There seems to be an advantage to Roth conversion now until 12/31/2025

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hardlawjockey
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Re: There seems to be a huge advantage to Roth conversion now until 12/31/2025

Post by hardlawjockey » Fri May 11, 2018 4:04 pm

If I were ever going to do a Roth conversion this would probably be the year for it. Next year I turn 70 and will start collecting both SS and taking RMD's from my IRA. Obviously this will result in a significant increase in my income. The way I figure it, if I send the whole RMD to the government it should pay the tax on my SS. So it's a case of the government giveth and the government taketh away.

I've decided not to do it because I just can't get over the hurdle of writing a big check to the government this year for the Roth conversion and reducing the value of my portfolio in the here and now. I can do the math and perhaps prove that it will theoretically work out better in the long run but it still requires making predictions about the future and needing them to come to pass to achieve the desired result (like assuming this so-called Roth conversion advantage will end in 2025). So I'm going to stick with the old rule of a bird in the hand is worth two in the bush and see how that plays out.
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Re: There seems to be a huge advantage to Roth conversion now until 12/31/2025

Post by ochotona » Fri May 11, 2018 4:21 pm

hardlawjockey wrote:
Fri May 11, 2018 4:04 pm
If I were ever going to do a Roth conversion this would probably be the year for it. Next year I turn 70 and will start collecting both SS and taking RMD's from my IRA. Obviously this will result in a significant increase in my income. The way I figure it, if I send the whole RMD to the government it should pay the tax on my SS. So it's a case of the government giveth and the government taketh away.

I've decided not to do it because I just can't get over the hurdle of writing a big check to the government this year for the Roth conversion and reducing the value of my portfolio in the here and now. I can do the math and perhaps prove that it will theoretically work out better in the long run but it still requires making predictions about the future and needing them to come to pass to achieve the desired result (like assuming this so-called Roth conversion advantage will end in 2025). So I'm going to stick with the old rule of a bird in the hand is worth two in the bush and see how that plays out.
hardlaw, one of the fundamentals of financial analysis is the only thing that matters is after-tax cash flows. If you can write a big check and instantly increase your after-tax cash flows, then by all means do it. Pre-tax values or cash flows are illusions. Harvesting that kind of tax-related gain at your age carries no risk... there will be no tax law changes between now and next year. I wish I could buy you a case of beers so you could get some courage and just do it.

I myself just went literally instantly after doing that spreadsheet from maxing out my Roth 401(k) $24,500 per year to just putting in enough to catch the Company match. The rest will go to funding conversions. My CFP friend agrees with me. He's one of the best CFPs in Texas if not the country. He knows I'm a DIY guy, he writes, "Do surgical conversions every year, be mindful of your tax brackets".

Yes, it will hurt to write a big 1040-ES check every year in January. But the math proves it to be the right course of action. Also, my heirs will thank me.

There is a book out on the topic by David McKnight, “The Power of Zero". I haven't read it yet, but I heard him on a podcast, which is what prompted me to construct my spreadsheet. Now I'm not sure I need to read the book.
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Re: There seems to be a huge advantage to Roth conversion now until 12/31/2025

Post by sophie » Sat May 12, 2018 8:21 am

ochotona wrote:
Fri May 11, 2018 4:21 pm
hardlaw, one of the fundamentals of financial analysis is the only thing that matters is after-tax cash flows.
Spot on. Unfortunately, the balances in tax deferred accounts are sort of like a mythical mirage that you won't ever be able to realize. It's a question of when you pay the tax, not if. I think there's a huge tax-shaped hole in many retirement plans, because people (and calculators) forget to take taxes into account. I dealt with it by figuring my average tax rate in retirement and then multiplying my projected expenses by (1+(percentage of savings that is tax-deferred)* tax rate). Doing a Roth conversion would reduce that "percentage of savings" factor and effectively lower your expenses - that might help you write that check!

