Roth conversions - his or hers?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
foursix
Posts: 89
Joined: Wed Dec 24, 2014 2:45 pm

Roth conversions - his or hers?

Post by foursix »

Just recently retired and looking to start Roth conversions. I'm curious if there are any considerations that should be made regarding whether we concentrate on one spouse's account or do both proportionally. I plan to leave some TIRA funds for future use. Married filing jointly.

In case it matters:

His (57yrs old) TIRA: $1,040,000
His Roth: $66,000
57 yrs old

Her TIRA: $282,000
Her Roth: $53,000
59 yrs old
Last edited by foursix on Wed Jan 26, 2022 1:00 pm, edited 1 time in total.
User avatar
retired@50
Posts: 12829
Joined: Tue Oct 01, 2019 2:36 pm
Location: Living in the U.S.A.

Re: Roth conversions - his or hers?

Post by retired@50 »

Many couples convert part of the older person's T-IRA first, since there are fewer years until RMDs begin.

Maybe add your ages to your original post.

Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
Topic Author
foursix
Posts: 89
Joined: Wed Dec 24, 2014 2:45 pm

Re: Roth conversions - his or hers?

Post by foursix »

Thanks and that makes sense. Ages added.
Walkure
Posts: 1023
Joined: Tue Apr 11, 2017 9:59 pm

Re: Roth conversions - his or hers?

Post by Walkure »

retired@50 beat me to it. If you are converting the same dollar amount today regardless of which account you are pulling from, I would assume based on McQ's threads (do look them up) and my own spreadsheet estimates that it's most effective if you convert from whichever account would be subject to RMDs sooner.
Topic Author
foursix
Posts: 89
Joined: Wed Dec 24, 2014 2:45 pm

Re: Roth conversions - his or hers?

Post by foursix »

Thank you I will look up those threads. One other question....If I'm going to convert 50% of the combined balances to Roths, is there any reason to leave "Her" TIRA with a balance after the process is complete? In otherwords, should I deplete that entirely before moving to "his"?
User avatar
celia
Posts: 16774
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

Re: Roth conversions - his or hers?

Post by celia »

Her RMDs are going to be so small that they won’t be a problem.

If you have different beneficiaries in either account or different assets in your accounts, I would take that into account. For example, if her tIRA is primarily bonds now and his isn’t, then I would start by converting the asset that is likely to grow the fastest. Maximize the growth in Roth instead of tax-deferred.
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.
delamer
Posts: 17458
Joined: Tue Feb 08, 2011 5:13 pm

Re: Roth conversions - his or hers?

Post by delamer »

I’ve been contemplating these same issues recently.

We both had smallish rollovers IRAs that we converted to Roths in 2021. They are about 10% of our total retirement assets and hold only stocks.

Now it’s time to start converting our 401(k)s, via rollover to traditional IRAs first.

I’m a couple of years older than my husband. But 40% of our tax-deferred assets are in my name (unlike with the OP). And we are just a few years from RMD time.

We don’t have a specific annual goal or target; we are converting to the degree it makes sense yearly. Avoiding the NIIT is the plan.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
sailaway
Posts: 8218
Joined: Fri May 12, 2017 1:11 pm

Re: Roth conversions - his or hers?

Post by sailaway »

With your ages and goals, you focus should probably be on converting the larger amount.
User avatar
teen persuasion
Posts: 2327
Joined: Sun Oct 25, 2015 1:43 pm

Re: Roth conversions - his or hers?

Post by teen persuasion »

Any special state rules on retirement account income taxation?

We have lopsided tIRA balances, too. We plan to simultaneously Roth convert the larger account, and add to the smaller account, for the next few years. This is because NY exempts the first $20k of tIRA income (or conversions) per person after age 59.5. I can't transfer my unused exemption to DH.

Withdrawals from 2 individuals' accounts - $20k + $20k + $16k standard deduction = $56k state tax free. Withdrawals from only one spouse's account - $20k + $16k standard deduction = only $36k state tax free.

We want a fairly even balance between accounts. We don't want to empty one spouse's accounts early, cutting our exemption.
Topic Author
foursix
Posts: 89
Joined: Wed Dec 24, 2014 2:45 pm

Re: Roth conversions - his or hers?

Post by foursix »

teen persuasion wrote: Wed Jan 26, 2022 4:26 pm Any special state rules on retirement account income taxation?
Not in our case, as we’re in FL with no state taxes.
User avatar
Lee_WSP
Posts: 10401
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: Roth conversions - his or hers?

Post by Lee_WSP »

Just divorce. No one ever likes to talk about it, but if the retirement accounts are unequal after tax, then there's going to be some additional negotiations happening.

