Roth IRA Conversions- Age 71

[Laker14]

I'm mulling over the idea of making some substantial Roth conversions from my regular IRA account.

Other than a couple of homes, one in TV and one on a lake in NY, all of my money is in IRAs. I'm 71, and with the amount in my IRAs, and my yearly draw, I am in a comfortable position, UNLESS...where my plan gets shaky is if I or my wife live into our mid-90s (we have some history of long life-spans as well as some history of early demise, so it's a crap shoot), and we have all of our money in IRAs, we could get into some very heavy RMD years, with exorbitant tax rates, and serious depletion of our wealth.

So, it seems to me that Roth conversions over the. next 10 years could be a good hedge against that. From my calculations, somewhere in the 4 or 5 year range would be the break-even point. After that it's a clear win.

From what I've researched, the immediate costs would be obviously, more income tax now, and a bump in our Medicare premiums. Factoring those in, we get the tax back later when we withdraw the Roth money tax-free, and at the pace required of our lifestyles, not at a pace dictated by the IRS.

Furthermore, there is a very good chance that only one of us would survive into such an old age, and the survivor would be taxed at the Single rate, which would be even more of a burden.

As long as I am certain (and I'm as certain as I can be) that we won't need to tap the Roth IRA for 10 years, this seems like a no-brainer.

I'm interested in the opinions of others who may have done this, or are considering doing this, and what their thought processes are.

[dewilson58]

Convert = guaranteed tax payment.

No Convert = maybe tax payment.

:popcorn::popcorn:

[rjm1cc]

From your question I think you understand the calculations. Picking up on the increase in Medicare premium was good.
Once you are done with the conversions the Medicare premium will be higher the next year. I think you can appeal this. Remember they are a year behind because they can not know your current income until the year is completed. I would go for it.

[retiredguy123]

I find this example to be simple but interesting. Assume a tax rate of 30 percent, and an investment return of 10 percent. Convert $1,000 of your IRA to a Roth and pay $300 in tax. One year later, you will have $770 in the Roth. But, instead of converting, suppose you keep the $1,000 in the traditional IRA and withdraw it a year later. You will pay $330 in tax ($1,100 × 0.3) and you will have $770, the exact same amount as if you had converted it to a Roth.

Two points:
1. You are assuming that tax rates will be higher in the future, but they may not be.
2. If you ever need long term health care, assisted living, or a nursing home, you can use the traditional IRA money to pay for the care and take a huge medical tax deduction. In the case of a nursing home, 100 percent of the cost is tax deductible. With assisted living, you can deduct a percentage of the cost, which could be about 60 percent.

[Stu from NYC]

I find this example to be simple but interesting. Assume a tax rate of 30 percent, and an investment return of 10 percent. Convert $1,000 of your IRA to a Roth and pay $300 in tax. One year later, you will have $770 in the Roth. But, instead of converting, suppose you keep the $1,000 in the traditional IRA and withdraw it a year later. You will pay $330 in tax ($1,100 × 0.3) and you will have $770, the exact same amount as if you had converted it to a Roth.

Two points:
1. You are assuming that tax rates will be higher in the future, but they may not be.
2. If you ever need long term health care, assisted living, or a nursing home, you can use the traditional IRA money to pay for the care and take a huge medical tax deduction. In the case of a nursing home, 100 percent of the cost is tax deductible. With assisted living, you can deduct a percentage of the cost, which could be about 60 percent.

I agree. Paying taxes now removes the growth from those funds. Who is to say the govt might decide to tax ROTH funds down the road.

Who would have thought we would be paying taxes on our SS income.

[CoachKandSportsguy]

I find this example to be simple but interesting. Assume a tax rate of 30 percent, and an investment return of 10 percent. Convert $1,000 of your IRA to a Roth and pay $300 in tax. One year later, you will have $770 in the Roth. But, instead of converting, suppose you keep the $1,000 in the traditional IRA and withdraw it a year later. You will pay $330 in tax ($1,100 × 0.3) and you will have $770, the exact same amount as if you had converted it to a Roth.

Two points:
1. You are assuming that tax rates will be higher in the future, but they may not be.
2. If you ever need long term health care, assisted living, or a nursing home, you can use the traditional IRA money to pay for the care and take a huge medical tax deduction. In the case of a nursing home, 100 percent of the cost is tax deductible. With assisted living, you can deduct a percentage of the cost, which could be about 60 percent.

Absolutely correct BUT
the problem with RMDs is that one is forced to take a higher percentage each year as your age progresses. so what's 3% now will be 5% eventually, and 7% even later. .

So if you continue to earn 10 % on the remaining IRA funds, and you take out less than the annual return, your IRA is still growing and your distribution rate is also still growing by a larger percentage than the RMD percentage = RMD % + (Annual return - RMD %)

Assuming married couple status, the IRMMA tax won't effect you until you pass approximately $3M in the combined IRA (assuming no other taxable income and maximum SS income for both spouses). . I didn't calculate the single IRMMA threshold but assume its about 50% less (mental estimate, not modeled out)

So if you can target reducing your IRA balances combined to below $3M, by moving to ROTH IRA, you can put off the IRMMA tax until one spouse passes away. At the end of the day, the future is uncertain, and so is this outcome of this decision . .

