Author Topic: Roth conversion before the RMD hits. Smart thing to do?  (Read 840 times)

Andy up north

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Roth conversion before the RMD hits. Smart thing to do?
« on: September 18, 2018, 10:41:27 AM »
When we are ďfull time retiredĒ in three years, at 63 for me, 60 for my spouse, we will have about $650k in our 401(k)ís.
We apply for SS when Iím 70 (and my spouse 67) and will get about $36k/yr that will provide 80% of our spending needs. 

We will be in a lower tax bracket and consider to make some Roth conversions to lower the RMD coming at 70 Ĺ so we have a seven to ten year window to make the conversions.
I'm not sure if we have the cash on hand at that time to pay the taxes on the conversions or we might need to add the taxes to the 401(k) withdrawal.

The question is if the Roth conversion is the smart thing to do in this situation? Is it worthwhile to use 401(k) funds to pay taxes? Any good calculators out there or advice. Iím afraid that a discussion with a CPA won't be too fruitful.


MDM

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Re: Roth conversion before the RMD hits. Smart thing to do?
« Reply #1 on: September 18, 2018, 11:01:20 AM »
The question is if the Roth conversion is the smart thing to do in this situation?
Yes.

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Is it worthwhile to use 401(k) funds to pay taxes?
If your current marginal rate will be less than your future marginal rate, paying the tax from the 401k withdrawal is still favorable.

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Any good calculators out there or advice. Iím afraid that a discussion with a CPA won't be too fruitful.
The case study spreadsheet will provide probably the most accurate chart of marginal tax rate vs. conversion or withdrawal amount.

The Optimal Retirement Planner - Extended Parameter Form and Retiree Portfolio Model - Bogleheads are two good tools for multi-year planning, although their tax calculations are not always accurate.

BTDretire

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Re: Roth conversion before the RMD hits. Smart thing to do?
« Reply #2 on: September 18, 2018, 07:55:03 PM »
Everytime I have ran the numbers on RMD conversions it came out even if the tax rate was the same.
 And then add in the fact that RMD income creates several other advantages.
1- Better for your heirs to inherit.
2-The RMD income doesn't push you out of some income based benefits.
Please add other advantages, I had a list of 5 but my mind is not recalling them.
Edit, found my list,
Since the spendable dollars are the same, there are other advantages to a Roth Conversion.
1. You think tax rates will increase for your bracket at withdrawal time.
2. A  Roth has advantages for your heirs to inherit.
3. The extra income from RMDs of a traditional IRA will push you into higher tax Brackets.
4. If one spouse dies, traditional IRA RMDs would push the remaining spouse to a higher bracket.
5. Phaseouts and benefits based on AGI and MAGI could push you into a higher bracket with a Traditional IRA.
6. More money in a Roth lowers your AGI which may make less of your social security taxable.


 There is one tax/accountant type that posts, who does not like Roth conversions,
but I have never heard the reasons why.
« Last Edit: September 18, 2018, 07:57:55 PM by BTDretire »

MDM

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Re: Roth conversion before the RMD hits. Smart thing to do?
« Reply #3 on: September 18, 2018, 08:28:27 PM »
Everytime I have ran the numbers on RMD conversions it came out even if the tax rate was the same.
That will happen if you pay the conversion tax from the traditional account, or if you pay the conversion tax from taxable funds but pay no tax on returns in the taxable account.
If you pay the conversion tax from a taxable account that incurs taxes on the interest/dividends/capital gains in that account, you come out ahead by doing a conversion even with equal tax rate now vs. later.

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And then add in the fact that RMD income creates several other advantages.
1- Better for your heirs to inherit.
Depends on your heirs' marginal rates vs. yours.
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2-The RMD income doesn't push you out of some income based benefits.
Huh?  Which do you have in mind?

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Please add other advantages, I had a list of 5 but my mind is not recalling them.
Edit, found my list,
Since the spendable dollars are the same, there are other advantages to a Roth Conversion.
1. You think tax rates will increase for your bracket at withdrawal time.  Yes.
2. A  Roth has advantages for your heirs to inherit.  Depends on your heirs' marginal rates vs. yours.
3. The extra income from RMDs of a traditional IRA will push you into higher tax Brackets. It might.  If it does, it's a good reason to convert now.
4. If one spouse dies, traditional IRA RMDs would push the remaining spouse to a higher bracket. Yes.
5. Phaseouts and benefits based on AGI and MAGI could push you into a higher bracket with a Traditional IRA. Have to consider this both now and the expected future.
6. More money in a Roth lowers your AGI which may make less of your social security taxable. It could.

