Was not converting to Roth a good idea?

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Topic Author
protagonist
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Was not converting to Roth a good idea?

Post by protagonist »

I retired at 55 and I thought about converting since age 60....I'm 69 now. It was recommended by many on this site.
My reason for not converting is that my IRA is only about 20% of my portfolio, so my RMDs would not be that great, and the tax burden would have been large and would have disqualified me for cheap health insurance (at least before age 66).

In retrospect, I suspect not paying huge taxes up front for the Roth conversion probably will work to my advantage in the long run.

Does that make sense?
Last edited by protagonist on Thu Sep 09, 2021 12:14 pm, edited 1 time in total.
Gabelli2020
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Re: Was not converting to Roth a good idea?

Post by Gabelli2020 »

I’m 65, and made a similar decision. 3.5 million in my IRA, 1.2 in my wife’s. No available cash to pay the conversion. Withdrawal at 72 should be about 200 K for me ( about 22% bracket) . Did not make sense
Chuckles960
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Re: Was not converting to Roth a good idea?

Post by Chuckles960 »

protagonist wrote: Thu Sep 09, 2021 10:54 amIn retrospect, given the huge stock market gains over the past decade, I suspect not paying huge taxes up front for the Roth conversion probably will work to my advantage in the long run, since I have made so much money (compounded) in the stock market on what would have been the taxes I would have had to pay the government had I converted in past years.

Does that make sense?
No, it does not make sense. If the tax rate does not change, it is better to convert.

Consider $1000, a tax rate of 20%, and an investment that increases your money tenfold before you have to withdraw it to pay your expenses.

If you convert it to a Roth, you must pay upfront tax of $200. Pay the tax from other money, not from the Roth balance (crucial point). Put the entire $1000 into the Roth. This now grows to $10,000, completely tax free.

If you leave it in the IRA, it grows to $10,000 and then you have to pay tax on withdrawal, leaving $8000. Of course, for apples-to-apples you also have to consider the $200 you did not pay in taxes up front. This is the amount you say "since I have made so much money (compounded) in the stock market on what would have been the taxes...". This also grows to $2000, but (crucial point) you have to pay tax on the dividends and capital gains, so it is less than $2000 after tax. So you end up with $8000+2000-tax, which is less than the $10,000 from the Roth.

I have used specific numbers as an example, but it is the same with any numbers. The more "huge" the market gains are, the better the Roth conversion is; not the other way around as you thought. But you must have other money to pay the tax when doing the Roth conversion.If you ay tax from the Roth balance, then there is no difference between converting and not converting; but the Roth is still never worse.
Last edited by Chuckles960 on Thu Sep 09, 2021 11:40 am, edited 3 times in total.
tibbitts
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Re: Was not converting to Roth a good idea?

Post by tibbitts »

protagonist wrote: Thu Sep 09, 2021 10:54 am I retired at 55 and I thought about converting since age 60....I'm 69 now. It was recommended by many on this site.
My reason for not converting is that my IRA is only about 20% of my portfolio, so my RMDs would not be that great, and the tax burden would have been large and would have disqualified me for cheap health insurance (at least before age 66).

In retrospect, given the huge stock market gains over the past decade, I suspect not paying huge taxes up front for the Roth conversion probably will work to my advantage in the long run, since I have made so much money (compounded) in the stock market on what would have been the taxes I would have had to pay the government had I converted in past years.

Does that make sense?
I don't think the "given the huge stock market gains" part makes any sense. If your tIRA had lost 50% over the past decade you'd be very glad you didn't convert. If it had gained 5000%... not so much.

But all kinds of factors like health insurance, RMDs and their effects on IRMAA, NIIT etc. come into play so it's usually complicated to determine what would have been best.
smitcat
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Re: Was not converting to Roth a good idea?

Post by smitcat »

protagonist wrote: Thu Sep 09, 2021 10:54 am I retired at 55 and I thought about converting since age 60....I'm 69 now. It was recommended by many on this site.
My reason for not converting is that my IRA is only about 20% of my portfolio, so my RMDs would not be that great, and the tax burden would have been large and would have disqualified me for cheap health insurance (at least before age 66).

In retrospect, given the huge stock market gains over the past decade, I suspect not paying huge taxes up front for the Roth conversion probably will work to my advantage in the long run, since I have made so much money (compounded) in the stock market on what would have been the taxes I would have had to pay the government had I converted in past years.

Does that make sense?
Why would it matter now?
If it is important to know for some reason I am sure you could spend the time and efforts to model it out if you wanted to.
curmudgeon
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Re: Was not converting to Roth a good idea?

Post by curmudgeon »

There are many circumstances where not doing Roth conversions is an appropriate path. Having a significant pension, or having tIRA being relatively small are two common cases. If you want to bother, there still might be some benefit to small conversions in these circumstances, but they aren't likely to move the needle much.
marcopolo
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Re: Was not converting to Roth a good idea?

Post by marcopolo »

Chuckles960 wrote: Thu Sep 09, 2021 11:18 am
protagonist wrote: Thu Sep 09, 2021 10:54 amIn retrospect, given the huge stock market gains over the past decade, I suspect not paying huge taxes up front for the Roth conversion probably will work to my advantage in the long run, since I have made so much money (compounded) in the stock market on what would have been the taxes I would have had to pay the government had I converted in past years.

Does that make sense?
No, it does not make sense. If the tax rate does not change, it is better to convert.

Consider $1000, a tax rate of 20%, and an investment that increases your money tenfold before you have to withdraw it to pay your expenses.

If you convert it to a Roth, you must pay upfront tax of $200. Pay the tax from other money, not from the Roth balance (crucial point). Put the entire $1000 into the Roth. This now grows to $10,000, completely tax free.

If you leave it in the IRA, it grows to $10,000 and then you have to pay tax on withdrawal, leaving $8000. Of course, for apples-to-apples you also have to consider the $200 you did not pay in taxes up front. This is the amount you say "since I have made so much money (compounded) in the stock market on what would have been the taxes...". This also grows to $2000, but (crucial point) you have to pay tax on the dividends and capital gains, so it is less than $2000 after tax. So you end up with $8000+2000-tax, which is less than the $10,000 from the Roth.

I have used specific numbers as an example, but it is the same with any numbers. The more "huge" the market gains are, the better the Roth conversion is; not the other way around as you thought. But you must have other money to pay the tax when doing the Roth conversion.If you ay tax from the Roth balance, then there is no difference between converting and not converting; but the Roth is still never worse.
Now factor in the part where the OP stated they would have lost access to cheap health insurance, I am assuming referring to ACA tax credits.

Those would around 10% added tax under the cliff (temporarily reduced to 8.6%), and then a huge step function of taxes once over the cliff.

I do agree that the amount of growth does not matter. Although, I usually see that argument being (erroneously) used to support Roth Conversions.
Last edited by marcopolo on Thu Sep 09, 2021 11:58 am, edited 1 time in total.
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MrJedi
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Re: Was not converting to Roth a good idea?

Post by MrJedi »

What still matters is marginal tax rate between the two times in question.

If you deferred tax at a higher tax rate than when you withdraw it, you win.

I think the scenario you are trying to draw up is if you defer tax and have some monstrous growth, so you end up with a huge tax deferred balance and end up getting hit by higher tax rate due to big deferred growth. In that case it might be better to do Roth conversion instead of being forced into higher tax bracket due to huge deferred balance. BUT it is asymmetric risk. It is much better situation if you get forced into paying high tax due to big deferred growth vs. doing Roth with low growth and end up running out of money because you paid more tax than necessary.
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Re: Was not converting to Roth a good idea?

