Author Topic: Should this DC workaholic convert his family's IRAs?  (Read 3137 times)

DCisExpensive

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Should this DC workaholic convert his family's IRAs?
« on: December 15, 2014, 08:18:59 PM »
MMM community,
My wife and I are trying to decide if we should convert our Traditional IRAs to Roth IRAs for her and me -- what do you think?
  • Our annual income is around $250K as a couple (we file taxes jointly)
  • We have about $210K in IRAs ($63K in Roth IRAs and the rest in Traditional IRAs) between the two of us
  • I'm in my early 30's and have the cash on hand to pay the $50K+ tax bill, though I certainly wouldn't mind keeping that money invested if it doesn't make sense to create a huge tax bill
  • Fiddling with http://www.archimedes.com/vanguard/roth/RothConsumer.phtml makes me think that I'd make more long-term converting all of my Traditional IRA money to Roth, though I imagine that assumes I continue working to 65 and not try to get to MMM early retirement
  • My wife and I have around $700K in total assets counting retirement investments and personal investments (Vanguard funds)
  • We're spending about $55K a year in expenses (I'm sure we could cut this further, but the DC-area rent isn't helping)

I'd love advice, as I'm not sure if I should be looking to pay off taxes now to enjoy the money later; or if I should wait until a cheaper tax year (e.g. if we have kids, my wife may work part-time or stop working altogether; instead of our current dual-income, no-kids situation).  Or maybe I should be preparing us for early retirement sometime soon.
« Last Edit: December 15, 2014, 08:47:40 PM by DCisExpensive »

Catbert

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Re: Should this DC workaholic convert his family's IRAs?
« Reply #1 on: December 16, 2014, 11:39:51 AM »
Well you have two competing rules of thumb in play.  In general at your high tax rate you should not convert to a Roth since you'll probably be in a lower income bracket when you retire.  OTOH Roth conversions benefit the young* the most since the money will have the most time to grow tax free. 

*"early 30s" counts as young if you are retiring at 60.

I probably would not do Roth conversions now since you may have lower tax years coming soon.  Or at most do small conversions each year.  If you do decide to do conversions double check the tax consequences.  I think you are at a level that some deductions start to phase out and surcharges kick in. (I'm not at your income level so my knowledge of 250k tax traps is limited.)


GoldenStache

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Re: Should this DC workaholic convert his family's IRAs?
« Reply #2 on: December 16, 2014, 01:45:25 PM »
You should not do it at this time, do it when you retire early and live off of some of your taxable account so you have little to no income.

Do you have access to a 401k or TSP? If you are renting in DC, you should really check out buying in VA.  It is expensive with a pretty stable market but the savings on taxes are amazing.

DCisExpensive

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Re: Should this DC workaholic convert his family's IRAs?
« Reply #3 on: December 17, 2014, 05:08:28 PM »
Great advice -- thanks!

My wife and I are both using our 401k's (no TSP access).

We do keep looking to buy in Virginia, but we haven't found anything we love yet; so it's hard to motivate ourselves to consider buying something that expensive.  I'm thinking we'll wait to have kids, and then house/condo shop.

rmendpara

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Re: Should this DC workaholic convert his family's IRAs?
« Reply #4 on: December 17, 2014, 05:28:19 PM »
MMM community,
My wife and I are trying to decide if we should convert our Traditional IRAs to Roth IRAs for her and me -- what do you think?
  • Our annual income is around $250K as a couple (we file taxes jointly)
  • We have about $210K in IRAs ($63K in Roth IRAs and the rest in Traditional IRAs) between the two of us
  • I'm in my early 30's and have the cash on hand to pay the $50K+ tax bill, though I certainly wouldn't mind keeping that money invested if it doesn't make sense to create a huge tax bill
  • Fiddling with http://www.archimedes.com/vanguard/roth/RothConsumer.phtml makes me think that I'd make more long-term converting all of my Traditional IRA money to Roth, though I imagine that assumes I continue working to 65 and not try to get to MMM early retirement
  • My wife and I have around $700K in total assets counting retirement investments and personal investments (Vanguard funds)
  • We're spending about $55K a year in expenses (I'm sure we could cut this further, but the DC-area rent isn't helping)

I'd love advice, as I'm not sure if I should be looking to pay off taxes now to enjoy the money later; or if I should wait until a cheaper tax year (e.g. if we have kids, my wife may work part-time or stop working altogether; instead of our current dual-income, no-kids situation).  Or maybe I should be preparing us for early retirement sometime soon.

I'd suggest you never convert the IRAs. You are in your prime earning years right now with dual incomes. At the very least, wait until your wife slows down.

At best, just withdraw normally when you actually retire. You're almost certain to be paying less than the 30%+ you're paying now in average tax rate.

What is your rationale for converting to Roth?

DCisExpensive

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Re: Should this DC workaholic convert his family's IRAs?
« Reply #5 on: December 22, 2014, 06:03:12 PM »
Thanks rmendpara.  I don't have any reason to consider IRA conversion; other than wanting to know if it's a good idea.  It sounds like I should wait until we're making a lot less, or maybe never convert.

Thanks so much!

TreeTired

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Re: Should this DC workaholic convert his family's IRAs?
« Reply #6 on: December 22, 2014, 07:55:19 PM »
It is hard to imagine now, but there are times when you actually want income,  and an IRA conversion is a great way to create taxable income when you want it (need it) in the exact amount you desire. 

Over the past 7 years I did some "strategic" IRA conversions when my income was very low.   I wasn't working and I had very high cash balances so dividend/interest income was also very low.    1. We purchased new A/C and furnaces for our house that came with an energy tax credit.   My IRA conversion produced no tax bill but let me take advantage of the tax credit that otherwise would have been wasted.      2. Another year I did a small IRA conversion that with my meager dividend/interest income took me up to the end of the 0% tax bracket.   So I was able to convert without paying any income taxes on the converted amount.   and, now  3. I need a certain amount of MAGI to even qualify for ACA healthcare subsidies.  If my investment income doesn't get me there I can do a Roth conversion to create the income I need to qualify for subsidies.

You can't take advantage of these types of situations if you have no traditional IRA to convert,  that is if you already converted and paid taxes on the income in prior years.  You and/or your wife might lose your jobs and be unemployed for a while. In any given year you might end up in a much lower tax bracket.

DoNorth

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Re: Should this DC workaholic convert his family's IRAs?
« Reply #7 on: December 23, 2014, 06:10:56 AM »
check out the Mad Fientist on this question--he gives a good explanation of how to do this.

http://www.madfientist.com/traditional-ira-vs-roth-ira/