Convert to Roth Now?
Convert to Roth Now?
My 31 year old daughter works for a large corporation. Thanks to a good paying job early on, she has $417,000 in the company 401K. She soon will be changing employers and can roll that into a traditional IRA. She's thinking about doing that and converting to a ROTH, although it will require paying taxes of $158,736 or 38% (Federal and State, based on her 2020 tax return). I will lend her the money to pay the taxes and she will repay me over a few years, with the IRS required minimum interest.
My thinking is that to have that amount of money compound, perhaps for 60 years, tax free, is an rare opportunity for a young person. And without discussing current events, it may be a short-lived opportunity. On the other hand, paying that much in tax now would equate to killing big compoundable dollars that otherwise would have gone her taxable brokerage account. 38% sounds like a very high percent to pay, but might the many probable years of compounding tip the scales in favor of doing this now?
My thinking is that to have that amount of money compound, perhaps for 60 years, tax free, is an rare opportunity for a young person. And without discussing current events, it may be a short-lived opportunity. On the other hand, paying that much in tax now would equate to killing big compoundable dollars that otherwise would have gone her taxable brokerage account. 38% sounds like a very high percent to pay, but might the many probable years of compounding tip the scales in favor of doing this now?
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Re: Convert to ROTH Now?
does she have the option to rollover portions each year for a while? that way she could keep the tax at lower brackets.
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Re: Convert to ROTH Now?
38% seems a very high price to pay.
Yes the 62% remaining compounds tax free .. but the 38% is gone forever.
Its not a time thing but rather:
Tax Rate at conversion (now) vs. Tax Rate at withdraw (later)
I wouldn't do it //and certainly not all in one year
Yes the 62% remaining compounds tax free .. but the 38% is gone forever.
Its not a time thing but rather:
Tax Rate at conversion (now) vs. Tax Rate at withdraw (later)
I wouldn't do it //and certainly not all in one year
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Re: Convert to ROTH Now?
If you are not discussing current events, what is giving you the needed guarantee that the landscape will remain the same for next 60 years regarding the tax situation?
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Re: Convert to ROTH Now?
What tax bracket is she in without the conversion? Converting a portion each year in lower tax brackets may save significant tax.
Re: Convert to ROTH Now?
She'll be in the top bracket probably for the rest of her career. And there are other possible reasons that it must be converted all in 2021, if at all.GenawithanE wrote: ↑Thu Sep 16, 2021 9:21 am does she have the option to rollover portions each year for a while? that way she could keep the tax at lower brackets.
Last edited by Leesbro63 on Thu Sep 16, 2021 9:43 am, edited 1 time in total.
Re: Convert to ROTH Now?
There is no absolute guarantee, except for death and taxes. To me it's about the odds. And I think the odds are great that existing Roth IRAs will maintain their tax free status, perhaps with some tweaks. The main trigger here is the change of jobs, not stuff that cannot be discussed. It's an opportunity to roll her 401K into a Traditional IRA, which then brings the whole "Rothify?" discussion into play.wrongfunds wrote: ↑Thu Sep 16, 2021 9:26 am If you are not discussing current events, what is giving you the needed guarantee that the landscape will remain the same for next 60 years regarding the tax situation?
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Re: Convert to ROTH Now?
And does she plan to work 30+ more years or FIRE? To me 38% seems steep, and wonder if there may be better time to optimize the Roth conversion at a lower rate down the road (due to a break from work, FIRE, reduced work hours, etc)Leesbro63 wrote: ↑Thu Sep 16, 2021 9:38 amShe'll be in the top bracket probably for the rest of her career. And there are other possible reasons that it must be converted all in 2021, if at all.GenawithanE wrote: ↑Thu Sep 16, 2021 9:21 am does she have the option to rollover portions each year for a while? that way she could keep the tax at lower brackets.
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Re: Convert to ROTH Now?
Well, if she has non-deductible IRA then it might even make sense to NOT roll 401K in to traditional IRA to avoid the pro-rata business but I suspect she does not.Leesbro63 wrote: ↑Thu Sep 16, 2021 9:41 amThere is no absolute guarantee, except for death and taxes. To me it's about the odds. And I think the odds are great that existing Roth IRAs will maintain their tax free status, perhaps with some tweaks. The main trigger here is the change of jobs, not stuff that cannot be discussed. It's an opportunity to roll her 401K into a Traditional IRA, which then brings the whole "Rothify?" discussion into play.wrongfunds wrote: ↑Thu Sep 16, 2021 9:26 am If you are not discussing current events, what is giving you the needed guarantee that the landscape will remain the same for next 60 years regarding the tax situation?
Rolling the 401K in to traditional IRA is completely orthogonal to doing the Roth conversion of the the traditional IRA in to Roth IRA. The 2nd step does depend upon the 1st step completion but 2nd step can be done any time in next 60 years.
