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Chuck_R Offline OP
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Guys,

Looking for some + and - on doing a Roth IRA Conversion.

I retired (again) on 30DEC23 at age 63 and now have an army pension and a federal civil service pension. Bottom line is I'm stuck in the 22% tax bracket. In addition, when I retired I sold back annual leave which pushed my final paycheck in JAN to over $32K. I had quite a bit in the federal TSP, both pre and post tax.

I plan on starting SS next year when I turn 65, so 2024 will be my lowest year income wise (unless the Feds and KS come through with not taxing SS). My thought is to do a ROTH Conversion this year in DEC when I know how the Tax on SS pans out, then possibly again in 25.

Thoughts?


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Roth conversions usually don’t work out mathematically unless you don’t touch the money for 15 years or so.

If that’s the plan, and you have the means to pay the 22% Fed taxes plus state taxes, go for it.


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Chuck_R Offline OP
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Originally Posted by Dutch
Roth conversions usually don’t work out mathematically unless you don’t touch the money for 15 years or so.

If that’s the plan, and you have the means to pay the 22% Fed taxes plus state taxes, go for it.

Have the money for taxes, and have the time, don't "need" the retirement funds. Pensions cover expenses plus. The intent with the retirement accounts is to "enjoy" retirement and add to some generational wealth.

I don't really get the bolded, or better yet I can't really see an effect.

No matter what, I owe taxes on the pre-tax IRA (rolled over TSP). As long as I don't convert enough to push me into the next tax bracket, all of the money, whether taken out in small amounts or larger will be taxed at the same rate. The difference in my mind is that whatever the converted money makes in a Roth is also tax free.. forever (or until they change laws) so the sooner the better.

The 22% tax bracket for 2024 is huge; Married filing Joint $94,301 to $201,050, so I should be able to convert around $80K and remain in the 22%. Next year when I start SS, the amount I can convert will drop down to around $40K. Unless they stop taxing SS.

Since IRA withdrawals aren't subject to quarterly tax payments, there's no harm in waiting till mid-December to make the conversion. I'll then pay the 22% on the converted amount out of savings, leaving the investment whole. Plan is to put the Roth into a dividend fund and create another passive income stream that's tax free while reinvesting gains.

It will also lower my RMD requirement which will be coming someday.


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Chuck_R Offline OP
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Longbob,

For some reason I can't see your post here, but I got it in an Email.. Good catch on the Medicare impact..

It looks like the breakpoint for Medicare is $206K, slightly over the top end of the 22% tax bracket, so I should be OK, because I'll end up paying the $174 per month for Part B regardless. I've got Tricare for life, so the rest is covered under that.


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Not sure what happened.

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Some financial advisors are suggesting that people consider doing Roth conversions and taking the tax hits in the next two years (2024 and 2025) because the tax cuts enacted under Trump's presidency will expire at the end of 2025 unless extended by Congressional and Presidential approval. If this happens, it will automatically change tax rates/brackets back to where they were before Trump, which will impact taxes on distributions and Roth conversions from tax deferred accounts from that point forward. I am not a financial advisor and I am not up to speed on all of this. You may want to look into this and determine the impact of a potential tax cut rollback on your particular situation.

Of course, the national elections this year will likely impact the odds of an extension of the Trump-era tax cuts.

Perhaps someone with more insight on this issue will weigh in on this.


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Originally Posted by Chuck_R
Originally Posted by Dutch
Roth conversions usually don’t work out mathematically unless you don’t touch the money for 15 years or so.

If that’s the plan, and you have the means to pay the 22% Fed taxes plus state taxes, go for it.

Have the money for taxes, and have the time, don't "need" the retirement funds. Pensions cover expenses plus. The intent with the retirement accounts is to "enjoy" retirement and add to some generational wealth.

I don't really get the bolded, or better yet I can't really see an effect.

No matter what, I owe taxes on the pre-tax IRA (rolled over TSP). As long as I don't convert enough to push me into the next tax bracket, all of the money, whether taken out in small amounts or larger will be taxed at the same rate. The difference in my mind is that whatever the converted money makes in a Roth is also tax free.. forever (or until they change laws) so the sooner the better.

