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Convert a Rollover (conventiona0 IRA to ROTH


Parliament
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I've been wondering about this for a long time, but never pursued it.  I'm a Surly poor, but have a paid-off trailer house (so I have that going for me).  Right now I have a mix of conventional and ROTH savings.  Saw this popup in my Vanguard and was reminded about it.  

When you do a rollover, is it all taxed in one year?  If you aren't already in the top tax bracket (I'm not) does it make zero sense?  Is it good idea to keep an mix of convention and ROTH?

 

Screenshot 2022-09-08 074007.png

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1 hour ago, Parliament said:

When you do a rollover, is it all taxed in one year?

Yes, but you don't have to convert the entire amount.  You can pick how much you want to convert to Roth.  You can convert more next year if you wish, or not.

I see the benefits of Roth conversions as allowing you to pick today's marginal tax rate for income rather than some unknown future rate, and allowing you to shelter more wealth in a Roth IRA than you have in a regular IRA.  You end up with the same number of dollars in a Roth that you had in the regular IRA, but it's now taxed and any future income is tax free.

You can also dial in your income to exactly what you want it to be, which may allow you to maximize the benefit of a lower tax bracket without getting into higher brackets.

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Some people do conversions up to the next marginal bracket if they think that's about as low as their income tax will ever go.

For instance.....if you are MFJ and have taxable income above $83.5k but less than $178k, you can convert up to that 178k threshold if you have doubts you'll see marginal rates remain at or below 22% in the decades to come.

Bear in mind that you have to have the cash on hand to pay the taxes on what's converted in a given year and the conversion amount is locked up for 5 years without the more liberal standard Roth withdrawal rules.

Basically you are pre-paying the tax today to have income flexibility down the road and locking in a tax rate now at a known rate that might increase in the future.

You limit or eliminate RMDs down the road so you have a lot of tax planning flexibility when you hit retirement age and start drawing SS.

Some of the benefits to heirs has been muted by recent legislation, but there are still some benefits.

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Any advantage to having a shitload of unrealized loss when it comes to such conversions? Our savvy retirement investment manager invested all our real estate cash between Sep-Nov 2021 (mostly conventional IRA) and we are down about 15%. 

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11 hours ago, Murfdogg21 said:

Any advantage to having a shitload of unrealized loss when it comes to such conversions? Our savvy retirement investment manager invested all our real estate cash between Sep-Nov 2021 (mostly conventional IRA) and we are down about 15%. 

Well, if you believe that over any considerable, long term period of time your investment assets will increase in value  (if they don't it's Thunderdome anyway IMO) then yes, strategically converting to a Roth during a declining market will allow you to pay lower taxes on what otherwise would have been a larger conversion.

You run the risk of being out of the market during potential up-day pops while the transfer is taking place, but in general, your situation would allow you to convert and reinvest in the same assets while paying a 15% lower tax bill than you would have otherwise.

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If you cash it in to take the tax deduction on the loss and then move that cash to a Roth IRA account, there would be no taxes due since there were no gains but you can write off the loss on your taxes.  One question is, if you rebuy those same stocks after moving it to the Roth IRA account, would a wash sale apply or does that only apply if that money is left in the same account?

 

 

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23 hours ago, Texas Jeff said:

Yes, but you don't have to convert the entire amount.  You can pick how much you want to convert to Roth.  You can convert more next year if you wish, or not.

I see the benefits of Roth conversions as allowing you to pick today's marginal tax rate for income rather than some unknown future rate, and allowing you to shelter more wealth in a Roth IRA than you have in a regular IRA.  You end up with the same number of dollars in a Roth that you had in the regular IRA, but it's now taxed and any future income is tax free.

You can also dial in your income to exactly what you want it to be, which may allow you to maximize the benefit of a lower tax bracket without getting into higher brackets.

So I go to my tax preparer in December who does a "draft" of my filing.  Then I roll enough to get me right up to where it jumps to the next bracket.  Makes sense.

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5 hours ago, CooterBrown said:

If you cash it in to take the tax deduction on the loss and then move that cash to a Roth IRA account, there would be no taxes due since there were no gains but you can write off the loss on your taxes.  One question is, if you rebuy those same stocks after moving it to the Roth IRA account, would a wash sale apply or does that only apply if that money is left in the same account?

 

 

You don't get a tax deduction on realized losses in an IRA....and you don't have capital gains taxes on realized gains.  You pay income tax on whatever comes out (plus a penalty unless it is a conversion or otherwise allowed distribution).  There is no wash sale rule since there is no capital loss deduction.

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Also depends on how much you have in traditional ira.  If you've got 2mm in there, it makes sense to start converting some now because required minimum distributions are going to destroy you tax wise.  If you've only got 100k, you can finesse that out in small increments once you retire. Basically, you want some amount around 500k-1mm in traditional after you retire and you can manage your tax levels by withdrawing the right amount every year in retirement.

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3 hours ago, Not a cat said:

Also depends on how much you have in traditional ira.  If you've got 2mm in there, it makes sense to start converting some now because required minimum distributions are going to destroy you tax wise.  If you've only got 100k, you can finesse that out in small increments once you retire. Basically, you want some amount around 500k-1mm in traditional after you retire and you can manage your tax levels by withdrawing the right amount every year in retirement.

The conversions are really dependent on  your marginal tax rate. If I have $2MM in an IRA but I’m in the 35-37% tax bracket I don’t want to lock in that high tax rate to convert to a Roth.  I’d convert up to whatever tax rate I felt was reasonable, probably 22-24%. With RMDs starting at 73 you should have a decade or so to convert from traditional to a Roth at a presumably lower tax rate than your peak earning years. Depending on when I retire I plan to start doing Roth conversions at 55-59 when I start pulling out of my 401K. 

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