How do I tell if Roth conversions are worth the trouble?

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Horsefly
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Location: Colorado, mostly

How do I tell if Roth conversions are worth the trouble?

Post by Horsefly » Mon May 21, 2018 9:37 pm

Greetings all. Although I didn't actually find this site until after I retired, I'm finding I'm aligned with most of the BH way. I'm now trying to figure out some stuff, for which I think I need some help.

I'd like to discuss notional numbers, rather than expose all my real numbers.

My wife and I both retired at age 55, and are both now 60. Our combined rIRA, tIRA, and taxable assets make it so we would be hard pressed to spend more than about 2%-2.5% each year (based on current values). So I'm not too worried about making it all work. However, I'd like to not have lots of self-inflicted wounds along the way, especially in taxes.

Here's the issue: We have too much in tIRA, and I'm concerned that our RMDs ten years from now may push us into a tax bracket that I don't want to be in. Most of my fear is also tied to my belief that tax rates are likely to go up (I'm working hard to avoid getting the thread locked because of speculation, so I won't elaborate).

In rough terms, we currently have about 70% in tIRAs, 6% in rIRAs, and 24% in taxable.

My goal was to do Roth conversions every year after we retired, and hopefully make the future RMD tax issue not so bad. I couldn't do it the first year of retirement due to deferred salary, but we did it for the last four years. However, I've constrained myself to stay within the same tax bracket, which has held me to relatively small conversions.

So far this feels rather futile. I know it is largely an emotional thing, but it's painful to pay taxes for something I got not benefit from, at least in the year I paid it. Meanwhile my tIRA is growing at the same rate percentage-wise as my rIRA, so I'm not really making an impact.

Now with the ridiculously large 24% tax bracket (which I'm already in), I can actually do a larger conversion this year, and maybe for a few years. More taxes now, but I'm not sure I am lowering my taxes later. Sigh....

I know this is all a great problem to have, but my emotional/short-term-pain-hating self needs some unemotional advice: Is it worth it to try and continue doing Roth conversions now, not knowing what taxes will be in the future, or should I just ignore it, knowing that I can almost certainly afford to pay the taxes at that future date?

I will say that I followed the whole thread of "Why do so many people quote 'You will likely be in a lower tax bracket in retirement'" (viewtopic.php?p=3938233) but that thread seemed to zig and zag quite a bit, and mostly didn't answer the question. I've also searched around the board, but maybe I can't find something that feels enough like my problem.

Thanks in advance for any thoughts!

go_mets
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Re: How do I tell if Roth conversions are worth the trouble?

Post by go_mets » Mon May 21, 2018 10:36 pm


Horsefly
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Joined: Sat Oct 24, 2015 8:13 am
Location: Colorado, mostly

Re: How do I tell if Roth conversions are worth the trouble?

Post by Horsefly » Mon May 21, 2018 10:55 pm

go_mets wrote:
Mon May 21, 2018 10:36 pm
have you read viewtopic.php?f=2&t=87471
Yeah, I've read it before, but I'll go through it again. Seemed like it had lots of stuff that I couldn't relate to, from what I remember.

Thanks though. I'll re-read it.

ejm009
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Re: How do I tell if Roth conversions are worth the trouble?

Post by ejm009 » Mon May 21, 2018 11:27 pm

Horsefly, the online tool ORP provides a methodology to analyze this question.
Please see
https://www.i-orp.com/InfezMsg/extended.html

Horsefly
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Re: How do I tell if Roth conversions are worth the trouble?

Post by Horsefly » Mon May 21, 2018 11:51 pm

ejm009 wrote:
Mon May 21, 2018 11:27 pm
Horsefly, the online tool ORP provides a methodology to analyze this question.
Please see
https://www.i-orp.com/InfezMsg/extended.html
Funny, I was just trying to use iORP again today. When I put in my numbers and selected the 24% tax bracket, it errored out. The error was "model x will not solve, possibly because your Roth conversion tax bracket limit may be over-constricting your taxable income." I tried it several ways, but couldn't get it to work. The only way I could get it to not fail was to use a higher tax bracket, which in turn gave me a much higher tax bill. Like I said, I'm trying to see what I can do within the now much broader 24% bracket.

I sent an email to the developer, but the fact that it couldn't help me was one of the reasons I threw up my hands and decided to post here.

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FiveK
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Re: How do I tell if Roth conversions are worth the trouble?

Post by FiveK » Tue May 22, 2018 1:49 am

Horsefly wrote:
Mon May 21, 2018 9:37 pm
I'm concerned that our RMDs ten years from now may push us into a tax bracket that I don't want to be in.
...
However, I've constrained myself to stay within the same tax bracket [when doing Roth conversions], which has held me to relatively small conversions.
Your concern may be valid and if so, it's probably best not to over-constrain yourself now.

E.g., it may benefit you to take money out of taxable and put it into Roth (in effect) by paying the tax on Roth conversions from cash on hand instead of from the converted funds.

Conversions will be beneficial now if they are done at tax rates less than (or equal to, if the tax is paid from taxable funds) the tax rates you pay in the future. So yes, some guesswork is involved.

The Wizard
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Re: How do I tell if Roth conversions are worth the trouble?

Post by The Wizard » Tue May 22, 2018 2:57 am

I would worry less about tax BRACKETS and more about taxable income and net income taxes owed.
What I do is focus on my AGI, which is the dollar amount at the bottom of the front page on your form 1040.

Using a spreadsheet, I project my annual income (AGI) for each year out to age 74 or so, starting originally when I retired at age 63.
I have different income streams that start at different times, including SS and RMDs starting in 2020 at age 70.
I do Roth conversions to bring my AGI up close to, but not over what my AGI is projected to be in 2020.
And I update my projections each January.

So, as an example, if your AGI is projected to be $100k at age 70, then use Roth conversions this year to get that AGI up to maybe $90k...
Last edited by The Wizard on Tue May 22, 2018 4:19 am, edited 1 time in total.
Attempted new signature...

Longdog
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Re: How do I tell if Roth conversions are worth the trouble?

Post by Longdog » Tue May 22, 2018 3:55 am

What type of income is putting you into the 24% bracket? Is there any way to restructure your entire portfolio while keeping the same asset allocation, so that the dominant source of taxable income is contained within your pre-tax IRA? For example, if you have substantial interest income from CDs, perhaps you could sell them and increase your equity in taxable accounts, while simultaneously moving from stocks to fixed income in your IRA. That could give you more space for conversions at the same tax bracket.
Steve

motorcyclesarecool
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Re: How do I tell if Roth conversions are worth the trouble?

Post by motorcyclesarecool » Tue May 22, 2018 5:10 am

Actuarially speaking, it is likely that you will wind up predeceasing your wife. In which case she’d be taking the same RMDs but without the benefit of the married-filing-jointly tax brackets. It may be worthwhile to see in what bracket your surviving spouse would be with RMDs, and convert up to that point. It may well be worth paying more now to relieve your survivor from paying a lot more later.

Have you considered buying a High Deductible Health Plan so that you can contribute to his and hers HSAs? That would allow you to protect $8900 per year ($6900 plus two $1000 catch-ups) from RMDs, and you wouldn’t have to pay federal taxes on the “conversion”. (Also tax free in most states)

Have you considered adjusting your asset allocation so that you keep your most productive assets in Roth and your stabilizing assets in Traditional?
Understand that choosing an HDHP is very much a "red pill" approach. Most would rather pay higher premiums for a $20 copay per visit. They will think you weird for choosing an HSA.

smitcat
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Re: How do I tell if Roth conversions are worth the trouble?