Assuming that the market casino still returns 10% annually, the simple payback period is about 3.5 years, round to 4 years for conservatism, being incrementally taxed at 30%, and just live off SS and any existing withdrawals to live in the villages. .

BUT this is a tax avoidance scheme for those who prefer tax minimization versus wealth maximization. At a certain point of IRA wealth, the IRMMA tax is negligible to your total spendable income. . . .

time to visit a financial planner and look at your long term year by year assets, income, expenses, and resulting taxes. . if done properly, and I have done ours, you might be surprised at the outcome, good or bad. . i have no clue to your individual situation. .

good luck

[Blueblaze]

Every time I do the math, I decide to stay the course. I pull out enough to hit the limit of the 15% tax bracket. It keeps me over RMD, and steadily moves savings to the taxable side, so if the gooberment decides to suddenly confiscate 401K money, as they've so often threatened, at least I've got enough they can't touch to avoid the Kibble diet. My Fidelity guy tried to get me to do a ROTH conversion, but I just can't see handing over mass sums until I have to. Of course, if you're already living in the high tax brackets, what difference does it make? You might as well do it now, while taxes are relatively low. Being that wealthy has never been a problem I had to face.

[GoRedSox!]

Not everyone invests the same....I can't assume 10% return in retirement because I can't or won't put the entire IRA at investment risk when I am depending on it for income. I am not going to average 10% return because I am closer to 50/50 between equities and guaranteed funds. I was making over 5% on guaranteed side for the last couple years, but it looks like that is about to come to an end. I am still not going higher on the equities mix than 50/50 unless it drops to 0.1% again...and even then I wouldn't go higher than 60/40. I may be more conservative than others....or maybe I would put more at risk if it was just me, but I have my wife to consider.

I have never really worried about the RMD's, perhaps because I have the philosophy that if I live into my 90's, I will be happy to deal with higher RMD's. I'll sign for that right now. At age 80, the RMD is still only about 5%. At age 90, it is 8.2%. I hope I live to complain about having to pay tax on 8.2% of my IRA in 2050. I am not going to argue if the numbers work out that it may be more advantageous for tax purposes to convert to Roth in the long run. It may be, but I am not going to give up such a huge chunk of my IRA in income taxes in one year plus pay the higher Medicare premiums when I have no idea how long I am going to live. Good luck to everyone, these are not easy decisions to make and what may be right for one is not necessarily right for everyone.

[jimbomaybe]

Tough decision that has to be made on ones individual situation , desires and concerns, one thing that hasn't been mentioned yet is the estate planning aspect, here again everyone is going to have a different perspective. I did a conversion some years ago , it was sizable enough that my hand cramped up writing the check to Uncle Sugar. OK I'm something of a "tightwad" , they took the buffalo off the nickel because PETA complained that people like me were squeezing them too hard

[blueash]

Who would have thought we would be paying taxes on our SS income.

Well pretty much everyone as it has been taxable since 1984 (https://www.ssa.gov/history/taxationofbenefits.html#:~:text=This%20changed%20f or%20the%20first,subject%20to%20federal%20income%2 0taxes.)

[walterray1]

Absolutely correct BUT
the problem with RMDs is that one is forced to take a higher percentage each year as your age progresses. so what's 3% now will be 5% eventually, and 7% even later. .

So if you continue to earn 10 % on the remaining IRA funds, and you take out less than the annual return, your IRA is still growing and your distribution rate is also still growing by a larger percentage than the RMD percentage = RMD % + (Annual return - RMD %)

Assuming married couple status, the IRMMA tax won't effect you until you pass approximately $3M in the combined IRA (assuming no other taxable income and maximum SS income for both spouses). . I didn't calculate the single IRMMA threshold but assume its about 50% less (mental estimate, not modeled out)

So if you can target reducing your IRA balances combined to below $3M, by moving to ROTH IRA, you can put off the IRMMA tax until one spouse passes away. At the end of the day, the future is uncertain, and so is this outcome of this decision . .

Assuming that the market casino still returns 10% annually, the simple payback period is about 3.5 years, round to 4 years for conservatism, being incrementally taxed at 30%, and just live off SS and any existing withdrawals to live in the villages. .

BUT this is a tax avoidance scheme for those who prefer tax minimization versus wealth maximization. At a certain point of IRA wealth, the IRMMA tax is negligible to your total spendable income. . . .

time to visit a financial planner and look at your long term year by year assets, income, expenses, and resulting taxes. . if done properly, and I have done ours, you might be surprised at the outcome, good or bad. . i have no clue to your individual situation. .

good luck

To original OP Could you expand on your comments regarding IRMMA tax? You mention $3mm in IRA for married couple. Are you referring to a distribution of that amount or overall account value. My understanding is that account value only comes into play for RMD if one is at the RMD age. AGI threshold for max IRMAA impact on Medicare Part B for married couples filing jointly is $750,000 regardless of income source. Are we talking about two different things?

[JoelJohnson]

Convert = guaranteed tax payment.

No Convert = maybe tax payment.

:popcorn::popcorn:

Not "maybe", someone WILL pay the taxes at some point.

[dewilson58]

Not "maybe", someone WILL pay the taxes at some point.

Not if donated.