Re: Convert to ROTH Now?
Probably will work till normal retirement age.ThankYouJack wrote: ↑Thu Sep 16, 2021 9:49 amAnd does she plan to work 30+ more years or FIRE? To me 38% seems steep, and wonder if there may be better time to optimize the Roth conversion at a lower rate down the road (due to a break from work, FIRE, reduced work hours, etc)Leesbro63 wrote: ↑Thu Sep 16, 2021 9:38 amShe'll be in the top bracket probably for the rest of her career. And there are other possible reasons that it must be converted all in 2021, if at all.GenawithanE wrote: ↑Thu Sep 16, 2021 9:21 am does she have the option to rollover portions each year for a while? that way she could keep the tax at lower brackets.
Re: Convert to ROTH Now?
I agree, 38% is steep for the conversion. Although the thought is enticing to convert it all, take a step back and run through some projections of what her future portfolio position will be. What does she have for Traditional (401k/IRA), Roth (401k/IRA), and Taxable accounts now and with future contributions/growth, what will they be at retirement. I am guessing there will be a better opportunity in the future to take advantage of Roth conversions at a lower tax rate than what you are calculating now.ThankYouJack wrote: ↑Thu Sep 16, 2021 9:49 am And does she plan to work 30+ more years or FIRE? To me 38% seems steep, and wonder if there may be better time to optimize the Roth conversion at a lower rate down the road (due to a break from work, FIRE, reduced work hours, etc)
My suggestion without fully understanding the bigger picture today and in the future is to NOT convert. If you feel strongly about getting it into a Roth account, will she have a Roth 401k option with the future employer? She can put her contributions into the Roth and any company match will be pre-tax. Some plans allow in-plan conversions from traditional to Roth too. She can always roll-over her old 401k into the new plan, if they allow it, and convert as time goes by. This strategy is meant to reduce the tax rate bump and minimize what is paid in taxes.
Re: Convert to Roth Now?
I wouldn't convert it at 38%.
Re: Convert to ROTH Now?
Leesbro63,
How long is the career?
The likelihood for it to last 30+ years is slim to none.
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Re: Convert to ROTH Now?
Leesbro63,
Is she willing to work for free?
Aka, she will work even if her portfolio earn much more than her gross income.
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Re: Convert to Roth Now?
I am sure you already know this, but if rates are the same, paying tax now vs paying tax later are the same. The advantage of a Roth conversion comes from paying taxes with outside money, in this case your loan.Leesbro63 wrote: ↑Thu Sep 16, 2021 9:17 amMy thinking is that to have that amount of money compound, perhaps for 60 years, tax free, is an rare opportunity for a young person...38% sounds like a very high percent to pay, but might the many probable years of compounding tip the scales in favor of doing this now?
So it is only in that sense that compounding is more helpful in a Roth vs tIRA. But the same advantage would be gained, without having to pay tax in advance, if the money you will lend her for taxes could be put into the 401k instead. Hence the question is, is she maximizing her 401k voluntary investment going forward? If if you are lending her money for these taxes, it sounds like she may not have money to spare for that. if so, increasing the voluntary 401k (using your loan) is a better choice that postpones paying taxes at this high rate.
Re: Convert to Roth Now?
Leesbro63 ,
I would not convert at 38%. My max tax rate for conversion is 25%. The only exception is if there is recession with >35%/>50% drop in equities. Or at F-P/E is at <12. That is a win-win bet vs a win-lose bet as proposed.
If she has mega backdoor roth, maybe that offers some roth position to build. Said simply & paraphrasing, the 38% is always government's that is compounding to pay them back if she is in 38% bracket at retirement. With recent threads, one thing people miss is government can always request RMD's beyond a certain limit for Roth. It could be 5 million proposed today and might be still same while inflation eats at it in 30 years from now. With the way congress is spending, there are very limited places to tax in future.
I would not convert at 38%. My max tax rate for conversion is 25%. The only exception is if there is recession with >35%/>50% drop in equities. Or at F-P/E is at <12. That is a win-win bet vs a win-lose bet as proposed.
If she has mega backdoor roth, maybe that offers some roth position to build. Said simply & paraphrasing, the 38% is always government's that is compounding to pay them back if she is in 38% bracket at retirement. With recent threads, one thing people miss is government can always request RMD's beyond a certain limit for Roth. It could be 5 million proposed today and might be still same while inflation eats at it in 30 years from now. With the way congress is spending, there are very limited places to tax in future.
When in doubt, http://www.bogleheads.org/forum/viewtopic.php?f=1&t=79939
Re: Convert to Roth Now?