The 22% tax bracket for 2024 is huge; Married filing Joint $94,301 to $201,050, so I should be able to convert around $80K and remain in the 22%. Next year when I start SS, the amount I can convert will drop down to around $40K. Unless they stop taxing SS.

Since IRA withdrawals aren't subject to quarterly tax payments, there's no harm in waiting till mid-December to make the conversion. I'll then pay the 22% on the converted amount out of savings, leaving the investment whole. Plan is to put the Roth into a dividend fund and create another passive income stream that's tax free while reinvesting gains.

It will also lower my RMD requirement which will be coming someday.

Precisely what I am doing for the same reason and did it for the first time when eligible. Banking on taxation not going down in the future as well.


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Originally Posted by Chuck_R
Originally Posted by Dutch
Roth conversions usually don’t work out mathematically unless you don’t touch the money for 15 years or so.

If that’s the plan, and you have the means to pay the 22% Fed taxes plus state taxes, go for it.

Have the money for taxes, and have the time, don't "need" the retirement funds. Pensions cover expenses plus. The intent with the retirement accounts is to "enjoy" retirement and add to some generational wealth.

I don't really get the bolded, or better yet I can't really see an effect.

No matter what, I owe taxes on the pre-tax IRA (rolled over TSP). As long as I don't convert enough to push me into the next tax bracket, all of the money, whether taken out in small amounts or larger will be taxed at the same rate. The difference in my mind is that whatever the converted money makes in a Roth is also tax free.. forever (or until they change laws) so the sooner the better.

The 22% tax bracket for 2024 is huge; Married filing Joint $94,301 to $201,050, so I should be able to convert around $80K and remain in the 22%. Next year when I start SS, the amount I can convert will drop down to around $40K. Unless they stop taxing SS.

Since IRA withdrawals aren't subject to quarterly tax payments, there's no harm in waiting till mid-December to make the conversion. I'll then pay the 22% on the converted amount out of savings, leaving the investment whole. Plan is to put the Roth into a dividend fund and create another passive income stream that's tax free while reinvesting gains.

It will also lower my RMD requirement which will be coming someday.

Ok, the reason it takes time to make Roth conversions pay:

Say, you convert 100K to Roth, and the tax man (Federal, State and local) take $30K.

You now only have $70K drawing returns, rather than $100K. The benefit from Roth is that the returns will be tax free. It simply takes time to get the returns to the point where the tax savings exceed the lost returns from the portion you gave the tax man early.

Easiest way to understand it is to run a scenario both ways.

I did a $100K conversion two years ago, but I really don’t expect to ever use that money. Having the Roth reduces my future RMD and extends the tax saving benefit to my heirs (for a time, anyway).


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Chuck_R Offline OP
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Originally Posted by Dutch
Originally Posted by Chuck_R
Originally Posted by Dutch
Roth conversions usually don’t work out mathematically unless you don’t touch the money for 15 years or so.

If that’s the plan, and you have the means to pay the 22% Fed taxes plus state taxes, go for it.

Have the money for taxes, and have the time, don't "need" the retirement funds. Pensions cover expenses plus. The intent with the retirement accounts is to "enjoy" retirement and add to some generational wealth.

I don't really get the bolded, or better yet I can't really see an effect.

No matter what, I owe taxes on the pre-tax IRA (rolled over TSP). As long as I don't convert enough to push me into the next tax bracket, all of the money, whether taken out in small amounts or larger will be taxed at the same rate. The difference in my mind is that whatever the converted money makes in a Roth is also tax free.. forever (or until they change laws) so the sooner the better.

The 22% tax bracket for 2024 is huge; Married filing Joint $94,301 to $201,050, so I should be able to convert around $80K and remain in the 22%. Next year when I start SS, the amount I can convert will drop down to around $40K. Unless they stop taxing SS.

Since IRA withdrawals aren't subject to quarterly tax payments, there's no harm in waiting till mid-December to make the conversion. I'll then pay the 22% on the converted amount out of savings, leaving the investment whole. Plan is to put the Roth into a dividend fund and create another passive income stream that's tax free while reinvesting gains.

It will also lower my RMD requirement which will be coming someday.

Ok, the reason it takes time to make Roth conversions pay:

Say, you convert 100K to Roth, and the tax man (Federal, State and local) take $30K.