:icon_bored:

[Plinker]

Don’t forget, you will not be able to access the converted ROTH money for a period between 4 years plus one day to 5 years, depending on what date you do the conversion. Regardless of the date of your conversion, the IRS starts counting the 5 year wait on January 1st of the year of conversion. So, a conversion on July 1st has a 4 1/2 year wait while a December 31st conversion only waits 4 years plus one day. Consider waiting until mid-December to convert. Each conversion starts a new wait period.

[AMB444]

Who would have thought we would be paying taxes on our SS income.

Minnesota pays tax on SS.

[jimbomaybe]

Don’t forget, you will not be able to access the converted ROTH money for a period between 4 years plus one day to 5 years, depending on what date you do the conversion. Regardless of the date of your conversion, the IRS starts counting the 5 year wait on January 1st of the year of conversion. So, a conversion on July 1st has a 4 1/2 year wait while a December 31st conversion only waits 4 years plus one day. Consider waiting until mid-December to convert. Each conversion starts a new wait period.
There is a work around for that . From Investopedia
" A note for multiple account owners: The five-year clock starts with your first contribution to any Roth IRA—not necessarily the one from which you’re withdrawing funds. Once you satisfy the five-year requirement for one Roth IRA, you’ve fulfilled it for all of them.
7
Internal Revenue Service. "Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs)," Pages 31-32.


Any subsequent Roth IRA is considered held for five years. Rollovers from one Roth IRA to another don't reset the five-year clock.
8

[PersonOfInterest]

I'm mulling over the idea of making some substantial Roth conversions from my regular IRA account.

Other than a couple of homes, one in TV and one on a lake in NY, all of my money is in IRAs. I'm 71, and with the amount in my IRAs, and my yearly draw, I am in a comfortable position, UNLESS...where my plan gets shaky is if I or my wife live into our mid-90s (we have some history of long life-spans as well as some history of early demise, so it's a crap shoot), and we have all of our money in IRAs, we could get into some very heavy RMD years, with exorbitant tax rates, and serious depletion of our wealth.

So, it seems to me that Roth conversions over the. next 10 years could be a good hedge against that. From my calculations, somewhere in the 4 or 5 year range would be the break-even point. After that it's a clear win.

From what I've researched, the immediate costs would be obviously, more income tax now, and a bump in our Medicare premiums. Factoring those in, we get the tax back later when we withdraw the Roth money tax-free, and at the pace required of our lifestyles, not at a pace dictated by the IRS.

Furthermore, there is a very good chance that only one of us would survive into such an old age, and the survivor would be taxed at the Single rate, which would be even more of a burden.

As long as I am certain (and I'm as certain as I can be) that we won't need to tap the Roth IRA for 10 years, this seems like a no-brainer.

I'm interested in the opinions of others who may have done this, or are considering doing this, and what their thought processes are.

I'm not sure I see your dilemma. If you're 90 and drawing an RMD that has exorbitant tax rates you're sitting on a very large retirement account which should be more than sufficient to sustain you for the few years you'd have left. Also if your RMD is being taxed it means you've got substantial income as well. In either case if you're 90+ and paying exorbitant tax on your income then you've got an Income that is probably well in excess of what you're spending at that age.

[rsmurano]

Why would anybody convert huge sums of money into a Roth to decrease your nest egg so you can earn less money per year until you die and pay high taxes the year of conversion?
The years you should have converted are 2020 and 2022 when the markets were down 30%, you would have paid less capital gains taxes because you were already down. Don’t convert today since the market is high and you will pay more.

Being a senior doesn’t mean you have to play it safe with your money if you need this money to live on. Making 5% during the last couple of years means you were losing money to inflation. I will never buy bonds to do the old fashioned 60/40 split, it’s all 100% equities for me. There are probably 100’s if not a lot more index funds that have very low low risk like a bond that will make you many times more than that 5% over time. I have half a dozen that I have been using for decades.

[Gladys Turnip]

I'm mulling over the idea of making some substantial Roth conversions from my regular IRA account.

Other than a couple of homes, one in TV and one on a lake in NY, all of my money is in IRAs. I'm 71, and with the amount in my IRAs, and my yearly draw, I am in a comfortable position, UNLESS...where my plan gets shaky is if I or my wife live into our mid-90s (we have some history of long life-spans as well as some history of early demise, so it's a crap shoot), and we have all of our money in IRAs, we could get into some very heavy RMD years, with exorbitant tax rates, and serious depletion of our wealth.

So, it seems to me that Roth conversions over the. next 10 years could be a good hedge against that. From my calculations, somewhere in the 4 or 5 year range would be the break-even point. After that it's a clear win.

From what I've researched, the immediate costs would be obviously, more income tax now, and a bump in our Medicare premiums. Factoring those in, we get the tax back later when we withdraw the Roth money tax-free, and at the pace required of our lifestyles, not at a pace dictated by the IRS.

Furthermore, there is a very good chance that only one of us would survive into such an old age, and the survivor would be taxed at the Single rate, which would be even more of a burden.

As long as I am certain (and I'm as certain as I can be) that we won't need to tap the Roth IRA for 10 years, this seems like a no-brainer.