She will have the money. She works in the financial industry and will use bonuses for a few years to repay. Currently bonuses go into savings.Chuckles960 wrote: ↑Thu Sep 16, 2021 2:03 pmI am sure you already know this, but if rates are the same, paying tax now vs paying tax later are the same. The advantage of a Roth conversion comes from paying taxes with outside money, in this case your loan.Leesbro63 wrote: ↑Thu Sep 16, 2021 9:17 amMy thinking is that to have that amount of money compound, perhaps for 60 years, tax free, is an rare opportunity for a young person...38% sounds like a very high percent to pay, but might the many probable years of compounding tip the scales in favor of doing this now?
So it is only in that sense that compounding is more helpful in a Roth vs tIRA. But the same advantage would be gained, without having to pay tax in advance, if the money you will lend her for taxes could be put into the 401k instead. Hence the question is, is she maximizing her 401k voluntary investment going forward? If if you are lending her money for these taxes, it sounds like she may not have money to spare for that. if so, increasing the voluntary 401k (using your loan) is a better choice that postpones paying taxes at this high rate.
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Re: Convert to Roth Now?
If you're daughter were to convert this year to a Roth IRA, she would still have access to the $417K original contribution tax-free but she would have to pay income taxes, including a 10% early penalty withdraw based on current rules, should she need access to any of the earnings up to age 59.5. If she were to leave the $417K in a traditional IRA, she would have to pay income taxes, including a 10% early penalty, should she need access to any of the monies up to age 59.5. So the true benefits begin around 60 and thereafter.
I'm 59 and recently ran the numbers of doing annual conversions (escalating, de-escalating, and equal annual amount) from my IRA to a Roth IRA until age 71, prior to RMDs from my IRA beginning at 72, until an assumed death at 85. I found using the same asset allocation, i.e. same annual return, for both retirement accounts that the net present value of the IRA was more favorable than the Roth IRA regardless of the annual conversion options or the reasonable marginal tax rate assumptions. The key driver is the net present value of the investment returns more so than the distributions or taxes on the distributions. Hence, if the annual return for the Roth IRA is higher, i.e. more risky portfolio, then the IRA, the net present value of the Roth IRA is likely more favorable. Because your daughter is 31, she can assume a relatively aggressive portfolio for either type of retirement account.
You may find running your own numbers that if your daughter takes voluntary annual distributions, e.g. 4% of previous year's balance, after 59.5 from both the IRA or the Roth IRA option, which may differ in the results I found above. Assuming equal annual returns, both the IRA and Roth IRA balances will continue to grow equally each year but the net annual distributions, i.e. after-tax, for the Roth IRA will be more favorable and the net present value of distributions, taxes and the final after-tax balance combined for both options may favor the Roth IRA.
Finally, your daughter may not want to consider this an all or nothing opportunity. Something to consider are performing conversions in a market correction, i.e. 20% to 30%, may be an excellent opportunity to do a total or partial conversion. For example, I kick myself now for not doing a full conversion last year of my wife's IRA. Today, the value of that IRA is approximately $370K and back in March 2020, the value was approximately $200K. If I would have done the conversion the same day in March that I was doing some tax loss harvesting of non-retirement investments, my wife would have a Roth IRA with additional $170K (tax-free) for the cost of approximately $70K in taxes. Your daughter will certainly have many opportunities in the future to take advantage of a conversion in a market correction.
I'm 59 and recently ran the numbers of doing annual conversions (escalating, de-escalating, and equal annual amount) from my IRA to a Roth IRA until age 71, prior to RMDs from my IRA beginning at 72, until an assumed death at 85. I found using the same asset allocation, i.e. same annual return, for both retirement accounts that the net present value of the IRA was more favorable than the Roth IRA regardless of the annual conversion options or the reasonable marginal tax rate assumptions. The key driver is the net present value of the investment returns more so than the distributions or taxes on the distributions. Hence, if the annual return for the Roth IRA is higher, i.e. more risky portfolio, then the IRA, the net present value of the Roth IRA is likely more favorable. Because your daughter is 31, she can assume a relatively aggressive portfolio for either type of retirement account.
You may find running your own numbers that if your daughter takes voluntary annual distributions, e.g. 4% of previous year's balance, after 59.5 from both the IRA or the Roth IRA option, which may differ in the results I found above. Assuming equal annual returns, both the IRA and Roth IRA balances will continue to grow equally each year but the net annual distributions, i.e. after-tax, for the Roth IRA will be more favorable and the net present value of distributions, taxes and the final after-tax balance combined for both options may favor the Roth IRA.
Finally, your daughter may not want to consider this an all or nothing opportunity. Something to consider are performing conversions in a market correction, i.e. 20% to 30%, may be an excellent opportunity to do a total or partial conversion. For example, I kick myself now for not doing a full conversion last year of my wife's IRA. Today, the value of that IRA is approximately $370K and back in March 2020, the value was approximately $200K. If I would have done the conversion the same day in March that I was doing some tax loss harvesting of non-retirement investments, my wife would have a Roth IRA with additional $170K (tax-free) for the cost of approximately $70K in taxes. Your daughter will certainly have many opportunities in the future to take advantage of a conversion in a market correction.
