Converting traditional IRAs to Roths

The conversion is taxable.

Decision is depending on the income and unrealized gains

Already too late for 2022. Expect 1..2 weeks delay,in some cases, so don't leave it till end of the year

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Personally, not generally in favor of doing a conversion either as someone near retirement or in retirement. BC, it is really a long call, LEAP option, "out-of-the-money" and that you have the privilege to pay taxes (generally).

Some one with a long time horizon to RMD age may have some advantage, assuming that their tax and Income situation are high compared to the previous life before conversion. OneEyedDiva, is an example.
 
Murrmurr said:
The only advantage I could see was that a roth is RMD-free. That didn't really matter in my situation, so I passed.
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The other advant is that the Roth can be left to grow tax free for your entire lifetime .

even if you didn’t spend the rmds and reinvested them you are still being taxed on all future growth .

people look at the comparison wrong as well .

they look at their final years in income and tax bracket and usually retirement budgets end up in that range too …

or they look at their final years pay and go we will be in a lower bracket in retirement.

that is a poor comparison.

most of us ramp up in pay over decades of time going from low pay to much higher pay .

that average tax bracket usually works out to be lower than retirement since that is our long term average tax bracket not just the final years .

roths can end up providing as much as 20% more income when all is said and done when compared correctly
 
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Thinking about this for my remaining tIRA and discretionary trading account;
If I had converted in early Jan 2022, and the same trades in 2022:
RMD for 2021 (account high).
Kicked our marginal tax bracket to 24%.
Keep us in another year at IRMAA rates.
Pay taxes on an account that is 40 years old.
EOY of 2022, the account value is -50% from Jan 01, 2022 (conversion taxes, RMD for 2021, and trading losses)
Will need years of exceptional growth in the Roth to recoup the taxes paid for the conversion.
Age 73/76.
Think carefully.
 
I haven't done any conversions but I did recharacterize my 2021 traditional-IRA contributions to become Roth-IRA contributions (did it when I filed taxes last April). And since I worked the first few months of 2022 I put all my IRA contribution into the Roth. So, I don't have much money in the Roth IRA but I have enough that if I need to buy a car in a few years, I'd be able to use non-taxable money (at least partly, I buy cheapest cars so might have enough).

I've tried online calculators to see if I'm in a situation that would benefit, but depending on my guesses about the future I'd either come out ahead or behind a few hundred dollars. So didn't seem worth it. There was one tool I used that indicated I could do a lot of conversions and pay a lot of taxes for the next several years but overall have a lot more money to spend. But, it seemed like I'd have to live into my 90s to really realize the advantage, and I doubt that I'll last that long.

Now that they've changed the beginning RMD age to 73 perhaps I should try the calculators and tools again. Though with the market so low I guess my RMDs would be tinier anyway. Too hard, too much trouble.
 
mathjak107 said:
The other advant is that the Roth can be left to grow tax free for your entire lifetime .

even if you didn’t spend the rmds and reinvested them you are still being taxed on all future growth .

people look at the comparison wrong as well .

they look at their final years in income and tax bracket and usually retirement budgets end up in that range too …

or they look at their final years pay and go we will be in a lower bracket in retirement.

that is a poor comparison.

most of us ramp up in pay over decades of time going from low pay to much higher pay .

that average tax bracket usually works out to be lower than retirement since that is our long term average tax bracket not just the final years .

roths can end up providing as much as 20% more income when all is said and done when compared correctly
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A real possibility for some us to never take distributions from the Roth, The one remaining Roth is a discretionary account and I don't count it as part of our retirement. Currently the Roth is barbell into highly speculative stocks and cash. Out shopping today for CD rates. The Roth isn't very large, and well most likely pass it forward, hopefully to grandchildren.

Our longevity annuities in tIRA, will be likely be sufficient, unless we see continued, high levels of inflation.
If I planned this correctly, our Effective Tax Rate will be 12%-15%. No state income taxes. (24% Marginal federal).
 
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There are several points to consider when evaluating whether to perform Roth Conversions or follow the Uncle Sam Plan (paying RMDs for the rest of your life):

Future Tax Rates: Do you believe taxes rates and brackets will be higher in the future? We know, short of congressional action, that the Tax Cuts and Job Act will automatically sunset December 31, 2025 and tax rates and brackets will revert to their previous, higher rates. So yes, taxes will automatically go up in 2026. Many believe with the current governmental spending that rates must increase in the future to cover the national debt. We may be experiencing the lowest rates of our lifetime. Remember also for couples there is a tax break for married filing jointly, when one has passed away, the remaining one is now filing single and at a higher rate.

Taxable Social Security: Did you know that up to 85% of your social security benefits can be taxable based on income from other sources such as pensions, IRAs, annuities, brokerage accounts? Withdrawals from Roth IRAs are not taxable and do not contribute to this adder for Social Security taxation. For couples filing jointly if your income is from $32,000 to $44,000 up to 50% of your SS benefits may be taxable, if more than $44,000 up to 85% can be taxable. For single filers, $25,000 to $34,000 up to 50% of your SS benefits may be taxable, if more than $34,000 up to 85% can be taxable... 2023 rates. Most tax payers do pay Social Security taxes.

