Rollover IRA to Roth Conversion - Calculators say it's not worth it

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FelixTheCat
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Rollover IRA to Roth Conversion - Calculators say it's not worth it

Post by FelixTheCat »

I've read the wiki and I've read the posts mentioning rollover ira.

I have a Rollover IRA from my decades at Mega Corp. I am trying to figure out if I should convert some of my rollover ira to a Roth. I've run my scenario through three different calculators and they all say it's not worth converting to a Roth IRA. I usually break even or lose a little money.

I figure I am missing something. Has anyone converted their Rollover IRA to a Roth? Is there a calculator you used?

Thanks for your help.
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FiveK
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Re: Rollover IRA to Roth Conversion - Calculators say it's not worth it

Post by FiveK »

See Roth IRA conversion - Bogleheads.

We have a version of the tool shown there. Along with an estimate for future marginal tax rates, that is what we use to guide conversion amounts each year.
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FelixTheCat
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Re: Rollover IRA to Roth Conversion - Calculators say it's not worth it

Post by FelixTheCat »

FiveK wrote: Thu Dec 31, 2020 6:54 pm See Roth IRA conversion - Bogleheads.

We have a version of the tool shown there. Along with an estimate for future marginal tax rates, that is what we use to guide conversion amounts each year.
Are you talking about the spreadsheet created by BigFoot48? If so, I don't see the link.
Forum member BigFoot48 has created a spreadsheet for use by retirees, or those nearing retirement, which will estimate the financial impact on your portfolio, including income taxes and RMDs, from doing Roth conversions. Use this spreadsheet to determine if Roth IRA conversions may be worthwhile for your personal situation.
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FiveK
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Re: Rollover IRA to Roth Conversion - Calculators say it's not worth it

Post by FiveK »

FelixTheCat wrote: Thu Dec 31, 2020 7:07 pm
FiveK wrote: Thu Dec 31, 2020 6:54 pm See Roth IRA conversion - Bogleheads.

We have a version of the tool shown there. Along with an estimate for future marginal tax rates, that is what we use to guide conversion amounts each year.
Are you talking about the spreadsheet created by BigFoot48? If so, I don't see the link.
Forum member BigFoot48 has created a spreadsheet for use by retirees, or those nearing retirement, which will estimate the financial impact on your portfolio, including income taxes and RMDs, from doing Roth conversions. Use this spreadsheet to determine if Roth IRA conversions may be worthwhile for your personal situation.
No. That's a good one, but the reference was to the Personal finance toolbox. There are some screenshots in the Using a spreadsheet section of the Roth IRA conversion wiki.
Pops1860
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Re: Rollover IRA to Roth Conversion - Calculators say it's not worth it

Post by Pops1860 »

Remember, there are other reasons to differentiate between traditional/Roth besides just 'break even.'

For example, in a Roth, you have no RMDs.

Roth withdrawals are tax free, so they are an option to get 'more money' without worrying about increasing your taxable income.

Leaving Roths to heirs means they also have no taxes to pay.

So, if it's close on a financial break even analysis, suggest you consider other Roth features that you might find useful.

But yes, be careful, space the conversions to minimize tax hit.
The power of accurate observation is often called cynicism by those who do not have it. ~George Bernard Shaw
evofxdwg
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Re: Rollover IRA to Roth Conversion - Calculators say it's not worth it

Post by evofxdwg »

Retired, living off SS, small pensions, and now small (since turning on SS) IRA/Roth withdrawals.
Our retirement savings is <10% Roth and approximately 85% regular IRA right now.

It may not make much sense in terms of total consumed retirement funds at death, but:
I don't want the "tax bomb" to kick us into a ridiculous tax bracket at age 72 due to minimum required withdrawals.
I want some flexibility in controlling my tax bracket each year (although I realize it needs to grow in the Roth for a while).
I want some flexibility if I decide to make that large purchase (or not), or if we have a family medical or other emergency requiring large funds injection.
I don't want my kids to inherit a large yield tax bomb (if there is anything left).

I just did the rest of my 2020 Roth conversion today. Its part of a multi-year plan to migrate mostly VTSAX into the Roth (opened more than 20 years ago) before I get to 72+. I stay just inside the first IRMAA bracket, which seems to be the major determiner. Im keeping in or under the 24% bracket (this year we stayed in the 22% yahoo!).

I live in a state with a generous retirement income exclusion (including Roth Conversion $) and they don't tax SS at all so that improves the conversion situation for me.

I was in a 25% to 28% fed bracket for many years before retirement, while contributing. So it seems like there is some benefit (for now) paying 22% to 24%.