Post by smitcat » Tue May 22, 2018 6:14 am

Horsefly wrote:
Mon May 21, 2018 11:51 pm
ejm009 wrote:
Mon May 21, 2018 11:27 pm
Horsefly, the online tool ORP provides a methodology to analyze this question.
Please see
https://www.i-orp.com/InfezMsg/extended.html
Funny, I was just trying to use iORP again today. When I put in my numbers and selected the 24% tax bracket, it errored out. The error was "model x will not solve, possibly because your Roth conversion tax bracket limit may be over-constricting your taxable income." I tried it several ways, but couldn't get it to work. The only way I could get it to not fail was to use a higher tax bracket, which in turn gave me a much higher tax bill. Like I said, I'm trying to see what I can do within the now much broader 24% bracket.

I sent an email to the developer, but the fact that it couldn't help me was one of the reasons I threw up my hands and decided to post here.
I have never had a problem with IORP but without more detailed information there is no way someone else can relate or try to help.
After using IORP to get a good quick feel on what we want to do we then use the RPM spreadsheet/calculator which takes longer to use but outputs greater detail and is more helpful for us. It does take longer to use it and understand all the details but it is specifically good with the Roth conversion decisions.

noupdjm
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Re: How do I tell if Roth conversions are worth the trouble?

Post by noupdjm » Tue May 22, 2018 6:34 am

Horsefly:
Similar to another reply, I recommend developing a spreadsheet to look at your income (or AGI) each year through the beginning of your RMDs. I put together something like that which also included a federal tax calculation. Of course, the rates / brackets may change, but you can only include the facts as you know them, AND also tweak to see how much impact various changes may have on your overall calculations. Once you have this pretty well developed, then you can run different scenarios to see what the impact is on your taxes.

For example, I ran:
1) 1 scenario with NO roth conversions,
1 just filling up whatever tax bracket I was in, 1 converting my entire 401k to roth before RMDs, etc. You can do this to your heart's content and compare what the landscape looks like. THEN you can see the impact on your overall taxes, your yearly taxes, your potential bequests to your children, etc.

noupdjm
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Re: How do I tell if Roth conversions are worth the trouble?

Post by noupdjm » Tue May 22, 2018 6:41 am

Sorry - I inadvertently posted my reply before I was done . . .

For example, I ran:
1) 1 scenario with NO roth conversions,
2) 1 just filling up whatever tax bracket I was in,
3) 1 converting my entire 401k to roth before RMDs, etc.

You can do this to your heart's content and compare what the landscape looks like. You can look at which results in the overall least taxes, which results in the most total account growth (roth, tIRA, etc), which results in the most overall income, which years have how much tax, etc.

THEN you can see the impact on your overall taxes, your yearly taxes, your potential bequests to your children, etc. It takes a little while to get the spreadsheet just where you want it, but once you do it is a valuable tool. Of course, changes to tax laws, income status, etc. throw it out of whack, but it still makes sense to make your decisions with the best facts you have at hand. Also, as you say, you are likely going to be OK no matter which path you choose. In my case, I still like to believe that I'm making my choices with the best info at hand. . .

Silk McCue
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Re: How do I tell if Roth conversions are worth the trouble?

Post by Silk McCue » Tue May 22, 2018 6:52 am

Horsefly wrote:
Mon May 21, 2018 11:51 pm
ejm009 wrote:
Mon May 21, 2018 11:27 pm
Horsefly, the online tool ORP provides a methodology to analyze this question.
Please see
https://www.i-orp.com/InfezMsg/extended.html
Funny, I was just trying to use iORP again today. When I put in my numbers and selected the 24% tax bracket, it errored out. The error was "model x will not solve, possibly because your Roth conversion tax bracket limit may be over-constricting your taxable income." I tried it several ways, but couldn't get it to work. The only way I could get it to not fail was to use a higher tax bracket, which in turn gave me a much higher tax bill. Like I said, I'm trying to see what I can do within the now much broader 24% bracket.

I sent an email to the developer, but the fact that it couldn't help me was one of the reasons I threw up my hands and decided to post here.
I'm pretty much certain you always have to allow i-ORP to go up at least one higher bracket. By paying more in taxes at a higher percentage at the beginning of a 30 year retirement you may avoid paying even more taxes on an ever increasing tax deferred account. Let i-ORP do its thing and calculate its best possible outcome for you over your entire life. You should also run unlimited conversions so that it won't be constrained and can determine what it finds to be optimal. Bottom line don't just let the concept of higher taxes earlier miss the possibility of long term benefit.

Cheers

cherijoh
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Re: How do I tell if Roth conversions are worth the trouble?

Post by cherijoh » Tue May 22, 2018 7:51 am

Horsefly wrote:
Mon May 21, 2018 9:37 pm
My wife and I both retired at age 55, and are both now 60. Our combined rIRA, tIRA, and taxable assets make it so we would be hard pressed to spend more than about 2%-2.5% each year (based on current values). So I'm not too worried about making it all work. However, I'd like to not have lots of self-inflicted wounds along the way, especially in taxes.

Here's the issue: We have too much in tIRA, and I'm concerned that our RMDs ten years from now may push us into a tax bracket that I don't want to be in. Most of my fear is also tied to my belief that tax rates are likely to go up (I'm working hard to avoid getting the thread locked because of speculation, so I won't elaborate).

In rough terms, we currently have about 70% in tIRAs, 6% in rIRAs, and 24% in taxable.

My goal was to do Roth conversions every year after we retired, and hopefully make the future RMD tax issue not so bad. I couldn't do it the first year of retirement due to deferred salary, but we did it for the last four years. However, I've constrained myself to stay within the same tax bracket, which has held me to relatively small conversions.

So far this feels rather futile. I know it is largely an emotional thing, but it's painful to pay taxes for something I got not benefit from, at least in the year I paid it. Meanwhile my tIRA is growing at the same rate percentage-wise as my rIRA, so I'm not really making an impact.

Now with the ridiculously large 24% tax bracket (which I'm already in), I can actually do a larger conversion this year, and maybe for a few years. More taxes now, but I'm not sure I am lowering my taxes later. Sigh....

I know this is all a great problem to have, but my emotional/short-term-pain-hating self needs some unemotional advice: Is it worth it to try and continue doing Roth conversions now, not knowing what taxes will be in the future, or should I just ignore it, knowing that I can almost certainly afford to pay the taxes at that future date?
Is your income coming from a pension or is it being generated as interest, dividends and capital gains from your taxable accounts?

What is your overall asset allocation (% stocks/%bonds)? Are you using the same AA across all your accounts? I think this may be part of the issue, since you mention that your traditional account is keeping pace with the Roth. Check out this article on tax-efficient placement in the Wiki.

