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401(k) to which kind of IRA

No. I'm sorry if I wasn't clear. The beautiful thing about the Roth conversion is the ability to reverse (recharacterize) any time up until you file the tax return, including the 6 mo extension.

Specific to my Roth Roulette concept - this means you can make conversions to multiple Roth accounts, and at tax time keep the ones that are favorable to you, recharacterize those that aren't. The multiple (new) accounts are required as the gain of loss is based on the whole account value, not just the asset you converted. So you literally take $10K in an ETF or single stock and convert that to a new Roth, another $10K in cash to another new Roth, etc. At tax time, you get to decide what's worth keeping.

To give you an idea of the value of the conversion, 2 personal anecdotes:

My sister is disabled, collecting untaxed workers comp, and started with a 401(k) worth about $150K 20 years ago. When the Roth was introduced in '98, I saw the unique opportunity to use the conversion to take advantage of her "zero bracket", the sum of her standard deduction and exemption. Each year, we converted some IRA money, but stayed under the threshold where tax would be due. By now, it's all converted. Roth money with no tax due, ever.

My father in law died 12 years ago, and I took over my Mother in Law's finances. In her case, I used the conversion to "top off" her 15% bracket each year. In this case, I convert to IRA, but at tax time, when I have all her exact numbers, I recharacterize enough to get her taxable income right at the 15/25 line. i.e. The last $100 was taxed $15, but the next $100 would have been taxed $25.

The 'roulette' strategy may be more effort than you feel is worth it. On average, one year in 3 is a down year, and you avoid paying tax on $10K with only $9000 in the Roth to show for it. In up years, tax on $10K but more in the Roth. By separating into asset classes or individual stocks, you can change the potential returns. Even in a down S&P year, your Apple stock might be up, or in that year, the cash is what you'll leave.

Last, my examples of looking at marginal rates will certainly help. If the conversion sends her into a higher bracket, the recharacterization can fix that, and just convert again next year. No need to pay 25%, when

15% will do.

Whatever you decide, I hope this long-winded answer helps you understand why Roth has great potential, far greater than any "all or none" discussions ever address.

Reply to
JoeTaxpayer
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If you have non-IRA assets available, doing a Roth conversion is mathematically the same as contributing the amount of the tax paid to a Roth IRA.

If you could somehow construct two portfolios which were perfectly negatively correlated, you could make a killing by doing a Roth conversion of half into each portfolio, then recharacterizing the one that went down. I haven't been able to figure out how to do that though.

There is really only one question pertinent to a Roth conversion (or which to contribute to), which is will your marginal tax rate be higher in retirement than it is now. Going back 30 years or so to when IRA's became popular, it was widely assumed your rate rate in retirement would be lower. That's no longer true, especially given the inclusion of a portion of social security benefits in taxable income. The calculation is mind-numbingly complex. And of course no one can be sure what will happen to the tax treatment of Roths, although if Congress or IRS tried to tax them I'm sure it would be litigated intensely. It seems wise to have at least a significant portion of your retirement assets in Roths to permit post-retirement flexibility.

The idea of "topping off" your income to the 15% bracket by Roth conversions is extremely sound. I do that currently, and in the past when I was working I remember doing a large Roth conversion to top up to the 25% limit two days before moving out of a state with no state income tax.

Of course, if you are under 59 1/2, paying the conversion tax from IRA assets isn't really an option, since it can't be worth paying the 10% penalty.

Reply to
Roger Fitzsimmons

An issue overlooked a lot is the distributions from a 401K while on Soc Sec could make a portion of the taxable at ordinary rates. All ROTH distribtions do not affect soc security taxation. A real plus.

Reply to
bh2os62

I've been trying to wrap my head around that, but failing. Could you possibly do an example, with numbers?

As it happens, I'm expecting a non-IRA legacy. Upwards of 90% of my IRA money is traditional, and I'm thinking about a partial Roth conversion, so if I can convince myself of your equivalence, that will help in planning. I'm guessing you didn't factor in the increased cost of Medicare, two years later?

Reply to
Stan Brown

The analysis is clearer to understand if we make some simplifying assumptions. The assumptions I will use are: 33.33% tax rate applies at the time of the Roth conversion. 33.33% tax rate applies at the time the Conventional IRA distribution. 6% rate of return in the IRAs (both Conventional and Roth). 4% after-tax return for non-IRA funds (6% Gross return less 33.33% tax)

Options Today for a $15K Conventional IRA and $5K in non-IRA funds:

1) Convert Conventional IRA to Roth. Use the non-IRA funds to pay taxes on the conversion. Result is $15K Roth IRA plus a $5K reduction in non-IRA funds used to pay the taxes. 2) Convert Conventional IRA to Roth. Pay the taxes with the proceeds from the IRA Distribution. Result is $10K Roth IRA plus no reduction in non-IRA funds. The $5K in non-IRA funds is invested the same way as the Roth investments. 3) Don't convert Conventional IRA to Roth. Result is $15K IRA plus $5K in non-IRA funds that is invested the same way as the IRA.

After 12 years @ 6% annual investment returns:

1) Converted Roth is worth $30K and no taxes are due. Net After-Tax Value: $30K 2) Converted Roth is worth $20K and no taxes are due. The $5K in non-IRA funds grew after-tax to about $8K. Net After-Tax Value: $28K 3) Conventional IRA grew to $30K, which is worth $20K after taxes. The $5K in non-IRA funds grew after-tax to about $8K. Net After-Tax Value: $28K

You will note that Option 1 shows "If you have non-IRA assets available, doing a Roth conversion is mathematically the same as contributing the amount of the tax paid to a Roth IRA."

Options 2 and 3 result in the same After-Tax Value so the choice between these options has to be based on other criteria. There is no RMD due at age 70.5 for the Roth in Option 2 while the RMD is due for the Conventional IRA in Option 3. If reducing future RMDs is an objective, Option 2 may be more desirable than Option 3.

This analysis is sensitive to current and future tax rates, investment returns for the IRAs, and after tax investment returns for the non-IRA funds. Use estimates that correspond to your individual situation.

The calculations for Options 1 and 2 did not factor in any increased cost in Medicare IRRMA two years after the Roth conversions. They also did not factor in any decreased cost in Medicare IRRMA in the future due to lower IRA RMDs.

Reply to
BignTall

I bought shares in a muni fund. Later, when I moved out of that state, I simply bought muni bonds. ROI was 4-5+%. When I look at the pages and pages of worksheets for income tax returns, I'm glad I did. I'd have spent 1-2% of the ROI doing my taxes.

/BAH

Reply to
jmfbahciv

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