Post by sureshoe »

I don't think many people on here advocate doing large Roth conversions that cause large tax bills.
Topic Author
protagonist
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Re: Was not converting to Roth a good idea?

Post by protagonist »

tibbitts wrote: Thu Sep 09, 2021 11:30 am
I don't think the "given the huge stock market gains" part makes any sense. If your tIRA had lost 50% over the past decade you'd be very glad you didn't convert. If it had gained 5000%... not so much.

But all kinds of factors like health insurance, RMDs and their effects on IRMAA, NIIT etc. come into play so it's usually complicated to determine what would have been best.
That's correct. I wasn't thinking with my initial post. I will edit it.
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Re: Was not converting to Roth a good idea?

Post by smitcat »

protagonist wrote: Thu Sep 09, 2021 10:54 am I retired at 55 and I thought about converting since age 60....I'm 69 now. It was recommended by many on this site.
My reason for not converting is that my IRA is only about 20% of my portfolio, so my RMDs would not be that great, and the tax burden would have been large and would have disqualified me for cheap health insurance (at least before age 66).

In retrospect, I suspect not paying huge taxes up front for the Roth conversion probably will work to my advantage in the long run.

Does that make sense?
This post does not contain near enough data to render a guess.
If this is important to you for some reason you can try and model it but it will take time and effort.
What value would that effort provide?
marcopolo
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Re: Was not converting to Roth a good idea?

Post by marcopolo »

sureshoe wrote: Thu Sep 09, 2021 11:59 am I don't think many people on here advocate doing large Roth conversions that cause large tax bills.
I guess that depends on what you mean by "many people". There are definitely many posts/threads where that is advocated. Sometimes justifiably, others that leave one scratching their heads.
Once in a while you get shown the light, in the strangest of places if you look at it right.
lstone19
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Re: Was not converting to Roth a good idea?

Post by lstone19 »

Gabelli2020 wrote: Thu Sep 09, 2021 11:04 am I’m 65, and made a similar decision. 3.5 million in my IRA, 1.2 in my wife’s. No available cash to pay the conversion.
The "no available cash to pay for the conversion", at least to me, makes no sense after you're 59-1/2. I've always assumed the main reason for paying the taxes on a conversion with other cash is due to the penalty on IRA distributions before 59-1/2. Once you're 59-1/2, you can take additional money out of the IRA for the taxes and split the target amount between a conversion and a distribution. If you think the taxes on a conversion now will be less than the taxes on a distribution later, then it makes sense to do so no matter how you pay the taxes.

For us, now that we're both over 59-1/2, we consider our retirement accounts to be just more current assets. Which to use is simply a matter of considering the tax treatment. And by having converted a fair amount and about to start looking for our retirement home, we are in the very nice position of being able to pay cash (by making a Roth distribution) without initially selling our current home (yes, we won't be able to get the money back in the Roth after selling the current home (unless it's within 60 days) but that's a small price to pay).
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Re: Was not converting to Roth a good idea?

Post by dodecahedron »

smitcat wrote: Thu Sep 09, 2021 12:27 pm
protagonist wrote: Thu Sep 09, 2021 10:54 am I retired at 55 and I thought about converting since age 60....I'm 69 now. It was recommended by many on this site.
My reason for not converting is that my IRA is only about 20% of my portfolio, so my RMDs would not be that great, and the tax burden would have been large and would have disqualified me for cheap health insurance (at least before age 66).

In retrospect, I suspect not paying huge taxes up front for the Roth conversion probably will work to my advantage in the long run.

Does that make sense?
This post does not contain near enough data to render a guess.
If this is important to you for some reason you can try and model it but it will take time and effort.
What value would that effort provide?
Indeed. The important and actionable question is not retrospectively whether it would have been worthwhile to have converted during those past years, but whether prospectively it would be worthwhile to convert any of your TIRA in the remaining few years before you reach your RMD age of 72.
docco
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Re: Was not converting to Roth a good idea?

Post by docco »

1. I think the sweet spot for doing larger Roth conversions is between ages 59.5 and 63 if not on ACA, to avoid IRMAA. If on ACA, probably want to even out the Roth conversions between ages 59.5 and 72.

2. It's also not really the 'relative' size of the IRA, but the 'absolute' size of the IRA (all non-Roth IRAs/401ks etc combined) that matters. For example, if you have $1 million in your IRA at age 72, you're probably not worried too much about the taxes on RMDs as you likely can manage your tax bracket to within 12% if you are inclined to optimize for taxes that way. But if you have $3 million in your IRAs at age 72, you are probably already into the 22% bracket so not much you can do in hindsight at that point.
desconhecido
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Re: Was not converting to Roth a good idea?

Post by desconhecido »

Chuckles960 wrote: Thu Sep 09, 2021 11:18 am
protagonist wrote: Thu Sep 09, 2021 10:54 amIn retrospect, given the huge stock market gains over the past decade, I suspect not paying huge taxes up front for the Roth conversion probably will work to my advantage in the long run, since I have made so much money (compounded) in the stock market on what would have been the taxes I would have had to pay the government had I converted in past years.

Does that make sense?
No, it does not make sense. If the tax rate does not change, it is better to convert.

Consider $1000, a tax rate of 20%, and an investment that increases your money tenfold before you have to withdraw it to pay your expenses.

If you convert it to a Roth, you must pay upfront tax of $200. Pay the tax from other money, not from the Roth balance (crucial point). Put the entire $1000 into the Roth. This now grows to $10,000, completely tax free.

If you leave it in the IRA, it grows to $10,000 and then you have to pay tax on withdrawal, leaving $8000. Of course, for apples-to-apples you also have to consider the $200 you did not pay in taxes up front. This is the amount you say "since I have made so much money (compounded) in the stock market on what would have been the taxes...". This also grows to $2000, but (crucial point) you have to pay tax on the dividends and capital gains, so it is less than $2000 after tax. So you end up with $8000+2000-tax, which is less than the $10,000 from the Roth.

I have used specific numbers as an example, but it is the same with any numbers. The more "huge" the market gains are, the better the Roth conversion is; not the other way around as you thought. But you must have other money to pay the tax when doing the Roth conversion.If you ay tax from the Roth balance, then there is no difference between converting and not converting; but the Roth is still never worse.
It's more complicated than that. You don't pay the extra tax on the $10,000 growth in the IRA, you only pay the tax on the extra amount that you have to withdraw when your RMD kicks in. Projections are that in a couple years first year RMD rate will be about 3.65%. So, in the first year of your RMD you will pay .2 * .0365 * $10k = $73 extra tax. As for the missing $2000 that you have to pay tax on, if you can allow your Roth money to grow unmolested, you have to consider that your $2000 can grow unmolested as well, except, let's assume that it spits out qualified dividends at 1.5% (VOO, for example). That dividend income is either tax free or taxed at, probably, 15%. So, that's $4.50/year -- not much more than a Big Mac.

So, depending on a person's situation and projected retirement tax rate, it may be advantageous to do the Roth conversions.

When I looked at this, in order to make a significant dent in my tIRA, it would have been necessary to bump up a couple tax brackets and likely RMDs would sill be taxed at about the same rate.
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celia
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Re: Was not converting to Roth a good idea?