Re 401K withdrawals at average vs marginal rate: yes, it's true that other income may come into the picture but it's still unlikely for most people that *all* 401K withdrawals are at the marginal rate. Retirement tax planning is so hellaciously complicated!!!! I think I'll either have to just pick a strategy based on best guess, or go all out and write a simulator.
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Re: There seems to be a huge advantage to Roth conversion now until 12/31/2025

Post by Dieter » Sat May 12, 2018 3:41 pm

sophie wrote:
Sat May 12, 2018 8:21 am
<snip>
Re 401K withdrawals at average vs marginal rate: yes, it's true that other income may come into the picture but it's still unlikely for most people that *all* 401K withdrawals are at the marginal rate. Retirement tax planning is so hellaciously complicated!!!! I think I'll either have to just pick a strategy based on best guess, or go all out and write a simulator.
Married filing jointly here -- all t401(k)/tIRA contributions avoid fed marginal rate of 22% (25% last few years), plus high income tax state.

At withdrawal time, with 19k - 77k of income taxed at 12% (18 - 75k at 15% old tax law; then 22% vs 25% depending on future laws, minus deductions), seems like traditional wins until get significantly above 75k in income.

Given how things are going, I don't expect to have that, um, "problem".

I'm vaguely aware of complicated Social Security rules on taxability that _should_ be incorporated, and I'm sure there are other things that I"m missing. I do plan to start putting a little more into Roth (~8% of existing retirement savings) to have more options, esp. for years of 'surge' spending if need to keep in lower bracket....
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Re: There seems to be a huge advantage to Roth conversion now until 12/31/2025

Post by hardlawjockey » Sat May 12, 2018 5:13 pm

ochotona wrote:
Fri May 11, 2018 4:21 pm
hardlawjockey wrote:
Fri May 11, 2018 4:04 pm
If I were ever going to do a Roth conversion this would probably be the year for it. Next year I turn 70 and will start collecting both SS and taking RMD's from my IRA. Obviously this will result in a significant increase in my income. The way I figure it, if I send the whole RMD to the government it should pay the tax on my SS. So it's a case of the government giveth and the government taketh away.

I've decided not to do it because I just can't get over the hurdle of writing a big check to the government this year for the Roth conversion and reducing the value of my portfolio in the here and now. I can do the math and perhaps prove that it will theoretically work out better in the long run but it still requires making predictions about the future and needing them to come to pass to achieve the desired result (like assuming this so-called Roth conversion advantage will end in 2025). So I'm going to stick with the old rule of a bird in the hand is worth two in the bush and see how that plays out.
hardlaw, one of the fundamentals of financial analysis is the only thing that matters is after-tax cash flows. If you can write a big check and instantly increase your after-tax cash flows, then by all means do it. Pre-tax values or cash flows are illusions. Harvesting that kind of tax-related gain at your age carries no risk... there will be no tax law changes between now and next year. I wish I could buy you a case of beers so you could get some courage and just do it.

I myself just went literally instantly after doing that spreadsheet from maxing out my Roth 401(k) $24,500 per year to just putting in enough to catch the Company match. The rest will go to funding conversions. My CFP friend agrees with me. He's one of the best CFPs in Texas if not the country. He knows I'm a DIY guy, he writes, "Do surgical conversions every year, be mindful of your tax brackets".

Yes, it will hurt to write a big 1040-ES check every year in January. But the math proves it to be the right course of action. Also, my heirs will thank me.

There is a book out on the topic by David McKnight, “The Power of Zero". I haven't read it yet, but I heard him on a podcast, which is what prompted me to construct my spreadsheet. Now I'm not sure I need to read the book.
Sorry but math cannot prove it to be the right course of action in the real world. The math only works because you are plugging constant values into the equations. In the real world of finance+economics+government policy those values are anything but constant. So I'm sticking with my bird in the hand philosophy, for now at least.
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Re: There seems to be an advantage to Roth conversion now until 12/31/2025

Post by ochotona » Sat May 12, 2018 6:24 pm

Sure you can never know the future, but the modeling I did only assumes we go back to 2017 rates in 2026. The way things are headed, future tax rates may move even higher. I don't want to be in my 80s in the 2040s with high RMDs due to age and facing really awful rates.

I did some more computations, and I think converting half of my IRA space will be fine. I especially want to convert the physical gold IRA, so I don't have to liquidate it via RMDs.