I am of a similar age but just retired this year. However, while my overall AA is around 60/40, the AA in my tIRA+401k combined is only around 30/70. Traditional has been growing much more slowly than my taxable and Roth accounts which are almost exclusively stocks. (I do have 2 - 2.5 years living expenses in cash equivalents outside of retirement accts to dampen sequence of return risk). I took the opportunity to do some Roth conversions between 2007 - 2009 (paying the taxes out of taxable), so my Roth % is now up to around 12% of my total assets. Even though the conversion amounts were very small, they rebounded nicely in the Roth during this long bull market since it was 100% in stock index funds.

If we ever get the significant correction in the stock market that I have been expecting for the last several years, I'll be doing a big Roth conversion even if it pushes me into the next highest tax bracket. Rather than trying to convert my entire traditional account, my goal is to convert at least the rest of my stock allocation. I don't expect to be able to convert the entire balance of traditional to Roth.

If you have a charitable bent, you could also consider setting up a donor advised fund (DAF) and seed it with ten years worth of charitable deductions that can be distributed gradually. This would likely allow you to itemize (rather than claim the new larger standard deduction) and give you extra head room for Roth Conversions in the year you fund the DAF. The reason I suggest 10 years of contributions is that once you hid RMDs, you can make a qualified charitable distribution (QCD) with some (or all) of the money that would otherwise have been your RMD. This allows you to avoid taxes on the amount of the QCD.

Another factor to consider when sizing you Roth Conversions is the surcharge on Medicare premiums for higher income individuals. See this article by Michael Kitces.

smitcat
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Re: How do I tell if Roth conversions are worth the trouble?

Post by smitcat » Tue May 22, 2018 7:59 am

The RPM calculator was developed by a member here named "Bigfoot'" - a great tool and we owe him ever increasing thanks for the advantages that it gives us. FWIW - in our personal scenario the Roth conversion strategy that we work with the RPM delivers significant after tax spendable funds and that is clearly seen when using and viewing the results produced by the RPM.
Here is a link to the RPM and description.....

https://www.bogleheads.org/wiki/Retiree_Portfolio_Model

Horsefly
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Location: Colorado, mostly

Re: How do I tell if Roth conversions are worth the trouble?

Post by Horsefly » Tue May 22, 2018 8:55 am

FiveK wrote:
Tue May 22, 2018 1:49 am
Horsefly wrote:
Mon May 21, 2018 9:37 pm
I'm concerned that our RMDs ten years from now may push us into a tax bracket that I don't want to be in.
...
However, I've constrained myself to stay within the same tax bracket [when doing Roth conversions], which has held me to relatively small conversions.
Your concern may be valid and if so, it's probably best not to over-constrain yourself now.

E.g., it may benefit you to take money out of taxable and put it into Roth (in effect) by paying the tax on Roth conversions from cash on hand instead of from the converted funds.

Conversions will be beneficial now if they are done at tax rates less than (or equal to, if the tax is paid from taxable funds) the tax rates you pay in the future. So yes, some guesswork is involved.
Thanks FiveK. Yeah, I was already using my taxable to pay the taxes of the conversions, since that's the only way that the conversion even makes sense.
The Wizard wrote:
Tue May 22, 2018 2:57 am
I would worry less about tax BRACKETS and more about taxable income and net income taxes owed.
What I do is focus on my AGI, which is the dollar amount at the bottom of the front page on your form 1040.

Using a spreadsheet, I project my annual income (AGI) for each year out to age 74 or so, starting originally when I retired at age 63.
I have different income streams that start at different times, including SS and RMDs starting in 2020 at age 70.
I do Roth conversions to bring my AGI up close to, but not over what my AGI is projected to be in 2020.
And I update my projections each January.

So, as an example, if your AGI is projected to be $100k at age 70, then use Roth conversions this year to get that AGI up to maybe $90k...
I think you are on to something. It's pretty simple to just think in terms of AGI. The only question is, do I assume the tax brackets in 10 years are the same as now, adjusted for inflation? Again, I'm not trying to get this thread locked, but given the national debt I can't see rates staying as low as they are now.

Anyway, I may give your idea a try. Thanks!

retiredjg
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Re: How do I tell if Roth conversions are worth the trouble?

Post by retiredjg » Tue May 22, 2018 9:20 am

You are currently in the 24% bracket. It might be helpful to know if a pension is putting you there or if you just have fairly high expenses.

It is possible/likely that your 24% bracket will revert to 28% in 5 or 6 years (whenever it is).

It is very possible that when one of you dies, the other will be pushed into the next bracket which is several percentage points higher than either your current bracket or what the bracket will be if taxes revert to the old percentages.

To me it seems likely that you will never be able to convert at any rate lower than 24%. So I'd max it out until you are 63 years old for sure. In the year one of you becomes 63, you may need to worry about going over the IRMAA threshold. Or maybe you are over it anyway - I'm not sure.

If taxes revert and if the survivor does not get pushed into a higher bracket, that person will still be facing the 24% bracket so there is no harm in doing this. There might be a benefit if reducing your tax-deferred accounts reduces RMDs enough to never be pushed any higher.

If you meant that you are already near the top of the 24% bracket and don't have a lot of space for conversions at 24%, things are less clear, at least to me.

Horsefly
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Re: How do I tell if Roth conversions are worth the trouble?

Post by Horsefly » Tue May 22, 2018 9:25 am

cherijoh wrote:
Tue May 22, 2018 7:51 am
Is your income coming from a pension or is it being generated as interest, dividends and capital gains from your taxable accounts?
Some of both. Wife and I have about $40K annually from non-inflation-indexed pensions. For 2018, I also have a lump sum deferred compensation payment. The rest is mostly dividend income from my taxable brokerage, along with (generally) some short-term and long-term capital gains.
cherijoh wrote:
Tue May 22, 2018 7:51 am
What is your overall asset allocation (% stocks/%bonds)? Are you using the same AA across all your accounts? I think this may be part of the issue, since you mention that your traditional account is keeping pace with the Roth. Check out this article on tax-efficient placement in the Wiki.
Both of our rIRAs are 100% equities. tIRAs are roughly 85/15. What I mean when I say that my tIRA is keeping pace with the rIRA is this: Since we retired, the tIRA has appreciated way, way more than I have taken out for conversions. Again, I know it is a good problem to have, and this isn't intended to be some backhanded brag. But when I do conversions, pay taxes on those conversions, and see that the tIRA is moving further away, it's hard to see the point, at least emotionally.
cherijoh wrote:
Tue May 22, 2018 7:51 am
Another factor to consider when sizing you Roth Conversions is the surcharge on Medicare premiums for higher income individuals. See this article by Michael Kitces.
I didn't know that. Thanks. I'll have to consider that once I hit 65.

Horsefly
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Location: Colorado, mostly

Re: How do I tell if Roth conversions are worth the trouble?

Post by Horsefly » Tue May 22, 2018 9:29 am

smitcat wrote:
Tue May 22, 2018 7:59 am
The RPM calculator was developed by a member here named "Bigfoot'" - a great tool and we owe him ever increasing thanks for the advantages that it gives us. FWIW - in our personal scenario the Roth conversion strategy that we work with the RPM delivers significant after tax spendable funds and that is clearly seen when using and viewing the results produced by the RPM.
Here is a link to the RPM and description.....

https://www.bogleheads.org/wiki/Retiree_Portfolio_Model
I'll download it and give it a try. Thanks for pointing it out.

retiredjg
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Re: How do I tell if Roth conversions are worth the trouble?

