Roth conversion, is it worth it for me?

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Topic Author
curiouscat
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Roth conversion, is it worth it for me?

Post by curiouscat »

Looking for second opinions on my $ question...

I'm a 58 yo man, no kids, in a domestic partnership.

My 2020 taxable income was 100k. Expecting the same for 2021. I am likely to leave my current job at the end of this year.

I have a portfolio in low/mid 7 figures, 60/35/5 allocation, virtually all $ in Vanguard index funds.

Considering whether I should do a Roth conversion on about 500k in an IRA (converted a SEP earlier this year).

Pros? Cons? Thinking I'd do the conversion over several years, what's the optimal strategy for that?
tibbitts
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Re: Roth conversion, is it worth it for me?

Post by tibbitts »

You haven't provided nearly enough information to answer the question. And no matter how much information you provide, you also have to consider your personal assumptions about things like future tax rates/brackets and other tax policies, cuts (or not) to projected SS benefits... the list goes on. In the end, there are some obvious cases for conversions (maybe yours included), but most of us just have to end up flipping a coin and hope we're making the best decision.
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retiredjg
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Re: Roth conversion, is it worth it for me?

Post by retiredjg »

curiouscat wrote: Sat Oct 23, 2021 8:16 am Looking for second opinions on my $ question...

I'm a 58 yo man, no kids, in a domestic partnership.

My 2020 taxable income was 100k. Expecting the same for 2021. I am likely to leave my current job at the end of this year.

I have a portfolio in low/mid 7 figures, 60/35/5 allocation, virtually all $ in Vanguard index funds.

Considering whether I should do a Roth conversion on about 500k in an IRA (converted a SEP earlier this year).

Pros? Cons? Thinking I'd do the conversion over several years, what's the optimal strategy for that?
I think more information is needed.

Is the domestic partnership recognized as married filing jointly or are you single?

If married, does partner have income?

Are you going to another job or retiring?

How much of the portfolio (in dollars) is in tax-deferred accounts? Why convert only $500k?

If retired, what will you live on? Is there a pension? How much income will you have if you don't do any conversions?
Nowizard
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Re: Roth conversion, is it worth it for me?

Post by Nowizard »

More information needed, as others have said. Obviously, one reason for Roth-IRA's are the choices provided in terms of not only taxation but withdrawal strategies. Fair to say that almost anyone would prefer to have their retirement income in Roth-IRA's. If you are planning to leave your job soon, your taxation level will likely drop considerably, depending on other information not yet provided. One possibility could include working PT and funding a Roth-IRA with proceeds and make conversions at the lower tax level since income would be less than the current 100K. That could be done over several years, assuming you have available funds for the additional taxation.

Tim
chassis
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Re: Roth conversion, is it worth it for me?

Post by chassis »

@curiouscat

Download the RPM spreadsheet (retirement model).

Use it to see the effect of Roth conversions.

They don’t make you richer, in most cases.

They are in most cases useless machinations of one’s own money. If in the narrow range of cases where Roth conversions are beneficial, the actual benefit is small and is realized very late in life - 80s to 90s years of age.

Run your own numbers using the RPM tool to see.
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MJS
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Re: Roth conversion, is it worth it for me?

Post by MJS »

Another way of playing around with the possible numbers:

Run the Schwab RMD estimator -- Note the advanced options under the initial results. Drop the rate of returns to show the results of conversions.
https://www.schwab.com/ira/understand-i ... lators/rmd.

Add your pensions & annuities & dividends & interest & rental income etc at age 72 to your SocSec (https://opensocialsecurity.com/)

Does not-converting puts you in the 32% tax bracket at age 75?
Does converting in the 22% tax bracket from age 60-71 keep you in the 22% bracket for life?
Do you stay in the 24% bracket for the next 40 years?
Ipsa scientia potestas est. Bacon F.
Topic Author
curiouscat
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Re: Roth conversion, is it worth it for me?

