation changes many times between the time it's introduced and signed into law.

The best approach is to invest according to current law. When the law changes make a decision at that time.
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teen persuasion
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Re: Roth conversions... tax speculation?

Post by teen persuasion »

Well, we want to do Roth conversions as part of a Roth conversion ladder, to gain access to our tIRA without penalty before 59.5, as well as to shift more of our assets from traditional to Roth over time. For the first 4 years we want to target an AGI under $27k, to make us eligible for auto EFC = 0 for DS5's FAFSA (starting 2 years ahead due to FAFSA using prior-prior year tax returns). This just happens to fall in a range that's essentially federal tax free, due to the standard deduction and some nonrefundable credits (and lots more of them wasted).

So we can Roth convert a bit each year, tax free, over time. Tax free going in, tax free converted, tax free coming out later.

Eventually, we expect mostly bonds left in tIRA, and stocks in Roth IRA, so growth is minimized on the tIRA side when we get to SS+RMD stage.
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Re: Roth conversions... tax speculation?

Post by tibbitts »

LivingTheDream wrote: Sun Nov 29, 2020 9:51 am I've been trying to get my head around Roth conversions, and understand the rationale. But I am having a hard time with the concept of tax speculation. While taxes are certain, tax rates & rules are not. The general consensus that market timing is bad seems to be in conflict (at least to me) with the general consensus that Roth conversions are good.

The tax-free status of Roth IRAs could conceivably change (admittedly not likely). RMD rates/calculations might change (or I might not live long enough for them to matter). Just because I currently project higher tax rates in the future, isn't that just speculation (similar to market timing)?

I'd appreciate input/feedback/perspectives (I genuinely want to become comfortable with Roth conversions, especially if advantageous... I'm just struggling with assumptions relating to taxes).
The fact that you have money to convert is due to the speculation you've already done - that it would be better to pay taxes later than at the time it was earned. You were speculating on rates and rules staying the same or becoming more favorable. Not that we all don't do that and it's not a bad thing necessarily, but Roth conversions are no different. We all just take our best guess at the time and hope things will work out favorably, while in fact the odds are we won't be hugely better or worse off no matter what taxation (among the available choices) we select.
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Re: Roth conversions... tax speculation?

Post by MathWizard »

The only tax change you can plan on within the rules for discussion on this board is the increase from 12% to 15% , 22% to 25% etc in 2026 that are part of the current tax code.

I think that the rules are quite reasonable.

Most people will have the bulk of their tax advantaged in tax deferred.
That is why many on this board advocate some diversity amount tax deferred and Roth.

RMDs , taxability of SS benefits , and the CARES act change that heirs must withdraw from inherited retirement accounts within 10 years , also tip the scales toward Roth.
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Re: Roth conversions... tax speculation?

Post by Tamarind »

Some amount of Roth conversion makes sense if you think that your income or tax bracket will be higher in retirement than they are now, either because you are accumulating a lot in tax deferred accounts or have a reasonable chance of one spouse outliving the other by a lot and spending years filling as single.

This makes sense regardless of whether future tax policy is different from today's. No speculation needed.
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Re: Roth conversions... tax speculation?

Post by 3feetpete »

Many bogleheads do conversions to avoid a tax bomb when RMD's kick in. I did a Roth conversion this year. My intent was to get the regular IRA amount to where the first couple of years of RMD's would be about what I would need to supplement my SS anyway. So roughly 4% of my regular IRA is what I need. This made intuitive sense to me but I confess I didn't run numbers or what if scenarios on it. I have two pots of investments. My regular IRA is sized to supplement my retirement income. My Roth IRA is for the benefit of my successors. And I have a different asset allocation for each pot. My Roth IRA is all stocks to provide maximum growth and will be inherited without any tax liability. It's already grown nicely since I did it in late March after the market had tanked. It's grown by over 50% that will never be taxed. That's the benefit of a Roth.
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Re: Roth conversions... tax speculation?

Post by Nate79 »

No one knows what the future holds, and that is especially true for anything related to taxes. So yes any planning and actions you may take involves a little bit or maybe a lot of speculation. But you can have paralysis by analysis or else you would never make any decisions.
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Re: Roth conversions... tax speculation?

