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A Brand-New Reason to Fall in Love With Roth IRA Conversions

What they sweep under the rug is that, by doing a significant conversion, you'll
pay taxes out the wazoo now, but if you wait and do systematic draws, it'll be a
pittance by comparison. Tax rates may go up, but the bite will be much smaller.
<my 2 cents>
.
 
The problem is that many people have substantial balances in traditional plans such as IRAs and 401k plans.

You can try a little exercise. There are online RMD calculators that will project your future RMDs from traditional IRA and 401k plans. (Warning: I don't think these have been adjusted yet to account for the recent passage of the SECURE act, which will allow us to delay RMDs until age 72.)

Do a search for "Vanguard RMD calculator" (there are others on other sites). Enter your current balance in traditional retirement plans. You will have to make a guess about your future rate of return.

If you have a pretty decent traditional IRA + 401k balance today, you may be surprised at how large your future RMDs may be (along with the accompanying income taxes).
 
They really came after us older people who saved a lot when we were not making much, now we have big rmds and if we should die with a lot in our traditional ira, our heirs have to withdraw within ten years. They will be in their peak earning years, so taxes will eat it up. Just hope they don’t decide to tax Roth which didn’t exist most of the time I was working
 
We are seriously looking at ROTH conversion as long as we can keep income tax to 24%. The issue with paying taxes now on the converted amount is that you are then losing the gains on the chunk of taxes that are paid to IRS immediately. I have not found a calculator that includes the amount of taxes that are to be paid now and thereby losing future gains on the amount.
 
I converted $40K about 4 years ago when we sold our primary residence and did not need to supplement income from 401k savings (the cap gain was not taxed due to $500k exemption). Its now at $60K in the Roth, and will keep compounding for many more years, passed on to our son.

I think it makes sense for small amount up to the top of the bracket you are currently in. There are circumstances that make it advantageous, it's not universal though.

Sent from my SM-G970U using Tapatalk
 
Consider the repercussions when considering doing a Roth conversion. Will it affect other items in your life if your income is higher?
We sold a business and the increased income caused DH medicare payment to go from $134 to $202/mo for the next year, a rude surprise!
 
Thanks for sharing this. Here's an additional 'caution' about watching about putting yourself into another tax bracket.
If you are receiving a 'lower rate' for health insurance because your income is lower than the rate the government chooses for levels of income, then you may lose that lower premium (and you'll pay it back with your tax return).

Here's a 'for instance' - and I'm going to just use round numbers for this example.

Let's say you estimated your income in a year will be $40,000. So you get a reduced premium because your income isn't higher. Let's say the premium on the plan you want is $2,000 but your reduced premium is $500. That means that you only pay $500/month. for now.

So .... you do a Roth conversation for $60,000. You have to pay the income tax for the additional $60,000. Your income - for health plan computation is now $100,000 (if your estimate was good). Probably enough to NOT give you a reduced premium. That means when you do your taxes for the year, you'll 'get to' pay back the $1500/month you got as a 'reduced by'. That means not only will you have to pay taxes on the additional $60K for the Roth conversation, you'll have to SEND IN $18,000 (1500 times 12 months). Or ..... if your income will allow a reduced premium - but not the whole $1500/month, you will send the difference in. Not sure if you'd also have to pay taxes on that.

I'm not saying you shouldn't do a Roth IRA conversion. Just be aware that it could change other things too. I didn't do a Roth conversion - I took some of my retirement out of an IRA last year. Had to pay part of the premium back along with the taxes on the money I took out (it is like converting to a Roth - only you're not putting it into another retirement account if you're old enough (59 1/2 or higher)).
 
It doesn't amount to much, relative to some of you probably, but I have been converting some of both of our Traditionals to Roths the last few years, without it affecting our current taxes.
 
Teresa said:
Thanks for sharing this. Here's an additional 'caution' about watching about putting yourself into another tax bracket.
If you are receiving a 'lower rate' for health insurance because your income is lower than the rate the government chooses for levels of income, then you may lose that lower premium (and you'll pay it back with your tax return).

Here's a 'for instance' - and I'm going to just use round numbers for this example.

Let's say you estimated your income in a year will be $40,000. So you get a reduced premium because your income isn't higher. Let's say the premium on the plan you want is $2,000 but your reduced premium is $500. That means that you only pay $500/month. for now.

So .... you do a Roth conversation for $60,000. You have to pay the income tax for the additional $60,000. Your income - for health plan computation is now $100,000 (if your estimate was good). Probably enough to NOT give you a reduced premium. That means when you do your taxes for the year, you'll 'get to' pay back the $1500/month you got as a 'reduced by'. That means not only will you have to pay taxes on the additional $60K for the Roth conversation, you'll have to SEND IN $18,000 (1500 times 12 months). Or ..... if your income will allow a reduced premium - but not the whole $1500/month, you will send the difference in. Not sure if you'd also have to pay taxes on that.

I'm not saying you shouldn't do a Roth IRA conversion. Just be aware that it could change other things too. I didn't do a Roth conversion - I took some of my retirement out of an IRA last year. Had to pay part of the premium back along with the taxes on the money I took out (it is like converting to a Roth - only you're not putting it into another retirement account if you're old enough (59 1/2 or higher)).
Click to expand...
Agree, it needs to be thought out.

A Roth conversion can work, if you are not getting credits on the affordable care program, and have insurance elsewhere.

I actually each year figure out where my income will be, my medical expenses and figure out if I should do any conversion. The year I had high medical expenses I did conversions.
 
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