Re: Convert to Roth Now?
I would not convert at 38% rate. Too steep, and seems likely could be opportunities to convert at a lower rate in the future. E.g., after living the dream in her current job she'll find a more satisfying albeit lower-paying job some years from now? I thought I'd be working full-time until 65 when I was in my 20's and 30's. Once I reached my later 40's, I could see viable alternative paths forward.
Re: Convert to Roth Now?
I don't see how a Roth conversion would be profitable if you have to pay 38% up front. Add to that the fact that you are going to have to lend her $150,000, and I just don't see this as a good idea. Also, if she is going to be in the top tax bracket the rest of her life she should max Roth, max 401k, put a bunch in taxable, and then worry about other things. No point wasting brain energy to save a nickel when the $20 bills are rolling in.Leesbro63 wrote: ↑Thu Sep 16, 2021 9:17 am My 31 year old daughter works for a large corporation. Thanks to a good paying job early on, she has $417,000 in the company 401K. She soon will be changing employers and can roll that into a traditional IRA. She's thinking about doing that and converting to a ROTH, although it will require paying taxes of $158,736 or 38% (Federal and State, based on her 2020 tax return). I will lend her the money to pay the taxes and she will repay me over a few years, with the IRS required minimum interest.
My thinking is that to have that amount of money compound, perhaps for 60 years, tax free, is an rare opportunity for a young person. And without discussing current events, it may be a short-lived opportunity. On the other hand, paying that much in tax now would equate to killing big compoundable dollars that otherwise would have gone her taxable brokerage account. 38% sounds like a very high percent to pay, but might the many probable years of compounding tip the scales in favor of doing this now?
Re: Convert to Roth Now?
What tax bracket will she be at her new job? Does she have access to a Roth 401k? Does the new 401k allow transfers in from a rollover IRA or a 401k?Leesbro63 wrote: ↑Thu Sep 16, 2021 9:17 am My 31 year old daughter works for a large corporation. Thanks to a good paying job early on, she has $417,000 in the company 401K. She soon will be changing employers and can roll that into a traditional IRA. She's thinking about doing that and converting to a ROTH, although it will require paying taxes of $158,736 or 38% (Federal and State, based on her 2020 tax return). I will lend her the money to pay the taxes and she will repay me over a few years, with the IRS required minimum interest.
My thinking is that to have that amount of money compound, perhaps for 60 years, tax free, is an rare opportunity for a young person. And without discussing current events, it may be a short-lived opportunity. On the other hand, paying that much in tax now would equate to killing big compoundable dollars that otherwise would have gone her taxable brokerage account. 38% sounds like a very high percent to pay, but might the many probable years of compounding tip the scales in favor of doing this now?
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Re: Convert to Roth Now?
I don't think you got my question. What are "savings", tax-deferred or after-tax? Is she putting in the absolute maximum allowed (matched or unmatched) into a 401k, and will she continue to do that in her new job? If not, that should come before a Roth conversion, even if she needs a loan from you to do it.
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Re: Convert to Roth Now?
I cannot think of a compelling reason to do Roth conversions in the 38% bracket. It's virtually impossible that the OP's daughter will be in the 38% bracket in retirement unless tax rates go up significantly.
The Sensible Steward
Re: Convert to Roth Now?
I think this aspect - the compounding issue - is a wash if tax rates remain the same, despite what it might seem at first glance.Leesbro63 wrote: ↑Thu Sep 16, 2021 9:17 am My thinking is that to have that amount of money compound, perhaps for 60 years, tax free, is an rare opportunity for a young person. And without discussing current events, it may be a short-lived opportunity. On the other hand, paying that much in tax now would equate to killing big compoundable dollars that otherwise would have gone her taxable brokerage account. 38% sounds like a very high percent to pay, but might the many probable years of compounding tip the scales in favor of doing this now?
Overall I think it's unpredictable as to which path will prove better. In my case I converted at a similar tax rate, but I was already retired, in my last full pre-IRMAA year. If I didn't convert at a high rate, there weren't enough years before RMDs (even assuming they move to age 75, which was already supposed to have happened by now) that I'd be able to convert over time at a more reasonable marginal rate and prevent the deferred balance from increasing, maybe sticking me with high IRMAA rates or other income-related "cliff" issues forever. The only other way I could get my deferred accounts back under "critical mass" was by making large DAF contributions, hoping for a huge downturn (sadly I mostly missed the one in 2020, although I did convert some during that time) before any future runups, and/or years of market stagnation. My beneficiary was already at a high enough income level that they would have paid a similar rate as I did for my conversion so that mostly was a non-issue. Of course you can tweak assumptions to make the conversion look good or bad, and even in my case unless every assumption falls the same way (in favor of converting or not), I'm not sure it'll make a huge difference.
