It was on the suggestion of our FP. Trusting it was at or near the bottom of a down market, and having non-retirement funds to pay the taxes for the conversion.
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Now, 15 years later, that weāre looking long term (inheritance) ā having it in a Roth does make a difference. Weāll likely not use that money so it gives an advantage to our kids.
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I keep responding to anyoneās comments, so definitely jump in!
Thinking out loud hereā¦
Letās even say $40K in taxes (fed & state). That $40K could have been invested for the same timeframe and grown to $350K with dividends reinvested. I cannot begin to attempt to calculate how much would have been owed in taxes on the returns each year, but the net return on that $40K would have been something less than $350Kāmaybe a third off the top, so $230?
The $800K gain on the $100K converted is completely tax-free.
I realize that the alternative scenario I have not run is the tax rate that would be due on the $800K of RMDs during the lower earning/lower tax retirement years.
One other thing to consider is that some peopleās tax rate in retirement may not be that much lower than during their earning years. Again, individual circumstances, but some RMDs are sizable + SS and for the lucky few, pensions. Or, RMDs from inherited IRAs from recently deceased parents.
I welcome any holes in my thinkingā¦as I am sure there are plenty!
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and yet landscaping is covered and can be deducted. I say tree removal is part of landscaping. Period! 
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I have trees trimmed/removed every few years and would love to consider that a capital expense.
Just install a pool where you need all your tree work. That will solve the problem!
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Significant advantage. They will enjoy another ten years of tax-free growth and then withdraw w/o owing any taxes.
Well, one of my justifications was to be able to replace our cedar fence, which had failed because of age and because of the trees. The trees had to come out to replace the fence. Fences are listed in the IRS guidance.
Ergo, that job, which was very expensive (tricky removal of some big trees in a tight space), is going on the list.
It would be interesting to know how frequently the IRS audits this particular tax calculation. Iāll be it gets hit a lot when the number is big.
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Sure it makes a difference. What was the tax bill though?
I ask because if those extra taxes had been invested instead, using the same calculator above, the following would be true.
So as opposed to having 898,000:
25k in taxes invested instead would reap an additional 225k, or 1,122,000.
30k in taxes invested instead would reap an additional 270k, or 1,167,000.
Those additional funds could pay a lot of taxes especially if the money was used in a way to keep the tax bracket low.
Iām not saying converting wasnāt a good idea but the reality is not converting could have resulted in a much larger sum which could be withdrawn in a more tax advantaged way also.
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I donāt see holes in your thinking. I just like to look at the outcomes as best I can.
I understand that tax free savings are beneficial. Iāve just tried to run through many different scenarios personally and when I add in the additional tax cost to get those tax savings it usually tends to not be advantageous if your tax rate will be lower in retirement, a wash if your tax rate will be the same and a real advantage only if your tax rate will be higher in retirement.
Obviously if someone is going to have a substantial amount of income from other sources in retirement then that would be a case where Roth money really shines.
In the other hand, if I end up paying say 30% or even worse 40% in taxes now to avoid paying 22% later then I havenāt really helped my bottom line in the end.
I appreciate having a conversation about these things and hearing what others think. Iām not saying Iām right, I am open to learning and changing my thinking too.
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Thatās the plan!
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Itās a good plan.
Thatās exactly right. Whether to convert or not depends on marginal tax rates now and into the future retirement.
In Joeās example, he would be worse off by converting at 30% today when his rate will be 22% later.
If your tax rate is 22% today and you estimate it will be 22% after retirement (including dividends, interest, RMDās and Social Security), there is zero value to convert.
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Thanks. I think it gets even more nuanced.
By contributing to traditional today I am saving about 30% in fed and local taxes right off the top, my marginal rate.
When I withdraw those funds Iāll be taxed across the tax spectrum and not at my marginal rate but at a lower āeffectiveā tax rate.
I understand the benefit to having some tax free money to use in certain scenarios but I also understand that taxes will be paid either now or later and different scenarios work better or worse for different individuals.
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I donāt think youāre accounting for human behavior. Though maybe it would have been your behavior, if you had extra money, that you would have invested it through a brokerage account. Iām guessing that most people would have found a way to spend that extra money, or have much of it sitting in a bank account earning very little. Forcing yourself to pay taxes up front for the big tax free bonus down the road can work psychologically for many people. Much harder to touch retirement funds than non-retirement, plus if youāre trading, youāre paying taxes along the way on sales, dividends and capital gains.
And of course, if you have that big chunk of extra money, instead of putting it in a taxable brokerage account, one could put it in a Roth or backdoor Roth.
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Youāre correct, Iām speaking about myself not the public in general. I would say the general public has much less saved for retirement than most here on CC. Iām speaking to this crowd that is fairly educated about finances and obviously cares about the future and probably would make certain choices regarding their money, not the āgeneral publicā.
In my hypothetical I show how either paying extra in taxes to help fund a Roth or using those same funds to obtain a larger nest egg would essentially be a wash if tax rates are similar when working and in retirement. Itās not an endorsement of one plan over the other, itās an observation and a result that someone could use to make a more informed decision about what is actually right for them as one size really doesnāt fit all.
Hereās a good explanation of Roth vs traditional.with some thoughts about why one might be better than the other in different situations.
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yeah, Iāve read a couple of those papers touting āeffectiveā tax rate, but not buying it.
By converting today, we are reducing RMDs in the future. SS is baked in. Pension/annuity is baked in. Dividends/interest are baked in (for most people). (Personally, I ascribe to the total return philosophy and donāt care for dividends.). By baked in, means we have little/no control over them. (other than sell the dividend paying stocks first, but those with dividends love them).
OTOH, we do have control over RMDs by our decision to convert today. So, I still hold out its marginal rates that matters.
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Youāre correct that you do have to factor in all those other income streams that could take up the lower tax brackets.
My plan at the moment is to retire and potentially delay SS while living off of 401k funds, a small pension and possibly making yearly Roth conversions then when I should be at a lower marginal tax rate. Otherwise Iāll just keep things in traditional and use up more funds while delaying SS and taking advantage of that guaranteed growth. That will reduce my future RMDs also.
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Another factor to consider, that I mentioned many posts back, is the tax impact on the surviving spouse. Income will be very close to while married, but brackets will be halved for the single taxpayer.
Also, the delay of RMD to 75 allows the IRA balance to grow even larger, resulting in higher RMDs.
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I think much of the key is knowing yourself. Theoretical situations can be useful, but understanding your own reality works best for me. We borrowed money for our Roth conversion, and hating being in debt, we worked extra trips and spent less to get out of that debt. No way would we have borrowed money to invest in a brokerage account. Now looking at our accounts and figuring out how much is Roth funds, Iāve calculated 25% of it is. I would never spend the money in taxes to convert more to Roths now, however.
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I agree with your tax during working years/retirement analysis. Roth conversions at āourā ages usually do not make sense.
I still believe in encouraging recent grads to max out all available Roth space as they have a 50 year growth horizon and will probably be in higher tax brackets in retirement. Of course, they are paying single rates now and may be paying married rates in retirement, so front loading the Roth may not work out.
But then I circle back to my surviving spouse tax predicament. My mother lived almost nine years longer than my father. The tax impact for her was not onerous as they had relatively small IRAs (compared to post-tax). But there are a LOT of people (over on Bogleheads) with these massive IRA balances. Some of these people will have higher incomes during retirement than they ever earned while working.
So yes, the decision is an individual one, completely dependent on oneās mix of assets and projected income during retirement.
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