Post by curiouscat »

chassis wrote: Sat Oct 23, 2021 1:22 pm @curiouscat

Download the RPM spreadsheet (retirement model).

Use it to see the effect of Roth conversions.

They don’t make you richer, in most cases.

They are in most cases useless machinations of one’s own money. If in the narrow range of cases where Roth conversions are beneficial, the actual benefit is small and is realized very late in life - 80s to 90s years of age.

Run your own numbers using the RPM tool to see.
Thank you!

That's what I'm trying to get to. Is a Roth conversion truly beneficial or just busywork for me?

I'll run the numbers in the spreadsheet
Topic Author
curiouscat
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Re: Roth conversion, is it worth it for me?

Post by curiouscat »

MJS wrote: Sat Oct 23, 2021 1:49 pm Another way of playing around with the possible numbers:

Run the Schwab RMD estimator -- Note the advanced options under the initial results. Drop the rate of returns to show the results of conversions.
https://www.schwab.com/ira/understand-i ... lators/rmd.

Add your pensions & annuities & dividends & interest & rental income etc at age 72 to your SocSec (https://opensocialsecurity.com/)

Does not-converting puts you in the 32% tax bracket at age 75?
Does converting in the 22% tax bracket from age 60-71 keep you in the 22% bracket for life?
Do you stay in the 24% bracket for the next 40 years?
Thank you helping me to clarify just what the question is inside my question. I'll run those numbers.
tibbitts
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Re: Roth conversion, is it worth it for me?

Post by tibbitts »

curiouscat wrote: Sat Oct 23, 2021 5:14 pm That's what I'm trying to get to. Is a Roth conversion truly beneficial or just busywork for me?
On the "busywork' point it takes less than a minute to do a Roth conversion, so not something I'd classify as "busywork."
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dodecahedron
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Re: Roth conversion, is it worth it for me?

Post by dodecahedron »

tibbitts wrote: Sat Oct 23, 2021 5:56 pm
curiouscat wrote: Sat Oct 23, 2021 5:14 pm That's what I'm trying to get to. Is a Roth conversion truly beneficial or just busywork for me?
On the "busywork' point it takes less than a minute to do a Roth conversion, so not something I'd classify as "busywork."
But figuring out the appropriate amount to convert (possibly zero) can take a lot more time!
tibbitts
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Re: Roth conversion, is it worth it for me?

Post by tibbitts »

dodecahedron wrote: Sat Oct 23, 2021 6:03 pm
tibbitts wrote: Sat Oct 23, 2021 5:56 pm
curiouscat wrote: Sat Oct 23, 2021 5:14 pm That's what I'm trying to get to. Is a Roth conversion truly beneficial or just busywork for me?
On the "busywork' point it takes less than a minute to do a Roth conversion, so not something I'd classify as "busywork."
But figuring out the appropriate amount to convert (possibly zero) can take a lot more time!
Now that I'd classify as mostly busywork with somewhere between little to no productive outcome. There's just no way to achieve any degree of precision when so many assumptions are involved. Luckily, in most cases whether you convert or not, or how much you, probably won't matter a lot.
Topic Author
curiouscat
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Re: Roth conversion, is it worth it for me?

Post by curiouscat »

tibbitts wrote: Sat Oct 23, 2021 5:56 pm
curiouscat wrote: Sat Oct 23, 2021 5:14 pm That's what I'm trying to get to. Is a Roth conversion truly beneficial or just busywork for me?
On the "busywork' point it takes less than a minute to do a Roth conversion, so not something I'd classify as "busywork."
I apologize for being unclear. My comment about busywork is not referring to doing the math. It's about doing the Roth conversion.

If the end result of converting means little or no benefit, to me, THAT is busywork.
an_asker
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Re: Roth conversion, is it worth it for me?

