Author Topic: Should you always contribute to tIRA over Roth?  (Read 1535 times)

remedy214

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Should you always contribute to tIRA over Roth?
« on: January 31, 2018, 05:44:09 PM »
Thanks for taking the time to read over this. 

As the title says, I am debating whether to contribute to a Roth or Traditional IRA.  I know many in the early retirement community preach that the traditional is the way to go, I am just curious to see if my numbers follow this theory.  I will attempt to provide you all with my numbers from my 1040 that are relevant.
So for for 2017, I've only added $2500 to my Roth

I filed as head of household and have 1 dependent
My AGI for 2017 was $35,032
I contributed $16,500 to my 401(k)
Standerd deduction was $9,350
Exemptions were $8,100
Taxable income as $17,582
Federal income tax withheld on w-2 was $1,468
I was able to get the EIC of $734


Really appreciate any feedback here!  Please let me know if there is any other numbers I can provide

My questions are:
Should I continue to contribute to a Roth?
How will the 2018 tax season effect these figures?  I am planning on maxing out my Roth and possibly buying a rental property this year.

« Last Edit: January 31, 2018, 06:19:02 PM by remedy214 »

MDM

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Re: Should you always contribute to tIRA over Roth?
« Reply #1 on: January 31, 2018, 10:20:19 PM »
Thanks for taking the time to read over this. 

As the title says, I am debating whether to contribute to a Roth or Traditional IRA.  I know many in the early retirement community preach that the traditional is the way to go, I am just curious to see if my numbers follow this theory.  I will attempt to provide you all with my numbers from my 1040 that are relevant.
So for for 2017, I've only added $2500 to my Roth

I filed as head of household and have 1 dependent
My AGI for 2017 was $35,032
I contributed $16,500 to my 401(k)
Standerd deduction was $9,350
Exemptions were $8,100
Taxable income as $17,582
Federal income tax withheld on w-2 was $1,468
I was able to get the EIC of $734


Really appreciate any feedback here!  Please let me know if there is any other numbers I can provide

My questions are:
Should I continue to contribute to a Roth?
How will the 2018 tax season effect these figures?  I am planning on maxing out my Roth and possibly buying a rental property this year.
Assuming you have no way to decrease your 2017 AGI at this time other than a tIRA contribution - e.g., you can't add any (more) to an HSA - then I get ~18% for the largest marginal federal tax saving rate you can have with a tIRA contribution, and that comes at $5,032 (where you reach the 2nd tier of the saver's credit).

Do you get the same result by using the 2017 version of the Case Study Spreadsheet?

If so, what do you get when using the 2018 version for 2018?

remedy214

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Re: Should you always contribute to tIRA over Roth?
« Reply #2 on: February 01, 2018, 08:58:23 AM »
Thank you, I'll check out the estimator.  I'll need to brush up on my excel. 

remedy214

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Re: Should you always contribute to tIRA over Roth?
« Reply #3 on: February 01, 2018, 11:29:51 AM »
Without getting to far in to it, is there are hard and fast rule that if your AGI is less that x you should contribute to a Roth, if its more that x contribute to tIRA...?

SeattleCPA

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Re: Should you always contribute to tIRA over Roth?
« Reply #4 on: February 01, 2018, 01:55:45 PM »
Without getting to far in to it, is there are hard and fast rule that if your AGI is less that x you should contribute to a Roth, if its more that x contribute to tIRA...?

A Roth makes sense, in general, only when you know you'll pay higher tax rates on the money you take out than on the money you put in.

I have argued for a long time, few people should make this assumption: Are Roth-IRAs and Roth-401(k)s Really a Good Deal?

MDM

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Re: Should you always contribute to tIRA over Roth?
« Reply #5 on: February 01, 2018, 02:07:13 PM »
Without getting to far in to it, is there are hard and fast rule that if your AGI is less that x you should contribute to a Roth, if its more that x contribute to tIRA...?
No, no hard and fast rule that considers only AGI.  There are rules of thumb, but there are also many exceptions to those "rules."  The true answer depends on your marginal tax rates both now and when withdrawing.

