<p>What calculator did you use and what assumptions did you make? We’re just procrastinating because we really don’t have a firm plan on what we’ll be doing 5-10 years from now, let alone try to project what tax rates will be.</p>
<p>Yep, we did a Roth conversion. We didn’t really think long and hard about it, as it seemed like such an obvious decision. We didn’t need a tax advisor or any specialized assistance. The Roth is such a great deal, I talked my 21 yr old son into opening one. We haven’t been able to contribute to a Roth for many years, and the IRA we converted is managed by a guy who tends to do pretty well and has had our money for years, so we know his track record. When we take it out in 20-25 years, I’m sure it will have done far better than the S&P.</p>
<p>We are in a high tax bracket, and have a good pension plan (that seems to be solid), so we will stay in the highest bracket. We don’t have to pay for the conversion out of the Roth itself (otherwise, we would never do it). It seems so obvious that taxes, at least for us, will be going nowhere but up. Now if we thought we would be in a low tax bracket after retirement, we wouldn’t have done it.</p>
<p>If you have extra money you want to put into your retirement accounts, a Roth conversion is a good way to accomplish that.</p>
<p>For example, let’s assume you have a $100,000 IRA you want to convert, and the taxes on the conversion would be $30,000. If you have $30,000 available to pay the tax (and you have already contributed the max to other retirement plans, then go ahead. It is like getting the $30,000 into a tax-deferred (or in this case a tax-free) account.</p>
<p>If you have to withdraw money from the IRA to pay the tax, then don’t do it.</p>
<p>Fidelity has a Roth conversion evaluator that I run every year, and every year there’s just a minimal benefit in reducing future taxes. So much depends on the estimated marginal tax rate that’s used in the calculator. How can this be anything but a wild guess if there’s a good chance DH and I won’t have much in the way of W-2 income in 5-10 years? </p>
<p>I just read the Marotta articles and he’s coming down pretty strongly on the side of doing the conversion. I think the ability to inherit the balance tax-free is a good reason to consider it, along with avoiding the required minimum distribution. But the upfront tax hit seems pretty painful.</p>
<p>I’ll be interested to hear of other calculators that people have found useful.</p>
<p>If you have kids in college and especially if they are getting any financial aid, make sure that you chat with the financial aid office about this if you do a conversion because it does show up as income. We looked into doing a conversion when they were first available to people with higher incomes. We asked about this at our oldest son’s school. They had a form to fill out so that wouldn’t be counted against you for financial aid. He wasn’t getting any financial aid but one scholarship he had was “need based” but the “need” was something like a AGI of $200,000.</p>
<p>We did the conversation last year & received a letter from the IRS claiming we owed $$$ in back taxes. It took a letter from an accountant to straighten this out with the IRS.</p>
<p>We did it. We converted all our IRA’s to Roth. From what I understand if you do a partial conversion and you convert only a portion of IRA to Roth, you have to pay taxes for all IRA accounts prorated. It didn’t apply to us but something to look into if you are considering a partial conversion.</p>
<p>Although Roth is tax free, it is still subject to Estate Tax when passed onto heirs. And you don’t get stepped up cost basis consideration.</p>
<p>We converted some of our IRA’s to Roths so we would have more flexibilty in retirement regarding required minimum distributions. It wasn’t cost-effective to convert everything.</p>
<p>Be aware that if you convert your IRA to a Roth, you cannot take the contributions out like a normal Roth. You have to wait five years.</p>
<p>Not that anyone is planning to take out funds, that is not the idea, but it is good to know that a Roth conversion is subject to different rules.</p>
<p>We did it and so did my parents. My parents did because they were subject to the minimum required distributions. That income made all their income taxed at a higher rate and make their social security taxable. They converted it all, paid the huge tax upfront, but for the rest of their lives they don’t have to take distributions, it grows tax free and the rest of their income, which is mostly capital gains and social security is barely taxed at all.</p>
<p>We did it since we don’t plan on needng it when we retire so we can leave it to the kids tax free. My kids have been contributing to their Roth IRA’s since they started working though, so I don’t think they’ll need it either. Maybe we should start spending more.</p>
<p>In essence, you are exchanging your payment of taxes ahead of the regular schedule for the potential advantage of a. avoiding future tax rate increases, b. permanently sheltering investment income from taxation.</p>
<p>If we end up in an environment of high inflation, high taxation, and potentially high nominal investment returns, you could end up with 3-4 times more assets at age 90 than you would have if you fail to make the conversion. If tax rates don’t rise, and investment returns stay in the low to mid single digits, then the advantage of conversion is not so remarkable.</p>
<p>I believe that’s only if you have non-deductable contributions in your existing IRAs. If all of your IRA contributions were deductable, then you don’t need to prorate the value of all of them when you do a partial Roth conversion.</p>
<p>Unfortunately, that’s not true. Let’s say you have $95,000 of contributions in your existing IRA’s which were deductible over the years. You contribute $5,000 non deductible this year because you can’t contribute to a Roth due to income limitations. You cannot convert the $5,000 and not pay tax on it. You have to convert whatever amount you want and pay tax on 95% of it.</p>
<p>But what if it’s just a partial conversion? The original statement was this:</p>
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<p>I believe this is only true if there were non-deductible contributions in the mix. If there were no non-deductible contributions, I’m assuming that the taxes are not prorated for all IRA accounts, they’re only calculated on the account or portion of the account that’s being converted.</p>
<p>I have a rollover IRA, a traditional IRA and a SEP-IRA. My husband has all of that plus a TIAA-CREF retirement account. I don’t want to roll everything over into a Roth IRA, and I wouldn’t want to pro-rate the gain over all these accounts. </p>
<p>Has anyone done a partial conversion or do most people just bite the bullet and convert everything?</p>
<p>If I understand your question correctly, if you only convert part of your traditional IRA into a Roth, then whatever you convert is taxable assuming all of the IRA’s were deductible. If any of the IRA’s were non deductible, then you would pay tax on a prorated amount. You can’t pick and choose which you convert. So if everything you have in IRA’s was deductible at the time of contribution and you convert half of it, you would pay tax on half. If you have both deductible and non deductible IRA’s, you would have a “basis” in the IRA’s. So if you have $20,000 in deductible IRA’s. and $20,000 in non deductible and you choose to convert $10,000 you can’t ask that only the non deductible ones get converted and have no tax liability. In that case, you would pay tax on $5,000 of the $10,000 you convert because half of what you have is deductible and half non deductible.</p>