Author Topic: Cost of Roth Conversion  (Read 2063 times)

deific

  • 5 O'Clock Shadow
  • *
  • Posts: 27
Cost of Roth Conversion
« on: February 21, 2017, 09:38:55 AM »
I have about $50k sitting in a Traditional Rollover IRA. I am interested in converting it to a Roth IRA but I can't afford the $15k in taxes. What do I do?

MDM

  • Walrus Stache
  • *******
  • Posts: 9791
Re: Cost of Roth Conversion
« Reply #1 on: February 21, 2017, 09:43:25 AM »
Wait until your tax rate is lower than 30% to do the conversion?

deific

  • 5 O'Clock Shadow
  • *
  • Posts: 27
Re: Cost of Roth Conversion
« Reply #2 on: February 21, 2017, 10:13:44 AM »
Wait until your tax rate is lower than 30% to do the conversion?
I try to do this yearly using smart as remarks at work and poor performance. Despite these efforts they still pay me more every year.

davisgang90

  • Handlebar Stache
  • *****
  • Posts: 1272
  • Location: Roanoke, VA
    • Photography by Rich Davis
Re: Cost of Roth Conversion
« Reply #3 on: February 21, 2017, 10:28:03 AM »
Don't do all $50,000 in one year.  Do $10-15K each year instead.

SeattleCPA

  • Handlebar Stache
  • *****
  • Posts: 1513
  • Age: 60
  • Location: Redmond, WA
    • Evergreen Small Business
Re: Cost of Roth Conversion
« Reply #4 on: February 21, 2017, 02:20:39 PM »
You probably shouldn't do a Roth conversion. Here's my longer argument:

http://evergreensmallbusiness.com/are-roth-iras-and-roth-401ks-really-a-good-deal/

But at a 30% marginal rate (so probably a 25% or 28% federal tax rate?) my math says you need to be looking at a situation where you'll retire with $4M in your tax-deferred accounts. That's pretty hard to hit unless you start early and end late and do some big contributions early in your accumulate phase.

seattlecyclone

  • Walrus Stache
  • *******
  • Posts: 5130
  • Age: 35
  • Location: Seattle, WA
    • My blog
Re: Cost of Roth Conversion
« Reply #5 on: February 21, 2017, 04:00:49 PM »
Yeah, most of the point of doing a Roth conversion is that you believe that your current tax rate is lower than it will be when you start actually withdrawing from your retirement accounts. If that's the case you should be rejoicing that you get to pay such a low tax rate on this money. Since you are instead dreading the large tax bill, perhaps a Roth conversion is not for you at this time.

SeattleCPA

  • Handlebar Stache
  • *****
  • Posts: 1513
  • Age: 60
  • Location: Redmond, WA
    • Evergreen Small Business
Re: Cost of Roth Conversion
« Reply #6 on: February 23, 2017, 09:50:17 AM »
Yeah, most of the point of doing a Roth conversion is that you believe that your current tax rate is lower than it will be when you start actually withdrawing from your retirement accounts. If that's the case you should be rejoicing that you get to pay such a low tax rate on this money. Since you are instead dreading the large tax bill, perhaps a Roth conversion is not for you at this time.

I agree with SeattleCyclone. FWIW...

deific

  • 5 O'Clock Shadow
  • *
  • Posts: 27
Re: Cost of Roth Conversion
« Reply #7 on: March 09, 2017, 07:00:33 AM »
Yeah, most of the point of doing a Roth conversion is that you believe that your current tax rate is lower than it will be when you start actually withdrawing from your retirement accounts. If that's the case you should be rejoicing that you get to pay such a low tax rate on this money. Since you are instead dreading the large tax bill, perhaps a Roth conversion is not for you at this time.
So should I be considering not contributing to a Roth 401k now?


Sent from my iPhone using Tapatalk

seanmerron

  • 5 O'Clock Shadow
  • *
  • Posts: 52
    • Early Retirement Roadmap
Re: Cost of Roth Conversion
« Reply #8 on: March 09, 2017, 07:14:22 AM »
In my case, which may help you I contribute to a traditional 401K and a Roth IRA. Previous employer 401Ks have been rolled over to traditional (rollover) IRAs but I will not convert them to Roths until I retire early and I'm in the lowest tax bracket possible.

SeattleCPA

  • Handlebar Stache
  • *****
  • Posts: 1513
  • Age: 60
  • Location: Redmond, WA
    • Evergreen Small Business
Re: Cost of Roth Conversion
« Reply #9 on: March 09, 2017, 07:14:57 AM »
Yeah, most of the point of doing a Roth conversion is that you believe that your current tax rate is lower than it will be when you start actually withdrawing from your retirement accounts. If that's the case you should be rejoicing that you get to pay such a low tax rate on this money. Since you are instead dreading the large tax bill, perhaps a Roth conversion is not for you at this time.
So should I be considering not contributing to a Roth 401k now?


Sent from my iPhone using Tapatalk

Probably not... and for the same reason you shouldn't convert: You'll save taxes by harvesting the tax savings now when you're working as opposed to later when you're not working.

You should peek at the link I provided earlier to understand the math beyond this suggestion...

jjandjab

  • Stubble
  • **
  • Posts: 134
Re: Cost of Roth Conversion
« Reply #10 on: March 09, 2017, 07:30:21 AM »
You probably shouldn't do a Roth conversion. Here's my longer argument:

http://evergreensmallbusiness.com/are-roth-iras-and-roth-401ks-really-a-good-deal/

But at a 30% marginal rate (so probably a 25% or 28% federal tax rate?) my math says you need to be looking at a situation where you'll retire with $4M in your tax-deferred accounts. That's pretty hard to hit unless you start early and end late and do some big contributions early in your accumulate phase.

Where is this 4M number coming from? How does that relate to a question about a 50k tIRA and whether to convert it?

And I have seen your article before, but you don't ask about current income - whether they can even contribute to a tax deductible traditional IRA at this point in their career or in the future - or whether the long term estate benefits of a Roth IRA and lack of mandatory withdrawals will be helpful.

For instance, say the OP is 30, wants to work for 25 more years, but salary (with or without spouse) is high enough to not have the tax deduction of traditional IRA and can't do regular Roth. Would you not suggest to convert as able and then do Backdoor Roth?