Should we convert all tIRA money to Roth?

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asif408
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Should we convert all tIRA money to Roth?

Post by asif408 » Mon Mar 11, 2019 2:38 pm

My wife and I currently have the following breakdown of our finances by account type (e.g., taxable, tax-deferred, post-tax):

Roth IRA: 45%
tIRA/457(b): 26%
HSA: 19%
Taxable: 10%

We are both around 40 with 1 child (3 years old) and another on the way. We did a small Roth conversion last year and are considering gradually converting the rest of the tIRA into a Roth over several years to minimize the tax burden. We can afford to pay taxes on the conversions, just not the whole amount at one time. I thought it might be useful for us in our situation because we are in the 15% taxable bracket for now and for the foreseeable future, and with 2 children and not being able to max out IRAs I figure the Roth's can serve as retirement and possibly college savings if needed. We don't plan to fund 529s or college savings because of our income level and the fact that our state has no taxes, so there is no state tax break for 529 contributions.

I am wondering if there is any reason we shouldn't convert all the tIRA money over to Roth. If you need additional details please let me know, as I've just gotten to thinking more about this in the last year or so and haven't quite wrapped my head around all the considerations. It doesn't seem like there would be any downside to convert all the tIRA money but I thought others might have some insights I haven't considered.

Thanks.

bloom2708
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Re: Should we convert all tIRA money to Roth?

Post by bloom2708 » Mon Mar 11, 2019 2:52 pm

Why pay the tax now? You could do Roth conversions between work stopping and Social Security.

The goal is not to have $0 in Pre-tax. If you do that, you will pay too much tax on every dollar.

Don't let the Roth tail wag the dog. Save pre-tax to avoid Fed/state tax now. Invest the tax savings + other post-tax dollars into Roth IRAs.

If you have more to save, HSA or taxable.

If you wait until work stops, then your conversion fills up 0%, 10%, 12% brackets. When working, the dollars all hit your top marginal bracket. 12% or maybe touching 22% for married filing jointly.

Having some traditional and letting it grow gives you options to control income. If you had all Roth before SS you would pay no tax and not even fill the lower brackets. That isn't optimal either.
"We are not here to agree with you; we are here to provoke thoughtfulness." Unknown Boglehead

sailaway
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Re: Should we convert all tIRA money to Roth?

Post by sailaway » Mon Mar 11, 2019 3:09 pm

Why wouldn't you put that money into a new IRA, rather than paying taxes with it?

TBillT
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Re: Should we convert all tIRA money to Roth?

Post by TBillT » Mon Mar 11, 2019 3:12 pm

I don't think we have enough info, becuase you have not given approx. amounts and other things.
Our personal current tIRAs came from personal IRAs, pension lump sum, 401k rollovers.
So we would have our work cut out getting all that converted, and it was OK that we converted the regular IRA in prior years.

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House Blend
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Re: Should we convert all tIRA money to Roth?

Post by House Blend » Mon Mar 11, 2019 3:43 pm

Agreed, not enough information.

Any pensions or other guaranteed income besides SS in retirement? The issue is whether you will have something besides RMDs filling up the low tax brackets.

Is your goal to retire as soon as humanly possible (or spend as much as humanly possible), or did you or spouse make the "mistake" of finding fulfillment in a job you will never retire from? (In other words, do you expect to retire with far more liquid assets than you need, and leave behind a large estate, or do you hope that the funeral check bounces?)

Is charitable giving part of your long term plan? (QCDs at age 70.5 often give you the most bang for your charitable buck).

Which is more likely: high deductible medical expenses in your later years (nursing home, etc), or one of you remaining in good health and outliving the other by many years? The former means a much lower tax rate than you might be imagining; the latter could mean the survivor deals with higher tax rates due to Single filing status.

Finally, consider a hypothetical retirement in which your only sources of income are Roth withdrawals and SS benefits. (No RMDs, no pension, no dividends from taxable.) In that case you will pay 0 income tax, meaning that you would have been better off having some tax-deferred dollars and RMDs, instead of paying nonzero amounts of tax to convert all of it.

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cheese_breath
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Re: Should we convert all tIRA money to Roth?

Post by cheese_breath » Mon Mar 11, 2019 6:54 pm

I hope you never find yourself in a situation like this, but if you do it could be better taxwise if you hadn't already converted it all.

viewtopic.php?f=2&t=274925
The surest way to know the future is when it becomes the past.