I'm interested in the opinions of others who may have done this, or are considering doing this, and what their thought processes are.
&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&

Yes, there are many pros and cons to converting (or not converting) Traditional IRA money to Roth. But one factor I have not seen mentioned yet in this thread is simplification. That is, while the decision whether to convert is usually a very close question from a purely financial standpoint, the simplification benefits of converting to Roth are often a game changer. More specifically, after conversion you no longer have to worry about RMDs or IRMAA or income taxes of any sort. This makes life much easier for you, a surviving spouse, heirs, etc. Life becomes simpler. 🙂

[M2inOR]

It's dependent on the size of your IRA. It depends on your life expectancy. It depends on your taxable accounts.

Check out Craig Wear. He has published several books on the topic of IRA to ROTH-IRA conversions.

I've completed 4 years worth of conversions and am at the point of whether to do a 5th year.

Before starting several years ago, I realized that my anticipated RMDs would deliver more income than we needed. I learned about the possibility of converting. I did the math myself, and wanted a 2nd opinion.

I contacted Craig Wear, Paid the fee, and got a detailed plan that worked for us.

The only surprise was IRMAA, but fortunately, we had a tax-free fund from my wife's retirement plan that took care of paying the very high IRMAA. We also had enough savings in our taxable account so that we did not need to use and of the IRA conversion to pay the taxes. One year we reached the 37% bracket, the other years we stayed in the 22% bracket.

We both delayed taking SS benefits until we reached age 70.

We are quite happy with our conversion guidance and the process.

Note well: every situation is different. The books Wear has published will help you decide whether a conversion is worthwhile. For US, it has worked out very well, and we won't need to convert all our IRA funds.

[Cbriggi]

We were on the phone yesterday with our financial advisor and CPA discussing this exact situation. There are many factors to consider - including beneficiaries.

First - talk with a financial advisor! There are pros and cons you have to calculate. A decent firm will have a CPA available (don’t trust just a FA to tax laws). Most will do it gratis as they want you for a client.

Second - Timing. If conversions are advised based on your situation, it is best to wait for a downturn in the market. Sell low from traditional IRA and invest low in ROTH. Think paying tax on a value of 75% vs. 100%

Third - Realize the future is uncertain around any changes to tax laws (oh well they definitely will change but not in our favor.)

Again pros and cons to this but having assets post tax that grow tax free is awesome!

YMMV

[Windguy]

I was under the impression that you can’t move money into a Roth unless you are making wages (have a job). I tried to move some of my IRA into my Roth after I retired, but I was not allowed to do so.

[retiredguy123]

We were on the phone yesterday with our financial advisor and CPA discussing this exact situation. There are many factors to consider - including beneficiaries.

First - talk with a financial advisor! There are pros and cons you have to calculate. A decent firm will have a CPA available (don’t trust just a FA to tax laws). Most will do it gratis as they want you for a client.

Second - Timing. If conversions are advised based on your situation, it is best to wait for a downturn in the market. Sell low from traditional IRA and invest low in ROTH. Think paying tax on a value of 75% vs. 100%

Third - Realize the future is uncertain around any changes to tax laws (oh well they definitely will change but not in our favor.)

Again pros and cons to this but having assets post tax that grow tax free is awesome!

YMMV
I would only take issue with your No. 2. If a CPA or a financial advisor claims that they can "time" the stock market, I would not have much confidence in their advice.

[Bridget Staunton]

Blue blaze: first: thank you for your post. But in my case the gov’t tell me the amount I have to withdraw. As far as I know there is no way around it because they want their taxes

[SaucyJim]

Don’t forget, you will not be able to access the converted ROTH money for a period between 4 years plus one day to 5 years, depending on what date you do the conversion. Regardless of the date of your conversion, the IRS starts counting the 5 year wait on January 1st of the year of conversion. So, a conversion on July 1st has a 4 1/2 year wait while a December 31st conversion only waits 4 years plus one day. Consider waiting until mid-December to convert. Each conversion starts a new wait period.

Interesting. I was of the understanding that the five year period was only for five years the specific account was established. I rolled my Roth 401(k) into a newly-established Roth IRA (better self-directed options) a short time ago. I was told the original contributions were still accessible and that only earnings could not be accessed.

[RICH1]

Estate Planning Attorney will be a small fee to pay for Answers ...decrease your financial worth ... Ted Tishman out of TPA is a good one if he's taking Clients.. now is the time to ease your worry's

[M2inOR]

I was under the impression that you can’t move money into a Roth unless you are making wages (have a job). I tried to move some of my IRA into my Roth after I retired, but I was not allowed to do so.

Wrong impression.

It's called a back-door conversion.

Yes there are rules, and age limitations.

Best to read up.

Check with any of the books on the subject, including a few from Craig Wear.

[retiredguy123]

Blue blaze: first: thank you for your post. But in my case the gov’t tell me the amount I have to withdraw. As far as I know there is no way around it because they want their taxes
As I understand it, the only way to avoid taxes on RMD money is to transfer it directly to a charity.

[Bridget Staunton]

We all pay taxes on SS. It’s national

[SaucyJim]

First - talk with a financial advisor! There are pros and cons you have to calculate. A decent firm will have a CPA available (don’t trust just a FA to tax laws). Most will do it gratis as they want you for a client

Good advice, but I would add that the advisor should be fee-based - not commission-based. There is no way I’m giving a percentage of my nest egg to anyone on an ongoing basis. Get the advice and implement it yourself.