Post by celia »

sureshoe wrote: Thu Sep 09, 2021 11:59 am I don't think many people on here advocate doing large Roth conversions that cause large tax bills.
You must not be reading the same threads I do. It is a choice of paying some of the taxes now or later. What would be your tax rate now and what would it be later? Do you think today's historically tax rates will always stay that way?
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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GerryL
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Re: Was not converting to Roth a good idea?

Post by GerryL »

curmudgeon wrote: Thu Sep 09, 2021 11:44 am There are many circumstances where not doing Roth conversions is an appropriate path. Having a significant pension, or having tIRA being relatively small are two common cases. If you want to bother, there still might be some benefit to small conversions in these circumstances, but they aren't likely to move the needle much.
Another factor is what you intend to do with the money eventually.
I was doing modest conversions that would not affect taxation of my SS benefits when I realized that all or most of my Roth was going to end up going to charity. There was no need for me to pay taxes on $$ in my IRA to bulk up the Roth. Stopped doing conversions. The Roth is invested aggressively, and I manage taxes on RMDs using QCDs.

I made the decision. It is in the past. Nothing I could do about it now even if someone insists it was not a good idea.
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Re: Was not converting to Roth a good idea?

Post by bsteiner »

There are many factors to consider. For those who can take advantage of it, one of the benefits of the Roth conversion is that there are no required distributions during the life of the IRA owner (and his/her spouse, if the spouse is the beneficiary).
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Re: Was not converting to Roth a good idea?

Post by sureshoe »

marcopolo wrote: Thu Sep 09, 2021 12:35 pm
sureshoe wrote: Thu Sep 09, 2021 11:59 am I don't think many people on here advocate doing large Roth conversions that cause large tax bills.
I guess that depends on what you mean by "many people". There are definitely many posts/threads where that is advocated. Sometimes justifiably, others that leave one scratching their heads.
celia wrote: Thu Sep 09, 2021 2:04 pm You must not be reading the same threads I do. It is a choice of paying some of the taxes now or later. What would be your tax rate now and what would it be later? Do you think today's historically tax rates will always stay that way?
I'd be curious what threads your seeing and your interpretation - I'll go up and examine this thread, maybe people are saying that.

But, if I make $200k a year and I have $400k in an IRA, I'm assuming nobody on here is saying you should convert that without really good reasons - you'd be paying 32% and 35% on lots of that. The goal is figuring out a way to convert in the 12% bracket. If you have RMDs and large income in retirement, there might be a case for some conversions in 22% or 24% that make sense.

Anyhoo, will re-skim this to see anyone advocating for "convert regardless of tax bill".
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Re: Was not converting to Roth a good idea?

Post by RJC »

Gabelli2020 wrote: Thu Sep 09, 2021 11:04 am I’m 65, and made a similar decision. 3.5 million in my IRA, 1.2 in my wife’s. No available cash to pay the conversion. Withdrawal at 72 should be about 200 K for me ( about 22% bracket) . Did not make sense
How does one accumulate 3.5M in an IRA? Isn't the max contribution 6k a year?
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Re: Was not converting to Roth a good idea?

Post by MrJedi »

RJC wrote: Thu Sep 09, 2021 2:21 pm
Gabelli2020 wrote: Thu Sep 09, 2021 11:04 am I’m 65, and made a similar decision. 3.5 million in my IRA, 1.2 in my wife’s. No available cash to pay the conversion. Withdrawal at 72 should be about 200 K for me ( about 22% bracket) . Did not make sense
How does one accumulate 3.5M in an IRA? Isn't the max contribution 6k a year?
401k rollovers. Or hitting a big stock in your IRA if that's your thing.
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Re: Was not converting to Roth a good idea?

Post by RJC »

MrJedi wrote: Thu Sep 09, 2021 2:22 pm
RJC wrote: Thu Sep 09, 2021 2:21 pm
Gabelli2020 wrote: Thu Sep 09, 2021 11:04 am I’m 65, and made a similar decision. 3.5 million in my IRA, 1.2 in my wife’s. No available cash to pay the conversion. Withdrawal at 72 should be about 200 K for me ( about 22% bracket) . Did not make sense
How does one accumulate 3.5M in an IRA? Isn't the max contribution 6k a year?
401k rollovers. Or hitting a big stock in your IRA if that's your thing.
Gotcha, thanks.
desconhecido
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Re: Was not converting to Roth a good idea?

Post by desconhecido »

sureshoe wrote: Thu Sep 09, 2021 2:19 pm
marcopolo wrote: Thu Sep 09, 2021 12:35 pm
sureshoe wrote: Thu Sep 09, 2021 11:59 am I don't think many people on here advocate doing large Roth conversions that cause large tax bills.
I guess that depends on what you mean by "many people". There are definitely many posts/threads where that is advocated. Sometimes justifiably, others that leave one scratching their heads.
celia wrote: Thu Sep 09, 2021 2:04 pm You must not be reading the same threads I do. It is a choice of paying some of the taxes now or later. What would be your tax rate now and what would it be later? Do you think today's historically tax rates will always stay that way?
I'd be curious what threads your seeing and your interpretation - I'll go up and examine this thread, maybe people are saying that.

But, if I make $200k a year and I have $400k in an IRA, I'm assuming nobody on here is saying you should convert that without really good reasons - you'd be paying 32% and 35% on lots of that. The goal is figuring out a way to convert in the 12% bracket. If you have RMDs and large income in retirement, there might be a case for some conversions in 22% or 24% that make sense.

Anyhoo, will re-skim this to see anyone advocating for "convert regardless of tax bill".
Here's the problem. Let's say you're 62 and will start taking RMDs in 10 years. If you convert $100,000 (is that large conversion?) to Roth and assume a discount rate of about 7%, when you're 72, you will have decreased the future gross value of your tIRA by $200,000. That will reduce your first RMD by about $7300 and you will save taxes on that at whatever rate you encounter. In order to get that tax savings in 10 years, you have to pay, depending on your current income level, probably in excess of $20,000 taxes. Today. It doesn't really matter whether you pay for it out of the Roth money or you take out a second mortgage to pay for it -- it's still $20k. All this to save taxes on $7.3k income in 10 years. If you're 62 and have no taxable income, then you can convert a sufficient amount into Roth to gain the slight tax advantage of reducing your RMD in 10 years by $7.3k. Or, if you anticipate making a giant expenditure sometime in the future, then, if you have Roth money you have the option of using tax paid money or taxable money. But, if you get SS and have a pension and little bit of investment income, you're going to face a significant tax bit even if $100,000 isn't a large conversion.
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Re: Was not converting to Roth a good idea?

Post by Lee_WSP »

Unless the tax deferred account numbers in the millions, it really makes very little difference. Most people (those in the middle brackets) can expect to save a few percentage points of the total account value. So, by rough math, if the account is 1 million, you'd save ~$10,000 - $50,000. Painful at the higher end, but certainly not disastrous.

The benefit really depends on what bracket RMD's push you into and what rate you can convert and how much you can convert at the lower rate. It's a question of how much extra will I pay if I do nothing? The answer is not usually all that bad unless the TDA is very large.
Last edited by Lee_WSP on Thu Sep 09, 2021 2:47 pm, edited 3 times in total.
marcopolo
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Re: Was not converting to Roth a good idea?