Topic Author
asif408
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Re: Should we convert all tIRA money to Roth?

Post by asif408 » Mon Mar 11, 2019 7:44 pm

House Blend wrote:
Mon Mar 11, 2019 3:43 pm
Agreed, not enough information.
Thanks, I'll try to fill in the gaps.
House Blend wrote:
Mon Mar 11, 2019 3:43 pm
Any pensions or other guaranteed income besides SS in retirement? The issue is whether you will have something besides RMDs filling up the low tax brackets.
Yes, I work for a state government and have a pension through work.
House Blend wrote:
Mon Mar 11, 2019 3:43 pm
Is your goal to retire as soon as humanly possible (or spend as much as humanly possible), or did you or spouse make the "mistake" of finding fulfillment in a job you will never retire from? (In other words, do you expect to retire with far more liquid assets than you need, and leave behind a large estate, or do you hope that the funeral check bounces?)
No, we don't have early retirement as any type of goal. Personally, I don't think I ever want to retire fully, though I would like to work less when I'm older and have control over my schedule. I don't ever foresee us having a large estate just because our income ceiling is limited where we are and what we do.
House Blend wrote:
Mon Mar 11, 2019 3:43 pm
Is charitable giving part of your long term plan? (QCDs at age 70.5 often give you the most bang for your charitable buck).
Somewhat, but not in large amount. More likely we'd be interested in volunteering our time vs. money.
House Blend wrote:
Mon Mar 11, 2019 3:43 pm
Which is more likely: high deductible medical expenses in your later years (nursing home, etc), or one of you remaining in good health and outliving the other by many years? The former means a much lower tax rate than you might be imagining; the latter could mean the survivor deals with higher tax rates due to Single filing status.
The latter, most likely me outliving my wife.

TBillT
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Re: Should we convert all tIRA money to Roth?

Post by TBillT » Mon Mar 11, 2019 11:40 pm

The reasons for Roth Conversion are (as I understand it) are:
(1) to prevent bumping into really high tax bracket at Age 70.5 due to the RMD Required Minimum dstributons from IRA; and
(2) for your heirs, to give them a Roth IRA inheritance with less tax burden

But it is not so bad having tIRA if it is smaller amount (not millions) and your taxable income is lower and you might have medical and other deductions you can offset the tax burden. You might actually rather have the tIRA. I think it is a little soon in your life to worry about aggressively converting, but smaller amounts with low tax burden are OK.

Bottom line is you would need to do some spreadsheet retirement planing, but at your age, I think I would wait a little and let the passage of time clarify the decisions to be made.

Topic Author
asif408
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Re: Should we convert all tIRA money to Roth?

Post by asif408 » Tue Mar 12, 2019 8:06 am

cheese_breath wrote:
Mon Mar 11, 2019 6:54 pm
I hope you never find yourself in a situation like this, but if you do it could be better taxwise if you hadn't already converted it all.

viewtopic.php?f=2&t=274925
Let me ask you this. IIRC, can't I use HSA money to pay for LTC? We do plan to further fund the HSA in future years, and I imagine the HSA may eventually be a significant chunk of our assets after 20-30 years.

Topic Author
asif408
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Joined: Sun Mar 02, 2014 8:34 am
Location: Florida

Re: Should we convert all tIRA money to Roth?

Post by asif408 » Tue Mar 12, 2019 8:09 am

TBillT wrote:
Mon Mar 11, 2019 11:40 pm
The reasons for Roth Conversion are (as I understand it) are:
(1) to prevent bumping into really high tax bracket at Age 70.5 due to the RMD Required Minimum dstributons from IRA; and
(2) for your heirs, to give them a Roth IRA inheritance with less tax burden

But it is not so bad having tIRA if it is smaller amount (not millions) and your taxable income is lower and you might have medical and other deductions you can offset the tax burden. You might actually rather have the tIRA. I think it is a little soon in your life to worry about aggressively converting, but smaller amounts with low tax burden are OK.

Bottom line is you would need to do some spreadsheet retirement planing, but at your age, I think I would wait a little and let the passage of time clarify the decisions to be made.
Thanks for the input. Yes, I've only converted a few thousand dollars, and we have less than 20K in tIRAs, so whatever partial amount we do convert won't be enough to move us above the 15% marginal tax bracket.

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