Should I begin converting to Roth IRA?

[I Shrugged]

I have ~$1,000,000 in a regular IRA.  My lovely wife has ~$350,000.  We are near the top of the 25% tax bracket, and have not been subject to AMT for the past few years, if that matters.  I am 55, she is 57.  We don't need the income from the IRA and therefore I suppose we would wait till 70 years of age to begin taking distributions.  My personal belief, and I'm willing to act on it, is that income tax rates will not be lower in the future, and might be higher.

Should we be converting some amount to Roths every year?  I wouldn't want to hit all the phaseouts, medicare tax, etc.  But, a quick look at same leads me to think we could convert somewhere in the area of $100,000 per year and be in the 28% bracket, and not hit the various punitive things.

[Pointedstick]

The part of me that likes gaming the system contemplates doing the kind of thing you're asking about, after retiring and temporarily moving to a zero income tax state. You can control your income by taking strategic distributions from your retirement funds to keep your income in whatever tax bracket you want, keeping in mind your married couple standard deduction. Doing this, I think it's theoretically possible to legally convert batches of income every year at a 10 or 15% tax rate. This is a ludicrous deal if you dodged outrageous, punitive 50%+ tax rates while accumulating that income.

[WildAboutHarry]

PS & Shrugged

I'm contemplating something like that heading into retirement.  I live in CA, and have minimal Roth dollars versus regular IRA dollars (about a 1:3+ ratio).  I will be retiring in WA, so all other things being equal I would save about 10% on Roth conversions by waiting until after the move.

Using assets from taxable accounts for living expenses during early retirement (and doing Roth conversions within the 10% or 15% bracket) seems attractive.

[moda0306]

I shrugged,

I have a few questions for you:

- If you "don't need the income," does this means you can live off of SS, will work in retirement, or have other wealth that is not part of the $1.35 Million in your IRA's?

- It seems that maybe you are going to have a lot of money left over at the end of life to give to the charitable cause or persons of your choice... is there any plan a to who this would go to?



Pre-tax qualified accounts should be viewed as having an embedded tax liability built into them.  These embedded tax liabilities grow with the balanc of the account, but can be "traded" by incuring the current tax via a Roth conversion.  If tax rates are the same currently as they would be at some future potential point of distribution, assuming taxes would be paid out of the pre-tax account, result in identical net wealth.


There are some significant advantages to moving amounts to a Roth arrangement:

- One could reasonably make much more significant moves of money out of a Roth IRA if the arrangement becomes tainted by what the government wants to do, or if you need a ton of money at once, than out of an account that will trigger ever-higher tax brackets than you'd otherwise ever have been in.

- The embedded tax liability can be paid with outside dollars, which essentially makes the Roth a "larger" tax shelter.

For instance, if you have $1 Million in a Traditional account, in an expected future 40% combined bracket, you really have $600,000 in the shelter.  If you have $400,000 sitting in an outside account on top of the $1 Million, paying taxes on the $1 Million via Roth conversion (likely over time) will allow you to effectively mov that $400,000 into the tax shelter by paying taxes with those dollars.  So instead of $600k as an effective tax sheltered balance, and $400k in non-sheltered assets, you have $1 Mil in shelterd assets.

- Roth asset are not subject to RMD's by the initial contributor.

- Roth assets, while subject to RMD's by a non-spouse beneficiary, are much more flexible for those beneficiaries to use if they want to get at the money without blasting themselves into higher tax-brackets.


One cool thing about pre-tax accounts is that if you DO have charitable inclinations, the pre-tax accounts they might inherit from your estate are not taxable to them...

So if you're planning on giving some money to kids, and some to charity, give the Traditional IRA assets to charity, and Roth to your kids.

I hope this serves to clarify, rather than confuse.  Feel free to ask for further clarifications.

- Imbedded tax liabilities within a Traditional IRA are not recognized as liabilities for purposes of calculating your "taxable estate" for estate taxes.  Therefore, paying taxes earlier than later essentially removes those dollars from your taxable estate, if you're subject to estate tax.

[I Shrugged]

edited by poster.  Half wrong, half personal.

[moda0306]

I shrugged,

Usually, the key is "balance."  It's rarely squatting on an IRA until RMD's blast you into the 47% effective tax bracket, or doing mad Roth conversions because you think Obama's going to go "Full Commie-tard" soon and rates are going back to 90% (not saying this is you at all).

It's similar to this idea of diversification within the PP... it's not about predicting the future, but always having your feet firmly planted by having one asset that isn't $hitting the bed.

I can move much more confidently/strategically with a 50/50 split between IRA and Roth than being to far out of balance one way or the other.

[I Shrugged]

Well, I sat down to take a fresh look at this, and realized I made a huge error in my interpretation of the RMD worksheet I looked at.  So my RMD would not be anywhere near as large as I first thought.  Given this, the Roth question is probably not a big deal either way.  I may edit out some of the more personal details of earlier posts.  Thanks for the help.

[moda0306]

I forgot one ...

Any RMD is essentially a forced ejection of assets out of a tax shelter, so if you don't spend them, they now accumulate with a tax load, whether annually or deferred.

[Libertarian666]

Of course everyone is absolutely sure that the government will NEVER go back on their promise not to tax Roth profits, right?

[I Shrugged]

Of course everyone is absolutely sure that the government will NEVER go back on their promise not to tax Roth profits, right?

No, but when you play the tax shelter game, you have to realize you're not in the driver's seat. 

[Libertarian666]

Of course everyone is absolutely sure that the government will NEVER go back on their promise not to tax Roth profits, right?

No, but when you play the tax shelter game, you have to realize you're not in the driver's seat.

Right, which is why I'm mostly out of it now.

[Kshartle]

This is pretty much a lawless country now. When you constantly have new laws you never really have law. Imagine playing a football game and every quarter the socring rules change and they're retroactive.

[moda0306]

The Roth is currently liquid, which means pre-59.5 you could remove all basis in two days, and post-59.5 you could remove it all.  The IRS would have to look BACKWARDS to nail someone who's thinking on their feet.

Now the government could do that, but I tend to think that government will shy away from ever pissing off the AARP.. it's political suicide.

They might add them to SS "means testing" or something, but if the government's fighting that hard for tax dollars, I've got bigger problems than my Roth.  Hell, who knows what kind of ridiculous rates we'll all be paying on ordinary/dividend income along the way by the time they would get that desperate.

Remember, unless they go retro-active, the Roth is a pretty damn escapable vehicle.