Not saying you should necessarily plan for it, but it is one thing that can throw wrenches.
Fat Tails
Posts: 519
Joined: Wed Oct 30, 2019 12:47 am
Location: New Mexico

Re: Roth conversions - his or hers?

Post by Fat Tails »

sailaway wrote: Wed Jan 26, 2022 3:55 pm With your ages and goals, you focus should probably be on converting the larger amount.
+1.
“Doing well with money has little to do with how smart you are and a lot to do with how you behave.” - Morgan Housel
retire2022
Posts: 3286
Joined: Tue Oct 02, 2018 6:10 pm
Location: NYC

Re: Roth conversions - his or hers?

Post by retire2022 »

foursix wrote: Wed Jan 26, 2022 1:00 pm
OP

I just posted this tonight, and did Roth conversion, let me know if you have questions.


viewtopic.php?p=6478753#p6478753
retire2022 wrote: Wed Jan 26, 2022 11:55 pm
I just did Roth Conversion, Wednesday Jan 26, 2022 on the following securities, all brought at higher cost basis Vanguard uses Jan 25, 2022 NAV and I have until 11:59PM to decide to Roth convert.

Note I should had waited until tomorrow to Roth Converted VOO because cost basis was lower at today's close, this was a minor error. I forgot to check before I pressed button.

VOO 251 shares at 399.46, I would pay tax on $100,264.46 and the original cost basis was $415.0072 at 251 shares or $104,166.8072, a difference of -$3,902.3472

VGT 107 shares at 395.08, I would pay tax on $42,273.56 and the original cost basis was 107 shares @ $429.90 or $45,999.30, a difference of -$3,725.74

VFIAX 7.231 shares @402.28 or $2908.88, I would pay tax on $2908.88 and the original cost basis was 7.231 shares @ $417.6915 or $3,020.4108, a difference of $111.5308.

Total of Dollar amount converted $100,264.46+$42,273.56+$2908.88=$145,446.90 this is the amount in which 1099-r to pay tax, instead of $153,186.518 a difference of -7,739.618

I can't speak on how other brokerage than Vanguard platform.
Alan S.
Posts: 12669
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Roth conversions - his or hers?

Post by Alan S. »

It hasn't been mentioned, but another factor is the % of IRA basis in each spouse's TIRA if that % variance is significant. Converting the higher % basis IRA gets more dollars into the Roth per taxable dollar of the conversion.
an_asker
Posts: 4903
Joined: Thu Jun 27, 2013 2:15 pm

Re: Roth conversions - his or hers?

Post by an_asker »

celia wrote: Wed Jan 26, 2022 3:30 pm Her RMDs are going to be so small that they won’t be a problem.
[...]
Are we to assume that neither of the OPs has a 401k or equivalent? Or is there a clue I missed? :oops:
toast0
Posts: 337
Joined: Fri Dec 12, 2014 12:41 am
Location: Puget Sound

Re: Roth conversions - his or hers?

Post by toast0 »

celia wrote: Wed Jan 26, 2022 3:30 pm Her RMDs are going to be so small that they won’t be a problem.
(Once they start), her RMDs are always going to be more per dollar balance than his, because she's two years older. If the concern is only reducing RMDs for the couple, it makes sense to Roth convert her balance before his. Once you convert all of hers then you can start on his.
User avatar
celia
Posts: 16774
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

Re: Roth conversions - his or hers?

Post by celia »

toast0 wrote: Thu Jan 27, 2022 1:29 pm
celia wrote: Wed Jan 26, 2022 3:30 pm Her RMDs are going to be so small that they won’t be a problem.
(Once they start), her RMDs are always going to be more per dollar balance than his, because she's two years older. If the concern is only reducing RMDs for the couple, it makes sense to Roth convert her balance before his.
Of course, but it also works the other way. Think ahead even further. By converting her $282K now, that leaves $282K more for his account to convert or withdraw. By the time he gets to his last $282K to convert, he could be more than two years older with larger divisors and his RMDs will be larger down the road. He would be applying his future larger divisor to a larger amount.

You should also start by converting the assets that are expected to grow the fastest. If this is being done, she is likely left with mostly bond funds while he has lots of stocks in his account. Don’t you think his stocks should be converted before her bonds so that more future growth happens in the Roth instead of the tax-deferred?
Once you convert all of hers then you can start on his.
Sure they can do that, but they will likely pay more taxes than necessary due to his tax-deferred growing faster than necessary, due to holding more stock in tax-deferred.