IRMAA Surcharge on Medicare: This is an adder charge to the monthly Medicare premium based on the annual income of the recipient. Income-Related Monthly Adjustment Amount (IRMAA) can be up to $560.50 for Part B and $76.40 for Part D per month if income is above $194,000 per year (Married Filing Jointly) or $97,000 per year (Filing Single)... 2023 rates.

On the surface these income rates, especially the ones for IRMAA seem very high, but a quick review of what your projected RMDs will be in your late 70's and beyond show that they quickly climb and remain high and these surcharges remain for the rest of your life. The true driving factor to converting monies to Roth IRAs is to reduce or eliminate taxes (of multiple types) in the future. I've heard rough numbers of a portfolio at or greater than $1M should evaluate Roth conversions.

I'm not an accountant or tax professional but did stay at a Holiday Inn Express... and have done a tremendous amount of reading and modeling to confirm above for myself.
 
CJ29621 said:
On the surface these income rates, especially the ones for IRMAA seem very high, but a quick review of what your projected RMDs will be in your late 70's and beyond show that they quickly climb and remain high and these surcharges remain for the rest of your life. The true driving factor to converting monies to Roth IRAs is to reduce or eliminate taxes (of multiple types) in the future. I've heard rough numbers of a portfolio at or greater than $1M should evaluate Roth conversions.

I'm not an accountant or tax professional but did stay at a Holiday Inn Express... and have done a tremendous amount of reading and modeling to confirm above for myself.
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A quick question if I may, is that $1 M portfolio all ordinary IRA money only, or does it include non tax advantaged investments and Roth investments.?
 
The first Roth I set up was with the intent of passing untaxed assets to our daughter.

The subsequent conversions are a strategy to control our annual taxable income into the future, staying in as low a bracket as possible, minimum Medicare premiums, etc.

We are eating our way thru my one small IRA that requires an RMD. At RMD levels this will last 19 more years.

With some luck this is all we'll need to pay taxes on besides SS and non-retirement income. Anything that is left after the both of us die will go to our daughter, tax free, under current regulations she will have a five year window to withdrawal from the inherited Roths.
 
Due to amount of Spouse's pension, we always knew that 85% of our SocSec would be taxable. Plus, since spouse falls under the WEP provision, he loses 60% of his (modest) SocSec right from the get-go. So I took my SS benefit at age 66, he'll take his at age 70.

We ran the #s but Roths were not really helpful as the pension fund didn't offer them until 18 months before he retired. Had they been available earlier we might have managed to contribute.

Our financial adviser runs the #s for us periodically but they agreed it's a 50-50 action at best. When one of us dies, however, it will MAYBE make more of a difference, depending on how long the survivor lives. As neither of us has optimal longevity, and are in a higher tax bracket than we were when working, we choose not to convert.

People who are interested might want to peruse the FIRE forums (Financial Independence, Retire Early). They are very, very big on Roth conversions as well as keeping their income low enough to qualify for Medicare subsidies. Some knowledgeable folks over there and very helpful, albeit you are expected to read previous threads and not ask questions that have been answered a number of times previously, LOL:

Early Retirement & Financial Independence Community
 
Lethe200 said:
Due to amount of Spouse's pension, we always knew that 85% of our SocSec would be taxable. Plus, since spouse falls under the WEP provision, he loses 60% of his (modest) SocSec right from the get-go. So I took my SS benefit at age 66, he'll take his at age 70.

We ran the #s but Roths were not really helpful as the pension fund didn't offer them until 18 months before he retired. Had they been available earlier we might have managed to contribute.

Our financial adviser runs the #s for us periodically but they agreed it's a 50-50 action at best. When one of us dies, however, it will MAYBE make more of a difference, depending on how long the survivor lives. As neither of us has optimal longevity, and are in a higher tax bracket than we were when working, we choose not to convert.

People who are interested might want to peruse the FIRE forums (Financial Independence, Retire Early). They are very, very big on Roth conversions as well as keeping their income low enough to qualify for Medicare subsidies. Some knowledgeable folks over there and very helpful, albeit you are expected to read previous threads and not ask questions that have been answered a number of times previously, LOL:

Early Retirement & Financial Independence Community
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Good info.

Thanks!
 
leastlongprime said:
Thinking about this for my remaining tIRA and discretionary trading account;
If I had converted in early Jan 2022, and the same trades in 2022:
RMD for 2021 (account high).
Kicked our marginal tax bracket to 24%.
Keep us in another year at IRMAA rates.
Pay taxes on an account that is 40 years old.
EOY of 2022, the account value is -50% from Jan 01, 2022 (conversion taxes, RMD for 2021, and trading losses)
Will need years of exceptional growth in the Roth to recoup the taxes paid for the conversion.
Age 73/76.
Think carefully.
Click to expand...
I think once we're senior citizens it's too late to consider converting to a rough for the reason you stated. I believe I was in my late thirties when I converted mine.
 

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