Post by an_asker »

curiouscat wrote: Sun Oct 24, 2021 7:20 am
tibbitts wrote: Sat Oct 23, 2021 5:56 pm
curiouscat wrote: Sat Oct 23, 2021 5:14 pm That's what I'm trying to get to. Is a Roth conversion truly beneficial or just busywork for me?
On the "busywork' point it takes less than a minute to do a Roth conversion, so not something I'd classify as "busywork."
I apologize for being unclear. My comment about busywork is not referring to doing the math. It's about doing the Roth conversion.

If the end result of converting means little or no benefit, to me, THAT is busywork.
The problem with Roth conversion is that bottom line, it is still a pure guess (though some might say an "educated guess") most of the time.

Unless you are not making any money this year (or next year) or/and your tax bracket is really low, it will not be a quick and dirty answer that you should be converting.

PS: Reading the responses, it appears that the first response was right on the money!
Normchad
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Re: Roth conversion, is it worth it for me?

Post by Normchad »

What are your plans for healthcare?

I probably wont be doing conversions, as I plan on using ACA for healthcare, and the conversions would erode the extremely generous Premium Tax Credits.

I.e. conversions could increase my health care premiums from near zero, to nearly 18K annually.
chassis
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Re: Roth conversion, is it worth it for me?

Post by chassis »

curiouscat wrote: Sun Oct 24, 2021 7:20 am
tibbitts wrote: Sat Oct 23, 2021 5:56 pm
curiouscat wrote: Sat Oct 23, 2021 5:14 pm That's what I'm trying to get to. Is a Roth conversion truly beneficial or just busywork for me?
On the "busywork' point it takes less than a minute to do a Roth conversion, so not something I'd classify as "busywork."
I apologize for being unclear. My comment about busywork is not referring to doing the math. It's about doing the Roth conversion.

If the end result of converting means little or no benefit, to me, THAT is busywork.
@curiouscat your thinking is correct.

For most people, Roth conversions are busywork. They are needless machinations of one's own financial accounts. They do not make most people richer, rather, Roth conversions make them poorer.

The more a person digs into the details and models his/her own situation, the undesirability of Roth conversions comes into focus.

For the very small cohort of people for whom Roth conversions are beneficial, they deliver very small benefits as a percentage of net worth, and these benefits are delivered near time of deceases - 80s or 90s years of age. So the "happy years" for those who have done Roth conversions are a very short time window indeed.
printer86
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Re: Roth conversion, is it worth it for me?

Post by printer86 »

Normchad wrote: Sun Oct 24, 2021 9:09 am What are your plans for healthcare?

I probably wont be doing conversions, as I plan on using ACA for healthcare, and the conversions would erode the extremely generous Premium Tax Credits.

I.e. conversions could increase my health care premiums from near zero, to nearly 18K annually.
As someone also relying on the ACA until becoming Medicare eligible, I too need to "manage" our income. But, since we are paying for our early retirement expenses with taxable account funds, Roth Conversions, interest income and capital gains provide us with enough reportable income to keep us above the Medicaid threshold.

There is an income window that can get you a $0 premium ACA policy and 0% capital gains tax. I'm going to try to surf that window until Medicare.
Topic Author
curiouscat
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Re: Roth conversion, is it worth it for me?

Post by curiouscat »

Normchad wrote: Sun Oct 24, 2021 9:09 am What are your plans for healthcare?

I probably wont be doing conversions, as I plan on using ACA for healthcare, and the conversions would erode the extremely generous Premium Tax Credits.

I.e. conversions could increase my health care premiums from near zero, to nearly 18K annually.
Excellent observation. That is a detail I had not considered. Thankfully I am covered on my partner's insurance.
SGM
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Re: Roth conversion, is it worth it for me?

Post by SGM »

Roth conversions made us wealthier. My IRMAA would be even higher if I had RMDs. My Roth account is much higher than the traditional IRA and 401k accounts were while I was converting. We have multiple income streams in retirement. When I was working I was only able to put money into tax deferred accounts or my taxable account. In 2010 the law was changed allowing conversions regardless of income. Now everything goes into my taxable account except for the Roth accounts.
marcopolo
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Re: Roth conversion, is it worth it for me?

