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[Roth conversions]

Posted: Mon Jan 14, 2019 11:40 am
by hvaclorax
First post; long time lurker (2+years).
I recently had a review with my financial advisor. Wife and I, both retired ages 65, have been doing Roth conversions up to first IRMAA level and paying taxes out of a small after tax account. Received advice from him about a colleague who will be converting much more into Roth, nearly all of a $5,000,000 Traditional IRA. Paying tax with money from his IRA (not after tax.) This person believes the current tax rates will revert to higher rates in the future. Of course one would leave some money in the TIRA to fill up lower tax brackets, say around $500k in TIRA. To me this breaks the cardinal rule of not paying taxes on taxes. For myself FI but not ultra rich sounds like bad advice. What say you?
The idea is that we convert up to top of 24% bracket each year until age 70.5 which is 2024 for my wife. Rates likely to go up to 25% or even 28% with RMDs after that. We live in MT with state income tax of 6.9% but won’t be relocating. Thanks in advance.

Re: [Roth conversions]

Posted: Mon Jan 14, 2019 2:31 pm
by mhalley
How much to convert is a problem I struggle with, but I don’t have 5 mill. I use I-orp for a guideline.

https://www.i-orp.com/CashAcc/extended.html
Paying the taxes from the Ira itself makes it much less attractive to do conversions, but you need to run the cakculations on the tax rates.

Re: [Roth conversions]

Posted: Mon Jan 14, 2019 2:57 pm
by 2pedals
I posted a question for my Roth conversions as well. I had to struggle with it as well. It didn't a make a big difference with before and after conversions when using i-orp and RPM projections after I maxed out the 12% bucket. The big kicker One Ping mentioned that if one dies early the single tax payer rates could have a big impact on your outcome. A tIRA may help with paying big tax deductible medical expenses, a Roth may help with lumpy discretionary expenses can help limiting RMDs so you don't jump into higher tax brackets. Roth accounts are good for estate planing and legacy concerns as well. I am just approaching as a compromise since I think it is a guessing game. I think this is balancing act with many "shades of grey". In the end i-orp and RPM projections could be waaay off due to shifting of the goalposts.

my topic and post follows:
viewtopic.php?f=1&t=269266

Re: [Roth conversions]

Posted: Mon Jan 14, 2019 3:03 pm
by DrGoogle2017
It depends on wether he might need to use the $5 Million or not, if he has expenses all covered then the $5 million could be for hiers, which I think is beneficial todo conversion now. It also depends on how many years he has to do conversion. Right now we have the widest band for tax rate. Tax rate for sure will revert back to higher rate after 2025.

But it makes sense to go through some tools to help seeing things clearly.

Re: [Roth conversions]

Posted: Mon Jan 14, 2019 3:38 pm
by megabad
hvaclorax wrote:
Mon Jan 14, 2019 11:40 am
First post; long time lurker (2+years).
I recently had a review with my financial advisor. Wife and I, both retired ages 65, have been doing Roth conversions up to first IRMAA level and paying taxes out of a small after tax account. Received advice from him about a colleague who will be converting much more into Roth, nearly all of a $5,000,000 Traditional IRA. Paying tax with money from his IRA (not after tax.) This person believes the current tax rates will revert to higher rates in the future. Of course one would leave some money in the TIRA to fill up lower tax brackets, say around $500k in TIRA. To me this breaks the cardinal rule of not paying taxes on taxes. For myself FI but not ultra rich sounds like bad advice. What say you?
The idea is that we convert up to top of 24% bracket each year until age 70.5 which is 2024 for my wife. Rates likely to go up to 25% or even 28% with RMDs after that. We live in MT with state income tax of 6.9% but won’t be relocating. Thanks in advance.
Agree that this bet might make sense for some (very very few). If you are already in the highest bracket and likely will be for the extended future, than this logic could make sense to me. Most will not be in the highest bracket (37%+3.8% NIIT bracket+highest state tax) for extended future though. Thusly, in almost all cases I would venture that converting through the top bracket is a foolish idea. The step from upper middle brackets to the higher ones has been huge for many years and I would bet this will continue (even if tax rates go up). Of course, I could be wrong and it may be that this colleague will come out like a bandit.

In either case, you have diversified your tax situation with partial conversions so you will be somewhat insulated no matter what future tax law is. Colleague has bet all his eggs that taxes will be higher than the highest tax bracket in the future.

Also, ideally I would prefer to pay taxes (on conversions) with taxable income as this would allow more and longer tax sheltered treatment.

Re: [Roth conversions]

Posted: Mon Jan 14, 2019 3:51 pm
by 02nz
I think your plan makes more sense than converting most of $5 million all at once. I suppose there are some edge cases - say maybe moving from TX to CA - where it might make sense to take more of the hit now, but for most people, even most people with $5M in tax-deferred balances, it doesn't make sense to pay now. Of course I probably would've shifted more toward Roth well before hitting $5M in traditional balances, but perhaps the growth snuck up on the person during the bull market of the past several years.

Re: [Roth conversions]

Posted: Tue Jan 15, 2019 10:48 am
by hvaclorax
Thanks to all for your thoughtfulness. I like being reminded of the tax deductibility for medical expenses if we ever get seriously ill. Doubt we’ll move to a low tax state. I’ll fool around with TurboTax some to look into the relevant cost for large conversions. I did see a thread after my initial post with advice in our 22%-24% brackets to just carry on as we are. No need to swing for the fences. Lots of moving part to deal with here.

Re: [Roth conversions]

Posted: Tue Jan 15, 2019 12:18 pm
by 02nz
hvaclorax wrote:
Tue Jan 15, 2019 10:48 am
I like being reminded of the tax deductibility for medical expenses if we ever get seriously ill
Good idea, it's like a backdoor HSA! :happy

Re: [Roth conversions]

Posted: Thu Mar 14, 2019 10:41 am
by hvaclorax
Spoke with my advisor last week, he added that the ORP calculator doesn’t fully capture the tax benefits of this strategy because the Roth Ira would be bequeathed (upon deaths) to 2 adult children who will also be in a higher tax bracket. Hence the strategy is extended for another 30 or more years. Advisor feels the multi generation approach is not something that most investment advisors are aware of or providing for their clients. I suppose you could set the calculator to provide say $1 million bequest and then set up a new scenario where are you use that bequest at the adult children’s rather low RMD and project forward.
Thanks, you are all rock stars :happy

Re: [Roth conversions]

Posted: Thu Mar 14, 2019 2:05 pm
by busdriver
I'm in a similar circumstance with recent retirement at age 65 and low 7 digits TDA's. I am delaying pension & SS until age 70, (although I'll file for SS spousal benefits at age 66). The plan is to convert all TDA's to Roth before RMD's come into play. While this will put us in the 35% tax bracket and a high IRMAA level, We should drop to lower brackets & fees from age 71 forward which will make for less cumulative taxes & fees paid for our remaining lifespans with a large tax-free Roth to pass on to heirs. If taxes are revised to higher levels in the future, the planned savings will be greater.

Regarding using funds from TDA's to pay taxes for Roth conversions, CPA/Attorney James Lange has said that at worst, it's a break-even, but more than likely, you'll be ahead by converting with TDA funds to pay taxes after your taxable account funds are exhausted. Some of his books can be downloaded free at https://paytaxeslater.com/books