The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: BTDretire on December 06, 2017, 07:23:24 PM
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I have never done a Roth Conversion, but keep thinking about it.
The question is always, why pay taxes now when that tax money can grow tax free.
And, will you be in a higher or lower tax bracket when you pull it out.
In 2018 we may have a new 12% rate, I expect to be at that rate for any conversions.
I'm 8 years away from RMD's (required minimum distributions), our combined income,
with social security and dividends from VTSAX plus the RMDs could be easily be $100,000+.
I never thought about the RMD's forcing me to take income and pushing me into a higher bracket.
This has pretty well pushed me to think that 2018 is the year to do it.
It's complicated, say I make a $20k conversion, I lose 12%, I can only reinvest $17,600.
If I earn 7.2%, in 10 years 20k will be 40k and 17.6k will be 35.2k.
If I use the 40k at 12%, I pay $4,800 tax I have 35.2k left, exactly break even.
It get better if my tax rate increases after RMDs start.
OK, I'm getting foggy, time for bed.
Any input is appreciated.
Any changes in the tax bill and your thoughts about Roth conversions.
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See Traditional versus Roth - Bogleheads (https://www.bogleheads.org/wiki/Traditional_versus_Roth) for the overview.
If your marginal rate never changes, it doesn't matter much when (or whether) you do conversions. But yes, if you can convert while paying 12-15% and thus avoid paying 25% later, that's a good deal.
It does help a little when converting if you can pay the tax from taxable savings, instead of taking part of the traditional withdrawal to pay the tax. It helps because you are in effect taking money from taxable and putting it into Roth, nevermore (we hope) to be taxed again.
Haven't heard about any restrictions on traditional to Roth conversions. Have seen suggestions that recharacterizations may be limited, perhaps to take away the Roth IRA Horse Race (https://www.madfientist.com/roth-ira-horse-race/) technique.
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See Traditional versus Roth - Bogleheads (https://www.bogleheads.org/wiki/Traditional_versus_Roth) for the overview.
If your marginal rate never changes, it doesn't matter much when (or whether) you do conversions. But yes, if you can convert while paying 12-15% and thus avoid paying 25% later, that's a good deal.
It does help a little when converting if you can pay the tax from taxable savings, instead of taking part of the traditional withdrawal to pay the tax.
I like that idea, But, not having done one, do people actually withdraw from the IRA, fund the Roth, then withdraw from the Roth to pay their taxes, just seems like something I wouldn't do,
spend money that can grow tax free.
It helps because you are in effect taking money from taxable and putting it into Roth, nevermore (we hope) to be taxed again.
Haven't heard about any restrictions on traditional to Roth conversions. Have seen suggestions that recharacterizations may be limited, perhaps to take away the Roth IRA Horse Race (https://www.madfientist.com/roth-ira-horse-race/) technique.
That's a neat idea, but, I they he skewed his numbers to make it look better than typical outcomes, also, I'm not a good paper shuffler.
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...do people actually withdraw from the IRA, fund the Roth, then withdraw from the Roth to pay their taxes, just seems like something I wouldn't do,
spend money that can grow tax free.
Usually not that series of steps, but often the equivalent: have X% of the traditional amount withheld for taxes so only (1 - X%) goes into the Roth.
If the issue is "withholding vs. paying estimated tax" and one wishes to withhold, IIRC the amount withheld may be added to the Roth (e.g., from a checking account) if done in a timely manner.