Post by JBTX »

LivingTheDream wrote: Sun Nov 29, 2020 9:51 am I've been trying to get my head around Roth conversions, and understand the rationale. But I am having a hard time with the concept of tax speculation. While taxes are certain, tax rates & rules are not. The general consensus that market timing is bad seems to be in conflict (at least to me) with the general consensus that Roth conversions are good.

The tax-free status of Roth IRAs could conceivably change (admittedly not likely). RMD rates/calculations might change (or I might not live long enough for them to matter). Just because I currently project higher tax rates in the future, isn't that just speculation (similar to market timing)?

I'd appreciate input/feedback/perspectives (I genuinely want to become comfortable with Roth conversions, especially if advantageous... I'm just struggling with assumptions relating to taxes).
When deciding to do a Roth conversion, there are going to be assumptions (speculation) by definition. Overall it is a process of evaluating what your marginal tax rate is now upon conversion vs future marginal tax rate. Predicting the future requires assumptions

- what your income will be
- the amount you have saved up until that point
- how much your investments will grow
- what your cash flow needs may be
- what will the tax code look like.

Obviously the tax code is just one of many assumptions. Of course, you can just assume it (tax code, rates) will be what it is now, because you can't know the future. Or you can look at macroeconomic and political factors and weigh those into your decision. However trying to guess those is virtually impossible.

Personally, I look at things like deficits/debt, unfunded entitlements, etc that that informs my future assumptions, but I realize whatever I assume will be wrong.

Bottom line, if the decision using reasonable assumptions is close to indifferent or favoring Roth, or I'll err towards Roth

I do think some diversification in both is warranted in many cases, unless you are in the highest tax brackets, where I'd still favor traditional.
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Re: Roth conversions... tax speculation?

Post by Peter Foley »

While Roth conversions are certainly related to expectations, expectations are not the same as speculation.

That issue aside. Having some of one's savings in a Roth allows for flexibility in terms of taxes and spending during one's withdrawal phase.
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Re: Roth conversions... tax speculation?

Post by aristotelian »

It would also be speculation to assume that tax rates are going up or going down. Seems to me the least speculative option is to assume they are staying the same.
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Re: Roth conversions... tax speculation?

Post by LivingTheDream »

LadyGeek wrote: Sun Nov 29, 2020 11:17 am A few words about tax speculation - discussions about future legislation is prohibited by forum policy, see: Unacceptable Topics
Politics and Religion

In order to avoid the inevitable frictions that arise from these topics, political or religious posts and comments are prohibited. The only exceptions to this rule are:
  • Common religious expressions such as sending your prayers to an ailing member.
  • Usage of factual and non-derogatory political labels when necessary to the discussion at hand.
  • Discussions about enacted laws or regulations that affect the individual investor. Note that discussions of proposed legislation are prohibited.
  • Proposed regulations that are directly related to investing may be discussed if and when they are published for public comments.
This forum is focused on investing that is directly actionable to personal investors. We don't hold debates on conjecture.

The whole point of the policy is to (1) eliminate contentious disagreements that result from these discussions and (2) keep investors from making bad decisions. Proposed legislation changes many times between the time it's introduced and signed into law.

The best approach is to invest according to current law. When the law changes make a decision at that time.
LadyGeek,
Thanks for the cautionary note. I wasn't trying to discuss tax legislation, so my note was probably poorly worded. I'll monitor more closely in the future.
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Re: Roth conversions... tax speculation?

Post by LivingTheDream »

