Convert to Roth or Not
Convert to Roth or Not
Hello,
I plan to retire early next year. Me = 65 yrs; wife = 58 yrs. We've reached our FIRE number; no debt. Neither of us have a pension, or a ROTH IRA, and I dont plan to take SS until 70; wife to take SS at 62 (she retired this year). We're assessing the pros and cons of converting some of our 401k assets and/or smaller inherited IRA to a Roth. We are planning to use the inherited IRA (~$350K) to supplement our income until I reach 70 for SS since this IRA must be used within 9-10 years from now.
Are there any advantages at this time for us to convert a part of our assets to a ROTH, or should we simply withdraw from our 401k and inherited IRA and pay the taxes along the way? Anything we should consider beforehand if we were to convert some of the assets?
Thank you in advance for any thoughts.
I plan to retire early next year. Me = 65 yrs; wife = 58 yrs. We've reached our FIRE number; no debt. Neither of us have a pension, or a ROTH IRA, and I dont plan to take SS until 70; wife to take SS at 62 (she retired this year). We're assessing the pros and cons of converting some of our 401k assets and/or smaller inherited IRA to a Roth. We are planning to use the inherited IRA (~$350K) to supplement our income until I reach 70 for SS since this IRA must be used within 9-10 years from now.
Are there any advantages at this time for us to convert a part of our assets to a ROTH, or should we simply withdraw from our 401k and inherited IRA and pay the taxes along the way? Anything we should consider beforehand if we were to convert some of the assets?
Thank you in advance for any thoughts.
Regards, |
Doug
Re: Convert to Roth or Not
An inherited IRA cannot be converted to a Roth, but withdrawals from it can be used to pay taxes on the conversion of a different IRA to Roth.
Otherwise, you did not give enough information in your query to answer your question. I can make up a scenario: You need $5,000 a year for all your expenses, so since you do not pay income taxes until you have lots more income, you should convert enough of an IRA to fill the 0% tax bracket and still pay no income taxes.
Otherwise, you did not give enough information in your query to answer your question. I can make up a scenario: You need $5,000 a year for all your expenses, so since you do not pay income taxes until you have lots more income, you should convert enough of an IRA to fill the 0% tax bracket and still pay no income taxes.
Re: Convert to Roth or Not
Agree with the above answer. The inherited IRA cannot be converted to Roth. There is not enough information to answer your other question.
Roth conversions can often be a good idea if you can do them at low tax rates or if they prevent high tax rates in the future. So a good place to start is knowing what your tax rate(s) will be if you do not do any Roth conversions. Then work upwards.
This depends on how much income you will have and how much income you will need for ordinary living - and the types of income it will be (mostly from tax-deferred accounts or will there be a significant amount of dividends and capital gains in your future?)
It is perfectly fine to just withdraw from the 401k(s) and IRA(s) and pay the taxes as you go along....if....the size of the tax-deferred accounts is not "too large". By "too large" I mean enough to cause you a tax bomb in your 70's and 80's and beyond when you must take your RMDs.
An example, if you have $5 million in tax-deferred accounts, chances are that large balance is going to be a tax problem when RMDs start. It might be good to start trimming it down now by doing Roth conversions each year. On the other hand, if the tax-deferred balance is $1 million, your first RMD will be something like $36k...not enough to be a "problem".
Even if you don't "need" to do Roth conversions, you might want to do some so that you will have a source of money that can be used without further taxation. For example, lumpy expenses like cars and new roofs could come out of Roth IRA without increasing your taxable income for the year.
Roth conversions can often be a good idea if you can do them at low tax rates or if they prevent high tax rates in the future. So a good place to start is knowing what your tax rate(s) will be if you do not do any Roth conversions. Then work upwards.
This depends on how much income you will have and how much income you will need for ordinary living - and the types of income it will be (mostly from tax-deferred accounts or will there be a significant amount of dividends and capital gains in your future?)
It is perfectly fine to just withdraw from the 401k(s) and IRA(s) and pay the taxes as you go along....if....the size of the tax-deferred accounts is not "too large". By "too large" I mean enough to cause you a tax bomb in your 70's and 80's and beyond when you must take your RMDs.
An example, if you have $5 million in tax-deferred accounts, chances are that large balance is going to be a tax problem when RMDs start. It might be good to start trimming it down now by doing Roth conversions each year. On the other hand, if the tax-deferred balance is $1 million, your first RMD will be something like $36k...not enough to be a "problem".
Even if you don't "need" to do Roth conversions, you might want to do some so that you will have a source of money that can be used without further taxation. For example, lumpy expenses like cars and new roofs could come out of Roth IRA without increasing your taxable income for the year.
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Re: Convert to Roth or Not
Thank you for the replies; our tax deferred assets are $4M; future tax burden might be an issue. I may consider gradually converting some tax deferred assets to a ROTH. Thank you.
