Author Topic: tIRA to Roth conversion - getting started  (Read 1293 times)

Financial.Velociraptor

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tIRA to Roth conversion - getting started
« on: January 10, 2017, 08:29:53 AM »
I have a tIRA (rollover from work 401k) with mark to market value of about 140k.  I want to start converting it to Roth.  Up till now (first 4.5 years of FIRE), I either wasn't ready or was managing my income to qualify for Obamacare subsidies.  This year is probably my last year of OC subsidy since the Republicans are in control and seem to loathe that. 

So, I'm thinking 20k conversion per year for 7 or so years.  I expect 25% marginal rate so 1,250 to be prepaid per quarter.  This kicks up my withdrawal rate a little as I don't have 5k in budget room to give.  I think I'll ultimately be happier with the funds in Roth though.

Libertea

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Re: tIRA to Roth conversion - getting started
« Reply #1 on: January 13, 2017, 08:56:50 AM »
Curious why you think you'll ultimately be "happier" with the funds in the Roth.  Are you expecting your marginal tax bracket to increase above 25% in the future (say, once you're required to start making RMDs)?

My feeling is that Roths are most useful for people who expect to have higher incomes during retirement than they had during their working years.  When you contribute to a Roth, you are paying the taxes now in order to allow that money to grow tax free afterward.  For someone who was in the 33% or greater tax bracket while working and who now has a large 401k that will have massive required distributions (in the 28% or greater tax bracket after age 70), filling the 25% tax bracket by making partial Roth conversions after FIRE makes sense, because they would be paying income tax at a lower tax rate for the conversions than they would have by contributing to a Roth while working (or than they would pay by waiting until after they begin RMDs).  However, for someone who never exceeded the 25% tax bracket while working, filling the 25% marginal bracket makes much less sense, because now you cannot arbitrage your tax rates.  Just another perspective to consider, especially since there's no pressing reason why you have to convert your entire tIRA within seven years given your relatively young age (say, rather than converting $10,000 per year for the next 15 years).

caffeine

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Re: tIRA to Roth conversion - getting started
« Reply #2 on: January 13, 2017, 09:00:27 AM »
With the expectation of increased automation in the future, higher income taxes should be expected. Shouldn't someone hedge their investments around that expectation? The benefit of the tIRA is you could pick when to pay those taxes. Wouldn't it be to your benefit to lock in a lower income tax on it when you're in FIRE and probably not earning excessively high income levels?
« Last Edit: January 13, 2017, 09:02:16 AM by caffeine »

Libertea

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Re: tIRA to Roth conversion - getting started
« Reply #3 on: January 13, 2017, 09:27:42 AM »
With the expectation of increased automation in the future, higher income taxes should be expected. Shouldn't someone hedge their investments around that expectation? The benefit of the tIRA is you could pick when to pay those taxes. Wouldn't it be to your benefit to lock in a lower income tax on it when you're in FIRE and probably not earning excessively high income levels?
If you figure out the secret for accurately predicting the future (whether it's market movements, technological revolutions, or acts of Congress), by all means, you should act upon that knowledge.  Keep that insight to yourself and jump on it, in fact.  But for the rest of us who are stuck in the present, there is, alas, no way to know what will happen in the future.  And unfortunately, accurately predicting the present or the past is a much less useful skill than accurately predicting the future would be. ;-)

In all seriousness, it is entirely possible that the government will stop allowing Roth conversions, or will means test them in the future.  Obama was in favor of doing away with the back door Roth, for example, but he didn't manage to eliminate it.  Which, I suppose, is potentially an argument in favor of FV doing his Roth conversions more rapidly as he laid out in his OP.  But again, there is no way to know what policies a future government will choose to follow, and even if we did know, there are always unintended consequences that even the architects of said policies won't have anticipated.