jeffyscott wrote: Sun Nov 29, 2020 10:44 am
LivingTheDream wrote: Sun Nov 29, 2020 9:51 am I've been trying to get my head around Roth conversions, and understand the rationale. But I am having a hard time with the concept of tax speculation. While taxes are certain, tax rates & rules are not. The general consensus that market timing is bad seems to be in conflict (at least to me) with the general consensus that Roth conversions are good.
Yes, things could change but not converting is a decision that could be wrong to. Without going it to details why, for me converting to top of 12%, seems very likely to be advantageous but going beyond that would be more questionable.
The tax-free status of Roth IRAs could conceivably change (admittedly not likely). RMD rates/calculations might change (or I might not live long enough for them to matter).
If there were a move to change the tax free status, this would presumably apply only to any gains on which taxes have not already been paid. If those gains were to occur in a TIRA, they will also be taxed upon withdrawal by you or your heirs. In addition, perhaps if this were coming you would have time to pull all your Roth money out before it were to go into effect? Note that your heirs would now have to withdraw all the money from IRAs within 10 years of your death, that tends to make converting more likely to be beneficial.
Just because I currently project higher tax rates in the future, isn't that just speculation (similar to market timing)?
I am not converting based on speculation of higher tax rates in the future, I am converting based on assuming tax rates remaining what they are today. I would also consider the tax differential. By this I mean converting at 12% when this is likely to avoid 22% (a 10% differential) but maybe not converting at 22% when this is only likely to avoid 24% (only a 2% differential).
JeffyScott,
Good points.
I'm currently in the 0% tax bracket & receiving APTCs (about $18k a year). A couple of years into retirement at 54/55, living off LTCG from After-Tax account within the 0% CG tax rate. My current concerns are bumping into a higher tax rate (any), and potentially losing APTCs. While I have enough in After-Tax accounts to easily carry me to 65+, I'm concerned about the tIRA growing to a size that would eventually push RMDs into higher (much higher?) tax rate. My current thoughts are to wait until the APTCs go away (either through legislation or when Medicare begins) & then evaluate potential Roth conversions (or simply drawing down tIRAs for expenses from 65 forward).
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Re: Roth conversions... tax speculation?

Post by LivingTheDream »

MathWizard wrote: Sun Nov 29, 2020 11:59 am The only tax change you can plan on within the rules for discussion on this board is the increase from 12% to 15% , 22% to 25% etc in 2026 that are part of the current tax code.

I think that the rules are quite reasonable.

Most people will have the bulk of their tax advantaged in tax deferred.
That is why many on this board advocate some diversity amount tax deferred and Roth.

RMDs , taxability of SS benefits , and the CARES act change that heirs must withdraw from inherited retirement accounts within 10 years , also tip the scales toward Roth.
MathWizard,
Good points about focusing on current brackets (others agreed).
I also agree with points about heirs (& would prefer to leave After-Tax (either Roth or Taxable accounts).
For me, most of my money (about 2/3) is in After-Tax so the value in tIRA might not end up being problematic.
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Re: Roth conversions... tax speculation?

Post by LivingTheDream »

Nate79 wrote: Sun Nov 29, 2020 10:07 pm No one knows what the future holds, and that is especially true for anything related to taxes. So yes any planning and actions you may take involves a little bit or maybe a lot of speculation. But you can have paralysis by analysis or else you would never make any decisions.
Nate79,
Good point about "paralysis by analysis"... I definitely fall into this category.
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Re: Roth conversions... tax speculation?

Post by LivingTheDream »

3feetpete wrote: Sun Nov 29, 2020 7:56 pm Many bogleheads do conversions to avoid a tax bomb when RMD's kick in. I did a Roth conversion this year. My intent was to get the regular IRA amount to where the first couple of years of RMD's would be about what I would need to supplement my SS anyway. So roughly 4% of my regular IRA is what I need. This made intuitive sense to me but I confess I didn't run numbers or what if scenarios on it. I have two pots of investments. My regular IRA is sized to supplement my retirement income. My Roth IRA is for the benefit of my successors. And I have a different asset allocation for each pot. My Roth IRA is all stocks to provide maximum growth and will be inherited without any tax liability. It's already grown nicely since I did it in late March after the market had tanked. It's grown by over 50% that will never be taxed. That's the benefit of a Roth.
3FeetPete,
I like your thoughts about trying to quantify the "acceptable" tIRA value (RMDs covering spending gap). I'll have to run some numbers (yes, speculate :D ) to see where I project to be.
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Re: Roth conversions... tax speculation?