Post by retiredjg » Tue May 22, 2018 9:30 am

Horsefly wrote:
Tue May 22, 2018 9:25 am
I didn't know that. Thanks. I'll have to consider that once I hit 65.
What happens when you turn 65 is based on your income when 63. Do not accidentally overlook this.

go_mets
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Re: How do I tell if Roth conversions are worth the trouble?

Post by go_mets » Tue May 22, 2018 9:30 am

smitcat wrote:
Tue May 22, 2018 7:59 am
The RPM calculator was developed by a member here named "Bigfoot'" - a great tool and we owe him ever increasing thanks for the advantages that it gives us. FWIW - in our personal scenario the Roth conversion strategy that we work with the RPM delivers significant after tax spendable funds and that is clearly seen when using and viewing the results produced by the RPM.
Here is a link to the RPM and description.....

https://www.bogleheads.org/wiki/Retiree_Portfolio_Model
Can you give me the Dummies & Cliff Notes version of which cells in the spreadsheet I need to fill in?

It is very overwhelming! :?

.

Horsefly
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Location: Colorado, mostly

Re: How do I tell if Roth conversions are worth the trouble?

Post by Horsefly » Tue May 22, 2018 9:35 am

retiredjg wrote:
Tue May 22, 2018 9:30 am
Horsefly wrote:
Tue May 22, 2018 9:25 am
I didn't know that. Thanks. I'll have to consider that once I hit 65.
What happens when you turn 65 is based on your income when 63. Do not accidentally overlook this.
Ugh!! I guess it isn't a killer, but certainly a pain. Thanks.

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Reb Tevye
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Re: How do I tell if Roth conversions are worth the trouble?

Post by Reb Tevye » Tue May 22, 2018 9:51 am

Recently I spent 45 minutes running a big handful of I-ORP scenarios. I found it directionally helpful. I found it fast and easy.
80% of our assets are tax deferred so it’s quite relevant to answer this question.

Here is how I used I-ORP.
I made a “base case” scenario with no conversions. I-ORP spits out a spending number that I think is too high, but regardless I call it X.

Then I checked how much (% and $) that changes for 22% and 24% conversion cases.

Then I altered 1 or 2 inputs and again compared how 22%/24% cases compared to No conversion.

The changes I ran vs the Base were...
. One spouse dies young
. Both spouses live longer
. Low returns
. Bigger estate (equal to deciding I want a bigger cushion for long term or memory care)
. Low returns, and big estate (cushion)

It told me that generally No Conversion and Conversion to top of 22% are a wash.
It told me that Conersions to the top of the 24% bracket is best by about 3%-6% in nearly all cases.

Not sure that I have the guts to start paying that much tax now. It’s kind of anathema to my M.O. of so many years. My head tells me I’ll be happy in my 70’s to reduce SS taxation and have the flexibility of assets in a Roth.

So I’ll ponder it for a good long while. And study the myriad I-ORP output graphs and tables.
"So, what would have been so terrible if I had a small fortune?"

Dasnyc
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Re: How do I tell if Roth conversions are worth the trouble?

Post by Dasnyc » Tue May 22, 2018 9:52 am

smitcat wrote:
Tue May 22, 2018 7:59 am
The RPM calculator was developed by a member here named "Bigfoot'" - a great tool and we owe him ever increasing thanks for the advantages that it gives us. FWIW - in our personal scenario the Roth conversion strategy that we work with the RPM delivers significant after tax spendable funds and that is clearly seen when using and viewing the results produced by the RPM.
Here is a link to the RPM and description.....

https://www.bogleheads.org/wiki/Retiree_Portfolio_Model
+1. A great tool. You should try it. It takes the guesswork out, and provides rich functionality for most ‘what if’ scenarios

smitcat
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Re: How do I tell if Roth conversions are worth the trouble?

Post by smitcat » Tue May 22, 2018 10:05 am

go_mets wrote:
Tue May 22, 2018 9:30 am
smitcat wrote:
Tue May 22, 2018 7:59 am
The RPM calculator was developed by a member here named "Bigfoot'" - a great tool and we owe him ever increasing thanks for the advantages that it gives us. FWIW - in our personal scenario the Roth conversion strategy that we work with the RPM delivers significant after tax spendable funds and that is clearly seen when using and viewing the results produced by the RPM.
Here is a link to the RPM and description.....

https://www.bogleheads.org/wiki/Retiree_Portfolio_Model
Can you give me the Dummies & Cliff Notes version of which cells in the spreadsheet I need to fill in?

It is very overwhelming! :?

.

The short story is we are not too far along from bieng the 'dummies' either - but with some work we were able to make this work really well for us.
Reb Tevye's post below talks about setting a base case and then comparing variables to that base case - that is exactly what we have done.
We utilize IORP to perform quick comparisons of many variables by first setting a base case then printing that results and listing the key outputs when varying all the things that we find of interest to us - SS file, spouse's age of demise, fund earnings, SS diminished return vs full, amount to leave for heirs, Roth converts etc.
Then we select the most likely candidate of run(s) we want to work with and enter them in RPM.
Yes - it takes longer to load, Yes - it takes longer to understand , Yes - it is initially challenging, Yes - you will initially make dumb mistakes.
But at the end the RPM will output a base case and a full case of your Roth conversion options (as well as countless other info.)

We have found it to be very worthwhile - it allowed us to view methods and plans to save significant taxes and yield large spendable dollars.
We complained that it took us like a week to get it right but it was relly like 20 hours of focused work.
But it very well may lead you to a 5 figure payout - for us it was more like a 6 figure payout (not a bad return).

It all depends upon each persons inputs which will vary dramatically from person to person.

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Leif
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Re: How do I tell if Roth conversions are worth the trouble?

Post by Leif » Tue May 22, 2018 10:06 am

The answer depends on many details and your expectation for tax rates in the future.

I'm just starting my Roth conversions. I plan to do conversions until 70. The downside for me is paying more taxes, both in higher tax rates and medicare rates, then if I did not convert. The upside is I expect to have lower rates, even with SS and RMDs starting, at 70 and beyound. I see the current tax rates as a well timed "gift" for me. If current tax rates stay in place I'll be able to convert at the current rate and avoid the possible rate increase in 2026 (I'll already be 70).

I found the following recent links useful.

Would Roth Conversions be worthwhile for me?

Making the decision to do a Roth Conversion
Last edited by Leif on Tue May 22, 2018 11:48 am, edited 2 times in total.

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Re: How do I tell if Roth conversions are worth the trouble?

Post by smitcat » Tue May 22, 2018 10:09 am

Reb Tevye wrote:
Tue May 22, 2018 9:51 am
Recently I spent 45 minutes running a big handful of I-ORP scenarios. I found it directionally helpful. I found it fast and easy.
80% of our assets are tax deferred so it’s quite relevant to answer this question.

Here is how I used I-ORP.
I made a “base case” scenario with no conversions. I-ORP spits out a spending number that I think is too high, but regardless I call it X.

Then I checked how much (% and $) that changes for 22% and 24% conversion cases.

Then I altered 1 or 2 inputs and again compared how 22%/24% cases compared to No conversion.

The changes I ran vs the Base were...
. One spouse dies young
. Both spouses live longer
. Low returns
. Bigger estate (equal to deciding I want a bigger cushion for long term or memory care)
. Low returns, and big estate (cushion)

It told me that generally No Conversion and Conversion to top of 22% are a wash.
It told me that Conersions to the top of the 24% bracket is best by about 3%-6% in nearly all cases.

