Advice on Roth Conversions in This Scenario

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Advice on Roth Conversions in This Scenario

Post by The_G_Fund »

Hello everyone, 

Longtime lurker here who appreciates all the helpful wisdom and information on this board. We are looking for advice on our situation, as it appears that we will be hitting the Roth IRA income limits, starting in Tax Year 2021 or 2022. Ideally, we would both start doing Backdoor Roth IRAs when that happens. But, we have one $77,000 Traditional IRA that cannot be rolled over into the Employer's 401(k) plan. Is it worth it to pay the taxes to convert this Traditional IRA to a Roth, and if so, what would be the best strategy? 

Ages: 36 (Him), 37 (Her) 
Filing Status: Married Filing Jointly 
Federal Tax Bracket: 22% 
State Tax Bracket: 0% 
Estimated 2020 MAGI: $166k 

Current Annual Contributions: $78k
-Trad. TSP (His): $19.5k
-Trad. 401(k) (Hers): $32.2k ($19.5k + Employer Contribution $12.7k) 
-Roth IRA (His): $6k 
-Roth IRA (Hers): $6k 
-Taxable (Joint): $14.3k 

Current Portfolio: $2.2M 
-Trad. 401(k) (Hers): $156k 
-Trad. IRA (Hers): $77k 
-Roth IRA (Hers): $42k 
-Trad. TSP (His): $124k 
-Roth TSP (His): $28k 
-Roth IRA (His): $181k 
-Inherited Trad. IRA (His): $994k (No RMDs this year, and the intent is to take future RMDs over his lifetime under pre-SECURE Act rules) 
-Taxable (Joint): $608k 

It's still early to tell, but we hope to retire at age 60 with one govt pension (his), and we plan to both delay SS until 70. Because the inherited IRA has no RMDs this year due to COVID, there is potentially room (2020 only) to convert up to $30k of her Traditional IRA to Roth at the 22% Fed Tax Rate without hitting the Roth IRA income limit. Is it worth it to pay taxes on a $77k Traditional IRA conversion so we can both potentially do Backdoor Roth IRAs in the future, or should we just keep it as is and do one Backdoor Roth IRA (him) in the future and shift her previous $6k IRA contribution towards our Taxable account? 

We appreciate your thoughts and suggestions!
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Re: Advice on Roth Conversions in This Scenario

Post by FiveK »

If you expect a 22% or higher marginal rate in retirement even without converting the $77K now, then it makes good sense to do the conversion now.

See why in when one uses taxable funds to pay the tax on a conversion.

If you expect a significantly lower marginal rate in retirement, more study is needed.
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Joined: Tue Dec 21, 2010 3:24 pm

Re: Advice on Roth Conversions in This Scenario

Post by Skiandswim »

As noted, the conversion depends on your forecast for future regiment tax rates. However, you are in 22% bracket with $166K MAGI and with a conversion of $77K you will be in 24% bracket (not a big impact). You will be staying below $250K MAGI limit for net investment income tax. Add to this that in 2020 you don't have to take the 2+% in RMDs on Inherited IRA (~$20K). My thought would be this is a good year and situation to do a conversion, assuming you will fund taxes from your regular investment accounts. Always a difficult choice!
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Re: Advice on Roth Conversions in This Scenario

Post by retiredjg »

I would NOT convert $77k to Roth just for one person to be able to use the backdoor Roth method. An exception would be if you can predict that you will almost surely be in at least the 22% bracket in retirement. Retirement is a long way away - prediction would be difficult unless you know the pension will be large.

You can accomplish essentially the same thing by using some Roth TSP or Roth 401k instead of traditional. With a federal pension, you likely should be using less traditional and more Roth anyway.

What I'm saying is to use backdoor Roth for him, skip it for her, put her "Roth money" into taxable instead, and change some of your TSP and 401k contributions to Roth because of the pension. In fact, I might even skip the backdoor Roth for him and contribute only to Roth TSP.

You have a lot of years until retirement. Putting over $50k into tax-deferred accounts for that many years will probably result in too much in tax-deferred accounts. With a pension and SS for two, you likely will not use all that much of your tax-deferred accounts in retirement. When RMDs start, they might be large enough to push you into a bracket higher than your current 22%. Better to use more Roth now.
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