Regards, |
Doug
Re: Convert to Roth or Not
With a balance that large, I would be doing Roth conversions each year - even just enough to keep the balance from growing. But mostly I would hope to "smooth out" the tax rate over the years instead of paying "12% now and 32% later".
There are people who would not be worried about it - just willing to pay the higher tax later on and considering it a "good problem to have".
Obviously, there is plenty of room for personal preferences in this decision.
Since you are already Medicare age, you need to become aware of IRMAA limits if not aware already. As you go up the IRMAA tiers, what you will pay for Medicare increases. So take that into account as you decide how much to convert.
Also, if you are charitably inclined, you can make a qualified charitable donation (QCDs) of up to $100k in RMDs once you reach 70.5 years. This is a way to satisfy some or all of your RMD requirement without actually paying the taxes.
There are people who would not be worried about it - just willing to pay the higher tax later on and considering it a "good problem to have".
Obviously, there is plenty of room for personal preferences in this decision.
Since you are already Medicare age, you need to become aware of IRMAA limits if not aware already. As you go up the IRMAA tiers, what you will pay for Medicare increases. So take that into account as you decide how much to convert.
Also, if you are charitably inclined, you can make a qualified charitable donation (QCDs) of up to $100k in RMDs once you reach 70.5 years. This is a way to satisfy some or all of your RMD requirement without actually paying the taxes.
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Re: Convert to Roth or Not
In addition to doing Roth conversions, are you also holding your bond allocation in your tax deferred accounts to limit growth?
Consider opening and contributing to Roth IRA accounts for you/spouse in 2021 to start the 5-year clock on initial Roth IRAs. If you cannot directly contribute to the Roth IRAs, do a very small Roth conversion this year to start the clock. If you decide to do Roth conversions in the future, having already started the clock as of 1/1/21 will be beneficial.
Consider opening and contributing to Roth IRA accounts for you/spouse in 2021 to start the 5-year clock on initial Roth IRAs. If you cannot directly contribute to the Roth IRAs, do a very small Roth conversion this year to start the clock. If you decide to do Roth conversions in the future, having already started the clock as of 1/1/21 will be beneficial.
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Re: Convert to Roth or Not
OP,
You might find this thread on Roth Conversion Metrics helpful….
viewtopic.php?t=354318
WoodSpinner
You might find this thread on Roth Conversion Metrics helpful….
viewtopic.php?t=354318
WoodSpinner
WoodSpinner
Re: Convert to Roth or Not
You probably have the good problem of "too much money (at least in tax deferred accounts)." Congratulations on getting to this point.
Even a 5%/yr return on your $4 million will be a $200K/yr increase in value.
Some things to consider:
See also Roth IRA conversion - Bogleheads.
Even a 5%/yr return on your $4 million will be a $200K/yr increase in value.
Some things to consider:
- Delay wife's SS start date "somewhat". See Open Social Security: Free, Open-Source Social Security Calculator for what will probably (unless there is a reason to expect shorter than average life expectancy) be the earliest she should take it. "Earliest" is because that excellent tool doesn't incorporate the effects of higher taxes on Roth conversions when SS benefits are included.
- Convert up to the top of the 24% bracket for at least the next several years, then reevaluate. Also nothing wrong with reevaluating each year along the way.
See also Roth IRA conversion - Bogleheads.
Re: Convert to Roth or Not
Ignoring the issue of if it's allowed.
Isn't it always beneficial to convert to a Roth if you stay in the same tax bracket.
I.e. $100K converted into a Roth over 10 years will have you paying tax on that amount. But any growth is untaxed.
If I keep it in.the tIRA all growth is eventually taxed when I with draw it.
Isn't it always beneficial to convert to a Roth if you stay in the same tax bracket.
I.e. $100K converted into a Roth over 10 years will have you paying tax on that amount. But any growth is untaxed.
If I keep it in.the tIRA all growth is eventually taxed when I with draw it.
D Newton wrote: ↑Tue Sep 28, 2021 7:01 am Hello,
I plan to retire early next year. Me = 65 yrs; wife = 58 yrs. We've reached our FIRE number; no debt. Neither of us have a pension, or a ROTH IRA, and I dont plan to take SS until 70; wife to take SS at 62 (she retired this year). We're assessing the pros and cons of converting some of our 401k assets and/or smaller inherited IRA to a Roth. We are planning to use the inherited IRA (~$350K) to supplement our income until I reach 70 for SS since this IRA must be used within 9-10 years from now.
Are there any advantages at this time for us to convert a part of our assets to a ROTH, or should we simply withdraw from our 401k and inherited IRA and pay the taxes along the way? Anything we should consider beforehand if we were to convert some of the assets?
Thank you in advance for any thoughts.
Re: Convert to Roth or Not
Not always, but when it's not it's a tie.
See the Simplest situation and second of two Common misconceptions for why it can be a tie.I.e. $100K converted into a Roth over 10 years will have you paying tax on that amount. But any growth is untaxed.
