Roth Conversion Question

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Topic Author
VVenti7401
Posts: 122
Joined: Fri Aug 06, 2021 11:58 pm

Roth Conversion Question

Post by VVenti7401 »

Hi all,

Wanted to get some opinions on whether or not I should consider doing a Roth conversion. Here are some stats that may help

- Married couple Ages 38 and 35 / 1 Child (2.5 years old)
- Combined salary of $217,816 (Wife Salary 54,576 / My Salary 163,240
- 2022 AGI $170,045
- Live in NYC
- Current Pre-tax retirement savings balances $394,725
- Current Roth IRA Balance of $13,807
- Current 529 Balance - $52,502
- Current “cash” savings - $100,000

Of the Pre-Tax retirement accounts my wife has a Fidelity 401k from a previous job that has approximately $80,000 in it. I was thinking of doing a Roth Conversion to my Fidelity Roth IRA account. Doing it all at once is something I considered but seems awfully expensive especially considering the income taxes in NYC. Then I was thinking about doing 10-15k for a few years until its all converted into the Roth as that seems more palatable. Just wanted to get everyone’s thoughts if either scenario was worth it or if there are better ideas? Thanks!
delamer
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Joined: Tue Feb 08, 2011 5:13 pm

Re: Roth Conversion Question

Post by delamer »

You can’t put your wife’s 401(k) money into your IRA. You’d have to set up a Roth IRA for her to put any converted funds into.

But given your tax rates, I would defer Roth conversions until you are in lower bracket(s).
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
tibbitts
Posts: 23716
Joined: Tue Feb 27, 2007 5:50 pm

Re: Roth Conversion Question

Post by tibbitts »

VVenti7401 wrote: Sat Mar 25, 2023 10:03 pm Hi all,

Wanted to get some opinions on whether or not I should consider doing a Roth conversion. Here are some stats that may help

- Married couple Ages 38 and 35 / 1 Child (2.5 years old)
- Combined salary of $217,816 (Wife Salary 54,576 / My Salary 163,240
- 2022 AGI $170,045
- Live in NYC
- Current Pre-tax retirement savings balances $394,725
- Current Roth IRA Balance of $13,807
- Current 529 Balance - $52,502
- Current “cash” savings - $100,000

Of the Pre-Tax retirement accounts my wife has a Fidelity 401k from a previous job that has approximately $80,000 in it. I was thinking of doing a Roth Conversion to my Fidelity Roth IRA account. Doing it all at once is something I considered but seems awfully expensive especially considering the income taxes in NYC. Then I was thinking about doing 10-15k for a few years until its all converted into the Roth as that seems more palatable. Just wanted to get everyone’s thoughts if either scenario was worth it or if there are better ideas? Thanks!
Other than the popularity of conversion posts on this forum, what made you think it would be a good idea to do a Roth conversion? I'm wondering if you're thinking for example that you're likely to have a substantial income increase in coming years for example.

I assume you know you can't convert tIRA money to a different person's Roth, and had just worded that awkwardly.
Topic Author
VVenti7401
Posts: 122
Joined: Fri Aug 06, 2021 11:58 pm

Re: Roth Conversion Question

Post by VVenti7401 »

I apologize for the wording my wife has a Roth account so she could do the conversion there. The thought process behind it is I am likely to have the same if not greater income when retired. Currently my wife and I save about 36k per year toward retirement, this number is going to grow substantially over the next 3 years (wife got a promotion that will double her salary phased in over 3 years). We are both federal employees who also receive a fixed pension based on percentage of salary, plus (if it’s still around social security). Considering the outsized contributions, pensions, SS, and the fact I will likely inherit around 750k to 1m, and I am likely to move to a more cost friendly location outside of NYC that will allow me to yield a significant profit in my home all points to having more in retirement then I do now. I am figuring the more I can put into Roths will help me take less out of taxables then i will already have to when RMD’s kick in. Also if for whatever reason I do not have enough in my 529’s for my sons school I can always tap the Roths as well. Make sense?
Topic Author
VVenti7401
Posts: 122
Joined: Fri Aug 06, 2021 11:58 pm

Re: Roth Conversion Question

Post by VVenti7401 »

delamer wrote: Sat Mar 25, 2023 10:10 pm You can’t put your wife’s 401(k) money into your IRA. You’d have to set up a Roth IRA for her to put any converted funds into.