Post by jeffyscott »

LivingTheDream wrote: Mon Nov 30, 2020 9:21 am
jeffyscott wrote: Sun Nov 29, 2020 10:44 am
LivingTheDream wrote: Sun Nov 29, 2020 9:51 am I've been trying to get my head around Roth conversions, and understand the rationale. But I am having a hard time with the concept of tax speculation. While taxes are certain, tax rates & rules are not. The general consensus that market timing is bad seems to be in conflict (at least to me) with the general consensus that Roth conversions are good.
Yes, things could change but not converting is a decision that could be wrong to. Without going it to details why, for me converting to top of 12%, seems very likely to be advantageous but going beyond that would be more questionable.
The tax-free status of Roth IRAs could conceivably change (admittedly not likely). RMD rates/calculations might change (or I might not live long enough for them to matter).
If there were a move to change the tax free status, this would presumably apply only to any gains on which taxes have not already been paid. If those gains were to occur in a TIRA, they will also be taxed upon withdrawal by you or your heirs. In addition, perhaps if this were coming you would have time to pull all your Roth money out before it were to go into effect? Note that your heirs would now have to withdraw all the money from IRAs within 10 years of your death, that tends to make converting more likely to be beneficial.
Just because I currently project higher tax rates in the future, isn't that just speculation (similar to market timing)?
I am not converting based on speculation of higher tax rates in the future, I am converting based on assuming tax rates remaining what they are today. I would also consider the tax differential. By this I mean converting at 12% when this is likely to avoid 22% (a 10% differential) but maybe not converting at 22% when this is only likely to avoid 24% (only a 2% differential).
JeffyScott,
Good points.
I'm currently in the 0% tax bracket & receiving APTCs (about $18k a year). A couple of years into retirement at 54/55, living off LTCG from After-Tax account within the 0% CG tax rate. My current concerns are bumping into a higher tax rate (any), and potentially losing APTCs. While I have enough in After-Tax accounts to easily carry me to 65+, I'm concerned about the tIRA growing to a size that would eventually push RMDs into higher (much higher?) tax rate. My current thoughts are to wait until the APTCs go away (either through legislation or when Medicare begins) & then evaluate potential Roth conversions (or simply drawing down tIRAs for expenses from 65 forward).
Losing a portion of the health insurance tax credit can be equivalent to about a 10% tax rate. So were I in that situation, I might want to keep income out of the range where it's equivalent to an 8-10% tax rate. And you certainly would not want to go over the cliff.

Taxation of SS benefits is another thing that complicates this decision for some. We are not collecting yet, but it will not be much of a factor, since pensions and RMDs pretty much guarantee that 85% of our SS benefits will be taxed.

At retirement we had about 67% tax deferred, 24% Roth (and HSA), the remaining 9% taxable was mostly I and EE bonds. I was quite sure that without Roth conversions, RMDs would someday be in the current 22% bracket. And it also seemed that even with converting to the top of 12% bracket (or 0% cap gains bracket) every year, they might still reach the 22% bracket. Plus when there is a sole survivor the 22% bracket will be unavoidable. It is also certain that RMDs will never be below the current 12% bracket, due to pensions and SS.

After three years of conversions and market action, we now have 56% tax deferred, 39% Roth (and HSA). We have spent only from taxable (cashed in most I bonds), with a lot of that "spending" being paying tax on Roth conversions and adding to HSA.
The two greatest enemies of the equity fund investor are expenses and emotions. ― John C. Bogle
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Re: Roth conversions... tax speculation?

Post by ralph124cf »

For someone having a low to moderate six figure income, Federal income tax rates are the lowest that we have seen in the last 100 years.

Current tax law already has a snap back to the 2017 rates in 2026.

I am cramming all I can from TIRA conversions to Roth while avoiding the relevant IRMAA cliff.

Ralph
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Re: Roth conversions... tax speculation?

Post by TonyDAntonio »

In my case there isn't much 'timing' going on. I'm 61 and have no earned income. I live off a small pension and dividends. When I hit RMD age my IRA withdrawals plus my social security (taken at age 70) will almost assuredly put me in a higher tax bracket than I'm in now. So I move money from my IRA to my Roth and pay taxes now. I don't move a bunch and I don't worry about getting this exactly right. It doesn't seem close to tax timing to me.
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Re: Roth conversions... tax speculation?