Not sure that I have the guts to start paying that much tax now. It’s kind of anathema to my M.O. of so many years. My head tells me I’ll be happy in my 70’s to reduce SS taxation and have the flexibility of assets in a Roth.

So I’ll ponder it for a good long while. And study the myriad I-ORP output graphs and tables.
"It told me that generally No Conversion and Conversion to top of 22% are a wash.
It told me that Conersions to the top of the 24% bracket is best by about 3%-6% in nearly all cases."

I would propose that you make sure that your set earnings in each fund type ( taxable, Roth, tax deferred) is equal when you do the Roth conversion comparison - otherwise you will tend to drive any of these calculators to recommend the best return rather than the best approach.

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Re: How do I tell if Roth conversions are worth the trouble?

Post by CnC » Tue May 22, 2018 10:43 am

Horsefly wrote:
Mon May 21, 2018 9:37 pm
Greetings all. Although I didn't actually find this site until after I retired, I'm finding I'm aligned with most of the BH way. I'm now trying to figure out some stuff, for which I think I need some help.

I'd like to discuss notional numbers, rather than expose all my real numbers.

My wife and I both retired at age 55, and are both now 60. Our combined rIRA, tIRA, and taxable assets make it so we would be hard pressed to spend more than about 2%-2.5% each year (based on current values). So I'm not too worried about making it all work. However, I'd like to not have lots of self-inflicted wounds along the way, especially in taxes.

Here's the issue: We have too much in tIRA, and I'm concerned that our RMDs ten years from now may push us into a tax bracket that I don't want to be in. Most of my fear is also tied to my belief that tax rates are likely to go up (I'm working hard to avoid getting the thread locked because of speculation, so I won't elaborate).

In rough terms, we currently have about 70% in tIRAs, 6% in rIRAs, and 24% in taxable.

My goal was to do Roth conversions every year after we retired, and hopefully make the future RMD tax issue not so bad. I couldn't do it the first year of retirement due to deferred salary, but we did it for the last four years. However, I've constrained myself to stay within the same tax bracket, which has held me to relatively small conversions.

So far this feels rather futile. I know it is largely an emotional thing, but it's painful to pay taxes for something I got not benefit from, at least in the year I paid it. Meanwhile my tIRA is growing at the same rate percentage-wise as my rIRA, so I'm not really making an impact.

Now with the ridiculously large 24% tax bracket (which I'm already in), I can actually do a larger conversion this year, and maybe for a few years. More taxes now, but I'm not sure I am lowering my taxes later. Sigh....

I know this is all a great problem to have, but my emotional/short-term-pain-hating self needs some unemotional advice: Is it worth it to try and continue doing Roth conversions now, not knowing what taxes will be in the future, or should I just ignore it, knowing that I can almost certainly afford to pay the taxes at that future date?

I will say that I followed the whole thread of "Why do so many people quote 'You will likely be in a lower tax bracket in retirement'" (viewtopic.php?p=3938233) but that thread seemed to zig and zag quite a bit, and mostly didn't answer the question. I've also searched around the board, but maybe I can't find something that feels enough like my problem.

Thanks in advance for any thoughts!
This is the exact problem I was asking about in my thread! And people were telling me I was crazy. No atleast someone had a real actual situation rather than my 20 year in the future hypothetical one.

Thanks for the thread I'll be watching it closely. :sharebeer

Because converting 3% of your tIRA does nothing if it grows at 6% per year.

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Re: How do I tell if Roth conversions are worth the trouble?

Post by bloom2708 » Tue May 22, 2018 10:51 am

I think you are worrying about it too much.

"Ridiculously large 24% tax bracket..." I think you mean the income range is broad, not that 24% is ridiculously high.

Let's say you are 79 and your traditional pile is large and your RMD is growing. You are 79, you won. You made it to 79 with a large pile. Pay the tax, whatever the rate is.

There is a lot of angst over this topic. Optimal/perfect is the enemy.

A. Pay the tax when working? I choose to defer, defer, defer
B. Pay the tax during the early stages of retirement with Roth conversions? I choose to defer, defer, defer (maybe I will change my mind)
C. Pay the tax when your RMDs kick in and you are closing in on 80. Got to spend it on something. I don't see this as a "loss".

If you want to pay some tax now, convert. Or revisit in mid-70s.
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Re: How do I tell if Roth conversions are worth the trouble?

Post by Epsilon Delta » Tue May 22, 2018 10:57 am

Horsefly wrote:
Tue May 22, 2018 9:25 am
Both of our rIRAs are 100% equities. tIRAs are roughly 85/15. What I mean when I say that my tIRA is keeping pace with the rIRA is this: Since we retired, the tIRA has appreciated way, way more than I have taken out for conversions. Again, I know it is a good problem to have, and this isn't intended to be some backhanded brag. But when I do conversions, pay taxes on those conversions, and see that the tIRA is moving further away, it's hard to see the point, at least emotionally.
You're emotions are comparing the following two case:
  • Conversion and investment gains in the tIRA.
  • No conversion and no investment gains in tIRA.
These really aren't alternatives.

The actual alternatives are
  • Conversion and investment gains in the tIRA.
  • No conversion and larger investment gains in tIRA.
In this world not converting sees the tIRA move even further away. The conversion does lower RMDs and helps as long as the current tax rate is not too high.

gneeby
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Re: How do I tell if Roth conversions are worth the trouble?

Post by gneeby » Tue May 22, 2018 11:00 am

smitcat wrote:
Tue May 22, 2018 10:09 am
"It told me that generally No Conversion and Conversion to top of 22% are a wash.
It told me that Conersions to the top of the 24% bracket is best by about 3%-6% in nearly all cases."

I would propose that you make sure that your set earnings in each fund type ( taxable, Roth, tax deferred) is equal when you do the Roth conversion comparison - otherwise you will tend to drive any of these calculators to recommend the best return rather than the best approach.
Generally speaking ORP's reports say that there isn't that much difference in spending between conversions and no conversions, but there is a big difference in when you pay your taxes and in how much you pay. Over the span of retirement conversion will jam your tax payments up front but you will pay less tax. Non-conversions will spread taxes out over retirement and pay more taxes.

For many retirees the decision to do conversions is based on factors other than maximizing spending; such as anticipating government policy changes or structuring the estate. One factor that should be ignored is the high (prepaid) tax bill accompanying conversions. ORP's goal is to maximize spending, not minimize taxes.

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Re: How do I tell if Roth conversions are worth the trouble?

Post by smitcat » Tue May 22, 2018 11:24 am

gneeby wrote:
Tue May 22, 2018 11:00 am
smitcat wrote:
Tue May 22, 2018 10:09 am
"It told me that generally No Conversion and Conversion to top of 22% are a wash.
It told me that Conersions to the top of the 24% bracket is best by about 3%-6% in nearly all cases."

I would propose that you make sure that your set earnings in each fund type ( taxable, Roth, tax deferred) is equal when you do the Roth conversion comparison - otherwise you will tend to drive any of these calculators to recommend the best return rather than the best approach.
Generally speaking ORP's reports say that there isn't that much difference in spending between conversions and no conversions, but there is a big difference in when you pay your taxes and in how much you pay. Over the span of retirement conversion will jam your tax payments up front but you will pay less tax. Non-conversions will spread taxes out over retirement and pay more taxes.