Now, if my mental faculties should start to fail, that’s a separate consideration. If that happens, I’d probably run for public office. 😎

[SaucyJim]

I was under the impression that you can’t move money into a Roth unless you are making wages (have a job). I tried to move some of my IRA into my Roth after I retired, but I was not allowed to do so.

I’d be interested to know if you were misinformed. My understanding was that it was contributions that were limited to income in a given year - not rollovers. I could be wrong, though. As my first two wives. ������

[dewilson58]

I was under the impression that you can’t move money into a Roth unless you are making wages (have a job). I tried to move some of my IRA into my Roth after I retired, but I was not allowed to do so.

Wrong.

[retiredguy123]

I have done the math several times for a Roth conversion, and I have decided that it is not a good idea.

The only good argument I have heard in favor of a Roth conversion was from a guy who wanted to leave money to his children free of taxes and the hassle associated with withdrawing money from a traditional IRA and paying taxes on it. That made sense to me.

[M2inOR]

I have done the math several times for a Roth conversion, and I have decided that it is not a good idea.

The only good argument I have heard in favor of a Roth conversion was from a guy who wanted to leave money to his children free of taxes and the hassle associated with withdrawing money from a traditional IRA and paying taxes on it. That made sense to me.

It's all dependent on the size of the IRA amount you plan to convert.

It also depends on your age and your view of the future for taxes and longevity.

For some it's an easy decision to not convert. For others, it's an easy decision to convert.

Find a fee-based advisor for a 2nd opinion AFTER reading books on the topic, and AFTER you understand the pros and cons.

As I wrote previously, it's not for everyone.

For US, it worked out well as we had both IRAs large enough that made sense, AND had savings in an account to pay the required estimated taxes.

This requires you to read and understand all aspects of the process.

[lawgolfer]

The older one gets, a conversion makes less sense. At my age of 80, I could convert to a Roth and pay a large amount in taxes at the highest rate, only to die next year. This would leave a reduced sum to our son and grandchildren, which they must withdraw over the next 10 years. Although the withdrawals would be free from income tax, the total amount would be significantly reduced from what they would receive had I not converted.

What the discussion in this thread shows is that our children and grandchildren need to be shown the benefit to be gained from putting everything they can into a Roth. The greatest benefit from a Roth is from making 50+ years of deposits, letting them grow free of income taxes, then making tax-free withdrawals after retirement.

The best thing you can do for children grandchildren, or great-grandchildren, is to help them deposit all they can in a Roth from an early age. Money paid into a Roth must have been "earned". One great method to help a child etc. is for a parent, grandparent, or great-grandparent to match the child's earnings and deposit the matching money in a Roth. If your 14 year old granddaughter earns $500 by babysitting, open a Roth for her and put $500 in her account. It would be wonderful if you were able to deposit the maximum of $7K/yr, but few of us have that ability. However, every dollar paid into a Roth will grow to a large sum over the following 50+years

[nn0wheremann]

Convert = guaranteed tax payment.

No Convert = maybe tax payment.

:popcorn::popcorn:
I got a guy in Chicago (actually in Oakbrook) that I pay to worry about this. He does a good job, and I have no worries. Itake out my RMD’s, make my QCDs, and my cas balance keeps going up. It is nice to be retired.

[Plinker]

There is a work around for that . From Investopedia
" A note for multiple account owners: The five-year clock starts with your first contribution to any Roth IRA—not necessarily the one from which you’re withdrawing funds. Once you satisfy the five-year requirement for one Roth IRA, you’ve fulfilled it for all of them.
7
Internal Revenue Service. "Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs)," Pages 31-32.


Any subsequent Roth IRA is considered held for five years. Rollovers from one Roth IRA to another don't reset the five-year clock.
8

This is a common mistake. There are two, 5 year rules. There is a huge difference between a ROTH rollover and a ROTH conversion. Your statement is correct for ROTH IRA’s you rollover. However, EACH conversion IRA to a ROTH IRA starts a new 5 year clock.

I’m 65 and Just Did a Roth IRA Conversion to Avoid RMDs. Does the 5-Year Rule Apply to Me? (https://smartasset.com/financial-advisor/ask-an-advisor-5-year-rule-roth-conversion)

[will1546]

Talk to a certified financial advisor where you file your taxes.

[dewilson58]

I got a guy in Chicago (actually in Oakbrook) that I pay to worry about this. He does a good job, and I have no worries. Itake out my RMD’s, make my QCDs, and my cas balance keeps going up. It is nice to be retired.

Oakbrook, I miss the Tin Fish.

[JRcorvette]

I'm mulling over the idea of making some substantial Roth conversions from my regular IRA account.

Other than a couple of homes, one in TV and one on a lake in NY, all of my money is in IRAs. I'm 71, and with the amount in my IRAs, and my yearly draw, I am in a comfortable position, UNLESS...where my plan gets shaky is if I or my wife live into our mid-90s (we have some history of long life-spans as well as some history of early demise, so it's a crap shoot), and we have all of our money in IRAs, we could get into some very heavy RMD years, with exorbitant tax rates, and serious depletion of our wealth.

So, it seems to me that Roth conversions over the. next 10 years could be a good hedge against that. From my calculations, somewhere in the 4 or 5 year range would be the break-even point. After that it's a clear win.

From what I've researched, the immediate costs would be obviously, more income tax now, and a bump in our Medicare premiums. Factoring those in, we get the tax back later when we withdraw the Roth money tax-free, and at the pace required of our lifestyles, not at a pace dictated by the IRS.