Post by corn18 »

3feetpete wrote: Sun Nov 29, 2020 7:56 pm Many bogleheads do conversions to avoid a tax bomb when RMD's kick in. I did a Roth conversion this year. My intent was to get the regular IRA amount to where the first couple of years of RMD's would be about what I would need to supplement my SS anyway. So roughly 4% of my regular IRA is what I need. This made intuitive sense to me but I confess I didn't run numbers or what if scenarios on it. I have two pots of investments. My regular IRA is sized to supplement my retirement income. My Roth IRA is for the benefit of my successors. And I have a different asset allocation for each pot. My Roth IRA is all stocks to provide maximum growth and will be inherited without any tax liability. It's already grown nicely since I did it in late March after the market had tanked. It's grown by over 50% that will never be taxed. That's the benefit of a Roth.
This is my situation. I can convert in the 12% tax bracket from age 55-72 or I can do nothing and then get hit with 22% taxes on my RMDs. No speculation, required. My COLA pension + SS puts me in the 22% tax bracket. Doesn't matter if they change the rates or cut points, I will pay higher taxes on my RMDs than I would on my conversions. Even if the conversions just went into a taxable account, I would still do them. Nice that they can sit in a Roth that my heirs can spend tax free.
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Re: Roth conversions... tax speculation?

Post by RetiredAL »

I convert because when death to one of us happens, the survivor's tax bill will be greatly higher, approaching 2x, thanks to a combination of the SS Hump and hitting higher tax brackets sooner.

That is not speculation, that is a fact.

It does pain me to pay 22% to convert money that only had a 15% deduction, but there is nothing I can do about that. I can only look ahead to what the survivor's tax rate and total tax bill with be and manage that.

I did yearly max fund our ROTHs almost from their beginning, and ROTH 401K came along too late.
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Re: Roth conversions... tax speculation?

Post by MathWizard »

LivingTheDream wrote: Mon Nov 30, 2020 9:26 am
MathWizard wrote: Sun Nov 29, 2020 11:59 am The only tax change you can plan on within the rules for discussion on this board is the increase from 12% to 15% , 22% to 25% etc in 2026 that are part of the current tax code.

I think that the rules are quite reasonable.

Most people will have the bulk of their tax advantaged in tax deferred.
That is why many on this board advocate some diversity amount tax deferred and Roth.

RMDs , taxability of SS benefits , and the CARES act change that heirs must withdraw from inherited retirement accounts within 10 years , also tip the scales toward Roth.
MathWizard,
Good points about focusing on current brackets (others agreed).
I also agree with points about heirs (& would prefer to leave After-Tax (either Roth or Taxable accounts).
For me, most of my money (about 2/3) is in After-Tax so the value in tIRA might not end up being problematic.
I'm impressed that you were able to get so much in after-tax.

I'm only about 30% after tax.

I assume that given the large difference in contribution limits , that much of your after tax is in taxable.
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Re: Roth conversions... tax speculation?

Post by rkhusky »

RetiredAL wrote: Mon Nov 30, 2020 4:05 pm I convert because when death to one of us happens, the survivor's tax bill will be greatly higher, approaching 2x, thanks to a combination of the SS Hump and hitting higher tax brackets sooner.

That is not speculation, that is a fact.

It does pain me to pay 22% to convert money that only had a 15% deduction, but there is nothing I can do about that. I can only look ahead to what the survivor's tax rate and total tax bill with be and manage that.

I did yearly max fund our ROTHs almost from their beginning, and ROTH 401K came along too late.
I would only use the single tax brackets in the calculation if one of you was not in good health and expected to die early.
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LivingTheDream
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Re: Roth conversions... tax speculation?

Post by LivingTheDream »

MathWizard wrote: Mon Nov 30, 2020 4:08 pm
I'm impressed that you were able to get so much in after-tax.

I'm only about 30% after tax.

I assume that given the large difference in contribution limits , that much of your after tax is in taxable.
I meant taxable (I struggle with after-tax vs taxable)
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MathWizard
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Re: Roth conversions... tax speculation?

Post by MathWizard »

LivingTheDream wrote: Mon Nov 30, 2020 5:36 pm
MathWizard wrote: Mon Nov 30, 2020 4:08 pm
I'm impressed that you were able to get so much in after-tax.