For many retirees the decision to do conversions is based on factors other than maximizing spending; such as anticipating government policy changes or structuring the estate. One factor that should be ignored is the high (prepaid) tax bill accompanying conversions. ORP's goal is to maximize spending, not minimize taxes.
"Generally speaking ORP's reports say that there isn't that much difference in spending between conversions and no conversions, but there is a big difference in when you pay your taxes and in how much you pay."

Yes - in our case we can 'spend' a lot more with Roth conversions with both of us living a ripe old age. If/when one of us goes earlier then the benefit rises and the benefit for heirs is better as well.
IORP indicates this as the ability to spend while RPM indicates that as well as totaling the dollars advantage (disadvantage) over time and by %.
As I mentionde before the "spendable dollar difference" is sigifiicant in our case - later SS, no pension, 7 figure 401K's etc.

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Re: How do I tell if Roth conversions are worth the trouble?

Post by Reb Tevye » Tue May 22, 2018 11:45 am

smitcat wrote:
Tue May 22, 2018 10:09 am
I would propose that you make sure that your set earnings in each fund type ( taxable, Roth, tax deferred) is equal when you do the Roth conversion comparison - otherwise you will tend to drive any of these calculators to recommend the best return rather than the best approach.
Hi. Thanks. My earnings are indeed set the same across all account types.
"So, what would have been so terrible if I had a small fortune?"

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Re: How do I tell if Roth conversions are worth the trouble?

Post by Horsefly » Tue May 22, 2018 11:56 am

bloom2708 wrote:
Tue May 22, 2018 10:51 am
Let's say you are 79 and your traditional pile is large and your RMD is growing. You are 79, you won. You made it to 79 with a large pile. Pay the tax, whatever the rate is.

There is a lot of angst over this topic. Optimal/perfect is the enemy.
Yeah, you are certainly right that this isn't worth worrying lots about. Fact is I haven't really been worrying very much. It's just that I had a plan to use the period from when I retired (at age 55) and RMDs (at 70.5) to do Roth conversions. Without analyzing the details, I had figured I would be building up my Roth account and reducing my tIRA. However, when I looked at the balances of both accounts it seems I've done very little except pay more taxes. My Roth is still pretty small (maybe 1.5x annual spending). In my head I figured I would be further along at this point.

I am tempted to go with your suggestion: In my 70's, just be happy I've done well, and pay the taxes.

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Re: How do I tell if Roth conversions are worth the trouble?

Post by Horsefly » Tue May 22, 2018 11:59 am

Epsilon Delta wrote:
Tue May 22, 2018 10:57 am
You're emotions are comparing the following two case:
  • Conversion and investment gains in the tIRA.
  • No conversion and no investment gains in tIRA.
These really aren't alternatives.

The actual alternatives are
  • Conversion and investment gains in the tIRA.
  • No conversion and larger investment gains in tIRA.
In this world not converting sees the tIRA move even further away. The conversion does lower RMDs and helps as long as the current tax rate is not too high.
Well put. You've done a good job of stripping away my bad attitude. :wink:

I'll buckle down and make a no kidding commitment one way or the other. If I don't do any more conversions, I'll have to write myself a note for when I'm 70.5: "Don't complain!"

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Re: How do I tell if Roth conversions are worth the trouble?

Post by niceguy7376 » Tue May 22, 2018 12:07 pm

Horsefly wrote:
Tue May 22, 2018 9:25 am
Some of both. Wife and I have about $40K annually from non-inflation-indexed pensions. For 2018, I also have a lump sum deferred compensation payment. The rest is mostly dividend income from my taxable brokerage, along with (generally) some short-term and long-term capital gains.

Both of our rIRAs are 100% equities. tIRAs are roughly 85/15. What I mean when I say that my tIRA is keeping pace with the rIRA is this: Since we retired, the tIRA has appreciated way, way more than I have taken out for conversions. Again, I know it is a good problem to have, and this isn't intended to be some backhanded brag. But when I do conversions, pay taxes on those conversions, and see that the tIRA is moving further away, it's hard to see the point, at least emotionally.
I dont remember seeing any numbers on the size of your accounts.
You mentioned a lump sum deferred compensation this year. You definitely are paying less on that income now than if you took it while working.

Since you mentioned short-term and long term capital gains, you did some selling of individual stocks or Mutual funds. Knowing that you had a lump sum, why did you do this transaction?

At the end of the day, everyone needs to pay taxes. If your TIRA (assumed rollovers from 401ks) is so large, that means you had high savings rate hwile working. With pensions in picture, you might not have much opportunity to do roth conversions.

My suggestions:
Your AA is too high for your age and balances.
Make your taxable account tax efficient with index funds and reduce the dividend income and capital gains (maybe by not selling)
For next few years before you need to take RMDs, convert upto the 24%. If you have some more lumpsum deferred compensation payment, then it might be a first world problem.

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Re: How do I tell if Roth conversions are worth the trouble?

Post by Horsefly » Tue May 22, 2018 12:58 pm

niceguy7376 wrote:
Tue May 22, 2018 12:07 pm
I dont remember seeing any numbers on the size of your accounts.
Yep, you're right. I didn't post any numbers on the size of the accounts. That was on purpose.
niceguy7376 wrote:
Tue May 22, 2018 12:07 pm
You mentioned a lump sum deferred compensation this year. You definitely are paying less on that income now than if you took it while working.
Absolutely! I'm actually really pleased this is showing up now rather than earlier. With the new tax rates, it is even better than if it would have showed up last year.
niceguy7376 wrote:
Tue May 22, 2018 12:07 pm
Since you mentioned short-term and long term capital gains, you did some selling of individual stocks or Mutual funds. Knowing that you had a lump sum, why did you do this transaction?
I should have stated that better. Right now I have no short- or long-term gains. I anticipate that before the end of the year I will have some (e.g., to pay estimated taxes on a Roth Conversion, and for vacations). My spreadsheet I use for figuring out my quarterly estimates includes something for short- and long-term gains based partly on previous years and partly on whatever Roth conversion I end up doing.
niceguy7376 wrote:
Tue May 22, 2018 12:07 pm
At the end of the day, everyone needs to pay taxes. If your TIRA (assumed rollovers from 401ks) is so large, that means you had high savings rate hwile working. With pensions in picture, you might not have much opportunity to do roth conversions.
Like I said, I realize this is a good problem to have. :beer
niceguy7376 wrote:
Tue May 22, 2018 12:07 pm
My suggestions:
Your AA is too high for your age and balances.
Make your taxable account tax efficient with index funds and reduce the dividend income and capital gains (maybe by not selling)
For next few years before you need to take RMDs, convert upto the 24%. If you have some more lumpsum deferred compensation payment, then it might be a first world problem.
For my entire investing career (about 35 years) I've been pretty agressive. I prefer to stay pretty heavily in equities. The only thing that bond holdings have done for me during the past couple of years is give me some tax loss harvesting.

You might want to look at your second suggestion again: You are suggesting I shift around my holdings in my taxable account, but you don't think I should sell anything. Hmmm... :P Still, I get your point. My taxable holdings are actually already mostly in index ETFs. I have a couple of actively managed funds that I've had for over a decade, and now have significant gains. I sell them off a little each year for what I need to take out of my taxable, but I'm not likely to do it in one fell swoop.

