@busdriver11
"I don’t know how not converting to Roth when you could pay zero or extremely low tax rates on the conversion would not be better. In all cases. Except if you have a philosophical desire for you or your children to pay more taxes. "
How could I pay zero tax on current income when I convert traditional IRA to Roth? Unless you exclude all income sources and do that conversion at “no income tax income level, ie, like $20,000/year”, if so, how do you get your living expenses paid? Your mortgages? property taxes? Insurances? and how about travel and entertainment? For a $1 Million IRA, you need 50 years of “zero income” to make that conversion, that is insane. Before my D’s graduation, I have to pay/budget about $5,000/mo of tuition alone as I was fully paying for her COA.
My intention is to widthdraw RMD each year from my traditional IRA and live on it with the combination of other incomes, I will be very happy. As far as the residuals from my IRA, I will leave it to my estate to worry about.
I have designed my IRA/401K to make enough income each year for my RMD so I will never have to touch the principles, which is real estate based.
I don’t think my BIL wants to leave his huge house to his S. There’s no way S could maintain it. Similarly, his D isn’t doing much to maintain the house he’s letting them live in. With BIL’s low cash flow, can’t see how he can pay higher premiums of a new insurance policy, whether whole life or term.
In any case, he says he will be sitting down and talking with a fee only financial planner to figure out what to do. I did suggest he have a look at bogleheads.org and H will send him sone links.
BIL likely may need to sell some of the real estate or at least convert it to positive cash flow investment properties via trade, as he will get no pension and his SS payments aren’t enough for his current monthly expenses.
@artloversplus – yes, @Iglooo explained what I was trying to say. I had pointed to @ucbalumnus’s post about liquidating assets in order to pay living expenses, and the discussion of using losses to offset gains. I wanted to add that there is also a zero percent capital gains space.
As to how someone would be able to access that space…I am thinking that would be someone who has post-tax savings available to spend while not earning wage income. I am ‘better’ at these tax calculations at year end, but I believe the standard deduction for MFJ is $24,400 this year. The maximum zero amount space is up to $78,750. This article may help explain since I realize I am not doing a very good job. (I have no tax background, but have been trying to educate myself.) https://www.forbes.com/sites/kellyphillipserb/2018/09/14/projected-2019-tax-rates-brackets-standard-deduction-amounts-and-more/#558a2d4612d9
I think @CT1417 explains it perfectly, @artloversplus. There are certainly people that have the ability to reduce income, defer income into other years, actually save money in order to pay living expenses. Not your usual working stiff getting a paycheck from their employer for the most part though. Not sure why so many people think it’s impossible to pay living expenses out of savings or assets, in a zero income year, though.
Oh well, enough for me on this one.
@artloversplus has a point. The amount you can convert tax free conversion is small. I am also not sure if there is significant advantages if you plan to spend it all in retirement. If you have to pay tax to convert, you have to consider how much you miss out by paying the tax upfront.
I have been doing it for years. The bulk of my retirement savings remains in my traditional IRA, but several times I have converted $40k one year (actually I think I had my wife do that one with her IRA), $25k the next from traditional IRA to roth IRA. I have 2 different traditional IRAs (one was started with non-deductible contributions and is small) and 2 separate roth IRAs. The Roths are relatively small, but I created them with no federal tax liability (I did pay some state income taxes on them) so I thought it was worthwhile.
Re: Convert traditional IRA to Roth
I can see there is some benefit if you can reduce income in one year and make the conversion.
But, it does not make any sense to defer income just to make the conversion. Lets say you can get zero income in one year to get the maximum conversion amount of $75,000, yes it is possible. But if you DEFER the current year income say, $100K to the next year, combined next year income of $100K for a total of $200K, that will put the next year tax rate to the top bracket and you will pay maximum tax there. Unless your converted Roth IRA has such a high return, the benefit might not be that great. You have to toss off the Roth IRA savings and the tax you will pay in RMD at age 70 1/2. As I said before, there is no way for me to do this conversion, because my retirement investment is in real estate.
Moreover, the notion of getting a significant reduced income in one year to do the conversion is most likely inpractical. If you are a salary earner, how can you work a year without pay? Or you stop working just for the roth conversion? Does not make sense. If you are running a business, can you close door for a year? What will happen to your clients in a year of no transaction?
Best is to keep IRAs in its own bucket and make sure at the onset, you invest in Roth instead of Traditional.
This is not possible if you love long enough, and the RMDs climb to 8% per year and higher.
The best reason to convert to a Roth is that there are no RMDs, you have total control over when to take out the money.
Including the standard deduction, the 12% bracket goes to about $102k, for an overall rate of about 8.5%. it’s a no brainer to convert up to the top of the 12% bracket.
One way to do this is to take enough out one year to last for two years, then on the second year do the conversion. You have to run the numbers to see if that strategy will be effective.
Our rental properties spin out enough income every year that we will never be able to use this strategy. Good problem to have I guess.
As a business co-owner, I have some flexibility to defer some income or accelerate some expenses, but never enough to get to a really low tax bracket. So, no Roth conversion for me as far I understand things. I do hope to leave money to my kids, but what this discussion makes apparent is that I should spend what is in my 401k and leave the kids other money. I have already set up a vehicle for that. I will have very large RMDs (just looked at the AARP RMD calculator. It will be distressing writing such big tax checks, but, I agree @artloversplus, that is a first world problem. Thanks for all of the clarifying discussion.
We converted everything to Roths many years ago. Had the cash to take the tax hit. Our FP ran numbers for different income/financial climate scenarios and they all pointed to it being the right thing to do. In retrospect that was totally correct. We still backdoor convert max IRA contributions to Roth every year.
FP recently said DH could retire whenever he wants, but health insurance is an issue to us. I’m hoping he can hang in there until Medicare kicks in. He’s almost 61 so four more years should be doable.
Everybody has a different situation as far as if or when to convert to a Roth. But if you don’t understand the advantages, the point is moot. Some people have flexibility, some don’t. Of course the best time to convert to a Roth is when you are as young as possible (to allow it to grow tax free for decades), or when you won’t pay much in taxes on the conversion. I am very glad we converted some of our funds into a Roth many years ago…paid a high tax rate, but that money has quadrupled in value, and we won’t have to pay taxes on that ever, nor take RMD’s on it. I would never convert to a Roth if I had to pull the money out of that Roth to pay the taxes, though.
On another note, we just sold one of our rentals (that has been a pain in the butt), and it should close in 3-4 weeks. Hallelujah, I’m ready to get rid of these, and get the cash in hand for it!
Just wanted to say thanks to those who tried to help. Will read the articles linked and see if I can make more sense of this Roth conversion issue. Since we’re both retired, I was wondering if, for example, we sold stock (not in retirement accounts) in Nov or Dec of one year in a sufficient amount to cover us for the following year, we could have a zero income year that next year. Then, according to what people have written here, we could either convert $24,000 or someone else referenced $72k (?) tax free (federal). Not sure it’s really worth it if we’re capped at $24k. Off to read…
Congress tried to close the backdoor. Didn’t succeed. That is an example I think we exasperate income inequality. It helps people in the know and the haves.
@jym626 I think it was 2010-11 they allowed to convert. We took advantage of it, too.
@jym626 I remember it was allowed to do it over two years. With my poor planning skills, I messed that one up tho. I didn’t forsee a life changing event and would be doing another conversion in the following year. It would have balanced out better if I did all the conversion in the first year.