I'm only about 30% after tax.

I assume that given the large difference in contribution limits , that much of your after tax is in taxable.
I meant taxable (I struggle with after-tax vs taxable)
You are right that taxable is after tax. Gains are taxable though, unlike Roth.

You have done a good job in savings.
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FIREchief
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Re: Roth conversions... tax speculation?

Post by FIREchief »

midareff wrote: Sun Nov 29, 2020 10:19 am The real question becomes; Will you live long enough for the funds in the Roth to grow beyond what you paid the IRS to move them there? If we assume stock funds grow an average talking head amount of 6% annually, and the conversion is done at a 22% tax rate of AGI, it looks like payback equality at about 3.5 years. If the tax rate is raised a point or two it might take a month or two less for parity. I''m willing to bet I will live longer than 3.5 years from now.
:confused

Is it just me?
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
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Re: Roth conversions... tax speculation?

Post by MathIsMyWayr »

corn18 wrote: Mon Nov 30, 2020 3:49 pm
3feetpete wrote: Sun Nov 29, 2020 7:56 pm Many bogleheads do conversions to avoid a tax bomb when RMD's kick in. I did a Roth conversion this year. My intent was to get the regular IRA amount to where the first couple of years of RMD's would be about what I would need to supplement my SS anyway. So roughly 4% of my regular IRA is what I need. This made intuitive sense to me but I confess I didn't run numbers or what if scenarios on it. I have two pots of investments. My regular IRA is sized to supplement my retirement income. My Roth IRA is for the benefit of my successors. And I have a different asset allocation for each pot. My Roth IRA is all stocks to provide maximum growth and will be inherited without any tax liability. It's already grown nicely since I did it in late March after the market had tanked. It's grown by over 50% that will never be taxed. That's the benefit of a Roth.
This is my situation. I can convert in the 12% tax bracket from age 55-72 or I can do nothing and then get hit with 22% taxes on my RMDs. No speculation, required. My COLA pension + SS puts me in the 22% tax bracket. Doesn't matter if they change the rates or cut points, I will pay higher taxes on my RMDs than I would on my conversions. Even if the conversions just went into a taxable account, I would still do them. Nice that they can sit in a Roth that my heirs can spend tax free.
+1.
Personal finance is plagued with fancy words which make simple things look complicated. Roth conversion is nothing but withdrawing money from tIRA in a sequence which is expected to be most tax efficient. Since there are always unknowns, a certain amount of speculation is involved, but not 100% speculation. You may claim tomorrow is 100% speculation. You never know you will be a new CEO of Tesla when you wake up tomorrow.
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Re: Roth conversions... tax speculation?

Post by JoMoney »

LivingTheDream wrote: Sun Nov 29, 2020 9:51 am...the general consensus that Roth conversions are good...
I haven't found that to be the case. While there certainly are circumstances where it makes sense, pre-paying taxes, especially if you're still earning income and it would be at the top of your current tax bracket, doesn't sound like a good idea to me.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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Monster99
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Re: Roth conversions... tax speculation?

Post by Monster99 »

You also have to be careful about LTCG and qualified dividends - if you are close to the top of the 12% bracket, the conversion may "push" some 0% taxed income into the 15% area and turn out to be a combined tax rate of 27% (12% + 15%) for the conversion.....
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Re: Roth conversions... tax speculation?

Post by RetiredCSProf »

I am 72 and stepped up my Roth conversions this year due to passage of the SECURE ACT in Dec 2019 and subsequent loss of the "stretch" IRA to non-spousal beneficiaries.
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Re: Roth conversions... tax speculation?

Post by Exchme »

In the simulations I ran, the key issue is Roth conversions can be a bad idea if the market subsequently has a big downturns and stays down for an extended period. Then you've managed to increase your early year taxes and maybe lifetime taxes in the very worst scenarios where you need to preserve capital. So no politicians needed to create a risk.
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Re: Roth conversions... tax speculation?