Re: Convert to Roth Now?
Well, now she'd be at 38% (making some assumptions about her state tax) at about $164k, and it doesn't take a lot of RMDs from deferred (plus social security, taxable investment income, and pension if any) to get there. Now if you mean 38% average tax rate vs. marginal, that's another story.willthrill81 wrote: ↑Thu Sep 16, 2021 2:40 pm I cannot think of a compelling reason to do Roth conversions in the 38% bracket. It's virtually impossible that the OP's daughter will be in the 38% bracket in retirement unless tax rates go up significantly.
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Re: Convert to Roth Now?
The highest marginal rates right now once SS benefits begin are 40.7%, which is only very slightly worse than Roth converting everything right now.tibbitts wrote: ↑Thu Sep 16, 2021 2:50 pmWell, now she'd be at 38% (making some assumptions about her state tax) at about $164k, and it doesn't take a lot of RMDs from deferred (plus social security, taxable investment income, and pension if any) to get there. Now if you mean 38% average tax rate vs. marginal, that's another story.willthrill81 wrote: ↑Thu Sep 16, 2021 2:40 pm I cannot think of a compelling reason to do Roth conversions in the 38% bracket. It's virtually impossible that the OP's daughter will be in the 38% bracket in retirement unless tax rates go up significantly.
The solution would seem to be to just do Roth conversions before SS benefits begin.
The Sensible Steward
Re: Convert to Roth Now?
Logged in to chime in with the others to vote "no" on the Roth conversion at 38%.
If you and she are set on doing a conversion soon, wait for a major crash to do so if possible. At a minimum, make sure she's doing a backdoor Roth IRA, so I'd probably see if she can just roll over her old 401k to the new employer's 401k, rather than roll over to a traditional IRA. And if her new employer has mega backdoor Roth option, definitely take full advantage of that.
If you and she are set on doing a conversion soon, wait for a major crash to do so if possible. At a minimum, make sure she's doing a backdoor Roth IRA, so I'd probably see if she can just roll over her old 401k to the new employer's 401k, rather than roll over to a traditional IRA. And if her new employer has mega backdoor Roth option, definitely take full advantage of that.
Re: Convert to Roth Now?
No, your daughter should not convert in the 38% bracket. That is not likely to pencil out to her financial advantage over the entire course of her life. Wait until she is in a lower tax bracket in the future. Could be due to taking time off from work (either because she wants to or because she needs to), moving into a different position/field, retiring early, delaying SS; lots of different scenarios where she will be in a lower bracket. In the meantime that $150K will still be in the market, compounding along with the rest of her funds.
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Re: Convert to Roth Now?
Another vote for don't do this.Leesbro63 wrote: ↑Thu Sep 16, 2021 9:17 am My 31 year old daughter works for a large corporation. Thanks to a good paying job early on, she has $417,000 in the company 401K. She soon will be changing employers and can roll that into a traditional IRA. She's thinking about doing that and converting to a ROTH, although it will require paying taxes of $158,736 or 38% (Federal and State, based on her 2020 tax return). I will lend her the money to pay the taxes and she will repay me over a few years, with the IRS required minimum interest.
My thinking is that to have that amount of money compound, perhaps for 60 years, tax free, is an rare opportunity for a young person. And without discussing current events, it may be a short-lived opportunity. On the other hand, paying that much in tax now would equate to killing big compoundable dollars that otherwise would have gone her taxable brokerage account. 38% sounds like a very high percent to pay, but might the many probable years of compounding tip the scales in favor of doing this now?
Also, watch out for pro rata rule if rolled to IRA. May be best to leave it where it is until a more tax efficient opportunity comes along (e.g., early retire and convert at lower tax rates).
Financologist
Re: Convert to Roth Now?
Not sure the highest marginal rates are 40.7% since in the OP's post he's including state - maybe I missed it but do we even know what state? I just guessed at state being in the 6% range.willthrill81 wrote: ↑Thu Sep 16, 2021 2:54 pmThe highest marginal rates right now once SS benefits begin are 40.7%, which is only very slightly worse than Roth converting everything right now.tibbitts wrote: ↑Thu Sep 16, 2021 2:50 pmWell, now she'd be at 38% (making some assumptions about her state tax) at about $164k, and it doesn't take a lot of RMDs from deferred (plus social security, taxable investment income, and pension if any) to get there. Now if you mean 38% average tax rate vs. marginal, that's another story.willthrill81 wrote: ↑Thu Sep 16, 2021 2:40 pm I cannot think of a compelling reason to do Roth conversions in the 38% bracket. It's virtually impossible that the OP's daughter will be in the 38% bracket in retirement unless tax rates go up significantly.
The solution would seem to be to just do Roth conversions before SS benefits begin.
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Re: Convert to Roth Now?