I guess Congress could fark us all and tax Roths too. Anything is possible I suppose.

The "bird is not in the hand" with a Traditional IRA. Part of the bird is in your hand. The other part goes to the Treasury. That's the entire point.
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Re: There seems to be an advantage to Roth conversion now until 12/31/2025

Post by InsuranceGuy » Sat May 12, 2018 8:25 pm

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Re: There seems to be an advantage to Roth conversion now until 12/31/2025

Post by ochotona » Sat May 12, 2018 10:07 pm

With respect, that article was written years before the new tax law. It could not have anticipated the current opportunity to arbitrage tax rates across time.
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Re: There seems to be an advantage to Roth conversion now until 12/31/2025

Post by InsuranceGuy » Sun May 13, 2018 1:23 am

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Re: There seems to be an advantage to Roth conversion now until 12/31/2025

Post by Dieter » Sun May 13, 2018 4:22 am

InsuranceGuy wrote:
Sat May 12, 2018 8:25 pm
I'm not excited about trading a future effective tax rate for today's marginal rate. This guy explains it better than I could, worth a read https://www.gocurrycracker.com/roth-sucks/.
Thanks for posting -- I've read this before, which is the basis for me putting most of my money into traditional retirement accounts. Even if I don't expect to retire early.
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Re: There seems to be an advantage to Roth conversion now until 12/31/2025

Post by ochotona » Sun May 13, 2018 6:51 am

As I am getting reasonably close to retirement, I have visibility as to what my future tax brackets might be. Based on the certain return to the old brackets on 1-1-26 just months before my 65th birthday, I am highly likely to benefit from Roth conversion. All of the reasons you state are fine, but in my individual case, I still see a benefit in spite of your list. Everyone else's conclusion will vary.

I have a pension, and I'm going to take SS at 70. Together they will be $75k. That means my possibly $100k IRA distribution on top of that (fingers crossed, c'mon GEM) is going to land into brackets which on 1-1-26 are firmly higher than my current "last dollar" conversion brackets.

I just took a swipe at the Schwab RMD calc, and at age 80 assuming only 5% CAGR my RMD will be $86k if I keep all of my Traditional IRA space. Ugh.

This is an affluenza problem, yes. Not everyone is a candidate for Roth conversion.
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Re: There seems to be an advantage to Roth conversion now until 12/31/2025

Post by sophie » Sun May 13, 2018 7:33 am

Don't be too sure the tax rates will go up in 2026. Congress passing extensions on various spending/tax bills are nothing new, and I'm sure they'll be aware that letting the tax cuts lapse would make them the nation's most-hated group ever. In fact, it's hard to think of an action that would alienate more people.
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Re: There seems to be an advantage to Roth conversion now until 12/31/2025

Post by barrett » Sun May 13, 2018 10:18 am

InsuranceGuy wrote:
Sat May 12, 2018 8:25 pm
I'm not excited about trading a future effective tax rate for today's marginal rate. This guy explains it better than I could, worth a read https://www.gocurrycracker.com/roth-sucks/.
Thanks for posting that, IG. That gocurrycracker article is really well done.

Crap, this tIRA/Roth debate is complicated, especially when one factors in that a younger spouse may continue to work after one turns 59.5 (my case). Most of my decisions about what to put where have already been made due to the fact that I'm pretty much retired.

When figuring out whether or not to do conversions and what one's longterm overall tax hit will be, cost basis in taxable accounts also comes into play, right? In my case that cost basis, apart from my big whack of savings bonds, is very high. So, I wonder if I might not be better off just taking some withdrawals from my tIRAs for now and not doing Roth conversions. Hmm.

I'm curious to know if anyone has used this i-orp calculator:

https://i-orp.com/GOPtax/extended.html

When I have plugged our numbers in, the tIRA to Roth conversions seem to be overly aggressive but overall it's a terrific tool.
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Re: There seems to be an advantage to Roth conversion now until 12/31/2025

Post by hardlawjockey » Sun May 13, 2018 12:24 pm

ochotona wrote:
Sun May 13, 2018 6:51 am
As I am getting reasonably close to retirement, I have visibility as to what my future tax brackets might be. Based on the certain return to the old brackets on 1-1-26 just months before my 65th birthday, I am highly likely to benefit from Roth conversion. All of the reasons you state are fine, but in my individual case, I still see a benefit in spite of your list. Everyone else's conclusion will vary.