If the Fed or State laws or IRMAA/tax brackets change, I suppose I'll amend or abandon the Roth conversion plan.
Hydromod
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Re: Rollover IRA to Roth Conversion - Calculators say it's not worth it

Post by Hydromod »

I recently created a Matlab-based simulator to look at issues like this in a probabilistic framework for different portfolio sequences. One of my concerns is what happens if one of us is left alone for some extended duration, since single and MFJ would be much different tax brackets. Our bracket won't change much after retirement while MFJ.

DW and I have several different accounts in a mix of tax-deferred, Roth, and taxable, and one of the questions I had was whether the Roth conversion was worthwhile for one of our tax-deferred accounts. I've tried running conversions over various durations. In general the probability of portfolio failure is within a percentage point or so with different Roth conversion strategies (e.g., 8 percent versus 8.5 percent), and the median final portfolio is within a few percent with and without conversion. These are very small differences compared to the range of outcomes that occur over 1000 realizations.

So I can say that your experience with calculators is consistent with mine, where the choice to convert or not doesn't make a great deal of difference compared to other factors.
cantabtim
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Re: Rollover IRA to Roth Conversion - Calculators say it's not worth it

Post by cantabtim »

We both retired within the last 2 months (relatively early at ages 57 and 56) and I have to admit to having spent an unhealthy amount of time since then playing with Roth conversions in the RPM spreadsheet, as downloaded from Bogleheads Wiki.

At the end of all of that I am still indecisive about whether to convert zero, up to 22% bracket, up to 24% bracket, for the next 5 years, for the next 10 years etc.

Not to sound selfish, but we're interested only in the money we have to spend on ourselves during retirement not what might be left at the end. We have no children and any assets we might have when we leave the planet will be going to charity.

The calculator shows any conversion giving a net predicted improvement in net worth, up to about a 20% improvement with the most aggressive schedule, at age 92/93 (which is optimistic as we're both men!), but a net decrease in net worth until we are well into our 80s. With the likely change in expenses at that age, presuming we're still around to spend at all, away from fun and non-deductible things like travel and culture, to things with potential tax breaks like medical expenses and long-term care, and the uncertainty of anything over that time horizon, is it worth suffering the tax hit now for possible benefit when we're not really in a position to enjoy it?

Current assets approx $4M

Tax deferred - $1.9M
Taxable brokerage - $1.8M
Roth - $0.3M
RetiredAL
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Re: Rollover IRA to Roth Conversion - Calculators say it's not worth it

Post by RetiredAL »

cantabtim wrote: Tue Feb 09, 2021 5:26 pm We both retired within the last 2 months (relatively early at ages 57 and 56) and I have to admit to having spent an unhealthy amount of time since then playing with Roth conversions in the RPM spreadsheet, as downloaded from Bogleheads Wiki.

At the end of all of that I am still indecisive about whether to convert zero, up to 22% bracket, up to 24% bracket, for the next 5 years, for the next 10 years etc.

Not to sound selfish, but we're interested only in the money we have to spend on ourselves during retirement not what might be left at the end. We have no children and any assets we might have when we leave the planet will be going to charity.

The calculator shows any conversion giving a net predicted improvement in net worth, up to about a 20% improvement with the most aggressive schedule, at age 92/93 (which is optimistic as we're both men!), but a net decrease in net worth until we are well into our 80s. With the likely change in expenses at that age, presuming we're still around to spend at all, away from fun and non-deductible things like travel and culture, to things with potential tax breaks like medical expenses and long-term care, and the uncertainty of anything over that time horizon, is it worth suffering the tax hit now for possible benefit when we're not really in a position to enjoy it?

Current assets approx $4M

Tax deferred - $1.9M
Taxable brokerage - $1.8M
Roth - $0.3M
2 suggestions for you:

1. Compare what your tax bill will be at 72 (RMD age) for MFJ and Single. It may help you decision.
2. If Long Term Care happens, that is a medical expense deduction. In that case, having a sizable deferred balance may allow you to withdraw deferred $ at a lower tax rate.

Lastly, there is no perfect answer as to convert now or not. What you want to avoid is picking a terrible one, vs landing on middle ground.

I fully contributed to our Roth since right after they started, and have converted a modest amount since retiring. I am currently approx 25% Roth and I am targeting 35% by in an effort not allowing the IRAs to grow drastically larger. I am hampered by the SS Tax Hump which essentially puts us in 22% marginal tax rate long before the top of the 12% income bracket. My driving factor to convert is that when one of us becomes the survivor, the tax bill in $ will nearly double, due to the single deduction point and single tax tax tables.

These outcomes are very income/situation dependent, so you own modeling.
drzzzzz
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Re: Rollover IRA to Roth Conversion - Calculators say it's not worth it

Post by drzzzzz »

We have ben converting IRAs to Roth accounts and I think the biggest issue for us is what was mentioned previously. At some point when one person dies, tax rates really increase, yet other than social security and depening on who inherits the traditional IRA, you still need to take RMD(s) and your tax rate is now much higher as a single filer.
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