Realcent.org

Just curious about this one- I wanted to see if anyone is considering (or already started) converting one or more traditional IRA's to Roth IRA's.

Five years ago I would have yawned when thinking about the topic because I didn't want to pay all that tax money. For those unaware, you pay tax on the amount you convert from a traditional IRA to a Roth. But, after paying the tax there is no additional tax to be paid from the Roth account (assuming you adhere to the 5-year holding period).

Now it is quite apparent to me and likely many on this site that taxes in the future are going to be MUCH HIGHER than they are now. Getting $1,200 stimulus checks for my wife and I drove that point home quite clearly. So I'd rather pay a much smaller percentage now and over the next few years than a much larger percentage after that.

Also, before jumping and doing anything you probably want to speak with a competent accountant to make sure you are converting an appropriate amount each year. I wouldn't blindly just convert everything at one time. If I did, I'd be in a really high tax bracket and would have sticker shock when I saw the tax bill.

So what is everyone doing?

There are two main reasons not to convert.

First, by incurring a tax now, you reduce the base on which your returns compound. Instinctively I have to think that is a mistake.

Second, taxes will not necessarily be higher for several reasons. Congress could just go with the status quo out of laziness, or because looking back at history they realize that rates now are about optimal for bringing in revenue and higher rates will stall the economy. Also, when you are older, you can stretch out the taxes on your distributions and possibly be in lower tax brackets, and/or move to lower tax jurisdictions. With the average state income tax about 6%, you could save 6% by moving to Florida or Texas.

For me it’s a no brainer. Throughout my career my tax bracket keeps increasing. And if the Democrats take control of everything, the brackets will increase dramatically.
Additionally, at least with a Roth I can look at my balance and know that’s how much savings I have for retirement. When I look at the traditional IRA balance, it’s meaningless because I can only guess how much of that I’ll get to keep.
I advise the youngsters in my family to start out with a Roth. My reasoning is they will never be in a lower tax bracket than they are at the beginning of their career. A few years down the road when they no longer qualify for a Roth they can use the traditional.

In case anyone is wondering due to covid you are allowed to take out up to $100,000 out of a 401k

I have most of my 401k in a roth

smackvay wrote:In case anyone is wondering due to covid you are allowed to take out up to $100,000 out of a 401k

That's worth considering but you still accelerate when you pay income tax on it.

I'm planning to take mine out between age 59.5 and 70 and spread it out. Hopefully I won't be working and will be in a lower bracket then, and in a low or no-tax jurisdiction. At a minimum Florida, or even Puerto Rico. Potentially somewhere offshore.

Lemon Thrower wrote:

smackvay wrote:In case anyone is wondering due to covid you are allowed to take out up to $100,000 out of a 401k

That's worth considering but you still accelerate when you pay income tax on it.

I'm planning to take mine out between age 59.5 and 70 and spread it out. Hopefully I won't be working and will be in a lower bracket then, and in a low or no-tax jurisdiction. At a minimum Florida, or even Puerto Rico. Potentially somewhere offshore.

i forgot to mention that there are no penalties either

smackvay wrote:i forgot to mention that there are no penalties either

Exactly, no penalties for withdraws up to $100K, but you still pay ordinary income tax on it because it was never taxed in the first place.

So the question is whether to take the tax hit now or defer it until retirement.

If you have credit card debt or a compelling business oportunity, yeah it makes sense to take it out now. But me I'm going to delay paying Uncle as long as I can.

Look back on historical tax rates and you will greatly appreciate what we have right now. In the early 1960’s the highest tax bracket was OVER 90%. And that doesn’t include state tax.

I think the brackets are likely as low now as I will ever see in my lifetime. I can appreciate what is being said about the compounding of money, but with interest rates near zero and my wife being super nervous about the stock market, we are heavily leaning towards biting the bullet now.

Rates were lower under Reagan after 86 until Bush read my lips raised taxes. Clinton raised them further and so on and so in