I have a pension, and I'm going to take SS at 70. Together they will be $75k. That means my possibly $100k IRA distribution on top of that (fingers crossed, c'mon GEM) is going to land into brackets which on 1-1-26 are firmly higher than my current "last dollar" conversion brackets.

I just took a swipe at the Schwab RMD calc, and at age 80 assuming only 5% CAGR my RMD will be $86k if I keep all of my Traditional IRA space. Ugh.

This is an affluenza problem, yes. Not everyone is a candidate for Roth conversion.
I'm delaying SS until 70 also (next year) so I guess my "bird in the hand philosophy" isn't entirely consistent. I'll be getting pretty close to the maximum which is somewhere > $40k/year. I also had a pension but it was discontinued and I received a lump sum distribution which I rolled into my IRA at the time.

I do already have Roth accounts for both me and my wife and we have been contributing the max each year ever since we became eligible. I also have accumulated a considerable amount in taxable and taken together those accounts are pretty much equal to my IRA. Checking into my RMD to start next year I was surprised that it was only $14k. If your wife is > 15 years younger than you, which mine is, different tables are used and the percentage is smaller.

Best I can figure, that $14k will pay the tax on the SS benefit with possibly some even left over. I suspect that situation will continue until my wife also retires and I'm comfortable enough with it for the time being.

One piece of economic advice from Keynes that I can definitely agree with when it comes to long range planning is to keep in mind that in the long run we are all dead. That's more true at my age than ever before but the world could be destroyed by an asteroid tomorrow and then the Roth conversion conversation will end once and for all.
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Re: There seems to be an advantage to Roth conversion now until 12/31/2025

Post by Dieter » Sun May 13, 2018 1:45 pm

ochotona wrote:
Sun May 13, 2018 6:51 am
As I am getting reasonably close to retirement, I have visibility as to what my future tax brackets might be. Based on the certain return to the old brackets on 1-1-26 just months before my 65th birthday, I am highly likely to benefit from Roth conversion. All of the reasons you state are fine, but in my individual case, I still see a benefit in spite of your list. Everyone else's conclusion will vary.

I have a pension, and I'm going to take SS at 70. Together they will be $75k. That means my possibly $100k IRA distribution on top of that (fingers crossed, c'mon GEM) is going to land into brackets which on 1-1-26 are firmly higher than my current "last dollar" conversion brackets.

I just took a swipe at the Schwab RMD calc, and at age 80 assuming only 5% CAGR my RMD will be $86k if I keep all of my Traditional IRA space. Ugh.

This is an affluenza problem, yes. Not everyone is a candidate for Roth conversion.
Congrats.
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Re: There seems to be an advantage to Roth conversion now until 12/31/2025

Post by ochotona » Tue May 15, 2018 6:58 pm

I rushed my GoldStar gold IRA Roth conversion form in today. The gold price dive today will lower my 1099 conversion income. I guess I'll feel remorse if gold goes even lower, but it seemed timely today.
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Re: There seems to be a huge advantage to Roth conversion now until 12/31/2025

Post by Libertarian666 » Tue May 15, 2018 7:31 pm

sophie wrote:
Fri May 11, 2018 7:06 am
Nice, ochotona! However - taxes on 401K withdrawals should be calculated at the average tax rate, not marginal. I estimated my average tax rate in retirement will be no worse than 15%, including state/local taxes. This makes tax deferral a no-brainer for me regardless of what happens in 2026.

A perk for New York residents: if you're over age 59.5, 401K withdrawals are exempt from state/local taxes up to $20,000. Sadly, that amount isn't inflation-indexed, but it still makes a big difference in strategy compared to other states. My average tax rate could be as low as 10% if I arrange withdrawals correctly.
Yes, we really envy you here in Texas. We don't get any state income tax break for 401k withdrawals at all!