Post by celia »

JoMoney wrote: Mon Nov 30, 2020 8:45 pm
LivingTheDream wrote: Sun Nov 29, 2020 9:51 am...the general consensus that Roth conversions are good...
I haven't found that to be the case. While there certainly are circumstances where it makes sense, pre-paying taxes, especially if you're still earning income and it would be at the top of your current tax bracket, doesn't sound like a good idea to me.
I was in that situation (higher income for me, still working) and it made perfect sense for us in 2008. I took advantage of the market crash as it was going down and converted 10% of our tIRAs every few weeks. The final conversion was on the day the DOW hit its lowest (but it went a little lower in early 2009). In effect, I converted most of our shares when they were half price or 60% of previous price. I didn’t care if my tax bracket was higher since once the shares rebounded to their previous high value, it was as if I paid half price on the Roth conversion taxes. (The higher your tax bracket, the more you “saved”.)

Of course, we could recharacterize back then, so some of the earliest Roth conversions were “un-done”, since we couldn’t afford all the taxes at once.

To clarify the “consensus”, it is qualified in that Roth conversions are good in the right circumstances...
Last edited by celia on Wed Dec 02, 2020 10:11 pm, edited 1 time in total.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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Re: Roth conversions... tax speculation?

Post by willthrill81 »

FIREchief wrote: Mon Nov 30, 2020 8:33 pm
midareff wrote: Sun Nov 29, 2020 10:19 am The real question becomes; Will you live long enough for the funds in the Roth to grow beyond what you paid the IRS to move them there? If we assume stock funds grow an average talking head amount of 6% annually, and the conversion is done at a 22% tax rate of AGI, it looks like payback equality at about 3.5 years. If the tax rate is raised a point or two it might take a month or two less for parity. I''m willing to bet I will live longer than 3.5 years from now.
:confused

Is it just me?
Yeah, that makes no sense to me either. In most situations, you only do a Roth conversion when your current tax rate is the same or lower than your future tax rate, so you're doing it to save money. The time involved is completely irrelevant; as we say very often, you must compare your current tax rate to your future tax rate.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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JoMoney
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Re: Roth conversions... tax speculation?

Post by JoMoney »

celia wrote: Wed Dec 02, 2020 10:01 pm
JoMoney wrote: Mon Nov 30, 2020 8:45 pm
LivingTheDream wrote: Sun Nov 29, 2020 9:51 am...the general consensus that Roth conversions are good...
I haven't found that to be the case. While there certainly are circumstances where it makes sense, pre-paying taxes, especially if you're still earning income and it would be at the top of your current tax bracket, doesn't sound like a good idea to me.
I was in that situation (higher income for me, still working) and it made perfect sense for us in 2008. I took advantage of the market crash as it was going down and converted 10% of our tIRAs every few weeks. The final conversion was on the day the DOW hit its lowest (but it went a little lower in early 2009). In effect, I converted most of our shares when they were half price or 60% of previous price. I didn’t care if my tax bracket was higher since once the shares rebounded to their previous high value, it was as if I paid half price on the higher taxes.

Of course, we could recharacterize back then, so some of the earliest Roth conversions were “un-done”, since we couldn’t afford all the taxes at once.

To clarify the “consensus”, it is qualified in that Roth conversions are good in the right circumstances...
I'm glad it worked out, it would have been especially ugly if you were invested in something that didn't recover, not only paid avoidable taxes but lost on the investment as well.
As you pointed out though, that was a special "situation" and not something you would have generally done if you didn't think it was opportunity. :wink:
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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celia
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Re: Roth conversions... tax speculation?

Post by celia »

FIREchief wrote: Mon Nov 30, 2020 8:33 pm
midareff wrote: Sun Nov 29, 2020 10:19 am The real question becomes; Will you live long enough for the funds in the Roth to grow beyond what you paid the IRS to move them there? If we assume stock funds grow an average talking head amount of 6% annually, and the conversion is done at a 22% tax rate of AGI, it looks like payback equality at about 3.5 years. If the tax rate is raised a point or two it might take a month or two less for parity. I''m willing to bet I will live longer than 3.5 years from now.
:confused

Is it just me?
Of course, it doesn’t make sense because you (or your heirs) have to pay the deferred taxes eventually. (That’s what you agreed to do when you contributed to the account.) It is your choice when to pay the taxes that are still owed (within the IRS rules).

Sorry, but a “break-even point” doesn’t apply here.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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