See Traditional versus Roth - Bogleheads for more.

If you don't want to think about it much, here are two considerations
1) Use traditional (if deductible) because traditional will be better for most
2) Split 50% to traditional (if deductible) and the rest to Roth.  That way you won't be more than half wrong.

NorthernBlitz

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Re: Should you always contribute to tIRA over Roth?
« Reply #6 on: February 01, 2018, 02:12:19 PM »
Without getting to far in to it, is there are hard and fast rule that if your AGI is less that x you should contribute to a Roth, if its more that x contribute to tIRA...?

A Roth makes sense, in general, only when you know you'll pay higher tax rates on the money you take out than on the money you put in.

I have argued for a long time, few people should make this assumption: Are Roth-IRAs and Roth-401(k)s Really a Good Deal?

My understanding was that another potential advantage of a Roth was that it provided some flexibility when you are drawing down. Since spending from the Roth doesn't increase you AGI, it may allow you to remain in a lower tax bracket during draw down.

MDM

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Re: Should you always contribute to tIRA over Roth?
« Reply #7 on: February 01, 2018, 02:47:56 PM »
My understanding was that another potential advantage of a Roth was that it provided some flexibility when you are drawing down. Since spending from the Roth doesn't increase you AGI, it may allow you to remain in a lower tax bracket during draw down.
That's true - but if one is in a lower bracket during draw down (vs. when contributing), that means traditional should have been used.

Similarly, if one is in a higher bracket during draw down (vs. when contributing), that means Roth should have been used.

swampwiz

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Re: Should you always contribute to tIRA over Roth?
« Reply #8 on: February 01, 2018, 10:23:15 PM »
IF there are the presumptions that

->  the *total* tax rate - i.e., total = explicit (as per the taxform) + implicit (loss of means-tested benefits, including ObamaRomneyHeritageCare) - is the same now as it will be when the grown amount (i.e., the initial put in now and its growth) is distributed

->  it is desired to contribute the same in equivalent in TIRA/Roth amounts (e.g., contributing $5K in a TIRA with a 40% *total* tax rate is equivalent to contributing $3K in a Roth, etc.)

-> there are no considerations for the ability to convert the TIRA or distribute Roth contribution basis

then it is equivalent.  I know this because I have run through the simulation with respect to the question of whether it would be a good move to do a Roth at a certain tax rate; the key point to keep in mind is that any taxes paid now will have its growth aborted, and any taxable funds distributed later will get taxed.   I have concluded that with my state's marginal 2% income tax rate and no implicit tax rate for my particular situation, it makes sense for me to only do the Roth conversion at the 0% federal tax rate (and since I will be able to fully Roth-ize my IRA well before I start getting SS/pension income, this has been a wise decision).  That said, since the limits are the same for the TIRA & Roth, it could make sense if the funds the would have gone into the Roth are instead invested in a non-IRA account, there would be a lower net return - but then again, that's only if the tax rate now and in the future are the same, and if anyone is getting an ObamaRomneyHeritageCare benefit in any way, it is almost assured that the *total* tax rate now is much less more than it will be when the funds are distributed.
« Last Edit: February 18, 2018, 06:32:23 AM by swampwiz »

teen persuasion

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Re: Should you always contribute to tIRA over Roth?
« Reply #9 on: February 02, 2018, 07:54:40 AM »
Since you are eligible for EITC, for 2018 concentrate on maxing your 401k before tIRA.  EITC is tested on both line 7 wages (after 401k contributions) and AGI, and you get whichever credit is smaller (usually due to higher income).  Traditional IRA contributions reduce AGI but won't reduce line 7 wages, so can't increase your EITC as 401k contributions can.  Putting an additional $2k in your 401k would increase your EITC about $320 at the same income.  It would also get you closer to the second tier of the Retirement Saver's credit, as MDM mentioned - you'd need to contribute some to tIRA to get you all the way there for the extra $200.