(Note: there is no state income tax in Texas. >:D )
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Re: There seems to be an advantage to Roth conversion now until 12/31/2025

Post by Libertarian666 » Tue May 15, 2018 7:41 pm

I paid 0 income taxes for 2016, and didn't even have to file.
I paid 0 income taxes for 2017, and didn't have to file.
At this rate it looks as though I will pay 0 income taxes for 2018, and won't have to file.
I expect the same to be true in the future if nothing else changes.
That's my idea of tax planning.
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Re: There seems to be an advantage to Roth conversion now until 12/31/2025

Post by ochotona » Tue May 15, 2018 8:56 pm

Awesome!
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Re: There seems to be an advantage to Roth conversion now until 12/31/2025

Post by bedraggled » Mon Jun 04, 2018 12:28 am

So, if I evenly withdrew from my traditional IRA over th next 6 years, emptying the IRA AND staying in the 22% Federal tax bracket, is that a better plan than doing a Roth conversion?

The amount of money involved is not huge. That cash will definitely help with expenses. There will be other good sources of income after this IRA goes to zero.

I am continuing to fund a Roth IRA with residual W-2 money for 2018, 2019 and 2020.

Thanks.
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Re: There seems to be an advantage to Roth conversion now until 12/31/2025

Post by sophie » Mon Jun 04, 2018 6:23 am

If you're over 59, you could do both couldn't you? Convert from IRA to Roth IRA, and later withdraw from the Roth if needed. Then it gets to stay there if you don't need it.

Libertarian666, go ahead rub it in...we here in Tax and Corrupted Wasteful Government Land will celebrate any break we can get!
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Re: There seems to be an advantage to Roth conversion now until 12/31/2025

Post by Libertarian666 » Mon Jun 04, 2018 9:35 am

sophie wrote:
Mon Jun 04, 2018 6:23 am
If you're over 59, you could do both couldn't you? Convert from IRA to Roth IRA, and later withdraw from the Roth if needed. Then it gets to stay there if you don't need it.

Libertarian666, go ahead rub it in...we here in Tax and Corrupted Wasteful Government Land will celebrate any break we can get!
You can move down here whenever you want to. There's plenty of room. I'll even throw a "get out of jail" party for you!
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Re: There seems to be an advantage to Roth conversion now until 12/31/2025

Post by ochotona » Sun Jul 01, 2018 6:12 pm

I just realized... if I convert my stash to Roth IRA now here in Texas, I can take it to Corrupt and Wasteful States later, and it will be immunized from taxes.

I asked Richard Rosso CFP about whether the Roth exemption is in danger of going away, here's what we wrote me:

RE: What is your assessment of risk to Roths?
Richard Rosso <richardrosso@myclarityfinancial.com>
Today, 1:07 PM

I think they love Roth. Anything to get tax money NOW over later as the government is myopic in focus. If anything I see them attempting to get a hold of tax-deferred money sooner. If they weren’t owned by Wall Street they’d have means tested Social Security a long time ago which would have included sizable balances in traditional IRA accounts.


Richard M. Rosso, MS, CFP®, CIMA©
Director of Financial Planning
Clarity Financial, LLC
11750 Katy Freeway, Suite 840
Energy Tower IV
Houston, TX 77079
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Re: There seems to be an advantage to Roth conversion now until 12/31/2025

Post by ochotona » Mon Jul 02, 2018 11:00 am

MangoMan wrote:
Mon Jul 02, 2018 8:46 am
LOL. But why would you go from a tax friendly place like TX and go somewhere Corrupt and Wasteful? If I wasn't already in IL [they wrote the manual on waste and corruption] no way would I choose to live here. I'd probably be in TX or FL.
Most States have income taxes, only a few don't. To limit relocation choice only to non-income tax States is limiting. I like Texas, but I might not want to spend all of my days here.
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Re: There seems to be an advantage to Roth conversion now until 12/31/2025

Post by ochotona » Wed Jul 04, 2018 6:45 am

I'm going to convert up to the TOP of my current 22% tax bracket. In retirement, my income of all sources will put me into the 25% bracket, or maybe in the late 2020s we'll have higher ones.

Also,

Will Congress someday tax Roth IRAs?

https://www.kitces.com/blog/will-congre ... a-promise/
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