Post by marcopolo »

sureshoe wrote: Thu Sep 09, 2021 2:19 pm
marcopolo wrote: Thu Sep 09, 2021 12:35 pm
sureshoe wrote: Thu Sep 09, 2021 11:59 am I don't think many people on here advocate doing large Roth conversions that cause large tax bills.
I guess that depends on what you mean by "many people". There are definitely many posts/threads where that is advocated. Sometimes justifiably, others that leave one scratching their heads.
celia wrote: Thu Sep 09, 2021 2:04 pm You must not be reading the same threads I do. It is a choice of paying some of the taxes now or later. What would be your tax rate now and what would it be later? Do you think today's historically tax rates will always stay that way?
I'd be curious what threads your seeing and your interpretation - I'll go up and examine this thread, maybe people are saying that.

But, if I make $200k a year and I have $400k in an IRA, I'm assuming nobody on here is saying you should convert that without really good reasons - you'd be paying 32% and 35% on lots of that. The goal is figuring out a way to convert in the 12% bracket. If you have RMDs and large income in retirement, there might be a case for some conversions in 22% or 24% that make sense.

Anyhoo, will re-skim this to see anyone advocating for "convert regardless of tax bill".
Celia, i will let you field this one as one the leading voices of doing large Roth Conversions, at almost any cost .
Perhaps you could point him to the numerous threads in which you have advocated doing that. (Some i found justified, others with which I disagreed).
Once in a while you get shown the light, in the strangest of places if you look at it right.
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Re: Was not converting to Roth a good idea?

Post by bradpevans »

Gabelli2020 wrote: Thu Sep 09, 2021 11:04 am I’m 65, and made a similar decision. 3.5 million in my IRA, 1.2 in my wife’s. No available cash to pay the conversion. Withdrawal at 72 should be about 200 K for me ( about 22% bracket) . Did not make sense


Not to be a downer, but loss of spouse means the 22% bracket is a whole lot smaller and the IRA is the same
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Re: Was not converting to Roth a good idea?

Post by lstone19 »

desconhecido wrote: Thu Sep 09, 2021 2:41 pm Here's the problem. Let's say you're 62 and will start taking RMDs in 10 years. If you convert $100,000 (is that large conversion?) to Roth and assume a discount rate of about 7%, when you're 72, you will have decreased the future gross value of your tIRA by $200,000. That will reduce your first RMD by about $7300 and you will save taxes on that at whatever rate you encounter. In order to get that tax savings in 10 years, you have to pay, depending on your current income level, probably in excess of $20,000 taxes. Today. It doesn't really matter whether you pay for it out of the Roth money or you take out a second mortgage to pay for it -- it's still $20k. All this to save taxes on $7.3k income in 10 years. If you're 62 and have no taxable income, then you can convert a sufficient amount into Roth to gain the slight tax advantage of reducing your RMD in 10 years by $7.3k. Or, if you anticipate making a giant expenditure sometime in the future, then, if you have Roth money you have the option of using tax paid money or taxable money. But, if you get SS and have a pension and little bit of investment income, you're going to face a significant tax bit even if $100,000 isn't a large conversion.
This seems like an apples to oranges comparison. You're comparing what you pay in taxes now to how it reduces RMDs. But remember the M means Minimum. Unless you're going on the assumption that you're never going to need to spend any of your retirement funds (and frankly, a lot of analyses of retirement funds seem to make the assumption that you should never be spending your retirement funds ever), the taxes on the minimum is irrelevant. What is relevant is the taxes on what you actually distribute.
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Re: Was not converting to Roth a good idea?

Post by celia »

protagonist wrote: Thu Sep 09, 2021 10:54 am I retired at 55 and I thought about converting since age 60....I'm 69 now. It was recommended by many on this site.
My reason for not converting is that my IRA is only about 20% of my portfolio, so my RMDs would not be that great, and the tax burden would have been large and would have disqualified me for cheap health insurance (at least before age 66).

In retrospect, I suspect not paying huge taxes up front for the Roth conversion probably will work to my advantage in the long run.

Does that make sense?
There is nowhere enough info to say one way or another. The percentage of your portfolio that is tax-deferred is irrelevant. You could have had $3M in tax-deferred and it would likely have been good for you to start converting.

It also depends on what your living expenses are in retirement. If there was a shortfall between regular incomes (pensions, SS, rental incomes, etc) and your expenses, the remainder of what you needed should have been taken from tax-deferred, as long as it didn't kick up you too high to be eligible for ACA (if needed). The rest of your living expenses could then have been taken from Roths.

The problem with thinking about "paying huge taxes up front" is that you are ignoring that even "huger" taxes will still be due some day (unless you leave them for your heirs). The more that the tax-deferred grows, the more the taxes will be. That is ok to some extent, except that there is only so much room in each tax bracket, before the large withdrawal/RMD/conversion pushes you into the next tax bracket.

For example, look at this situation:
Gabelli2020 wrote: Thu Sep 09, 2021 11:04 am I’m 65, and made a similar decision. 3.5 million in my IRA, 1.2 in my wife’s. No available cash to pay the conversion. Withdrawal at 72 should be about 200 K for me ( about 22% bracket) . Did not make sense
Today's 4.7 million in tax-deferred will likely be worth 6 or 7 million at age 72. That will make the RMDs be $240K or $280K and cause higher SS premiums, even if that is your only income. What tax bracket will that put you in? Compare that to today's tax bracket and you will see it probably helps to at least convert the amount of annual growth in the tax-deferred.

In addition, if you just let the tax-deferred continue to grow, it will also grow after RMDs start at the same time the percentage you have to remove each year also increases. As long as the amount withdrawn is less that the annual growth, the balance(s) will continue to grow. This usually continues until your late 80s, when the percentage to withdraw surpasses the rate of growth.
No available cash to pay the conversion.
You still have to pay the taxes. Since you will have to pay them from the money that was withdrawn, you might as well have the taxes withheld from the withdrawal, since you are over 59.5. You can also withhold from any Roth conversion, else how would you pay the taxes? (Paying the taxes out of taxable is recommended if you have enough in taxable, but is not required. It is the best place if you have assets in all categories: tax-deferred, Roth, and taxable. If you don't have such a portfolio, you have to work with what you have.)
Withdrawal at 72 should be about 200 K for me ( about 22% bracket).
The 22% tax bracket currently ends at $172,750 (for MFJ) of Taxable Income (after the standard deduction or itemized deductions are subtracted). If this is your only income, you would be near the top of that tax bracket. But if you have any other income (pensions, SS, rental income, dividends, capital gains) or your tax-deferred balance grows, that will increase your Taxable Income.

Luckily Gabelli2020 still has 7 years to make an impact on reducing future RMDs.
Last edited by celia on Thu Sep 09, 2021 3:07 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.
sureshoe
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Re: Was not converting to Roth a good idea?

Post by sureshoe »

desconhecido wrote: Thu Sep 09, 2021 2:41 pm
sureshoe wrote: Thu Sep 09, 2021 2:19 pm
marcopolo wrote: Thu Sep 09, 2021 12:35 pm
sureshoe wrote: Thu Sep 09, 2021 11:59 am I don't think many people on here advocate doing large Roth conversions that cause large tax bills.
I guess that depends on what you mean by "many people". There are definitely many posts/threads where that is advocated. Sometimes justifiably, others that leave one scratching their heads.
celia wrote: Thu Sep 09, 2021 2:04 pm You must not be reading the same threads I do. It is a choice of paying some of the taxes now or later. What would be your tax rate now and what would it be later? Do you think today's historically tax rates will always stay that way?
I'd be curious what threads your seeing and your interpretation - I'll go up and examine this thread, maybe people are saying that.