Here’s my concept in a simplified example:
A person has $700K in tax-deferred in early retirement and is Single. They (gender neutral) want to convert $400K of it in the next 4 years, before SS starts. The $700K is 50/50 stocks/bonds. Which of these choices is better:
1. Convert $50K stocks and $50K bonds for each of 4 years
2. Convert $100K stocks a year for 3 years, then $50K stocks and $50K bonds in the last year
3. Convert $100K bonds a year for 3 years, then $50K bonds and $50K stocks in the last year

Since the taxes will be the same in all cases, wouldn’t the “most stocks” [#2] be best? The Roth will grow faster that way while the growth in tax-deferred will be slowed down the most (along with future RMDs).

Now go back to two people with different values in tax-deferred and consider their tax-deferred accounts as joint. The RMD advisors won’t apply for a while, so what should they do? Start by converting the asset that has the potential to grow the fastest! In the last few years you can convert the smaller account for simplifying things (not worrying about RMDs).
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.
drzzzzz
Posts: 1047
Joined: Sat Sep 22, 2012 9:56 pm

Re: Roth conversions - his or hers?

Post by drzzzzz »

I would just offer that if you are planning to do substantial contributions in the future using a traditional IRA for that purpose and giving money via a QCD might mean you should convert less and save paying taxes on thar money. Same thing if your plan is to leave money to charity when you die, use a traditional IRA as the donation source and again no taxes need to be paid.
User avatar
celia
Posts: 16774
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

Re: Roth conversions - his or hers?

Post by celia »

toast0, Don’t be so concerned with RMD divisors. It’s not like you will have to withdraw just 3.65% of the balances at 72 and pay taxes on it. Over the long term, you (or your heirs) will have to eventually pay taxes on 100% of the balance (that is not given to charity). So paying taxes on the minimal amount or a higher amount is not the issue. Finding an optimal way to do it **IS** the issue.

This is where varying tax brackets, the balance in tax-deferred, other income in the year, stock market growth, and how much you have available to pay the taxes come in. Instead of being overwhelmed, just think of the things you can control:
the year-end balance**
other income (eg, defer SS as long as possible)
your AA and assets you own
the amount you convert/withdraw each year


**I also like to keep in mind that the balance will continue to grow as long as the yearly growth is more than what you convert/withdraw each year.
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.
marcopolo
Posts: 8445
Joined: Sat Dec 03, 2016 9:22 am

Re: Roth conversions - his or hers?

Post by marcopolo »

celia wrote: Wed Jan 26, 2022 3:30 pm Her RMDs are going to be so small that they won’t be a problem.

If you have different beneficiaries in either account or different assets in your accounts, I would take that into account. For example, if her tIRA is primarily bonds now and his isn’t, then I would start by converting the asset that is likely to grow the fastest. Maximize the growth in Roth instead of tax-deferred.
What assets are in each account should have no bearing on which one gets converted first. These are tax-advantaged accounts, and assets can be changed without any tax consequences. It's not like investments in these accounts are locked into some specific asset. Converting the older spouse's account first will leave more time to convert the younger spouse's account.
Once in a while you get shown the light, in the strangest of places if you look at it right.
User avatar
celia
Posts: 16774
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

Re: Roth conversions - his or hers?

Post by celia »

marcopolo wrote: Thu Jan 27, 2022 5:43 pm
celia wrote: Wed Jan 26, 2022 3:30 pm Her RMDs are going to be so small that they won’t be a problem.

If you have different beneficiaries in either account or different assets in your accounts, I would take that into account. For example, if her tIRA is primarily bonds now and his isn’t, then I would start by converting the asset that is likely to grow the fastest. Maximize the growth in Roth instead of tax-deferred.
What assets are in each account should have no bearing on which one gets converted first. These are tax-advantaged accounts, and assets can be changed without any tax consequences. It's not like investments in these accounts are locked into some specific asset.
The tax consequences are indeed there, not because of transactions in the account (as you noted), but because the assets in the account impact the future size of the account (and how much additional growth will have to be converted or withdrawn in the future).

Converting the older spouse's account first will leave more time to convert the younger spouse's account.
Whether the older spouse converts or not, that does NOT change the time the younger spouse has to convert (ie, he will age the same), but it does change the balance that will younger spouse is left with, depending on if the the older spouse used up some of the space in the tax bracket or not.

I encourage OP to run their data through a Roth conversion planning tool or spreadsheet multiple ways and confirm the difference over a time period that includes when they are both over 72, taking RMDs, and collecting SS.
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.
marcopolo
Posts: 8445
Joined: Sat Dec 03, 2016 9:22 am

Re: Roth conversions - his or hers?

Post by marcopolo »

celia wrote: Thu Jan 27, 2022 6:55 pm
marcopolo wrote: Thu Jan 27, 2022 5:43 pm
celia wrote: Wed Jan 26, 2022 3:30 pm Her RMDs are going to be so small that they won’t be a problem.