If I keep it in.the tIRA all growth is eventually taxed when I with draw it.
See the first of the More complicated situations for why it can be beneficial.
Re: Convert to Roth or Not
Thanks for the replies; still considering to convert or not.
question: what does "Convert up to the top of the 24% bracket for at least the next several years" mean? Does this mean convert XX dollars from tax-deferred IRAs up to the top of the 24% tax bracket?
question: what does "Convert up to the top of the 24% bracket for at least the next several years" mean? Does this mean convert XX dollars from tax-deferred IRAs up to the top of the 24% tax bracket?
Regards, |
Doug
Re: Convert to Roth or Not
Yes. Assuming the standard deduction, that would be an AGI of ~$355K for 2021.
Re: Convert to Roth or Not
With $4M in tax deferred that will continue to grow, you are headed for marginal tax rates of 24+%. Since you are several years older than your wife, odds are you will pass first, leaving her lots of years in single tax bracket of 32/35% range or higher. You are also in for extra IRMAA charges, extra Medicare and NIIT taxes, possibly even AMT. Don't forget that the current tax rates are set to go up in 2026, so there is no time to waste.
My wild guess is you should be converting at least to the top of the 24% bracket. You are probably correct that you should use the entire inherited IRA in the years that you need the cash, preferably even before you claim SS. You will get taxed on that eventually and using it now may avoid some taxes on capital gains.
You need to do some modeling or pay a fee only advisor/tax specialist/estate planner to do one for you. If you like to play with models, some tools to consider are I-orp.com (Extended Input), the Retiree Portfolio Model spreadsheet available at this site's wiki, a paid spreadsheet with a more complete tax model is Pralana Gold ($99 1st year, $49 renewal, requires Excel). Another paid program is MaxiFi, $149 or $109 1st year + renewal fees, depending on what you need. Each tool requires time to learn and has its own quirks and limitations. A low cost fee only advisor that I've seen recommended by others here Planvision, they would also recommend some index funds for your portfolio.
My wild guess is you should be converting at least to the top of the 24% bracket. You are probably correct that you should use the entire inherited IRA in the years that you need the cash, preferably even before you claim SS. You will get taxed on that eventually and using it now may avoid some taxes on capital gains.
You need to do some modeling or pay a fee only advisor/tax specialist/estate planner to do one for you. If you like to play with models, some tools to consider are I-orp.com (Extended Input), the Retiree Portfolio Model spreadsheet available at this site's wiki, a paid spreadsheet with a more complete tax model is Pralana Gold ($99 1st year, $49 renewal, requires Excel). Another paid program is MaxiFi, $149 or $109 1st year + renewal fees, depending on what you need. Each tool requires time to learn and has its own quirks and limitations. A low cost fee only advisor that I've seen recommended by others here Planvision, they would also recommend some index funds for your portfolio.
Re: Convert to Roth or Not
Back during the Great Recession, we converted an IRA to a Roth. At the time, the value of the IRA was worth about half its value, therefore the taxes paid were much less significant. In our case, we were earlier in our savings plan, and the initial value was around 80K.
Given your timeline before RMD, maybe there will be an opportunity like this where you can make a more significant rollover at that time. Maybe follow the suggestions noted by others and wait for a moment to pounce should it come.
Given your timeline before RMD, maybe there will be an opportunity like this where you can make a more significant rollover at that time. Maybe follow the suggestions noted by others and wait for a moment to pounce should it come.
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Re: Convert to Roth or Not
I compute about 8 years to RMD for OP. How much of $4M in tax deferred can be realistically converted in to Roth and what would be the final effect? Obviously, doing the conversion would certainly help but I am asking the relative effect. I hope Prof McQ chimes in here as this is a *real case* instead of a contrived one.
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Re: Convert to Roth or Not
We have $4M in our tax-deferred accounts. Retired last year at age 58. I’m using the time between ages 58-62 to do some aggressive Roth conversions, up to the top of the 24% tax bracket. Taxable funds are being used for the first 3 years of conversions for living expenses/taxes. This allows me to get the full benefit of these initial large conversions. After this, I’ll need to use some of the IRA withdrawals to fund living expenses/taxes (taxable funds used up). My modeling shows that these early conversions should enable me to have a 50/50 split between my tax-deferred and Roth accounts by age 70. Bonds will be held in IRA’s and equities in Roth. Most of our Roth (if not all) will be legacy funds for our heirs.
Current living expenses are around $100k, and we expect to receive close to the maximum SS amount (both of us), taken at age 70. Not doing conversions suggests we’ll be in the 32% tax bracket starting at age 80. In addition, IRMAA costs would increase significantly.
Current living expenses are around $100k, and we expect to receive close to the maximum SS amount (both of us), taken at age 70. Not doing conversions suggests we’ll be in the 32% tax bracket starting at age 80. In addition, IRMAA costs would increase significantly.