But, if I make $200k a year and I have $400k in an IRA, I'm assuming nobody on here is saying you should convert that without really good reasons - you'd be paying 32% and 35% on lots of that. The goal is figuring out a way to convert in the 12% bracket. If you have RMDs and large income in retirement, there might be a case for some conversions in 22% or 24% that make sense.

Anyhoo, will re-skim this to see anyone advocating for "convert regardless of tax bill".
Here's the problem. Let's say you're 62 and will start taking RMDs in 10 years. If you convert $100,000 (is that large conversion?) to Roth and assume a discount rate of about 7%, when you're 72, you will have decreased the future gross value of your tIRA by $200,000. That will reduce your first RMD by about $7300 and you will save taxes on that at whatever rate you encounter. In order to get that tax savings in 10 years, you have to pay, depending on your current income level, probably in excess of $20,000 taxes. Today. It doesn't really matter whether you pay for it out of the Roth money or you take out a second mortgage to pay for it -- it's still $20k. All this to save taxes on $7.3k income in 10 years. If you're 62 and have no taxable income, then you can convert a sufficient amount into Roth to gain the slight tax advantage of reducing your RMD in 10 years by $7.3k. Or, if you anticipate making a giant expenditure sometime in the future, then, if you have Roth money you have the option of using tax paid money or taxable money. But, if you get SS and have a pension and little bit of investment income, you're going to face a significant tax bit even if $100,000 isn't a large conversion.
I'm really not following your example. The numbers are too swagged. Either way, it all depends on timing and what the lowest tax bill is. It absolutely does not make sense to pay a 32% or 35% tax bill on something today if you can manage getting it into a 22% tax rate in the future.

Each case is different.
ILResident
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Re: Was not converting to Roth a good idea?

Post by ILResident »

I'm 59 and recently questioned whether performing annual Roth conversions made sense so I ran the numbers of performing conversions (3 scenarios: 1) $10K this year increasing $10K each year thereafter, 2) the reverse process, i.e. $130K this year decreasing $10K each year; and 3) equal annual conversion amounts, i.e. $10K/year) up to age 71. I assumed non-retirement funds to pay the federal taxes each year for these Roth conversions and used the NPV (3% discount rate) of of such conversion amounts as the basis for the starting balance (~$700K for scenarios 1 & 2) in the traditional IRA. I also assumed beginning at age 72 taking RMDs through an assumed age of death at 85 versus allowing the Roth IRA to grow until death at age 85.

Regardless of the estimated annual return, which I used 7%, and various current tax rates, before 72 and after 72, I found the after tax NPV of leaving the funds in the IRA (factoring in net distributions after age 71 and the after-tax NPV of the IRA) in every scenario to be greater than the NPV of the Roth IRA (factoring in taxes paid from non-retirement funds from 59 to 71).

The benefit of such scenarios is not to the owner of these retirement accounts but to the beneficiaries. Assuming relatively equal distributions (year 1: 1/10 of prior year balance, year 2, 1/9 of prior year balance, etc.) during the 10 years after death at 85, the NPV (at age 85) of the IRA for the beneficiary, taking into account 10 years of net distributions, was approximately half the balance of the NPV(at age 85) of the Roth IRA with a lump sum gross distribution at the end of year 10.

The preliminary conclusion I reached is doing annual Roth conversions did not appear to make sense with the caveat that they probably do make sense when there is a correction in the market (~20% or greater) like we saw last year.
desconhecido
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Re: Was not converting to Roth a good idea?

Post by desconhecido »

lstone19 wrote: Thu Sep 09, 2021 2:50 pm
desconhecido wrote: Thu Sep 09, 2021 2:41 pm Here's the problem. Let's say you're 62 and will start taking RMDs in 10 years. If you convert $100,000 (is that large conversion?) to Roth and assume a discount rate of about 7%, when you're 72, you will have decreased the future gross value of your tIRA by $200,000. That will reduce your first RMD by about $7300 and you will save taxes on that at whatever rate you encounter. In order to get that tax savings in 10 years, you have to pay, depending on your current income level, probably in excess of $20,000 taxes. Today. It doesn't really matter whether you pay for it out of the Roth money or you take out a second mortgage to pay for it -- it's still $20k. All this to save taxes on $7.3k income in 10 years. If you're 62 and have no taxable income, then you can convert a sufficient amount into Roth to gain the slight tax advantage of reducing your RMD in 10 years by $7.3k. Or, if you anticipate making a giant expenditure sometime in the future, then, if you have Roth money you have the option of using tax paid money or taxable money. But, if you get SS and have a pension and little bit of investment income, you're going to face a significant tax bit even if $100,000 isn't a large conversion.
This seems like an apples to oranges comparison. You're comparing what you pay in taxes now to how it reduces RMDs. But remember the M means Minimum. Unless you're going on the assumption that you're never going to need to spend any of your retirement funds (and frankly, a lot of analyses of retirement funds seem to make the assumption that you should never be spending your retirement funds ever), the taxes on the minimum is irrelevant. What is relevant is the taxes on what you actually distribute.
"What is relevant is the taxes on what you actually distribute." Ok, I take your point. If you are anticipating withdrawing in excess of your RMD, having the money in a Roth gives you the option of using before tax money (tIRA) or after tax money (Roth). Personally, I can't figure out what I would spend the RMD money for, other than investing in taxable. I understand that this is a very nice problem to have, in the world of problems.

I guess the solution is, make some assumptions, assign some probablities, and do the math.
edit: which is what Il Resident above appears to have done for his own situation.
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Re: Was not converting to Roth a good idea?

Post by LilyFleur »

MrJedi wrote: Thu Sep 09, 2021 11:56 am What still matters is marginal tax rate between the two times in question.

If you deferred tax at a higher tax rate than when you withdraw it, you win.

I think the scenario you are trying to draw up is if you defer tax and have some monstrous growth, so you end up with a huge tax deferred balance and end up getting hit by higher tax rate due to big deferred growth. In that case it might be better to do Roth conversion instead of being forced into higher tax bracket due to huge deferred balance. BUT it is asymmetric risk. It is much better situation if you get forced into paying high tax due to big deferred growth vs. doing Roth with low growth and end up running out of money because you paid more tax than necessary.
I don't understand how you can predict your future marginal tax rate in order to make a Roth conversion decision based on marginal tax rate now as compared to marginal tax rate during the RMD years.

Estimated earnings in an IRA can vary widely, and the estimated RMDs can vary quite a bit. The RMDs determine your future marginal tax rate.

If you select 2%, 6%, and 10% in the estimated earnings box on the Schwab RMD calculator and look at ages 72 and 82, your marginal tax rates could be quite different.

Some of us on this forum will never be in the 12% bracket.
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Re: Was not converting to Roth a good idea?

Post by marcopolo »

LilyFleur wrote: Thu Sep 09, 2021 3:21 pm
MrJedi wrote: Thu Sep 09, 2021 11:56 am What still matters is marginal tax rate between the two times in question.

If you deferred tax at a higher tax rate than when you withdraw it, you win.

I think the scenario you are trying to draw up is if you defer tax and have some monstrous growth, so you end up with a huge tax deferred balance and end up getting hit by higher tax rate due to big deferred growth. In that case it might be better to do Roth conversion instead of being forced into higher tax bracket due to huge deferred balance. BUT it is asymmetric risk. It is much better situation if you get forced into paying high tax due to big deferred growth vs. doing Roth with low growth and end up running out of money because you paid more tax than necessary.
I don't understand how you can predict your future marginal tax rate in order to make a Roth conversion decision based on marginal tax rate now as compared to marginal tax rate during the RMD years.