If you have different beneficiaries in either account or different assets in your accounts, I would take that into account. For example, if her tIRA is primarily bonds now and his isn’t, then I would start by converting the asset that is likely to grow the fastest. Maximize the growth in Roth instead of tax-deferred.
What assets are in each account should have no bearing on which one gets converted first. These are tax-advantaged accounts, and assets can be changed without any tax consequences. It's not like investments in these accounts are locked into some specific asset.
The tax consequences are indeed there, not because of transactions in the account (as you noted), but because the assets in the account impact the future size of the account (and how much additional growth will have to be converted or withdrawn in the future).

Converting the older spouse's account first will leave more time to convert the younger spouse's account.
Whether the older spouse converts or not, that does NOT change the time the younger spouse has to convert (ie, he will age the same), but it does change the balance that will younger spouse is left with, depending on if the the older spouse used up some of the space in the tax bracket or not.

I encourage OP to run their data through a Roth conversion planning tool or spreadsheet multiple ways and confirm the difference over a time period that includes when they are both over 72 and collecting SS.
let's say wife has equities and husband has bonds.
you are suggesting that should lead to converting wife's account first. I am saying what is in the account is meaningless to this decision. They could convert out of husband's account (selling bonds), then purchase purchase equities in the converted Roth account. Then swap equal amount of equities in wife's account to bonds. That would be the equivalent of "converting stocks", but without tying it to what is currently held in an account.
Once in a while you get shown the light, in the strangest of places if you look at it right.
User avatar
Peter Foley
Posts: 5533
Joined: Fri Nov 23, 2007 9:34 am
Location: Lake Wobegon

Re: Roth conversions - his or hers?

Post by Peter Foley »

What is missing in this conversation is spending. Do you as a couple currently make charitable contributions? If yes, you can plan on switching to Qualified Charitable Distributions at age 70.5. What does this have to do with account balances that are disproportionate? An Illustration:

Start with no conversions: In 13 years balances may as follows: His $2,000,000, Hers $600,000.

RMD from his would be about 2M x .0367 = $73,400
RMD from hers would be about 600K x .0367 = $22,020.

So if you annually give $10,000 to charities, you can see that her RMD's are really not much of an issue in terms of pushing you into a higher tax bracket and IRMAA costs. His are an issue in that respect.

Again - this is just an illustration taking into account a possible shift of an expense (charity) from one's taxable account to one's IRA.
User avatar
celia
Posts: 16774
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

Re: Roth conversions - his or hers?

Post by celia »

marcopolo wrote: Thu Jan 27, 2022 7:18 pm let's say wife has equities and husband has bonds.
you are suggesting that should lead to converting wife's account first. I am saying what is in the account is meaningless to this decision. They could convert out of husband's account (selling bonds), then purchase purchase equities in the converted Roth account. Then swap equal amount of equities in wife's account to bonds. That would be the equivalent of "converting stocks", but without tying it to what is currently held in an account.
In this situation, I agree the assets are irrelevant. But how many people are going to automatically know to convert into a completely different asset? How many people are going to read the original post and think this way? I've even done what you suggest, but it wouldn't be the standard recommendation for someone who needs to ask the question at hand.
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.
toast0
Posts: 337
Joined: Fri Dec 12, 2014 12:41 am
Location: Puget Sound

Re: Roth conversions - his or hers?

Post by toast0 »

celia wrote: Thu Jan 27, 2022 2:59 pm
toast0 wrote: Thu Jan 27, 2022 1:29 pm
celia wrote: Wed Jan 26, 2022 3:30 pm Her RMDs are going to be so small that they won’t be a problem.
(Once they start), her RMDs are always going to be more per dollar balance than his, because she's two years older. If the concern is only reducing RMDs for the couple, it makes sense to Roth convert her balance before his.
Of course, but it also works the other way. Think ahead even further. By converting her $282K now, that leaves $282K more for his account to convert or withdraw. By the time he gets to his last $282K to convert, he could be more than two years older with larger divisors and his RMDs will be larger down the road. He would be applying his future larger divisor to a larger amount.
In any given year, if the $282k (or whatever) amount is in her account, it will have a larger RMD than if it's in his account. If the concern is trying to minimize the total of both people's RMDs, it makes sense to work on her account first. Portfolio composition should be considered across all accounts held by both members of the couple, unless there's some unusual situation. And of course, tax-efficient fund placement would tend to put bonds in Traditional and equities in Roth, as much as possible (but early on, you're likely to run out of room in Roth for equities, and need to place some in Traditional, and if you convert enough, which may or may not be wise, you'll run out of room in Traditional for bonds, and need to place some in Roth; if you've got taxable investments, that needs to be accounted for as well).
Post Reply