We put as much as possible into DH's 401k to maximize our EITC.  Our state partially matches EITC and CTC.  Then we take those refundable credits to contribute to Roth IRAs, because we've reached the point where there's no additional tax benefit to tIRAs for us.  We've adjusted our withholding so that we aren't having anything withheld, since we owe no tax and have credits.  That extra bit in take home helps push more to the 401k.

NorthernBlitz

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Re: Should you always contribute to tIRA over Roth?
« Reply #10 on: February 02, 2018, 09:38:13 AM »
My understanding was that another potential advantage of a Roth was that it provided some flexibility when you are drawing down. Since spending from the Roth doesn't increase you AGI, it may allow you to remain in a lower tax bracket during draw down.
That's true - but if one is in a lower bracket during draw down (vs. when contributing), that means traditional should have been used.

Similarly, if one is in a higher bracket during draw down (vs. when contributing), that means Roth should have been used.

I agree. Unfortunately, only one of those numbers is known so any kind of decision is based on assumptions. Having a mix means that you won't have the "perfect" choice, but you'll hedge against the "worst" choice.

And, having both Roth and Traditional investments can let you manipulate whether or not your are in a lower or higher tax bracket.

I generally like to make decisions that preserve flexible in the future. To the OPs question, that's one reason why you should go Roth over tIRA.

My understanding is that there can be advantages to passing on a Roth as an inheritance if the OP is interested in multi-generational wealth (but that's not a straight forward decision either).
https://www.kitces.com/blog/when-a-roth-ira-may-actually-be-a-terrible-asset-to-inherit/

No matter what you decide, remember that ultimately (savings rate) >>> (tIRA vs rIRA)

BTDretire

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Re: Should you always contribute to tIRA over Roth?
« Reply #11 on: February 07, 2018, 02:52:59 PM »
Without getting to far in to it, is there are hard and fast rule that if your AGI is less that x you should contribute to a Roth, if its more that x contribute to tIRA...?
No, no hard and fast rule that considers only AGI.  There are rules of thumb, but there are also many exceptions to those "rules."  The true answer depends on your marginal tax rates both now and when withdrawing.

See Traditional versus Roth - Bogleheads for more.


 I looked over that page and had to run some numbers myself.
 I don't like his 30% tax, but I'll use it, maybe a try percentages later.
I used $10k, 20yrs growth @ 7%, 30% tax rate.

               tIRA
 $10k for 20yrs @ 7% = $38,696 minus 30% tax = $27,087
              Roth IRA
 $10k - $3k = $7k for 20yrs @ 7% = $27,087  Oddly the same!
             Non tax advantaged
$10k - $3k = $7k for 20yrs @ 7% = $27,087 - cost of $7k = $20,087
$20,087 - 30% taxes = $14,061 + cost of $7k =$21,061
If you need context it's in the article.
(taxed before investment, or taxed at withdawal, or only gain taxed)

  The remaining variable is the tax rate applied at investment and withdrawal time.
I plan on starting Roth Conversions in 2018, I expect to be at the 12% tax rate,
but when my wife and I have SS, RMDs and dividends, I expect our rate to be more than 12%

aceyou

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Re: Should you always contribute to tIRA over Roth?
« Reply #12 on: February 09, 2018, 03:27:48 PM »
I am taking a balanced approach, but value the Roth slightly more than the traditional right now.  Here's why:

Reason #1: Our professions.  My wife and I are both teachers.  At age 48 we will both get pensions worth 45% of the average of our highest 3 earning years.   That will be about 14 years away.  Assume that we both end with salaries of around 100k, that will be 45k each, so about 90k/year.  Then in our 60's we'll start collecting social security on top of that. Thus, the low tax brackets will get eaten up with pension and social security income.

Reason #2: Current tax brackets.  The 12% bracket for Married Filing Jointly is about 77,000.  Add a standard deduction on top of that of 24k, an that gets you to 101k.  Add two child tax credits of 2k each, and we pay 4k less.  Thus, we will pay about 5k of federal taxes on our first 101k earned...I can handle that:)

Reason #3: Current income.  My wife and I gross about 150k.  We already get 12k deducted due to pension contributions, that puts us at 138k.  If we fill up our 457 accounts at 18.5k each in a traditional, that brings us right down to 101k AGI...booyah!!!!!

