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Fortunately (unfortunately?), I just learned of ROTH conversions this past year. A friend had been doing this with small sums for the last two years, so I didn’t pay too much attention. Wife and I retired a few years ago, and we moved from Oregon to The Villages with well funded IRAs and proceeds from our Oregon home sale. Investing since the 70s, and fully funded our IRAs and 401Ks since then. We paid attention to that 70s scare that Social Security wouldn’t be there. Once retired, we’ve delayed taking SS until a few years from now when we turn 70 1/2. That 8% additional benefit growth is welcome. We started paying attention to RMDs and were quite surprised as we’re likely to have a comfortable income but be in a new, very high tax bracket. Soooo… ROTH conversion and establishing a Giving account made sense. Developed a plan in November with an advisor. Checked his math with my own calculations. Calculated likely estimated taxes, and converted 25% of our IRAs to ROTH in December. Paid our estimated taxes earlier this month, and it was the largest amount of $$$ we ever handed over to the IRS. We’ll convert the rest over the next 3 years. No one knows for sure what future tax laws may require us to pay, but it’s comforting to know that we should be OK for the rest of our sunset years. Those new ROTH accounts will grow tax free and with the right investments, grow well beyond our needs. Math and reading comprehension skills are very important at this point of our retirement. We gladly pay advisors to explain the details and provide reference reading material. For those looking into ROTH conversions, spend your time understanding the near term tax consequences. Also, be sure to understand your break even point. It is not something for everyone. |
just checked the ROTH allowances for funding from salaries, and we aren't allowed to fund new, actually got into IRS violation and had to re-characterize the account. . as far as a conversion, that is best when not working and have a lower tax rate than when you are working with a high tax rate. . . So for us, the ROTH in any form would be too expensive. .
However, recently, the IRS and other investment houses have created 401K roth accounts, which you can fund instead of the 401K, with after tax dollars with the same tax free benefits. This seems like a no brainer, but the same total applies to > 50 at @25K. With a 401K Roth, the income grows tax free, assets always grow tax free until sold. But a Roth 401K has an RMD, even though its tax free. . so, the key is in a high tax bracket, put as much away in qualified plans, 401K, especially with matching. When transitioned to a lower tax bracket, then conversions make sense, or even using IRA money to defer Social security and putting what you can into the ROTH, while your $30,000 SS income is growing at 3-4 % per year. . the often quoted 8% includes continuing to work. . . screw that! |
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About CoachKandSportsguy Biography Golfing and sports couple with a new begonia available for rent until we relocate down Location Marsh Bend Interests Golfing and sports for both, and chasing soccer and any other ball around for sportsguy Occupation medical data for coachK and finance, modeling, trading and investments for sportsguy You seem quite knowledgeably in finance. Are you presently selling financial instruments in the state of Florida ? Are you a resident yet ? If you are selling what are your credentials ? Education, licenses, fiduciary, specialties. etc.? |
Pros
Contributions and earnings grow tax-free. You can withdraw contributions at any time, for any reason, tax-free. You don’t have to take required minimum distributions. Those normally ineligible for a Roth IRA can use it to create the account and a tax-free pool of cash. Cons You pay tax on the conversion when you do it—and it could be substantial. You may not benefit if your tax rate is lower in the future. You must wait five years to take tax-free withdrawals, even if you’re already age 59½. Figuring taxes can be complicated if you have other traditional, SEP. or SIMPLE IRAs you're not converting. Just another view........................not seeing a GREAT advantage of converting to a ROTH. |
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Fortunately, the Backdoor ROTH Conversion has no limits. Just have to pay current taxes on the amount being converted. Since our future RMD tax rate would be similar, makes sense to start doing it now before RMDs are required. Advantage is that new ROTH IRA investments continue to grow without any additional taxes due in the future if/when we make withdrawals. The good news/bad news is that we expect to be in a higher tax bracket with RMDs if we do nothing. Our investments have done well during our working years. For the time being, our income (outside of ROTH conversion) now is quite low and we are living off savings until we start SS in a few years. That is enough to take care of current expenses. We even took a mortgage as our investment return is considerably higher than our mortgage rate. Wife and I are both retired now, and have no interest in working. We are not selling anything, either. Just providing info about ROTH conversions. |
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The taxes can be substantial! They are for us, but as written above, ours would be similar with the RMDs when added to our eventual, likely SS income. Our future tax rate will likely remain high if we did not proceed with conversion. Regarding that "untouchable for 5 years"...it's 5 years after each conversion year. For example, the amount converted in December 2021 is touchable without penalty in Jan 2026. The date of penalty withdrawals resets to Jan 1 of the year you convert funds. So 2021 conversions available Jan 1, 2026; 2022 conversions available Jan 1 of 2027, etc., regardless of when you did the conversion within that year. Yes, figuring taxes will be complex, but I've already done some simulations with the 2022 TurboTax. Of course, you can also talk to your tax preparer to see if they comprehend what you are trying to do. If this is all Greek, best to talk to a professional. |
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Obviously you don't know my background. :ho: |
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Not disagreeing with your Pros and Cons at all. |
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Thanks for a good, comprehensive thread. The stock market is high and the interest rates are STILL low, but increasing. Today, before more rate increases, a person could (?) sell their big home, sell much of their PROFITABLE stocks, and rent and buy a small condo, AFTER WAITING for the economy to drop. Because the economy ALWAYS eventually turns DOWN - just wait it out!
......As to the take 3% or 4% taken out each year after retirement - you need to know how long you are going to LIVE. Not counting accidents, there are apps, which could help a person predict their longevity. I have never used one so I can't really comment knowledgeably. For a universe of reasons, this is a tough time in History to make future predictions - especially in the US! |
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Here is a retirement calculator that lets you do what if senarios - FIRECalc: A different kind of retirement calculator
Also, as I recall, the 4% withdrawal rate has the actual amount adjusted for inflation every year and was thought to offer a 97% chance of not running out of money for 30 years. I am currently using 5% of the Dec 31 balance each year (no inflation adjustment) because I can change it at will, and being in my 70s, don't expect to need it to last 30 years. As for Roth, a question was asked about the 5 year waiting period. I believe that refers t the opening date, not the most recent contribution, and rules are different after 59-1/2. Last thought, if you already have both TIRA & Roth, hold the bond-like investments in TIRA since their growth is minimal right now and equities in Roth. |
I assume when you wrote TIRA, you mean Traditional IRA?
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