[M2inOR]

Originally Posted by dewilson58

…

When you convert a qualified account to a Roth IRA, you create taxable income in the conversion year. The income is taxable at your marginal rate. The taxable amount is the current value of the assets transferred, excluding any nondeductible contributions. The IRS has you value the conversion equal to the amount of taxable income you would create had you simply withdrawn the proceeds rather than converting them into a Roth IRA.

This is quite important.

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.

[CoachKandSportsguy]

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!

[rustyp]

Originally Posted by CoachKandSportsguy

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 after the 401K is full, 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.?

[dewilson58]

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.

[M2inOR]

Originally Posted by CoachKandSportsguy

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 after the 401K is full, 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!

We too had salaries that prevented funding of any ROTH IRA accounts while working in High Tech.

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.

[dewilson58]

Originally Posted by rustyp

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.?

He stayed at a Holiday Inn Express last night.

[M2inOR]

Originally Posted by dewilson58

Regarding:

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.

Yes, math and full understanding is required.

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.

[dewilson58]

Originally Posted by M2inOR

Yes, math and full understanding is required.

If this is all Greek, best to talk to a professional.

Obviously you don't know my background.

[M2inOR]

Originally Posted by dewilson58

Obviously you don't know my background.

Respectfully, quite true!

Not disagreeing with your Pros and Cons at all.

[dewilson58]

Originally Posted by M2inOR

Respectfully, quite true!

Not disagreeing with your Pros and Cons at all.

No Prob.

[jimjamuser]

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!

[jimjamuser]

Originally Posted by Boomer

Many years ago I had a CPA I loved. He loved me, too. (Not real love, not hubba-hubba love, just the kind of love between a CPA and a multi-faceted woman who loved to pick his brain and always showed up prepared. But he retired. (sigh) I then found another CPA and I liked him a lot, but he retired on me, too. (Hmmmm, should I be taking these CPA retirements personally?)

And so, now, I have a wet-behind-the-ears CPA who is also a lawyer in the office of our regular lawyer. He’s fine, but I have to teach him a little something once in a while — like how the way I do our QCDs is OK because of where the IRAs are on deposit.

(Of course, I took him well-sourced documentation on the subject to make sure he knew that this retired high school English teacher knew what she was talking about. . .And about that English teacher thing, yes, I know in my posts I bastardize the hellouta punctuation, but I know I am doing that and it’s OK. And I will never correct anybody else, unless it is to share a laugh about a funny typo. We all have them. Although, I do wish some people would double-space longer posts into paragraphs to make them more readable — to make them look less like a manifesto — but I digress.)

Anyway, the new young CPA is coming along nicely and I don’t think he will retire any time soon.

Long story longer — CPA #1 used to tease me a little about doing those Roth conversions before RMD age. He always said, “Why do you want to pay your kids’ taxes?” I would explain that it was not about anybody else’s taxes, and that I had projected taxable income, found some room to take a little more hit, and took the opportunity. (It just seemed like a good idea at the time. And I was right. But as I said earlier, I regret not doing more of those conversions while I could.)

I still project taxable income and buffer our RMDs with QCDs, especially if I think the next year is not going to bring any need for extra income. And when I reach a point where there could be a reason to keep more of the RMDs for ourselves, I will do that. But, for now, I stay well-aware of thresholds and IRMAA.

But to answer your question, “Why now?” — it’s because sometime I might want a little extra ice cream on my cake.

Boomer

Good Thoreau quote. That deserves extra ice cream and cake. Maybe start a class in TV Land called "teaching young CPAs".

[jimjamuser]

Originally Posted by Boomer

I understand everything we own. A professional might have been able to show a bigger return, but we’re OK with our own decisions and our returns.

My wiring is such that I like taking the responsibility for investment decisions. In fact, I really do think we are all wired in whatever way when it comes to money. I don’t know exactly why I am wired with an interest in investing, etc., but I am glad I am, and Mr. Boomer is happy about it, too.

Giving somebody one percent, annually, taken quarterly, whether the accounts are up or down is not something we are ready to do.

I have been at this for decades — in a sort of comfort zone. Maybe boring, but a comfort zone.

I do have a philosophy of investing. It is simple and categorized and forward-looking — and backward-looking — because I think many investors often suffer from amnesia. And I pay attention. No spreadsheets or formulas involved, just making sure I completely understand what we own — and what those companies do — and how they are doing at doing it, along with general awareness of things I might need to be aware of — like taxes — and have been getting tax advice along the way. I understand cap gains very well and play them carefully.

Mr. Boomer and I have a backup plan if I get to the point where I start investing in Franklin Mint plates or Pez dispensers or Beanie Babies. We have interviewed a few planners and know who we will see if we feel like we need or want to.

The main aggravation I have now is that there is no return on cash in that moat I maintain around the stocks. Our parents could always get returns on CDs. I don’t think we will ever see returns on CDs again. But, even so, I know to never get us into the position of having to sell stocks to pay taxes — thus, the moat will continue to be around.

All advisors can claim big returns right now. Bigger than mine, no doubt. But the old bull has been running for a long time. He must be getting awfully tired — and there sure seem to be a lot of picadors around these days. Whatever happens, I will stay swaddled in our comfort zone with my unsophisticated approach, still making our own decisions, while we can.

Btw, I am now over the idea of looking further into Roth conversions at RMD age. The existing Roth will be there already — and all ready — if we want it for a tax-advantaged expenditure. But I still regret not doing more conversion before RMD age. But that’s just me and my whole picture wiring.

Thanks for the conversation.

Boomer

Interesting wiring. I wonder if Henry David T. would have considered giving an expert 1% of his book royalties? I agree that it is time to remember that the old bull MUST be tiring sometime! I don't watch the 2 fast money shows as religiously as I used to. So, now I buy mostly ETFs, not individual stocks. I recently bought a small amount of ITA, an ETF for the Aerospace and Defense Industry.

[petsetc]

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.

[M2inOR]

I assume when you wrote TIRA, you mean Traditional IRA?