Good point. I missed the state tax rate being included. It sounds like we don't have enough information yet.tibbitts wrote: ↑Thu Sep 16, 2021 3:39 pmNot sure the highest marginal rates are 40.7% since in the OP's post he's including state - maybe I missed it but do we even know what state? I just guessed at state being in the 6% range.willthrill81 wrote: ↑Thu Sep 16, 2021 2:54 pmThe highest marginal rates right now once SS benefits begin are 40.7%, which is only very slightly worse than Roth converting everything right now.tibbitts wrote: ↑Thu Sep 16, 2021 2:50 pmWell, now she'd be at 38% (making some assumptions about her state tax) at about $164k, and it doesn't take a lot of RMDs from deferred (plus social security, taxable investment income, and pension if any) to get there. Now if you mean 38% average tax rate vs. marginal, that's another story.willthrill81 wrote: ↑Thu Sep 16, 2021 2:40 pm I cannot think of a compelling reason to do Roth conversions in the 38% bracket. It's virtually impossible that the OP's daughter will be in the 38% bracket in retirement unless tax rates go up significantly.
The solution would seem to be to just do Roth conversions before SS benefits begin.
The Sensible Steward
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Re: Convert to Roth Now?
Really? Slim to none? To make that kind of prediction, you’d need a crystal ball, and I thought BH didn’t believe in them.
TT, married to a woman whose career is > continuous 40 years and ongoing.
I get the FI part but not the RE part of FIRE.
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Re: Convert to Roth Now?
KF really believes that it's rare for people to not be laid off for an extended period of time during their career. I personally know many who never were though.TomatoTomahto wrote: ↑Thu Sep 16, 2021 4:21 pmReally? Slim to none? To make that kind of prediction, you’d need a crystal ball, and I thought BH didn’t believe in them.
TT, married to a woman whose career is > continuous 40 years and ongoing.
The Sensible Steward
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Re: Convert to Roth Now?
KF has often said such things, but saying the odds are slim to none means that it is almost a mortal lock. I know people who’ve been laid off, but more who haven’t. So, a statement that “it’s possible” is defensible. “Slim to none,” IMO, is a statement that goes over the top.willthrill81 wrote: ↑Thu Sep 16, 2021 4:26 pmKF really believes that it's rare for people to not be laid off for an extended period of time during their career. I personally know many who never were though.TomatoTomahto wrote: ↑Thu Sep 16, 2021 4:21 pmReally? Slim to none? To make that kind of prediction, you’d need a crystal ball, and I thought BH didn’t believe in them.
TT, married to a woman whose career is > continuous 40 years and ongoing.
I get the FI part but not the RE part of FIRE.
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Re: Convert to Roth Now?
I entirely agree. He seems to have let it happening to him make him think that it will happen to nearly everyone.TomatoTomahto wrote: ↑Thu Sep 16, 2021 4:30 pmKF has often said such things, but saying the odds are slim to none means that it is almost a mortal lock. I know people who’ve been laid off, but more who haven’t. So, a statement that “it’s possible” is defensible. “Slim to none,” IMO, is a statement that goes over the top.willthrill81 wrote: ↑Thu Sep 16, 2021 4:26 pmKF really believes that it's rare for people to not be laid off for an extended period of time during their career. I personally know many who never were though.TomatoTomahto wrote: ↑Thu Sep 16, 2021 4:21 pmReally? Slim to none? To make that kind of prediction, you’d need a crystal ball, and I thought BH didn’t believe in them.
TT, married to a woman whose career is > continuous 40 years and ongoing.
The Sensible Steward
Re: Convert to Roth Now?
It is, and they might. Or they might not.
See (preferably, together with your daughter) the Calculations section of that wiki, particularly the first of the "More complicated situations".
If the two of you run her numbers, what do you get for
a) her breakeven rate, and
b) her expected marginal rate in retirement?
Re: Convert to Roth Now?
Nah...do not believe this is worth the "price of admission". The heavy upfront cost is certain while so many unknowns about the future. Of course, many people are absolutely convinced of their powers of prognostication and make the choice to push ahead. Some are proven right...whether via keen insight or luck.
Re: Convert to Roth Now?
+1invest4 wrote: ↑Thu Sep 16, 2021 6:06 pm Nah...do not believe this is worth the "price of admission". The heavy upfront cost is certain while so many unknowns about the future. Of course, many people are absolutely convinced of their powers of prognostication and make the choice to push ahead. Some are proven right...whether via keen insight or luck.
Hehe, if only we can time/delay our demise to make aggressive Roth-conversions worth while (and most importantly- that we never need those Roth monies towards living expenses, and Roths are strictly left for next-gen)
Re: Convert to Roth Now?
Don't convert it to ROTH.
I am just a few years older than your daughter. I have traditional 401k, ROTH IRA and taxable accounts. We have no idea how tax policies or regulations will change in the next 50 years. Having money split between different types of accounts will give her more flexibility in the future. There is no reason to pay such a high tax penalty right now.