So, after that, we fill up our Roth 403B's for another 37k, plus our Roth IRA's for another 11k. 

In all, that puts us at
37k/year in traditional
48k/year in roth. 
5k/year maximum in Federal income taxes. 

...lots of money flowing to me...very little flowing to the taxman.

My hope is that we keep this pace, and at age 48, we have a little over a million in the roths, and a little over a million in traditional, so we only have about a million in retirement accounts that we'll have to pay tax on. 


BTDretire

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Re: Should you always contribute to tIRA over Roth?
« Reply #13 on: February 11, 2018, 08:11:49 AM »
I am taking a balanced approach, but value the Roth slightly more than the traditional right now.  Here's why:

Reason #1: Our professions.  My wife and I are both teachers.  At age 48 we will both get pensions worth 45% of the average of our highest 3 earning years.   That will be about 14 years away.  Assume that we both end with salaries of around 100k, that will be 45k each, so about 90k/year.  Then in our 60's we'll start collecting social security on top of that. Thus, the low tax brackets will get eaten up with pension and social security income.

Reason #2: Current tax brackets.  The 12% bracket for Married Filing Jointly is about 77,000.  Add a standard deduction on top of that of 24k, an that gets you to 101k.  Add two child tax credits of 2k each, and we pay 4k less.  Thus, we will pay about 5k of federal taxes on our first 101k earned...I can handle that:)

Reason #3: Current income.  My wife and I gross about 150k.  We already get 12k deducted due to pension contributions, that puts us at 138k.  If we fill up our 457 accounts at 18.5k each in a traditional, that brings us right down to 101k AGI...booyah!!!!!

So, after that, we fill up our Roth 403B's for another 37k, plus our Roth IRA's for another 11k. 

In all, that puts us at
37k/year in traditional
48k/year in roth. 
5k/year maximum in Federal income taxes. 

...lots of money flowing to me...very little flowing to the taxman.

My hope is that we keep this pace, and at age 48, we have a little over a million in the roths, and a little over a million in traditional, so we only have about a million in retirement accounts that we'll have to pay tax on.

 That all sounds great, the only quibble I might have is, if you have $1M in tIRA at 48yrs old and it grows at 7% until you're 70yrs old, you will have $4,430,000 in the tIRA. (Assumes you don't use the the tIRA as a source of income before 70yrs old.)
 If the RMD forced withdrawal rates don't change, you will have income of $218,226 just in tIRA withdrawals.
It may comfort you that tax brackets will creap up with inflation. But I did use 7% growth, expecting 10% growth minus 3% inflation.
 A wonderful first world problem to have!  :-)


aceyou

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Re: Should you always contribute to tIRA over Roth?
« Reply #14 on: February 11, 2018, 06:06:28 PM »
I am taking a balanced approach, but value the Roth slightly more than the traditional right now.  Here's why:

Reason #1: Our professions.  My wife and I are both teachers.  At age 48 we will both get pensions worth 45% of the average of our highest 3 earning years.   That will be about 14 years away.  Assume that we both end with salaries of around 100k, that will be 45k each, so about 90k/year.  Then in our 60's we'll start collecting social security on top of that. Thus, the low tax brackets will get eaten up with pension and social security income.

Reason #2: Current tax brackets.  The 12% bracket for Married Filing Jointly is about 77,000.  Add a standard deduction on top of that of 24k, an that gets you to 101k.  Add two child tax credits of 2k each, and we pay 4k less.  Thus, we will pay about 5k of federal taxes on our first 101k earned...I can handle that:)

Reason #3: Current income.  My wife and I gross about 150k.  We already get 12k deducted due to pension contributions, that puts us at 138k.  If we fill up our 457 accounts at 18.5k each in a traditional, that brings us right down to 101k AGI...booyah!!!!!

So, after that, we fill up our Roth 403B's for another 37k, plus our Roth IRA's for another 11k. 

In all, that puts us at
37k/year in traditional
48k/year in roth. 
5k/year maximum in Federal income taxes. 