Furthermore, there is a very good chance that only one of us would survive into such an old age, and the survivor would be taxed at the Single rate, which would be even more of a burden.

As long as I am certain (and I'm as certain as I can be) that we won't need to tap the Roth IRA for 10 years, this seems like a no-brainer.

I'm interested in the opinions of others who may have done this, or are considering doing this, and what their thought processes are.

We have been moving money out of our IRA into a ROTH for several years now. Taxes are as cheap as they ever will be. We take as much as we can and stay in the 22% bracket. Yes we will pay more on the Medicare side but it is still the smartest move you can make.
One other thing a ROTH being a tax free haven is it much better for your kids to inherit a ROTH vs an IRA.

[Plinker]

We have been moving money out of our IRA into a ROTH for several years now. Taxes are as cheap as they ever will be. We take as much as we can and stay in the 22% bracket. Yes we will pay more on the Medicare side but it is still the smartest move you can make.
One other thing a ROTH being a tax free haven is it much better for your kids to inherit a ROTH vs an IRA.

Filling your tax bracket with a Roth conversion can be a smart move. Don’t forget, the next tax bracket is only 24% (2% more). If married, you can convert an additional $182,850 for just under $3,700 in additional taxes over the 22% rate. If single, an additional $91,425 for around $1,800 in additional taxes over the 22% rate. Who knows how long this small spread between tax brackets will last? This could be a way to supersize your conversions and reduce RMD’s, if so inclined. Talk to a fee-only (not fee-based) advisor or your CPA.

[Pballer]

Don’t forget, you will not be able to access the converted ROTH money for a period between 4 years plus one day to 5 years, depending on what date you do the conversion. Regardless of the date of your conversion, the IRS starts counting the 5 year wait on January 1st of the year of conversion. So, a conversion on July 1st has a 4 1/2 year wait while a December 31st conversion only waits 4 years plus one day. Consider waiting until mid-December to convert. Each conversion starts a new wait period.

I believe this needs to be corrected. You can withdraw the original principal from the Roth conversion at any time without penalty. It is the earnings on the original converted principal that are subject to the 5 year rule.

[Bill14564]

I believe this needs to be corrected. You can withdraw the original principal from the Roth conversion at any time without penalty. It is the earnings on the original converted principal that are subject to the 5 year rule.

The original looks correct to me. If you contribute wages to a Roth then those can be withdrawn any time. If you convert an IRA to a Roth then the waiting period applies. And, as stated, it appears that each conversion starts its own waiting period.

[Aces4]

The government could certainly change the taxation of Roth IRAs in the future. There’s already talk about that.

They said they’d never tax Social Security. Those rascals decided to tax Social Security. What if they do the same thing with the Roth?”

We have to remember what poor financial shape this country is in and the dollars have to come from somewhere.

[Pballer]

The original looks correct to me. If you contribute wages to a Roth then those can be withdrawn any time. If you convert an IRA to a Roth then the waiting period applies. And, as stated, it appears that each conversion starts its own waiting period.

I’m 65 and Just Did a Roth IRA Conversion to Avoid RMDs. Does the 5-Year Rule Apply to Me? (https://smartasset.com/financial-advisor/ask-an-advisor-5-year-rule-roth-conversion)

[Bill14564]

I’m 65 and Just Did a Roth IRA Conversion to Avoid RMDs. Does the 5-Year Rule Apply to Me? (https://smartasset.com/financial-advisor/ask-an-advisor-5-year-rule-roth-conversion)

That article contradicts this article (https://smartasset.com/taxes/ira-penalty-for-early-withdrawal) from the same source which includes the paragraph (emphasis added):
Additionally, tax laws dictate that you must hold your Roth IRA for five years and be age 59½ to avoid the 10% penalty on withdrawing earnings and conversions. So, you will need to meet both the age and holding period requirements to avoid withdrawal penalties. But, the IRS can also waive these requirements if you meet the criteria for an exception.


EDIT: Other sources also claim an exception from penalties if you are over 59 1/2 but any earnings would be subject to income tax.

[jimbomaybe]

That article contradicts this article (https://smartasset.com/taxes/ira-penalty-for-early-withdrawal) from the same source which includes the paragraph (emphasis added):
[INDENT]Additionally, tax laws dictate that you must hold your Roth IRA for five years and be age 59½ to avoid the 10% penalty on withdrawing earnings and conversions. So, you will need to meet both the age and holding period requirements to avoid withdrawal penalties. But, the IRS can also waive these requirements if you meet the criteria for an exception. [/INDENT




EDIT: Other sources also claim an exception to the 5-year rule on conversions if you are over 59 1/2.

From Kiplinger article.
Scenario 3: You did a partial Roth IRA conversion in 2015. You did a second partial Roth IRA conversion in 2021, when you were age 67. In 2024, you take a distribution from your Roth IRA. You will not be taxed on the distributed earnings because it's been more than five years since you first deposited money into any IRA (through the first conversion).
I think having opened any Roth IRA previously that would comply with the 5 year rule and being over 59 1/2 would give you tax free access to the Roth IRA ?
unless less I misunderstood the people I have talked this is the case, at some point someone with professional standing will comment.