Estimated earnings in an IRA can vary widely, and the estimated RMDs can vary quite a bit. The RMDs determine your future marginal tax rate.

If you select 2%, 6%, and 10% in the estimated earnings box on the Schwab RMD calculator and look at ages 72 and 82, your marginal tax rates could be quite different.

Some of us on this forum will never be in the 12% bracket.
Just like most financial planning, you have to make estimated guesses, and play the probabilities.

If you want to make a decision on Roth Conversions, you have to make assumptions about future marginal tax rates, since that is pretty much the only thing that matters. If not that, what else would you use to make that decision?
Once in a while you get shown the light, in the strangest of places if you look at it right.
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Re: Was not converting to Roth a good idea?

Post by cowdogman »

protagonist wrote: Thu Sep 09, 2021 10:54 am I retired at 55 and I thought about converting since age 60....I'm 69 now. It was recommended by many on this site.
My reason for not converting is that my IRA is only about 20% of my portfolio, so my RMDs would not be that great, and the tax burden would have been large and would have disqualified me for cheap health insurance (at least before age 66).

In retrospect, I suspect not paying huge taxes up front for the Roth conversion probably will work to my advantage in the long run.

Does that make sense?
I'm generally in the same position (bulk of our savings is in non-TDA accounts) and I came to the same conclusion.

The only IRA withdrawals we will make will be RMDs (because they are required) and, assuming one of us makes to our expected mortality date, our TDA balance will slowly decrease (because of RMDs) to the point where it will be inconsequential (relative to the larger estate) to our heirs.

I'm 61. If I could do Roth conversions at 12% (15% in a few years) I probably would, but I am guessing I will not have the chance for at least a few years, and any conversions after that in the 12% bracket will not put much of dent in our IRA balance.

I have an aversion to voluntarily paying taxes early and an aversion to trying to solve problems that aren't problems yet, so doing nothing suits me just fine.
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LilyFleur
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Re: Was not converting to Roth a good idea?

Post by LilyFleur »

marcopolo wrote: Thu Sep 09, 2021 3:56 pm
LilyFleur wrote: Thu Sep 09, 2021 3:21 pm
MrJedi wrote: Thu Sep 09, 2021 11:56 am What still matters is marginal tax rate between the two times in question.

If you deferred tax at a higher tax rate than when you withdraw it, you win.

I think the scenario you are trying to draw up is if you defer tax and have some monstrous growth, so you end up with a huge tax deferred balance and end up getting hit by higher tax rate due to big deferred growth. In that case it might be better to do Roth conversion instead of being forced into higher tax bracket due to huge deferred balance. BUT it is asymmetric risk. It is much better situation if you get forced into paying high tax due to big deferred growth vs. doing Roth with low growth and end up running out of money because you paid more tax than necessary.
I don't understand how you can predict your future marginal tax rate in order to make a Roth conversion decision based on marginal tax rate now as compared to marginal tax rate during the RMD years.

Estimated earnings in an IRA can vary widely, and the estimated RMDs can vary quite a bit. The RMDs determine your future marginal tax rate.

If you select 2%, 6%, and 10% in the estimated earnings box on the Schwab RMD calculator and look at ages 72 and 82, your marginal tax rates could be quite different.

Some of us on this forum will never be in the 12% bracket.
Just like most financial planning, you have to make estimated guesses, and play the probabilities.

If you want to make a decision on Roth Conversions, you have to make assumptions about future marginal tax rates, since that is pretty much the only thing that matters. If not that, what else would you use to make that decision?
This is the advice I received on this forum before I did my first Roth conversion: It is good to have diversity in types of accounts, because we cannot know the future.

I think that advice has as much certainty and honesty as guessing about future returns.

It's really a fuzzy decision. Putting a fuzzy decision into a spreadsheet with estimates can make a person feel more in control, but it's still kind of a wild guess.
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Re: Was not converting to Roth a good idea?

Post by marcopolo »

LilyFleur wrote: Thu Sep 09, 2021 4:10 pm
marcopolo wrote: Thu Sep 09, 2021 3:56 pm
LilyFleur wrote: Thu Sep 09, 2021 3:21 pm
MrJedi wrote: Thu Sep 09, 2021 11:56 am What still matters is marginal tax rate between the two times in question.

If you deferred tax at a higher tax rate than when you withdraw it, you win.

I think the scenario you are trying to draw up is if you defer tax and have some monstrous growth, so you end up with a huge tax deferred balance and end up getting hit by higher tax rate due to big deferred growth. In that case it might be better to do Roth conversion instead of being forced into higher tax bracket due to huge deferred balance. BUT it is asymmetric risk. It is much better situation if you get forced into paying high tax due to big deferred growth vs. doing Roth with low growth and end up running out of money because you paid more tax than necessary.
I don't understand how you can predict your future marginal tax rate in order to make a Roth conversion decision based on marginal tax rate now as compared to marginal tax rate during the RMD years.

Estimated earnings in an IRA can vary widely, and the estimated RMDs can vary quite a bit. The RMDs determine your future marginal tax rate.

If you select 2%, 6%, and 10% in the estimated earnings box on the Schwab RMD calculator and look at ages 72 and 82, your marginal tax rates could be quite different.

Some of us on this forum will never be in the 12% bracket.
Just like most financial planning, you have to make estimated guesses, and play the probabilities.

If you want to make a decision on Roth Conversions, you have to make assumptions about future marginal tax rates, since that is pretty much the only thing that matters. If not that, what else would you use to make that decision?
This is the advice I received on this forum before I did my first Roth conversion: It is good to have diversity in types of accounts, because we cannot know the future.

I think that advice has as much certainty and honesty as guessing about future returns.

It's really a fuzzy decision. Putting a fuzzy decision into a spreadsheet with estimates can make a person feel more in control, but it's still kind of a wild guess.
Diversity of tax types is a good idea in the face of uncertainty.
Once in a while you get shown the light, in the strangest of places if you look at it right.
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Re: Was not converting to Roth a good idea?

Post by wrongfunds »

cowdogman wrote: Thu Sep 09, 2021 4:06 pm I have an aversion to voluntarily paying taxes early and an aversion to trying to solve problems that aren't problems yet, so doing nothing suits me just fine.
I love it; Can I make this my signature?
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celia
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Re: Was not converting to Roth a good idea?

Post by celia »

ILResident wrote: Thu Sep 09, 2021 3:04 pm I'm 59 and recently questioned whether performing annual Roth conversions made sense so I ran the numbers of performing conversions (3 scenarios: 1) $10K this year increasing $10K each year thereafter, 2) the reverse process, i.e. $130K this year decreasing $10K each year; and 3) equal annual conversion amounts, i.e. $10K/year) up to age 71. I assumed non-retirement funds to pay the federal taxes each year for these Roth conversions and used the NPV (3% discount rate) of of such conversion amounts as the basis for the starting balance (~$700K for scenarios 1 & 2) in the traditional IRA. I also assumed beginning at age 72 taking RMDs through an assumed age of death at 85 versus allowing the Roth IRA to grow until death at age 85.
These numbers don't have much meaning if we don't know how much you are starting with in tax-deferred. $10K or $130K could be a substantial part of the tax-deferred account or just "a drop in the bucket". It could be much more or a fraction of the yearly growth. The stock markets could even cause the account(s) to drop that much and may or may not make you nervous.

Based on previous cases I've seen posted here, I think if the tax-deferred accounts total less than $500K for a Single or $1M for MFJ at age 72, they don't need to worry about converting.