I would also caution her to not roll it to an IRA. Having the IRA will prevent her from doing back door ROTH IRA contributions. Roll it to the new company 401k or leave it as is if the new company plan is not as good.
I am just a few years older than your daughter. I have traditional 401k, ROTH IRA and taxable accounts. We have no idea how tax policies or regulations will change in the next 50 years. Having money split between different types of accounts will give her more flexibility in the future. There is no reason to pay such a high tax penalty right now.
I would also caution her to not roll it to an IRA. Having the IRA will prevent her from doing back door ROTH IRA contributions. Roll it to the new company 401k or leave it as is if the new company plan is not as good.
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Re: Convert to Roth Now?
I am a big fan of Roth conversion, but not in this case.
I don't see a clear "win" scenario here. If she keeps her tIRA account, she will have more flexibility taxwise.
I don't see a clear "win" scenario here. If she keeps her tIRA account, she will have more flexibility taxwise.
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Re: Convert to Roth Now?
When she retires, it is likely that her tax rate will be lower than 38% (just a guess, I don't know the future). If that's the case, then doing the roth conversion is the wrong thing to do...Leesbro63 wrote: ↑Thu Sep 16, 2021 9:17 am My 31 year old daughter works for a large corporation. Thanks to a good paying job early on, she has $417,000 in the company 401K. She soon will be changing employers and can roll that into a traditional IRA. She's thinking about doing that and converting to a ROTH, although it will require paying taxes of $158,736 or 38% (Federal and State, based on her 2020 tax return). I will lend her the money to pay the taxes and she will repay me over a few years, with the IRS required minimum interest.
My thinking is that to have that amount of money compound, perhaps for 60 years, tax free, is an rare opportunity for a young person. And without discussing current events, it may be a short-lived opportunity. On the other hand, paying that much in tax now would equate to killing big compoundable dollars that otherwise would have gone her taxable brokerage account. 38% sounds like a very high percent to pay, but might the many probable years of compounding tip the scales in favor of doing this now?
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Re: Convert to Roth Now?
I would jump on it and do it. I suggested that my daughter do it 3 years ago and she did. For all we know down the road roth conversions for young people will be eliminated and tax rates are going to be going way up for everybody. I think it's a bargain
Re: Convert to Roth Now?
As I mentioned just by assuming her salary keeps pace with inflation (and tax brackets due to), extrapolating from her age and deferred savings to this point, it's actually likely she'll be in the 38% combined marginal bracket in retirement, when RMDs are added to any taxable investment income plus what will presumably be maximum social security. It takes about $164k total income in current dollars to hit 38%, assuming 6% state (which is how I'm guessing the OP is arriving at 38%.) That's not to say life might not get in the way, and I'm not necessarily recommending converting, just saying that 38% in retirement wouldn't be unusual for someone the OP is describing.ivgrivchuck wrote: ↑Thu Sep 16, 2021 7:21 pmWhen she retires, it is likely that her tax rate will be lower than 38% (just a guess, I don't know the future). If that's the case, then doing the roth conversion is the wrong thing to do...Leesbro63 wrote: ↑Thu Sep 16, 2021 9:17 am My 31 year old daughter works for a large corporation. Thanks to a good paying job early on, she has $417,000 in the company 401K. She soon will be changing employers and can roll that into a traditional IRA. She's thinking about doing that and converting to a ROTH, although it will require paying taxes of $158,736 or 38% (Federal and State, based on her 2020 tax return). I will lend her the money to pay the taxes and she will repay me over a few years, with the IRS required minimum interest.
My thinking is that to have that amount of money compound, perhaps for 60 years, tax free, is an rare opportunity for a young person. And without discussing current events, it may be a short-lived opportunity. On the other hand, paying that much in tax now would equate to killing big compoundable dollars that otherwise would have gone her taxable brokerage account. 38% sounds like a very high percent to pay, but might the many probable years of compounding tip the scales in favor of doing this now?
Of course a portion of the RMDs might come in at a marginal rate under 38%, so that's also a consideration (vs. converting, with all of them seemingly being at 38%.)
Re: Convert to Roth Now?
Seems to make little sense.
-She might move to a no tax state in the future.
-30 year yield is 1.8%, so the compounding will be minimal.
Overall this seems like a reaction / response to the media's focus on Thiel's Roth IRA.
-She might move to a no tax state in the future.
-30 year yield is 1.8%, so the compounding will be minimal.
Overall this seems like a reaction / response to the media's focus on Thiel's Roth IRA.
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Re: Convert to Roth Now?
Will your daughter move to only new Roth contributions moving forward?
I haven't read the other posts, but any concerns of losing the ability to do the Backdoor Roth (if it continues to be available)?
Why not roll over the 401k to the new employer and convert over time?