BTDretire

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Re: Roth conversion before the RMD hits. Smart thing to do?
« Reply #4 on: September 19, 2018, 09:37:56 AM »
Everytime I have ran the numbers on RMD conversions it came out even if the tax rate was the same.
That will happen if you pay the conversion tax from the traditional account, or if you pay the conversion tax from taxable funds but pay no tax on returns in the taxable account.
If you pay the conversion tax from a taxable account that incurs taxes on the interest/dividends/capital gains in that account, you come out ahead by doing a conversion even with equal tax rate now vs. later.

Wow, I never considered running it that way, good to know.

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And then add in the fact that Roth income creates several other advantages.
1- Better for your heirs to inherit.
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Depends on your heirs' marginal rates vs. yours.

But, I would only do a Roth Conversion when I'm in a low tax bracket.


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2-The RMD income doesn't push you out of some income based benefits.
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Huh?  Which do you have in mind?

The ACA, Roth income is not included in MAGI for ACA qualification.
 Savers Credit- IRA income could push you out, whereas Roth income wouldn't.
Anyone think of others?

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Please add other advantages, I had a list of 5 but my mind is not recalling them.
Edit, found my list,
Since the spendable dollars are the same, there are other advantages to a Roth Conversion.
1. You think tax rates will increase for your bracket at withdrawal time.  Yes.
2. A  Roth has advantages for your heirs to inherit.  Depends on your heirs' marginal rates vs. yours.

Again, I would only do a Roth Conversion when I'm in a low tax bracket.

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3. The extra income from RMDs of a traditional IRA will push you into higher tax Brackets. It might.  If it does, it's a good reason to convert now.
4. If one spouse dies, traditional IRA RMDs would push the remaining spouse to a higher bracket. Yes.
5. Phaseouts and benefits based on AGI and MAGI could push you into a higher bracket with a Traditional IRA. Have to consider this both now and the expected future.

 I probably wouldn't do a Roth Conversion now if, it pushed my into a phaseout.

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6. More money in a Roth lowers your AGI which may make less of your social security taxable. It could.

 I appreciate your input, thanks.
« Last Edit: September 19, 2018, 10:30:50 AM by BTDretire »

MDM

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Re: Roth conversion before the RMD hits. Smart thing to do?
« Reply #5 on: September 19, 2018, 09:44:07 AM »
And then add in the fact that RMD income creates several other advantages.
1- Better for your heirs to inherit.
2-The RMD income doesn't push you out of some income based benefits.
If by "RMD" you meant "Roth" then I understand and agree.

BTDretire

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Re: Roth conversion before the RMD hits. Smart thing to do?
« Reply #6 on: September 19, 2018, 10:32:33 AM »
And then add in the fact that RMD income creates several other advantages.
1- Better for your heirs to inherit.
2-The RMD income doesn't push you out of some income based benefits.
If by "RMD" you meant "Roth" then I understand and agree.

 OH, sorry! I fixed that above.
Arrgh, I'm facepunching myself.
These things are confusing enough without my adding to it.

Catbert

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Re: Roth conversion before the RMD hits. Smart thing to do?
« Reply #7 on: September 21, 2018, 02:47:45 PM »
Check how Roth conversions and RMDs impact your SS taxation.  I think both can depending on your total income.  Could be wise to do as much as otherwise reasonable before you take SS

BTDretire

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Re: Roth conversion before the RMD hits. Smart thing to do?
« Reply #8 on: September 23, 2018, 06:07:45 PM »
I'm getting lost in the numbers and can't get my logic straight.
Through the CSS, I find I can take a tIRA Distribution (Cell D31)
 (which I hope is the right Cell taxwise as taking tIRA distribution and putting it in a Roth)
of $69,000 and it adds $7,181 to my tax bill. This is 10.4%.
 If I pay that $7,181 out of my regular savings, I am lossing the growth of it over the next
10 years.
  How do I incorporate that loss of growth into the lack of paying taxes if I left the tIRA intact.

MDM

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Re: Roth conversion before the RMD hits. Smart thing to do?
« Reply #9 on: September 23, 2018, 06:21:28 PM »
  How do I incorporate that loss of growth into the lack of paying taxes if I left the tIRA intact.
See the section including the commutative property of multiplication (simple comparison) and the part about Maxing out your retirement accounts in the Bogleheads wiki.  The latter is a little more complex, but in short there is often tax drag in a taxable account and if so, the combination of traditional + taxable is just a little worse than Roth, even for the same tax rates on the traditional and Roth portions.

Reducing the tax drag by paying Roth conversion tax out of taxable funds is why that approach is better than using part of the traditional conversion for the tax.  If the tax is paid out of the traditional amount, you're back to the commutative property of multiplication.