...lots of money flowing to me...very little flowing to the taxman.

My hope is that we keep this pace, and at age 48, we have a little over a million in the roths, and a little over a million in traditional, so we only have about a million in retirement accounts that we'll have to pay tax on.

 That all sounds great, the only quibble I might have is, if you have $1M in tIRA at 48yrs old and it grows at 7% until you're 70yrs old, you will have $4,430,000 in the tIRA. (Assumes you don't use the the tIRA as a source of income before 70yrs old.)
 If the RMD forced withdrawal rates don't change, you will have income of $218,226 just in tIRA withdrawals.
It may comfort you that tax brackets will creap up with inflation. But I did use 7% growth, expecting 10% growth minus 3% inflation.
 A wonderful first world problem to have!  :-)

Right.  There's nothing I can do about that though.  My wife and I are already Roth'ing 48k/year...we're maxed on those.  It's the only shelter I have left, and I'm going to take it:)

My thought is that most of the traditional accounts will be in the 457.  So from age 48 till the time we start drawing social security, we could do some Roth conversions each year.  Whether that makes sense will depend on lots of factors through...what the stock market gains/losses actually are over the coming decade, what the tax brackets are 10 years from now, the health of the pension at that time, and so on.  So who knows.

Like you said, it would be a good problem to have.  If the biggest problem for my wife and I at age 70 is what to do about a large tax bill, we will be VERY, VERY lucky. 

BTDretire

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Re: Should you always contribute to tIRA over Roth?
« Reply #15 on: February 17, 2018, 11:31:28 AM »
Without getting to far in to it, is there are hard and fast rule that if your AGI is less that x you should contribute to a Roth, if its more that x contribute to tIRA...?
No, no hard and fast rule that considers only AGI.  There are rules of thumb, but there are also many exceptions to those "rules."  The true answer depends on your marginal tax rates both now and when withdrawing.

See Traditional versus Roth - Bogleheads for more.


 I looked over that page and had to run some numbers myself.
 I don't like his 30% tax, but I'll use it, maybe a try percentages later.
I used $10k, 20yrs growth @ 7%, 30% tax rate.

               tIRA
 $10k for 20yrs @ 7% = $38,696 minus 30% tax = $27,087
              Roth IRA
 $10k - $3k = $7k for 20yrs @ 7% = $27,087  Oddly the same!
             Non tax advantaged
$10k - $3k = $7k for 20yrs @ 7% = $27,087 - cost of $7k = $20,087
$20,087 - 30% taxes = $14,061 + cost of $7k =$21,061
If you need context it's in the article.
(taxed before investment, or taxed at withdawal, or only gain taxed)

  The remaining variable is the tax rate applied at investment and withdrawal time.
I plan on starting Roth Conversions in 2018, I expect to be at the 12% tax rate,
but when my wife and I have SS, RMDs and dividends, I expect our rate to be more than 12%



  I ran some more cases and I'm surprised at the results but maybe I shouldn't be.
 I'm using what I hope will be my numbers for 2018, ie. 12% tax bracket with a $35,000 Roth conversion.
$35k @12%tax leaves $30,800.
$30,800 @7% for 7 years = $49,458 Roth Tax free dollars.
$35,000 @7% for 7 years = $56,202 taxable. If unconverted.
$56,202 @12% tax leaves $49,458 after taxes. Exactly the same with or without conversion.
$56,202 @20% tax leaves $44,964 after taxes.
Let's try a 10% growth rate.
$35k @12% tax leaves $30,800.
$30,800 @10% for 7 years = $60,020 Roth Tax free dollars.
$35,000 @10% for 7 years = $68,205 taxable. If unconverted.
$68205 @12% tax leaves $60,020 after taxes. Exactly the same with or without conversion.
$68205 @20% tax leaves $54,564 after taxes.
 Growth rate makes no difference, Let's try the time frame, I'll drop from 7 years to 3 years.
$35k @12%tax leaves $30,800.
$30,800 @7% for 3 years = $37,731 Roth Tax free dollars.
$35,000 @7% for 3 years = $42,877 taxable. If unconverted.
$42,877 @12% tax leaves $37,732 after taxes. The same with or without conversion.
$42,877 @20% tax leaves $34,302 after taxes.
 And again at 10%
$35k @12% tax leaves $30,800.
$30,800 @10% for 3 years = $40,995 Roth Tax free dollars.
$35,000 @10% for 3 years = $46,585 taxable. If unconverted.
$46,585 @12% tax leaves $40,994 after taxes. Exactly the same with or without conversion.
$46,585 @20% tax leaves $37,266 after taxes.