I haven't read the other posts, but any concerns of losing the ability to do the Backdoor Roth (if it continues to be available)?
Why not roll over the 401k to the new employer and convert over time?
Re: Convert to Roth Now?
I agree that I'm confused about how the entire conversion fits into 38%. Now if the OP was rounding up and saying 38% was federal-only, that would make sense: she'd be at the highest rate with just her wages, and it might not be a bad bet that that highest rate might go up. But it doesn't sound like that's the case. So we just don't have enough information.cashheavy18 wrote: ↑Thu Sep 16, 2021 8:14 pm Will your daughter move to only new Roth contributions moving forward?
I haven't read the other posts, but any concerns of losing the ability to do the Backdoor Roth (if it continues to be available)?
Why not roll over the 401k to the new employer and convert over time?
Re: Convert to Roth Now?
I would not convert at 38%. What if she rollovers to the new employer's 401K or equivalent if possible, invests 157K of the 417K in a ~2050 Target Date Index fund (consider this the government portion, used to pay for taxes in the future), and invests the remaining 260K in a ~2045 Target Date Index fund (consider this the "early converted" fund). Optionally she can still borrow 158K from you at the IRS minimum interest and invest in a ~2045 Target Date index fund for her Taxable account.Leesbro63 wrote: ↑Thu Sep 16, 2021 9:17 am My 31 year old daughter works for a large corporation. Thanks to a good paying job early on, she has $417,000 in the company 401K. She soon will be changing employers and can roll that into a traditional IRA. She's thinking about doing that and converting to a ROTH, although it will require paying taxes of $158,736 or 38% (Federal and State, based on her 2020 tax return). I will lend her the money to pay the taxes and she will repay me over a few years, with the IRS required minimum interest.
My thinking is that to have that amount of money compound, perhaps for 60 years, tax free, is an rare opportunity for a young person. And without discussing current events, it may be a short-lived opportunity. On the other hand, paying that much in tax now would equate to killing big compoundable dollars that otherwise would have gone her taxable brokerage account. 38% sounds like a very high percent to pay, but might the many probable years of compounding tip the scales in favor of doing this now?
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Re: Convert to Roth Now?
No, I wouldn’t do it at her tax rate. She could easily find herself in a lower tax bracket in the future due to marriage, layoff, resignation, disability, retirement, etc., and she can relook at conversions then.
Cheers.
Cheers.
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Re: Convert to Roth Now?
I am the original poster. Just to clarify the 38% rate thing. What I did was use her Turbotax file for tax year 2020 and changed it as if she converted all of that to a Roth IRA. There are lots of moving parts, including credits and phase outs for both Federal and State returns. The bottom line is that converting will cost 38% of conversion amount. In all honesty, I didn't closely examine the pieces to see how much was due to federal tax at the marginal rate, how much was due to phase outs, etc.tibbitts wrote: ↑Thu Sep 16, 2021 9:29 pmI agree that I'm confused about how the entire conversion fits into 38%. Now if the OP was rounding up and saying 38% was federal-only, that would make sense: she'd be at the highest rate with just her wages, and it might not be a bad bet that that highest rate might go up. But it doesn't sound like that's the case. So we just don't have enough information.cashheavy18 wrote: ↑Thu Sep 16, 2021 8:14 pm Will your daughter move to only new Roth contributions moving forward?
I haven't read the other posts, but any concerns of losing the ability to do the Backdoor Roth (if it continues to be available)?
Why not roll over the 401k to the new employer and convert over time?
This has been a highly useful thread and my daughter and I both thank all who posted. I think the conclusion is to not do any conversion now. And as always, continue to review the entire situation in future years.
Re: Convert to Roth Now?
with 417k today, doing nothing, and letting it grow 6% annual, retiring at 70, you would have just over $4m. using today's numbers, that puts your RMD at $145k, right into the 24% tax bracket.
that's less than 38%, so i agree with everyone else, it doesn't make sense to convert.
also, at 31, she's still young. she's got another 30 years until 60 where she can contribute to a Roth and let it grow. at retirement, the RMDs from her 401k will more than provide for an upper class livelihood. she could spend any of her Roth without being taxed. and unless she really wants to splurge, she probably wouldn't need to touch her taxable at all, which means she could pass onto her heirs with a step-up cost basis.
TDLR; rich people problems. even if you pick the wrong option you're still fine.
that's less than 38%, so i agree with everyone else, it doesn't make sense to convert.
also, at 31, she's still young. she's got another 30 years until 60 where she can contribute to a Roth and let it grow. at retirement, the RMDs from her 401k will more than provide for an upper class livelihood. she could spend any of her Roth without being taxed. and unless she really wants to splurge, she probably wouldn't need to touch her taxable at all, which means she could pass onto her heirs with a step-up cost basis.
TDLR; rich people problems. even if you pick the wrong option you're still fine.