A common error people make when analyzing Roth conversions is forgetting that the tax-deferred account will continue to grow until age 72 and EVEN AFTER 72. I don't know if that is the case here, or not.

Regardless of the estimated annual return, which I used 7%, and various current tax rates, before 72 and after 72, I found the after tax NPV of leaving the funds in the IRA (factoring in net distributions after age 71 and the after-tax NPV of the IRA) in every scenario to be greater than the NPV of the Roth IRA (factoring in taxes paid from non-retirement funds from 59 to 71).
I assume you are trying to account for inflation here, by referring to Net Present Value (NPV). You don't need to do that since income, tax bracket boundaries, and spending tend to grow similarly over time and this just makes the calculations unnecessarily complicated. Just keep in mind that dollars in Roth are worth more since all the taxes have already been paid while dollars in tax-deferred have tax owed before they can be spent.

This is where a tax-efficient portfolio comes in handy. If you put stocks in Roth and bonds in tax-deferred (to simplify this for a minute), you can maximize tax-free future growth while keeping your future RMDs from growing so much. In my Roth conversion analysis, I always have the Roth growing at a faster rate than the tax-deferred, as in this example:
viewtopic.php?f=1&t=323551&p=5462812#p5462812

That example is intentionally incomplete, for that OP to finish. I was originally showing him how to have a tax-efficient portfolio then showed what happens to the taxes and account values if you increase your Roth conversions or decrease them.
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: Was not converting to Roth a good idea?

Post by drzzzzz »

GerryL wrote: Thu Sep 09, 2021 2:09 pm
curmudgeon wrote: Thu Sep 09, 2021 11:44 am There are many circumstances where not doing Roth conversions is an appropriate path. Having a significant pension, or having tIRA being relatively small are two common cases. If you want to bother, there still might be some benefit to small conversions in these circumstances, but they aren't likely to move the needle much.
Another factor is what you intend to do with the money eventually.
I was doing modest conversions that would not affect taxation of my SS benefits when I realized that all or most of my Roth was going to end up going to charity. There was no need for me to pay taxes on $$ in my IRA to bulk up the Roth. Stopped doing conversions. The Roth is invested aggressively, and I manage taxes on RMDs using QCDs.

I made the decision. It is in the past. Nothing I could do about it now even if someone insists it was not a good idea.
I think this is something that is often overlooked - leaving assets to charity and if that is your plan leaving a traditional IRA is a win win for everyone but the tax collector.
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Re: Was not converting to Roth a good idea?

Post by celia »

LilyFleur wrote: Thu Sep 09, 2021 4:10 pm This is the advice I received on this forum before I did my first Roth conversion: It is good to have diversity in types of accounts, because we cannot know the future.

I think that advice has as much certainty and honesty as guessing about future returns.

It's really a fuzzy decision. Putting a fuzzy decision into a spreadsheet with estimates can make a person feel more in control, but it's still kind of a wild guess.
Things become more certain the closer you get to retirement or age 72. By then, you have a better idea of how much is in each type of account and what your income streams will be (pension, SS, dividends, capital gains, etc).

You can also make your own guess as to how taxes might change in the future based on current politics. Right now, our tax brackets are at historic lows.
:beer

To me, the WORST decision you can make is to not even think about it. . .

But it is your money. Your choice.
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: Was not converting to Roth a good idea?

Post by sc9182 »

celia wrote: Thu Sep 09, 2021 4:34 pm
ILResident wrote: Thu Sep 09, 2021 3:04 pm I'm 59 and recently questioned whether performing annual Roth conversions made sense so I ran the numbers of performing conversions (3 scenarios: 1) $10K this year increasing $10K each year thereafter, 2) the reverse process, i.e. $130K this year decreasing $10K each year; and 3) equal annual conversion amounts, i.e. $10K/year) up to age 71. I assumed non-retirement funds to pay the federal taxes each year for these Roth conversions and used the NPV (3% discount rate) of of such conversion amounts as the basis for the starting balance (~$700K for scenarios 1 & 2) in the traditional IRA. I also assumed beginning at age 72 taking RMDs through an assumed age of death at 85 versus allowing the Roth IRA to grow until death at age 85.
These numbers don't have much meaning if we don't know how much you are starting with in tax-deferred. $10K or $130K could be a substantial part of the tax-deferred account or just "a drop in the bucket". It could be much more or a fraction of the yearly growth. The stock markets could even cause the account(s) to drop that much and may or may not make you nervous.

Based on previous cases I've seen posted here, I think if the tax-deferred accounts total less than $500K for a Single or $1M for MFJ at age 72, they don't need to worry about converting.

A common error people make when analyzing Roth conversions is forgetting that the tax-deferred account will continue to grow until age 72 and EVEN AFTER 72. I don't know if that is the case here, or not.

Regardless of the estimated annual return, which I used 7%, and various current tax rates, before 72 and after 72, I found the after tax NPV of leaving the funds in the IRA (factoring in net distributions after age 71 and the after-tax NPV of the IRA) in every scenario to be greater than the NPV of the Roth IRA (factoring in taxes paid from non-retirement funds from 59 to 71).
I assume you are trying to account for inflation here, by referring to Net Present Value (NPV). You don't need to do that since income, tax bracket boundaries, and spending tend to grow similarly over time and this just makes the calculations unnecessarily complicated. Just keep in mind that dollars in Roth are worth more since all the taxes have already been paid while dollars in tax-deferred have tax owed before they can be spent.

This is where a tax-efficient portfolio comes in handy. If you put stocks in Roth and bonds in tax-deferred (to simplify this for a minute), you can maximize tax-free future growth while keeping your future RMDs from growing so much. In my Roth conversion analysis, I always have the Roth growing at a faster rate than the tax-deferred, as in this example:
viewtopic.php?f=1&t=323551&p=5462812#p5462812

That example is intentionally incomplete, for that OP to finish. I was originally showing him how to have a tax-efficient portfolio then showed what happens to the taxes and account values if you increase your Roth conversions or decrease them.
Starving TDA with mostly/all-bonds., while keeping Roth very aggressive— is a strategy to make Roth appear more richer; all you are doing it shifting much higher risk to Roth (and market Gods don’t announce time-frame at what instance they want to cut your Roth in half or worse yet keep it in lost-decade penalty column for how long :-(

If you’ve kept both TDA and Roth about similar risk profile ., you would definitely have “more” TDA balances to pay for future taxes due ..

It’s a “bet” you are willing to take that Aggressive/equity-rich Roth portfolio will continue to outperform Vs. mal-nourished TDA (yes likely it will - but with sudden/extended Unpredictable corrections)

Again - Roths (in lower brakcets) could be useful if you never need those monies., and can assure/provide long/extended time-frames allowing for it to compound - so Roths could help toward good inheritance play. This also assumes - your kids and grand-kids ARE all baby-Einsteins - who will assuredly be in high tax brackets after age 18 and well beyond !!
Last edited by sc9182 on Thu Sep 09, 2021 6:12 pm, edited 1 time in total.
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protagonist
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Re: Was not converting to Roth a good idea?

Post by protagonist »

dodecahedron wrote: Thu Sep 09, 2021 1:11 pm
smitcat wrote: Thu Sep 09, 2021 12:27 pm
protagonist wrote: Thu Sep 09, 2021 10:54 am I retired at 55 and I thought about converting since age 60....I'm 69 now. It was recommended by many on this site.
My reason for not converting is that my IRA is only about 20% of my portfolio, so my RMDs would not be that great, and the tax burden would have been large and would have disqualified me for cheap health insurance (at least before age 66).