Post by marcopolo »

curiouscat wrote: Sun Oct 24, 2021 7:20 am
tibbitts wrote: Sat Oct 23, 2021 5:56 pm
curiouscat wrote: Sat Oct 23, 2021 5:14 pm That's what I'm trying to get to. Is a Roth conversion truly beneficial or just busywork for me?
On the "busywork' point it takes less than a minute to do a Roth conversion, so not something I'd classify as "busywork."
I apologize for being unclear. My comment about busywork is not referring to doing the math. It's about doing the Roth conversion.

If the end result of converting means little or no benefit, to me, THAT is busywork.
Another thing to consider is the asymmetric nature of risks associated with Roth Conversions.

Roth Conversions payoff the most when your portfolio performs well, and you leave the money invested for a long time, maybe even until you die and it goes to heirs, rather than spend the money.

Roth Conversions have less of a payoff if you spend the money soon, and can actually be quite costly if your portfolio performs poorly.

So, you need to think about what problem you are trying to solve.

If you have a good sized portfolio, or outside income (pension, Soc Sec, etc.) such that there is very little risk of your spending being impacted by market losses, and you are really trying to maximize your estate, then Roth Conversions make a lot of sense.

If you plan to spend most of your money, and significant market losses would likely affect your spending patterns, and you would like to mitigate that, then Roth Conversions are less attractive.

Roth Conversions gives you more money when you probably don't need it (still nice to have), but less money when you might need it the most.

Not doing Roth Conversions gives you more when you need it the most, but less money when you are less likely to need it.

In between those scenarios, it probably does not make much difference.
Once in a while you get shown the light, in the strangest of places if you look at it right.
chassis
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Re: Roth conversion, is it worth it for me?

Post by chassis »

marcopolo wrote: Sun Oct 24, 2021 9:08 pm
curiouscat wrote: Sun Oct 24, 2021 7:20 am
tibbitts wrote: Sat Oct 23, 2021 5:56 pm
curiouscat wrote: Sat Oct 23, 2021 5:14 pm That's what I'm trying to get to. Is a Roth conversion truly beneficial or just busywork for me?
On the "busywork' point it takes less than a minute to do a Roth conversion, so not something I'd classify as "busywork."
I apologize for being unclear. My comment about busywork is not referring to doing the math. It's about doing the Roth conversion.

If the end result of converting means little or no benefit, to me, THAT is busywork.
Another thing to consider is the asymmetric nature of risks associated with Roth Conversions.

Roth Conversions payoff the most when your portfolio performs well, and you leave the money invested for a long time, maybe even until you die and it goes to heirs, rather than spend the money.

Roth Conversions have less of a payoff if you spend the money soon, and can actually be quite costly if your portfolio performs poorly.

So, you need to think about what problem you are trying to solve.

If you have a good sized portfolio, or outside income (pension, Soc Sec, etc.) such that there is very little risk of your spending being impacted by market losses, and you are really trying to maximize your estate, then Roth Conversions make a lot of sense.

If you plan to spend most of your money, and significant market losses would likely affect your spending patterns, and you would like to mitigate that, then Roth Conversions are less attractive.

Roth Conversions gives you more money when you probably don't need it (still nice to have), but less money when you might need it the most.

Not doing Roth Conversions gives you more when you need it the most, but less money when you are less likely to need it.

In between those scenarios, it probably does not make much difference.
Excellent, balanced post.
drzzzzz
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Re: Roth conversion, is it worth it for me?

Post by drzzzzz »

You have no children and not sure what your legacy plans are and who you might want to inherit what is in you estate. We have no children and while we plan to leave some money to relatives, we are planning charitable donations from our estate when we die. While we have previously done some Roth conversions, I think our current plan is to leave our traditional IRAs to charity rather than family - this seems like a great wayfor us to support charity and pay no taxes now or in the future on what remains in the traditional IRA (except when taking our RMDs which we can also give to charity through a QCD (qualified charitable distribution) if not needed for expenses.
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