But given your tax rates, I would defer Roth conversions until you are in lower bracket(s).
Thanks! I apologize I did mean to say the Roth would also been in my wife’s name (her own Roth).
tibbitts
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Re: Roth Conversion Question

Post by tibbitts »

VVenti7401 wrote: Sat Mar 25, 2023 11:26 pm I apologize for the wording my wife has a Roth account so she could do the conversion there. The thought process behind it is I am likely to have the same if not greater income when retired. Currently my wife and I save about 36k per year toward retirement, this number is going to grow substantially over the next 3 years (wife got a promotion that will double her salary phased in over 3 years). We are both federal employees who also receive a fixed pension based on percentage of salary, plus (if it’s still around social security). Considering the outsized contributions, pensions, SS, and the fact I will likely inherit around 750k to 1m, and I am likely to move to a more cost friendly location outside of NYC that will allow me to yield a significant profit in my home all points to having more in retirement then I do now. I am figuring the more I can put into Roths will help me take less out of taxables then i will already have to when RMD’s kick in. Also if for whatever reason I do not have enough in my 529’s for my sons school I can always tap the Roths as well. Make sense?
Well sort of, although I'm not sure you have the most obvious case for conversions. I've never tried using one so early in the process but maybe you could run scenarios with the usual calculators (RPM, Pralana.) Unfortunately the required assumptions that make them of limited value for people closer to or in retirement would be even more problematic for you. I'm sure you can provide some assumptions that will make you want to convert and some that won't. I'm assuming you don't have a choice of Roth for your employer plans?
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FiveK
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Re: Roth Conversion Question

Post by FiveK »

VVenti7401 wrote: Sat Mar 25, 2023 10:03 pm - Married couple Ages 38 and 35 / 1 Child (2.5 years old)
- Combined salary of $217,816 (Wife Salary 54,576 / My Salary 163,240
- 2022 AGI $170,045
- Live in NYC
- Current Pre-tax retirement savings balances $394,725
VVenti7401 wrote: Sat Mar 25, 2023 11:26 pm The thought process behind it is I am likely to have the same if not greater income when retired.
...
We are both federal employees who also receive a fixed pension based on percentage of salary....
....I am likely to move to a more cost friendly location outside of NYC that will allow me to yield a significant profit in my home all points to having more in retirement then I do now.
The traditional vs. Roth (including convert now or later) question comes down to the marginal tax rate it costs to do Roth contributions/conversions now, vs. the marginal tax it will cost to do traditional withdrawals/Roth conversions in the future.

See the beginning portions of the Traditional versus Roth wiki, from the start through the "Calculating marginal tax rate now" section. Ask if any of that is not clear.

For round numbers, assuming you both retire in 20 years, your pre-tax balance grows at 4%/yr real, and you withdraw 8%/yr for some combination of Roth conversion and spending, your income from your current $400K pre-tax balance will be $400K * 1.04^20 * 8% = $70K/yr. What "unavoidable" pension amounts (i.e., pensions that you "have" to start immediately upon retirement because you get no pension rate increase by deferring) would you have in today's dollars at that time? What marginal tax rate would you have then, using the same approach you used to calculate your marginal tax rate now, including anticipated changes in state/local tax rates?
ClassOf2021
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Location: New Jersey

Re: Roth Conversion Question

Post by ClassOf2021 »

While not exactly your question, can you or your wife do backdoor Roth contributions at this time?
delamer
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Re: Roth Conversion Question

Post by delamer »

VVenti7401 wrote: Sat Mar 25, 2023 11:26 pm I apologize for the wording my wife has a Roth account so she could do the conversion there. The thought process behind it is I am likely to have the same if not greater income when retired. Currently my wife and I save about 36k per year toward retirement, this number is going to grow substantially over the next 3 years (wife got a promotion that will double her salary phased in over 3 years). We are both federal employees who also receive a fixed pension based on percentage of salary, plus (if it’s still around social security). Considering the outsized contributions, pensions, SS, and the fact I will likely inherit around 750k to 1m, and I am likely to move to a more cost friendly location outside of NYC that will allow me to yield a significant profit in my home all points to having more in retirement then I do now. I am figuring the more I can put into Roths will help me take less out of taxables then i will already have to when RMD’s kick in. Also if for whatever reason I do not have enough in my 529’s for my sons school I can always tap the Roths as well. Make sense?
There are a lot of “likelys” in your scenario that could end up not panning out. Plus if you do move out if NYC in retirement, it’s likely that your state/local tax tate will be much lower (or nonexistent).