In retrospect, I suspect not paying huge taxes up front for the Roth conversion probably will work to my advantage in the long run.

Does that make sense?
This post does not contain near enough data to render a guess.
If this is important to you for some reason you can try and model it but it will take time and effort.
What value would that effort provide?
Indeed. The important and actionable question is not retrospectively whether it would have been worthwhile to have converted during those past years, but whether prospectively it would be worthwhile to convert any of your TIRA in the remaining few years before you reach your RMD age of 72.
The first part of what you say is true and not actionable. Really, as a means to understand it further, I wanted to pick brains on my retrospective decision.
The second part is also true.....what is important is whether it would be worthwhile to convert at this point.....and given some changes in my life status that complicate that issue I started a new thread on that topic.
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protagonist
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Re: Was not converting to Roth a good idea?

Post by protagonist »

Lee_WSP wrote: Thu Sep 09, 2021 2:44 pm Unless the tax deferred account numbers in the millions, it really makes very little difference.
That was my assumption as well when I decided not to convert.
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protagonist
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Re: Was not converting to Roth a good idea?

Post by protagonist »

wrongfunds wrote: Thu Sep 09, 2021 4:26 pm
cowdogman wrote: Thu Sep 09, 2021 4:06 pm I have an aversion to voluntarily paying taxes early and an aversion to trying to solve problems that aren't problems yet, so doing nothing suits me just fine.
I love it; Can I make this my signature?
Me as well (OP here)...that combined with a lack of crystal ball (at least one that works) has fueled my inertia up to this point.
wrongfunds
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Re: Was not converting to Roth a good idea?

Post by wrongfunds »

Here is an example from Kitces :oops:
Example 1. Dorothy is a 60-year-old widow who recently retired with $25,000/year in Social Security widow’s benefits and an inflation-adjusting survivorship pension of $45,000/year. In addition, she has a $300,000 brokerage account, and a $1.5M IRA. When Dorothy turns 72, and her Required Minimum Distributions begin, her IRA is projected to be almost $3.4M, which will produce an RMD of almost $132,000… which, stacked on top of her inflation-adjusted pension and Social Security benefits (which will rise to almost $100,000/year at a 3% inflation rate) will drive Dorothy up into the 32% tax bracket, with more and more of her future RMDs taxed at 32% as the RMD obligation grows with age.
He uses nominal (inflated) dollars but then does NOT apply them to the tax brackets :confused

If such a prominent person can give this as rationale for choosing the Roth conversion, how would you and I be able to resist their (flawed) logic?

(taken from https://www.kitces.com/blog/navigating- ... nversions/ )
WhiteMaxima
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Re: Was not converting to Roth a good idea?

Post by WhiteMaxima »

SS will be taxed AT 85% if your 401K IRA RMD + Pesion > $44000. So I would do Roth conversion as soon as possible to reduce future tax.
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dodecahedron
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Re: Was not converting to Roth a good idea?

Post by dodecahedron »

wrongfunds wrote: Thu Sep 09, 2021 6:08 pm Here is an example from Kitces :oops:
Example 1. Dorothy is a 60-year-old widow who recently retired with $25,000/year in Social Security widow’s benefits and an inflation-adjusting survivorship pension of $45,000/year. In addition, she has a $300,000 brokerage account, and a $1.5M IRA. When Dorothy turns 72, and her Required Minimum Distributions begin, her IRA is projected to be almost $3.4M, which will produce an RMD of almost $132,000… which, stacked on top of her inflation-adjusted pension and Social Security benefits (which will rise to almost $100,000/year at a 3% inflation rate) will drive Dorothy up into the 32% tax bracket, with more and more of her future RMDs taxed at 32% as the RMD obligation grows with age.
He uses nominal (inflated) dollars but then does NOT apply them to the tax brackets :confused

If such a prominent person can give this as rationale for choosing the Roth conversion, how would you and I be able to resist their (flawed) logic?

(taken from https://www.kitces.com/blog/navigating- ... nversions/ )
Good catch on the Kitces' mistake. I am surprised nobody else pointed that out in the comments. Why don't you post a comment there and see if he will respond and correct it.
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dodecahedron
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Re: Was not converting to Roth a good idea?

Post by dodecahedron »

WhiteMaxima wrote: Thu Sep 09, 2021 6:13 pm SS will be taxed AT 85% if your 401K IRA RMD + Pesion > $44000. So I would do Roth conversion as soon as possible to reduce future tax.
SS taxability is complicated, especially because OP's marital status is changing and spouse's future income is uncertain. A simple inequality like WhiteMaxima's above does not capture all the nuances.

Sooner or later, the fact that the formula for computing the taxable amount of SS is NOT adjusted for inflation means that SS will be 85% taxable for most folks, eventually even hitting folks whose only income is SS.

Edited to add: "taxed at 85%" only means that 85% of SS will be included in AGI (and ultimately taxable income.) It does NOT mean that a taxpayer pays 85% of their SS in taxes!
sc9182
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Re: Was not converting to Roth a good idea?

Post by sc9182 »

wrongfunds wrote: Thu Sep 09, 2021 6:08 pm Here is an example from Kitces :oops:
Example 1. Dorothy is a 60-year-old widow who recently retired with $25,000/year in Social Security widow’s benefits and an inflation-adjusting survivorship pension of $45,000/year. In addition, she has a $300,000 brokerage account, and a $1.5M IRA. When Dorothy turns 72, and her Required Minimum Distributions begin, her IRA is projected to be almost $3.4M, which will produce an RMD of almost $132,000… which, stacked on top of her inflation-adjusted pension and Social Security benefits (which will rise to almost $100,000/year at a 3% inflation rate) will drive Dorothy up into the 32% tax bracket, with more and more of her future RMDs taxed at 32% as the RMD obligation grows with age.
He uses nominal (inflated) dollars but then does NOT apply them to the tax brackets :confused

If such a prominent person can give this as rationale for choosing the Roth conversion, how would you and I be able to resist their (flawed) logic?

(taken from https://www.kitces.com/blog/navigating- ... nversions/ )
Lol. Also, such a highly diligent investor (passed-away spouse) — has amassed such large kitty — gr8.

Not much talked about having any “insurance” in force !? Really, this widowed person is 60, and they never have planned a small insurance at very least - mostly tax free to absorb the single filer situation and also help towards ensuing tax hit !?

Tax-Savings enjoyed due to Tax-free step-up basis on Brokerage and/or other appreciated assets !? (Instead of using such assets towards Roth conversions- thus pre-paying much-avoidable tax hit)

widow/er gets higher SS of the two, already more monies (yes, more taxes too — but you have more moneys in pocket) ?

Widow/er always chooses to remain single for next 25-30 years !? No Geo/state tax arbitrage savings considered ?

No Health/ACA Coverage needed at 60 !? (As marcopolo mentioned - approx 8-10% higher ACA tax on excessive Roth-conversions)

We can go on with many more Qs., but one can always construct a unique case to still make Roth conversions appear better for that specific case — then again, One should intend to use choices as available - don’t get pigeon-holed into one-way street of Roth conversions (and losing/PrePaying taxes) at full throttle !!

Tax diversification definitely helps - but hyper aggressive conversions at high tax brackets could turn risky — and strictly irreversible!!
Last edited by sc9182 on Thu Sep 09, 2021 8:53 pm, edited 3 times in total.
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