strategy to convert traditional ira to roth

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miles monroe
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Joined: Mon Jan 20, 2014 12:14 pm

strategy to convert traditional ira to roth

Post by miles monroe »

i want to come up with a strategy to convert my traditional ira to roth.

i intend to start social security at age 70.

if i convert enough each year to stay at the 15% tax rate i will still have a balance in my traditional ira account at age 70.

so do i convert enough so that everything is transferred by age 70 (thus paying taxes at 25% on some part of the transfers) or do i keep transferring up to the 15% tax bracket each year with no concern as to how long that will take?

thanks for your thots.
mhalley
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Joined: Tue Nov 20, 2007 6:02 am

Re: strategy to convert traditional ira to roth

Post by mhalley »

I don't think the goal should be to completely convert everything to roth. It depends on how much you have in your accounts, how much your expenses are, other sources of income (pension, ss,, etc.)
You can run the numbers through i-orp to get an idea.
http://www.i-orp.com/
Mike
jimkinny
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Re: strategy to convert traditional ira to roth

Post by jimkinny »

I am not an expert.

Some issues I considered were attempting to estimate my tax bracket after starting RMDs, how much of a cushion did I have post RMDs before I was in the next higher tax bracket because a TIRA can grow a lot over time and I spent time learning how SS is taxed. Also, consider states taxes with a conversion. I think the advice is to generally keep high potential growth assets in Roth, if possible.

It is a lot of guesswork but worth considering. After all of that planning, now after 3 years of retirement I am thinking of taking SS earlier than I had originally thought, no more conversions and just not worry about it. I have less concern about living to 90 but this really is not rational for the most part. Longevity is a risk.
Bill M
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Re: strategy to convert traditional ira to roth

Post by Bill M »

Once you are 70 (collecting SocSec) and the RMDs start, what will be your tax rate? If the RMD will be taxed at 15%, then there is no advantage to converting earlier to Roth. But if the RMD will be taxed at 25%, that amount could be converted to Roth pre-70 and still pay the same 25% in taxes. This gives you a way to decide whether (or how much) of the traditional IRA should be converted to Roth at the higher tax rate.
DSInvestor
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Re: strategy to convert traditional ira to roth

Post by DSInvestor »

If your income allows for ACA premium tax credit, be aware the Roth conversion income will impact that tax credit.
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whaleknives
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Re: strategy to convert traditional ira to roth

Post by whaleknives »

Bill M wrote:Once you are 70 (collecting SocSec) and the RMDs start, what will be your tax rate? If the RMD will be taxed at 15%, then there is no advantage to converting earlier to Roth. But if the RMD will be taxed at 25%, that amount could be converted to Roth pre-70 and still pay the same 25% in taxes. This gives you a way to decide whether (or how much) of the traditional IRA should be converted to Roth at the higher tax rate.
:thumbsup BigFoot48 has a very detailed spreadsheet in the Wiki called the Retiree Portfolio Model that is intended to analyze this problem. Unfortunately, I discovered it too late, and was already using my own very specific and rough spreadsheet. You might give it a try.

ORP addresses these issues, but never gave me more than a couple of years of Roth conversion before Social Security, since its goal is to maximize spending.
"I'm an indexer. I own the market. And I'm happy." (John Bogle, "BusinessWeek", 8/17/07) ☕ Maritime signal flag W - Whiskey: "I require medical assistance."
JW-Retired
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Re: strategy to convert traditional ira to roth

Post by JW-Retired »

miles monroe wrote:i want to come up with a strategy to convert my traditional ira to roth.

i intend to start social security at age 70.

if i convert enough each year to stay at the 15% tax rate i will still have a balance in my traditional ira account at age 70.

so do i convert enough so that everything is transferred by age 70 (thus paying taxes at 25% on some part of the transfers) or do i keep transferring up to the 15% tax bracket each year with no concern as to how long that will take?
It depends. If you are 70 and taking your maximum SS + some fairly substantial RMDs, you probably would be paying at a 46.25% marginal rate on some of that RMD income. If the RMDs are fairly small you may not owe any income tax at all. The only way to get a good idea what may happen is to determine what your taxes really will be for various conversion scenarios. I use TaxCaster for this. https://turbotax.intuit.com/tax-tools/c ... taxcaster/

Warning, what TaxCaster shows as your tax bracket rate for these SS/other income scenarios is meaningless. You have to do a $1000 increment to your RMD and see how much your taxes increase.
JW
Retired at Last
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