DC: Hiring a financial professional to do a Roth conversion analysis

[Anonymous]

I did a large Roth conversion on my own. Wanting to be conservative, I ended up totally overestimating the tax and missed out on converting even more. If I had to do it again, I definitely would get advice on the tax angle.

[Anonymous]

Anonymous wrote:

Anonymous wrote:
Unless you have
Over $10m in pre tax accounts it doesn’t make sense to do a Roth conversion. Your RMDs will never push you into the highest bracket.
If you want to use Roth accounts as inheritance vehicles just convert a moderate amount each year or even a sizable amount in a low income year. Just make sure you have the money to cover the taxes.


I’d just leave the kids stocks and they can get a step up in basis when they inherit so it’s effectively tax free.

Withdrawals from a traditional 401(k) are fully taxable and treated as ordinary income at your current income tax rate in the year you receive them. They are not subject to lower capital gains tax rates, even if the funds were invested in stocks within the account. If you have a beneficiary named on the 401(k) that person is also subject to income tax on the stocks in the account (and with no stepped up basis). This is because the stocks were bought with pretax income. The tax has to be paid when the money comes out of the 401(k) no matter how it is invested while it is there.

The OP is talking about converting to a Roth so that they can pay the tax now and either not pay it later or let it be inherited and not taxed later.

Yes— either way you have to withdraw money from the IRA and pay the exact same tax on it.

[Anonymous]

Anonymous wrote:

Anonymous wrote:Unless you have
Over $10m in pre tax accounts it doesn’t make sense to do a Roth conversion. Your RMDs will never push you into the highest bracket.
If you want to use Roth accounts as inheritance vehicles just convert a moderate amount each year or even a sizable amount in a low income year. Just make sure you have the money to cover the taxes.

This is incorrect. We have combined 2.5M in pre tax accounts. If we do nothing, our RMDs would knock us into top tax bracket. We’re retiring early to start Roth conversions.

Validated with Projections Lab software and a CFP.

Interesting because we have more than that (and some other income) and our projections don’t show us in the top bracket. Could be you also have other income or else the difference is some combination of what returns you are projecting and how much you plan to spend.

An interesting question I could try to figure out is what is the future rate of return where a Roth conversion would turn out to make sense but it’s enough for me to know the answer falls in a range of uncertainty, especially because I’d rather pay more taxes when returns are better than expected vs when they are worse than expected.

[Anonymous]

The high RMDs really only begin around age 86s. By that point there is a good chance one spouse (if not both) has already passed and you are already in the higher tax brackets. So your Roth conversions, the RMDs avoidance and tax free Roth account amounts mainly benefit your heirs or a long lived surviving spouse.

[Anonymous]

Anonymous wrote:

Anonymous wrote:Unless you have
Over $10m in pre tax accounts it doesn’t make sense to do a Roth conversion. Your RMDs will never push you into the highest bracket.
If you want to use Roth accounts as inheritance vehicles just convert a moderate amount each year or even a sizable amount in a low income year. Just make sure you have the money to cover the taxes.

I’d just leave the kids stocks and they can get a step up in basis when they inherit so it’s effectively tax free.

Completely fine if you’re talking about a taxable brokerage account. But avoid doing this if your “stocks” are in tax-deferred accounts (401k or traditional IRA). Your heirs have to liquidate deferred tax accounts in a 10-year timeframe upon receipt and it will likely be a tax bomb disaster since they’ll probably be in their highest-earning years while middle-aged and working.

[Anonymous]

Our wealth manager is also a CPA, so that is super convenient when thinking about tax implications.

[Anonymous]

Anonymous wrote:You don’t need a CPA for this. Mathematically it doesn’t really make sense for most people, unless you are in the highest tax brackets already have non-retirement assets (ie brokerage) to pay for the taxes.

It depends on if you think the tax bracket %s will go up or not. Currently, it seems to be a wash for us, but we are betting that the upper bracket tax rate will go up.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Unless you have
Over $10m in pre tax accounts it doesn’t make sense to do a Roth conversion. Your RMDs will never push you into the highest bracket.
If you want to use Roth accounts as inheritance vehicles just convert a moderate amount each year or even a sizable amount in a low income year. Just make sure you have the money to cover the taxes.