All you folks have been very good at distilling the problem down to the unemotional decision points, and I can see I should continue to try and do conversions. If nothing else, it will help in terms of leaving Roth instead of Traditional IRA assets to our kids, which I guess is good.

Thanks again to everyone!

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Re: How do I tell if Roth conversions are worth the trouble?

Post by niceguy7376 » Tue May 22, 2018 2:04 pm

Horsefly wrote:
Tue May 22, 2018 12:58 pm
niceguy7376 wrote:
Tue May 22, 2018 12:07 pm
Since you mentioned short-term and long term capital gains, you did some selling of individual stocks or Mutual funds. Knowing that you had a lump sum, why did you do this transaction?
I should have stated that better. Right now I have no short- or long-term gains. I anticipate that before the end of the year I will have some (e.g., to pay estimated taxes on a Roth Conversion, and for vacations). My spreadsheet I use for figuring out my quarterly estimates includes something for short- and long-term gains based partly on previous years and partly on whatever Roth conversion I end up doing.
Even after the lumpsum defered compensation you received this year, you need to touch taxable account to pay taxes on roth conversion and vacations, what are your yearly expenses range?

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Re: How do I tell if Roth conversions are worth the trouble?

Post by WhiteMaxima » Tue May 22, 2018 2:55 pm

Roth conversion is worth every trouble. Do it earlier. Just find out what's you target tax rate and do conversion until that limit.

smitcat
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Re: How do I tell if Roth conversions are worth the trouble?

Post by smitcat » Tue May 22, 2018 4:04 pm

CnC wrote:
Tue May 22, 2018 10:43 am
Horsefly wrote:
Mon May 21, 2018 9:37 pm
Greetings all. Although I didn't actually find this site until after I retired, I'm finding I'm aligned with most of the BH way. I'm now trying to figure out some stuff, for which I think I need some help.

I'd like to discuss notional numbers, rather than expose all my real numbers.

My wife and I both retired at age 55, and are both now 60. Our combined rIRA, tIRA, and taxable assets make it so we would be hard pressed to spend more than about 2%-2.5% each year (based on current values). So I'm not too worried about making it all work. However, I'd like to not have lots of self-inflicted wounds along the way, especially in taxes.

Here's the issue: We have too much in tIRA, and I'm concerned that our RMDs ten years from now may push us into a tax bracket that I don't want to be in. Most of my fear is also tied to my belief that tax rates are likely to go up (I'm working hard to avoid getting the thread locked because of speculation, so I won't elaborate).

In rough terms, we currently have about 70% in tIRAs, 6% in rIRAs, and 24% in taxable.

My goal was to do Roth conversions every year after we retired, and hopefully make the future RMD tax issue not so bad. I couldn't do it the first year of retirement due to deferred salary, but we did it for the last four years. However, I've constrained myself to stay within the same tax bracket, which has held me to relatively small conversions.

So far this feels rather futile. I know it is largely an emotional thing, but it's painful to pay taxes for something I got not benefit from, at least in the year I paid it. Meanwhile my tIRA is growing at the same rate percentage-wise as my rIRA, so I'm not really making an impact.

Now with the ridiculously large 24% tax bracket (which I'm already in), I can actually do a larger conversion this year, and maybe for a few years. More taxes now, but I'm not sure I am lowering my taxes later. Sigh....

I know this is all a great problem to have, but my emotional/short-term-pain-hating self needs some unemotional advice: Is it worth it to try and continue doing Roth conversions now, not knowing what taxes will be in the future, or should I just ignore it, knowing that I can almost certainly afford to pay the taxes at that future date?

I will say that I followed the whole thread of "Why do so many people quote 'You will likely be in a lower tax bracket in retirement'" (viewtopic.php?p=3938233) but that thread seemed to zig and zag quite a bit, and mostly didn't answer the question. I've also searched around the board, but maybe I can't find something that feels enough like my problem.

Thanks in advance for any thoughts!
This is the exact problem I was asking about in my thread! And people were telling me I was crazy. No atleast someone had a real actual situation rather than my 20 year in the future hypothetical one.

Thanks for the thread I'll be watching it closely. :sharebeer

Because converting 3% of your tIRA does nothing if it grows at 6% per year.
FWIW - in our current modeling we will be Roth converting between $35K and $145K a year.
So by converting amounts like those over years it does add up to a significant amount fairly quickly.
In our case the base case vs the Roth conversion has a large benefit clearly detialed with the help of the RPM.

That is why each perosn should look into it for themselves - it may really be a beneift but no-one else can put in your numbers to spit out your potential future picture.

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Re: How do I tell if Roth conversions are worth the trouble?

Post by Good Listener » Tue May 22, 2018 8:01 pm

I don't know why people seem it's essential to stay in the same bracket and not go a few per cent higher. I believe strongly that we are now at tax rates that are the lowest any of us will ever see. I would convert it all to Roths no matter what the bracket, and I am doing that.

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Leif
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Re: How do I tell if Roth conversions are worth the trouble?

Post by Leif » Wed May 23, 2018 11:56 am

Good Listener wrote:
Tue May 22, 2018 8:01 pm
I don't know why people seem it's essential to stay in the same bracket and not go a few per cent higher. I believe strongly that we are now at tax rates that are the lowest any of us will ever see. I would convert it all to Roths no matter what the bracket, and I am doing that.
"a few per cent higher" I have no problem. But the jump from 24% to 32% would be too big a leap for me. My main objective is to get as much as possible of my stock allocation out of tax deferred to Roth. The bonds can stay behind in my tIRAs. No one knows, but I agree it is likely the current tax rates will not last (current law says 2026). That is a factor to determine how much should be converted and how soon.
Last edited by Leif on Wed May 23, 2018 6:44 pm, edited 1 time in total.

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Re: How do I tell if Roth conversions are worth the trouble?

Post by gneeby » Wed May 23, 2018 12:04 pm

Horsefly wrote:
Mon May 21, 2018 11:51 pm

Funny, I was just trying to use iORP again today. When I put in my numbers and selected the 24% tax bracket, it errored out. The error was "model x will not solve, possibly because your Roth conversion tax bracket limit may be over-constricting your taxable income." I tried it several ways, but couldn't get it to work. The only way I could get it to not fail was to use a higher tax bracket, which in turn gave me a much higher tax bill.
You have run into a fundamental ORP assumption: "Retirement spending is constant throughout retirement, indexed to inflation." For example, if your inflation rate is 2% and your savings ROR is 6% then even though your early withdrawals are at 24%, downstream they may be forced above 24% because the upper limit on the 24% tax bracket is growing more slowly (2%) that your assets, and subsequent withdrawals (6%).

ORP is a guideline generator. Exceeding ORP's withdrawal is not a great idea because it could lead to premature saving depletion. "On the other hand", said the one armed economist, computing your guidelines while allowing unlimited conversion but implementing withdrawals at the 24% tax bracket leaves you with an modeled savings surplus. The unconstrained guidelines are reasonably representative of your plan, good enough for planning purposed. Trying to dot every "t" and cross every "i" is clearly beyond ORP's scope. Sometime the modeling process requires some concessions.