  Summary: If you have the same tax bracket at withrawal as when doing the Roth Conversion, the end result is equal dollars, If you have a higher tax bracket at withdrawal, the Roth is a better.

 Since I expect to be in a higher tax bracket at withdrawal, I will do a Roth conversion.
I'll lose some deductions as the kids finish college.

 The next question, is it worth contributing to my SEP/IRA and doing a Roth conversion?
 Advantage, gets more money into tax defered accounts. The SEP/IRA deduction allows more to be put into the Roth Conversion.
 Disadvantage, you will have increased RMDs because of the contribution.
 You can continue Roth conversions after 70-1/2.
 If you have any disagreement, Please post them, I'm here to learn.

MDM

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Re: Should you always contribute to tIRA over Roth?
« Reply #16 on: February 17, 2018, 12:24:23 PM »
  Summary: If you have the same tax bracket at withrawal as when doing the Roth Conversion, the end result is equal dollars, If you have a higher tax bracket at withdrawal, the Roth is a better.
That's correct.  See the "commutative property of multiplication" in the Bogleheads wiki.

Also note that, depending the tax treatment of a taxable "side account" and the length of time involved, Roth can be preferable even with a withdrawal tax rate slightly lower than at contribution.  That's covered in the wiki also.

Quote
Since I expect to be in a higher tax bracket at withdrawal, I will do a Roth conversion.
If your expectation proves true, that will have been the correct course of action.  Just check that your expectation is plausible: e.g., if you convert everything to Roth, having only SS and dividends will likely put you into a low tax bracket at withdrawal.

BTDretire

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Re: Should you always contribute to tIRA over Roth?
« Reply #17 on: February 18, 2018, 07:02:13 AM »

Quote
Since I expect to be in a higher tax bracket at withdrawal, I will do a Roth conversion.
If your expectation proves true, that will have been the correct course of action.  Just check that your expectation is plausible: e.g., if you convert everything to Roth, having only SS and dividends will likely put you into a low tax bracket at withdrawal.

   My first year of RMDs I expect about $67k of income,
but 5 years later when my wife takes RMDs, I expect $132k.
 This may be slightly inflated because I didn't add in some
spending prior to RMD withdrawals.
  I also have a feeling that we may never get back to a 12% tax rate
up to $77,400 and that's with a $24,000 standard deduction, so $101,400.
 But if rates do stay the same, it is a closer call, at least until I read the
Bogle wiki about  "tax treatment of a taxable side account".
 I have no idea what that is about.

MDM

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Re: Should you always contribute to tIRA over Roth?
« Reply #18 on: February 18, 2018, 09:35:16 AM »
But if rates do stay the same, it is a closer call, at least until I read the
Bogle wiki about  "tax treatment of a taxable side account".
 I have no idea what that is about.
See the Maxing out your retirement accounts section.

BTDretire

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Re: Should you always contribute to tIRA over Roth?
« Reply #19 on: February 18, 2018, 11:08:45 AM »
I should add, as I sit now I have approx. 48% of assets  in tIRA or SEP/IRA/.
Assets split even between Husband and wife, RMDs in 7 and 11 years.
48% in taxable accounts and 4.4% in Roth IRAs.
Total about $1,700,000,
Don't know if that helps making the Roth Conversion decision.
 I hope our current income ~$75,000 stops in 4 years,
I want to stop now, wife wants to continue working.


 If anyone has the link to this wiki, please post, I'm not finding it.
Bogle wiki about  "tax treatment of a taxable side account".