You now only have $70K drawing returns, rather than $100K. The benefit from Roth is that the returns will be tax free. It simply takes time to get the returns to the point where the tax savings exceed the lost returns from the portion you gave the tax man early.

Easiest way to understand it is to run a scenario both ways.

I did a $100K conversion two years ago, but I really don’t expect to ever use that money. Having the Roth reduces my future RMD and extends the tax saving benefit to my heirs (for a time, anyway).

Got it!

Which is one of the reasons I'll wait till DEC, and not do the withholding from the IRA account, since withholding is an "election" vs. "requirement". I have the money in savings (high yield) to cover the tax, which will allow 100% of the conversion to earn a return.

I maxed out my TSP (401K) and 2 Roths (mine and spouse) 3 years ago, after paying off our house and acreage. I then started funneling remaining disposable income into a high yield account to utilize for a bridging strategy, much like folks using a 401K to bridge to SS. It was also because at the time 2023 and 2024 were forecast as expecting a recession, so I didn't want to possibly risk of having to draw down retirement funds during a downturn.

As it turns out, I errored on the side of caution.. should have just invested more in the MKT.

Now that I have a solid idea of what the pensions (3) vs expenses leave, there's no need to "bridge" with the savings, so I'll use some of it to cover the taxes on the conversion.

Again, like you I have no intent to use the ROTH funds, other than possibly taking dividend income to play with. I will start drawing down the remaining IRA funds though as the taxes on that are inevitable and I'd like to do some hunts while still able to hike.


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Useful thread for a change though, sadly, it is meaningless for many for a plethora of reasons.

Enjoyed the above comments. My whole strategy is based on the odds of tax rates increasing for regular income going forward over the long term, at least on average. Our government's spending habits and policies almost dictate that!!! A "back-door" Roth conversion seems to make sense IF, as has been said, the $ is not needed early in retirement (or at all... what a problem to have!). "Taxable" income from savings/investments, non-taxable sources ie, Muni-bonds, etc. ("pro" American, too!), risk vs reward/stability all seem to play into the mix as well. Inflation???

"Pensions" would be a nice problem to have (I don't), but seem to be going the way of the do-do bird for most (unless maybe a "public servant" of some sort... "oxymoron" I might add for the rest of us... surprise!!!). Same with post-retirement benefits (I don't). These certainly figure in as well. Social security benefits just complicate the matter... lots of different perspectives on that dilemma, too, one being "Big Brother" is just looking for a reason to get that $ back for themselves from those who really don't "deserve" it!!!

Then consider the things we at least THINK we can control... lifestyle, "needs" vs "wants", travel, and food expenditures. Some of these can be "problems" (I laugh) for we 'fire members, too! The mirror never lies if we pay attention and are honest with ourselves.

Finally, consider that some of these things can change on a dime through no fault of our own... .gov "policy", health changes, tragedy, world events, etc. and there you are.

Common sense dictates that it might be better to "have a plan" than not, be grateful to have these "challenges" vs the alternative, and finally be flexible when we are acted upon by "outside" forces or even the inevitable ones from inside. "Murphy's law" at some level will likely apply. Hind sight is always 20/20... and usually(not always though) useful... live one day at a time and enjoy the simple things for what they are... "gifts"!

Thanks for the dialogue!

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69 retired wife is still working, Trying to lower my future RMD by reducing my IRA,s did a charitable contribution fund which offset my Roth conversion taxes. Alaska has no state tax. Cant use the Roth money for 5 years and don't need it.


Went to free annuity sales speeches to get good ideas and say no to annuity,s! Manage my own money but always looking for good ideas!


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Chuck_R Offline OP
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Originally Posted by kk alaska
69 retired wife is still working, Trying to lower my future RMD by reducing my IRA,s did a charitable contribution fund which offset my Roth conversion taxes. Alaska has no state tax. Cant use the Roth money for 5 years and don't need it.


Went to free annuity sales speeches to get good ideas and say no to annuity,s! Manage my own money but always looking for good ideas!

Same reason I made the OP.. I've got a plan, but it never hurts to bounce it off others.

Before punching out I attended several retirement seminars just to see what the latest trends are. A lot didn't apply, but I learned at least something from the ones I went to.


“Might does not make right but it sure makes what is.”

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