[Plinker]

The original looks correct to me. If you contribute wages to a Roth then those can be withdrawn any time. If you convert an IRA to a Roth then the waiting period applies. And, as stated, it appears that each conversion starts its own waiting period.

Yes. People often get confused over the 5 year wait after a conversion. You can’t take the original principal from a conversion because there is no principal that was deposited that was previously taxed. The entire traditional IRA amount has never been taxed. You already took a tax deduction when you contributed to it. Like it or not, you will start a new wait period on the entire converted amount. You can shorten the wait substantially by converting in December.

[Plinker]

This is from Fidelity -

“The Internal Revenue Service (IRS) requires a waiting period of 5 years before withdrawing balances converted from a traditional IRA to a Roth IRA, or you may pay a 10% early withdrawal penalty on the conversion amount in addition to the income taxes you pay in the tax year of your conversion. (There is an exception to the penalty for withdrawals if you are age 59½ or older.)

But the clock starts on January 1 of the year you do the conversion—no matter when during the year it happened. So if you converted in December, the aging requirement might, in practice, be only a bit more than 4 years.

Important to know: The 5-year rule is counted separately for each conversion. The same rules apply to so-called backdoor Roth IRA conversions.”

The exceptions mentioned will likely not affect the majority of retirees but could in select instances. You will still be on the hook for a 10% penalty, regardless of age.

[petsetc]

I have previously done much conversions. My two comments are 1) do the conversions before you start drawing SS and 2) if you think you will need to withdraw the money of the most recent conversion before 5 yrs, you shouldn't be doing it at all.

JMHO

[elevatorman]

I'm mulling over the idea of making some substantial Roth conversions from my regular IRA account.

Other than a couple of homes, one in TV and one on a lake in NY, all of my money is in IRAs. I'm 71, and with the amount in my IRAs, and my yearly draw, I am in a comfortable position, UNLESS...where my plan gets shaky is if I or my wife live into our mid-90s (we have some history of long life-spans as well as some history of early demise, so it's a crap shoot), and we have all of our money in IRAs, we could get into some very heavy RMD years, with exorbitant tax rates, and serious depletion of our wealth.

So, it seems to me that Roth conversions over the. next 10 years could be a good hedge against that. From my calculations, somewhere in the 4 or 5 year range would be the break-even point. After that it's a clear win.

From what I've researched, the immediate costs would be obviously, more income tax now, and a bump in our Medicare premiums. Factoring those in, we get the tax back later when we withdraw the Roth money tax-free, and at the pace required of our lifestyles, not at a pace dictated by the IRS.

Furthermore, there is a very good chance that only one of us would survive into such an old age, and the survivor would be taxed at the Single rate, which would be even more of a burden.

As long as I am certain (and I'm as certain as I can be) that we won't need to tap the Roth IRA for 10 years, this seems like a no-brainer.

I'm interested in the opinions of others who may have done this, or are considering doing this, and what their thought processes are.
This is what Chat GPT says
Your reasoning for considering Roth conversions makes a lot of sense, especially given your situation and the potential future tax implications. Here are some points to think about as you weigh your options:

Tax Bracket Considerations: Converting to Roth IRAs now could help you lock in your current tax rate rather than face potentially higher rates in the future, especially during RMD years. If you anticipate your income will remain steady, it might be beneficial to convert portions of your IRA over several years, ideally staying within lower tax brackets.
Medicare Premiums: As you mentioned, higher income from conversions can lead to increased Medicare premiums (IRMAA). It’s important to factor in these costs when determining how much to convert each year.
Longevity Risk: Given your family's history, planning for a longer life is prudent. A Roth IRA could provide tax-free income in your later years, helping to preserve your wealth and maintain your lifestyle.
Estate Planning: If you plan to leave assets to heirs, Roth IRAs can be advantageous since beneficiaries can take tax-free withdrawals. This could be a strategic move if you have significant IRA balances.
Withdrawal Flexibility: With Roth IRAs, you have more control over your withdrawals. This flexibility can be beneficial in managing your taxable income in retirement.
Gradual Conversions: To minimize tax impacts, consider converting smaller amounts each year rather than a large lump sum. This can help you manage your tax bracket effectively.
Consulting a Professional: Given the complexity of tax implications, it might be beneficial to consult with a financial advisor or tax professional who can help tailor a strategy based on your specific financial situation and long-term goals.
It sounds like you're on the right track with your analysis, and careful planning now could lead to significant benefits later on.

[Haggar]

So many possibilities - my clients frequently ask me the same question. No one answer. What's your age? Your spouse's age? Your health condition? What's your investment philosophy? What are your needs for money? Who are the beneficiaries of your plan? What tax bracket are you in? What bracket will you be in when you take the distributions? What do you think the growth rate of your investments will be? Do you realize that you may need to fund the taxes when you convert? And more - talk to a professional about this before you do anything.

Here's one idea - taking your RMD and invest in tax free municipals. No tax on the income and no five year waiting period.
Don't forget about Qualified Charities Donations to take money out of your retirement plan instead of making donations directly from your personal funds.

[opinionist]

I gradually converted about half of my IRA into a Roth IRA when I was working and could afford the extra tax burden.
My Roth IRA was unallocated physical gold and silver in the Perth Mint with no storage fees.
I have no regrets, as inflation sucks the wealth out of dollar-denominated assets.
The manipulation of gold/silver prices in the futures market will soon come to an end with a failure to deliver.