The point is that ORP's guidelines are for the full term of retirement but your retirement income implementation is done one year at a time. ORP is a guideline generator, not an accounting program where everything has to adhered to. The knowledgeable user has considerable leeway is how the plan is actually implemented.

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Re: How do I tell if Roth conversions are worth the trouble?

Post by smitcat » Wed May 23, 2018 12:22 pm

gneeby wrote:
Wed May 23, 2018 12:04 pm
Horsefly wrote:
Mon May 21, 2018 11:51 pm

Funny, I was just trying to use iORP again today. When I put in my numbers and selected the 24% tax bracket, it errored out. The error was "model x will not solve, possibly because your Roth conversion tax bracket limit may be over-constricting your taxable income." I tried it several ways, but couldn't get it to work. The only way I could get it to not fail was to use a higher tax bracket, which in turn gave me a much higher tax bill.
You have run into a fundamental ORP assumption: "Retirement spending is constant throughout retirement, indexed to inflation." For example, if your inflation rate is 2% and your savings ROR is 6% then even though your early withdrawals are at 24%, downstream they may be forced above 24% because the upper limit on the 24% tax bracket is growing more slowly (2%) that your assets, and subsequent withdrawals (6%).

ORP is a guideline generator. Exceeding ORP's withdrawal is not a great idea because it could lead to premature saving depletion. "On the other hand", said the one armed economist, computing your guidelines while allowing unlimited conversion but implementing withdrawals at the 24% tax bracket leaves you with an modeled savings surplus. The unconstrained guidelines are reasonably representative of your plan, good enough for planning purposed. Trying to dot every "t" and cross every "i" is clearly beyond ORP's scope. Sometime the modeling process requires some concessions.

The point is that ORP's guidelines are for the full term of retirement but your retirement income implementation is done one year at a time. ORP is a guideline generator, not an accounting program where everything has to adhered to. The knowledgeable user has considerable leeway is how the plan is actually implemented.
"You have run into a fundamental ORP assumption: "Retirement spending is constant throughout retirement, indexed to inflation."
FWIW - There are no less than 5 spending options to choose from with ORP during drawdown. You can select whichever you like or compare all of them within a few minutes by utilizing the button 'called retirement spending plan".

mhalley
Posts: 6010
Joined: Tue Nov 20, 2007 6:02 am

Re: How do I tell if Roth conversions are worth the trouble?

Post by mhalley » Wed May 23, 2018 4:00 pm

You might try using can I retire yet pro at the Google play store. It costs five bucks and you can customize the amount if the Roth conversions.

bloom2708
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Location: Fargo, ND

Re: How do I tell if Roth conversions are worth the trouble?

Post by bloom2708 » Wed May 23, 2018 4:50 pm

Good Listener wrote:
Tue May 22, 2018 8:01 pm
I don't know why people seem it's essential to stay in the same bracket and not go a few per cent higher. I believe strongly that we are now at tax rates that are the lowest any of us will ever see. I would convert it all to Roths no matter what the bracket, and I am doing that.
What if you said last year at this time "tax rates are the lowest ever seen....?". :wink:

Defer, defer, defer unless you are an extreme edge casse.
Where to spend your time: | 1. You completely control <--spend your time here! | 2. You partially control <--spend very little time here! | 3. You have no control <--spend no time here

Horsefly
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Re: How do I tell if Roth conversions are worth the trouble?

Post by Horsefly » Wed May 23, 2018 5:04 pm

bloom2708 wrote:
Wed May 23, 2018 4:50 pm
Defer, defer, defer unless you are an extreme edge casse.
See, this is one of the comments that happens here very often. However, I think two different situations get conflated. While I was working, I was all over deferring, contributing the max to IRAs while eligible, and maxing out the 401K when it came along. Now I'm not working, and I think the situation I brought up in this thread deserves more consideration than just that it is always better to defer.

The question here is really about once you've spent a career deferring, what are the criteria for when it is better to leave it in the deferred account, vs. do Roth conversions. If you retire at 55 (like I did) and probably won't need to draw on the deferred money until close to RMDs (like me), should we take advantage of our low-tax situation to do conversions?

I'm not being critical, just drawing the distinction.

Edit to add: I see that you commented earlier in this thread, so you clearly understand the difference. To me, deferring income is about putting income that you are receiving today into a tax deferred account (401K, 403B, TSP, tIRA, etc).

smitcat
Posts: 1764
Joined: Mon Nov 07, 2016 10:51 am

Re: How do I tell if Roth conversions are worth the trouble?

Post by smitcat » Wed May 23, 2018 5:48 pm

Horsefly wrote:
Wed May 23, 2018 5:04 pm
bloom2708 wrote:
Wed May 23, 2018 4:50 pm
Defer, defer, defer unless you are an extreme edge casse.
See, this is one of the comments that happens here very often. However, I think two different situations get conflated. While I was working, I was all over deferring, contributing the max to IRAs while eligible, and maxing out the 401K when it came along. Now I'm not working, and I think the situation I brought up in this thread deserves more consideration than just that it is always better to defer.

The question here is really about once you've spent a career deferring, what are the criteria for when it is better to leave it in the deferred account, vs. do Roth conversions. If you retire at 55 (like I did) and probably won't need to draw on the deferred money until close to RMDs (like me), should we take advantage of our low-tax situation to do conversions?

I'm not being critical, just drawing the distinction.

Edit to add: I see that you commented earlier in this thread, so you clearly understand the difference. To me, deferring income is about putting income that you are receiving today into a tax deferred account (401K, 403B, TSP, tIRA, etc).
"If you retire at 55 (like I did) and probably won't need to draw on the deferred money until close to RMDs (like me), should we take advantage of our low-tax situation to do conversions?"
Model your situation in the RPM and see what the answer is. As I posted before - it is a very sigificant advantage for us to do Roth converts over a number of possible varaibles before we take SS.

Horsefly
Posts: 264
Joined: Sat Oct 24, 2015 8:13 am
Location: Colorado, mostly

Re: How do I tell if Roth conversions are worth the trouble?

Post by Horsefly » Wed May 23, 2018 6:33 pm

Yeah, I certainly feel different now than when I started this thread. I've done a couple of spreadsheet models before, using the output of several RMD projection tools on-line. I think the comments here have been enormously helpful in helping me to push aside my short-term aversion to taxes. I'll probably top out my conversion this year and next at the top of the 24% bracket. I'll have to swallow hard as I do the estimated payments reflecting that conversion, but I can do it.

Thanks a ton to all of you who have helped me get off the fence!

Horsefly
Posts: 264
Joined: Sat Oct 24, 2015 8:13 am
Location: Colorado, mostly

Re: How do I tell if Roth conversions are worth the trouble?

Post by Horsefly » Wed May 23, 2018 6:45 pm

Speaking of estimated taxes:

I guess I'll need to look into how to avoid a penalty. I'll bump up my estimated payments to cover, but I seem to remember there was a penalty if I didn't adequately pay across all four quarters. This will be quite a bit of taxes, and my first quarter payment was based on my assumption of a smaller conversion. Is "income" from such a conversion handled differently? I'm going to be finding a new tax accountant this year, so maybe this will be one of my interview questions.

I'm sure I can go look this up. I probably shouldn't even be messing up this thread (my own!), as this is a change of topic.

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