This is incorrect. We have combined 2.5M in pre tax accounts. If we do nothing, our RMDs would knock us into top tax bracket. We’re retiring early to start Roth conversions.

Validated with Projections Lab software and a CFP.

Interesting because we have more than that (and some other income) and our projections don’t show us in the top bracket. Could be you also have other income or else the difference is some combination of what returns you are projecting and how much you plan to spend.

An interesting question I could try to figure out is what is the future rate of return where a Roth conversion would turn out to make sense but it’s enough for me to know the answer falls in a range of uncertainty, especially because I’d rather pay more taxes when returns are better than expected vs when they are worse than expected.

We’re mid 50s and our pretax accounts currently total almost 3M. If we did nothing but let the money grow (we assumed 6%), at 75 our first RMDs would put us a shade into top tax bracket. We’d rather start conversions now (filling 22% bracket) and not get RMDs taxed at up to 37%. For us it’s not really about returns but minimizing taxes. Our thought is that the tax brackets are low and they might go up later. Ideally we’d get all our investments into a Roth for tax savings as well as being easy for our heirs. From what we’ve projected, we will have plenty of yearly spending and our portfolio will still grow.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:
Unless you have
Over $10m in pre tax accounts it doesn’t make sense to do a Roth conversion. Your RMDs will never push you into the highest bracket.
If you want to use Roth accounts as inheritance vehicles just convert a moderate amount each year or even a sizable amount in a low income year. Just make sure you have the money to cover the taxes.


I’d just leave the kids stocks and they can get a step up in basis when they inherit so it’s effectively tax free.

Withdrawals from a traditional 401(k) are fully taxable and treated as ordinary income at your current income tax rate in the year you receive them. They are not subject to lower capital gains tax rates, even if the funds were invested in stocks within the account. If you have a beneficiary named on the 401(k) that person is also subject to income tax on the stocks in the account (and with no stepped up basis). This is because the stocks were bought with pretax income. The tax has to be paid when the money comes out of the 401(k) no matter how it is invested while it is there.

The OP is talking about converting to a Roth so that they can pay the tax now and either not pay it later or let it be inherited and not taxed later.

Yes— either way you have to withdraw money from the IRA and pay the exact same tax on it.

as long as the tax rates remain the same

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Unless you have
Over $10m in pre tax accounts it doesn’t make sense to do a Roth conversion. Your RMDs will never push you into the highest bracket.
If you want to use Roth accounts as inheritance vehicles just convert a moderate amount each year or even a sizable amount in a low income year. Just make sure you have the money to cover the taxes.

This is incorrect. We have combined 2.5M in pre tax accounts. If we do nothing, our RMDs would knock us into top tax bracket. We’re retiring early to start Roth conversions.

Validated with Projections Lab software and a CFP.

Interesting because we have more than that (and some other income) and our projections don’t show us in the top bracket. Could be you also have other income or else the difference is some combination of what returns you are projecting and how much you plan to spend.

An interesting question I could try to figure out is what is the future rate of return where a Roth conversion would turn out to make sense but it’s enough for me to know the answer falls in a range of uncertainty, especially because I’d rather pay more taxes when returns are better than expected vs when they are worse than expected.

We’re mid 50s and our pretax accounts currently total almost 3M. If we did nothing but let the money grow (we assumed 6%), at 75 our first RMDs would put us a shade into top tax bracket. We’d rather start conversions now (filling 22% bracket) and not get RMDs taxed at up to 37%. For us it’s not really about returns but minimizing taxes. Our thought is that the tax brackets are low and they might go up later. Ideally we’d get all our investments into a Roth for tax savings as well as being easy for our heirs. From what we’ve projected, we will have plenty of yearly spending and our portfolio will still grow.

Interesting. If that 6% is real then it’s higher than what we used (since we have a bunch of bonds in tax deferred) but also the tentative plan is to draw the tax-deferred down first so within maybe 10 years the drawdowns exceed the increases.