[rsmurano]

I don’t get it, people doing the conversion so they don’t have RMDs! How does this make sense? Instead of withdrawing a small portion of your nest egg with your portfolio at its highest value, you would rather pay high taxes now and then decrease your portfolio drastically to pay taxes, now you are making much less every year because your investment value has decreased greatly.
Also remember, when you withdraw an RMD, most of this money is available for you to spend or reinvest, you are only paying taxes on this RMD amount.
1 more thing, when you hire an advisor to ask for his/her advice on doing a conversion, or if you are making the decision yourself, what is the hypothetical rate of return are you using? If you are comfortable in your investing and don’t want to take a little risk, you are probably happy with 4-5%, then I wouldn’t convert because you will never recover your loss in the taxes you paid. My hypothetical rate of return is over 20+%, I would be able to overcome the deduction in taxes in gains over the long haul, and I still don’t think it’s smart for me to do this.

[M2inOR]

Math is involved as was mentioned earlier.

A conversion is NOT for everyone.

For me, the RMDs added to our SS benefits provided more annual income than what we needed. We would have been placed into a higher tax bracket, so for us, it was a wash.

If we placed the extra money in a taxable account to grow, we would have to pay taxes on that growth, and who knows what future taxes would be on capital gains or interest income.

So, for some, pay the taxes now, and let that money grow tax free.

Every situation is different. Yes, knowledge of tax preparation and taxes is important. And yes, there are guides to help you determine whether it makes sense for your particular situation.

Math skills and reading are required.

[retiredguy123]

I have never used my traditional IRA money to invest in stocks because you lose the lower tax advantage of capital gains. So, I have always maintained two accounts, taxable money in stocks and tax deferred IRA money in bonds. All tax deferred money that you withdraw from a traditional IRA is taxed as ordinary income. These facts should be considered when evaluating a Roth conversion.

[Laker14]

I just want to say thank you for all of the responses. I haven't read them all yet, and haven't responded because I am currently on the road from NY to TV. I will read them all when I can.

Laker

[dewilson58]

I just want to say thank you for all of the responses. I haven't read them all yet, and haven't responded because I am currently on the road from NY to TV. I will read them all when I can.

Laker

Good Luck. :beer3:

[Laker14]

Don’t forget, you will not be able to access the converted ROTH money for a period between 4 years plus one day to 5 years, depending on what date you do the conversion. Regardless of the date of your conversion, the IRS starts counting the 5 year wait on January 1st of the year of conversion. So, a conversion on July 1st has a 4 1/2 year wait while a December 31st conversion only waits 4 years plus one day. Consider waiting until mid-December to convert. Each conversion starts a new wait period.

Question about the waiting period: Say someone were to convert 100K/ year for 5 years.
In year 6 would the money converted in year 1 be available? I knew about the 5 year wait, but it isn't clear to me if every conversion freezes ALL of the money in the Roth IRA, or only the money converted over the last 5 year period.

EDIT: I knew I should have read ALL of the responses before I asked any specific questions, but I was afraid I'd forget to ask this one. Now that I've read ALL of the responses, I'm still unsure what the answer is, as there is disagreement. Which is, of course, why I will be doing further research and consulting a pro (fee based, not commission based), and reading the Craig Wear information (thanks for the tip!).

[Laker14]

Good Luck. :beer3:

Thanks.
I consider this one of those "good problems to have".

[Plinker]

Question about the waiting period: Say someone were to convert 100K/ year for 5 years.
In year 6 would the money converted in year 1 be available? I knew about the 5 year wait, but it isn't clear to me if every conversion freezes ALL of the money in the Roth IRA, or only the money converted over the last 5 year period.

EDIT: I knew I should have read ALL of the responses before I asked any specific questions, but I was afraid I'd forget to ask this one. Now that I've read ALL of the responses, I'm still unsure what the answer is, as there is disagreement. Which is, of course, why I will be doing further research and consulting a pro (fee based, not commission based), and reading the Craig Wear information (thanks for the tip!).

Yes, the first $100K plus any gains becomes available in 4-5 years. Each conversion starts a new 5 year clock which is determined by the date of the conversion. In effect, you could create a ladder of ROTH conversions just like a ladder of maturing CD’s. Please talk to a CFP or CPA to see if this is right for your circumstances.

[Plinker]

Question about the waiting period: Say someone were to convert 100K/ year for 5 years.
In year 6 would the money converted in year 1 be available? I knew about the 5 year wait, but it isn't clear to me if every conversion freezes ALL of the money in the Roth IRA, or only the money converted over the last 5 year period.

EDIT: I knew I should have read ALL of the responses before I asked any specific questions, but I was afraid I'd forget to ask this one. Now that I've read ALL of the responses, I'm still unsure what the answer is, as there is disagreement. Which is, of course, why I will be doing further research and consulting a pro (fee based, not commission based), and reading the Craig Wear information (thanks for the tip!).


Yes, the first $100K plus any gains becomes available in 4-5 years. Each conversion starts a new 5 year clock which is determined by the date of the conversion. In effect, you could create a ladder of ROTH conversions just like a ladder of maturing CD’s. Please talk to a CFP or CPA to see if this is right for your circumstances.