There’s an argument to be made that you are oversaving for retirement, assuming that you both expect to work until your MRAs.

I
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
tibbitts
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Re: Roth Conversion Question

Post by tibbitts »

ClassOf2021 wrote: Sun Mar 26, 2023 5:02 am While not exactly your question, can you or your wife do backdoor Roth contributions at this time?
That was what I was getting at asking about the availability of Roth 401k plans. The OP seems to be wanting a balance between Roth and deferred, which is probably a good idea, but there might be other ways to accomplish that.
Topic Author
VVenti7401
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Re: Roth Conversion Question

Post by VVenti7401 »

ClassOf2021 wrote: Sun Mar 26, 2023 5:02 am While not exactly your question, can you or your wife do backdoor Roth contributions at this time?
I do but for about 80,000 only, my wife can open a Roth and roll in that 80k from a previous 401k at her old job. Just wasn’t sure if 1. Should I do it now at my income levels or defer until later? (But then it will likely have grown and be more to convert) 2. Do it now as the whole lump sum? (Costly between Fed, City and State) or 3. Do about 10-15k per year until its all rolled over?
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teen persuasion
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Re: Roth Conversion Question

Post by teen persuasion »

VVenti7401 wrote: Sat Mar 25, 2023 11:26 pm I apologize for the wording my wife has a Roth account so she could do the conversion there. The thought process behind it is I am likely to have the same if not greater income when retired. Currently my wife and I save about 36k per year toward retirement, this number is going to grow substantially over the next 3 years (wife got a promotion that will double her salary phased in over 3 years). We are both federal employees who also receive a fixed pension based on percentage of salary, plus (if it’s still around social security). Considering the outsized contributions, pensions, SS, and the fact I will likely inherit around 750k to 1m, and I am likely to move to a more cost friendly location outside of NYC that will allow me to yield a significant profit in my home all points to having more in retirement then I do now. I am figuring the more I can put into Roths will help me take less out of taxables then i will already have to when RMD’s kick in. Also if for whatever reason I do not have enough in my 529’s for my sons school I can always tap the Roths as well. Make sense?
likely to have the same if not greater income when retired - Even if you have roughly the same income in retirement, the types of income will be different, and be taxed differently.

Social security will be only 85% taxable federally, and not taxed by NYS.

Some of your pension income will not be taxed by NYS.

Federal LTCG tax rates are lower than tax rates on earned income.

And if you move out of NYC, then that extra layer of taxes will go away, too.


It might be an option to do Roth conversions opportunistically if you ever find yourselves unexpectedly in a *relatively* lower tax bracket - e.g., if between jobs and thus lower income one year. Or if you retire early, and it's beneficial to wait before taking a pension - convert before pension, before SS, etc.

But if what you want is more Roth, contribute more TO Roth accounts as part of you planned saving, mega backdoor if available, Roth 401k instead of t401k if not (but then you lose out on tax deferral at your current high bracket). Contributing to tax deferred and Roth converting in the same year (even if different accounts, think of the whole picture) is equivalent to just contributing DIRECTLY to Roth in the first place, right?
Topic Author
VVenti7401
Posts: 122
Joined: Fri Aug 06, 2021 11:58 pm

Re: Roth Conversion Question

Post by VVenti7401 »

Great observations much appreciated!
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David Jay
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Re: Roth Conversion Question

Post by David Jay »

If neither of you have traditional IRAs (which would interfere with the tax benefits), you can each use the backdoor Roth process to put $6500 each into your respective Roth accounts tax free from your current cash savings.

Wiki link here: https://www.bogleheads.org/wiki/Backdoor_Roth
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