Increase retirement Roth conversions due to new tax rates

[RetiredERdoc]

I have been doing some Roth conversions since I retired to decrease RMDs when I turn 70.5.  My question is, does the new tax law mean I should increase these dramatically to take advantage of the new decreased tax rates, as the tax rates are set to expire in 2025. ( I will turn 70.5 in 2025)

i currently have 1.45M in rollover iras, plan on ss at 70, wife only gets my ss. No pension. No debt/mortgage. Expenses currently about 85k, but 25k of that is health insurance premiums which will go down once we hit Medicare in 2 years. Currently living on 35k Serp 10 year Distribution plus taxable investments, serp depleted at age 72.

i ran I-orp but couldn’t bring myself to do the very high conversion recommendation they gave, so have only been doing about 70k. Of course plan on rerunning it once they incorporate the new tax law.

[ENT Doc]

I don't like iORP because you can't set retirement spending at a specific level.  There's a Bogleheads retirement planner that is much more detailed regarding Roth conversions:

https://www.bogleheads.org/forum/viewtopic.php?t=97352

I think the decision to convert depends on your specific needs/goals.  If you're in danger of running out with a safe withdrawal rate then I wouldn't convert.  If you're more than safe and are looking to maximize total after tax dollars across generations this will depend on your heirs' marginal tax rate and the marginal rate in which you are doing the conversion.

[RetiredERdoc]

I’m at <3% withdrawal rate currently. Goal is to decrease lifetime taxation for me and heirs.

[ENT Doc]

RetiredERdoc wrote:

I’m at <3% withdrawal rate currently. Goal is to decrease lifetime taxation for me and heirs.

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So this would depend on your heirs' marginal rate and your marginal rate on conversion.  If I had a SERP, social security coming, plenty in taxable and had heirs in a high marginal rate I'd convert up to a tax bracket lower than their marginal rate.  No brainer IMO.  Taxes will only go up in the future given our national debt.

[RetiredERdoc]

I haven’t been able to confirm this with the new bill, but I believe both the house and senate bills prohibit Roth recharacterization, so I assume the compromise bill will do the same. Would this make episodic Roth conversions better vs a lump sum conversion at the beginning of the year?

[FIREchief]

RetiredERdoc wrote:

I haven’t been able to confirm this with the new bill, but I believe both the house and senate bills prohibit Roth recharacterization, so I assume the compromise bill will do the same. Would this make episodic Roth conversions better vs a lump sum conversion at the beginning of the year?

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Excellent question.  The conference report clearly explains the death of recharacterizations of "conversion contributions" to a Roth.

The conference agreement follows the House bill and the Senate amendment with a
modification. Under the provision, the special rule that allows a contribution to one type of IRA
to be recharacterized as a contribution to the other type of IRA does not apply to a conversion
contribution to a Roth IRA. Thus, recharacterization cannot be used to unwind a Roth
conversion. However, recharacterization is still permitted with respect to other contributions.
For example, an individual may make a contribution for a year to a Roth IRA and, before the due
date for the individual’s income tax return for that year, recharacterize it as a contribution to a
traditional IRA.277

To your point, it now regresses to a market timing question.  Do I convert my entire annual target in January, split it into equal parts (akin to dollar cost averaging) or watch the news to see and see when the next crash will occur (disclaimer:  that third one is silly, but it is an "option").  I may go against conventional wisdom and convert quarterly, however lump sum in January is the proven smart play.

[Hatton]

RetiredErDoc I have about 1.8 mill in IRAs. I have converted about 60k so far.  I am not trying to convert it all.  I converted 25k this year and opened a DAF for 25K hopefully cancelling each other out tax wise.

[Bmac]

Given that the majority of our 401k contributions have been at close to 40%, the change from the 25% tax bracket going up to $165,000 for MFJ to a 24% tax bracket going up to $315,000, it would certainly seem that there is much more room for traditional to Roth conversion with the new tax bill at a favorable marginal tax rate compared to the contribution rate. And possibly something to take advantage of, particularly if there is the possibility of the tax brackets/rates reverting in 2025. Although we are still a few years away from being in the conversion stage of life. But maybe by 2020.

[disneydoc]

Although the new TAX BILL is yet to become a Law, I think I read that the Roth Conversions from IRAs is being eliminated.

[ENT Doc]

disneydoc wrote:

Although the new TAX BILL is yet to become a Law, I think I read that the Roth Conversions from IRAs is being eliminated.

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It's Roth recharacterizations, not conversions.

https://www.onwallstreet.com/news/new-tax-bill-no-more-roth-ira-do-overs

[disneydoc]

Hi ENT,

 

I have a significant balance in my Traditional & Rollover IRAs, if this Bill passes, going forward can I convert(transfer) a part of that balance to Roth IRA, of course after paying Taxes at ordinary income tax rate on what I withdrew from the IRA. ?

[ENT Doc]

disneydoc wrote:

Hi ENT,

 

I have a significant balance in my Traditional & Rollover IRAs, if this Bill passes, going forward can I convert(transfer) a part of that balance to Roth IRA, of course after paying Taxes at ordinary income tax rate on what I withdrew from the IRA. ?

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Hey.  Are you required to take RMDs?  If so, this must be done before any Roth conversions.  If not, you can convert any amount you want whenever you want (up to the point of you needing to take RMDs, then see the first point), even if this bill doesn't pass.  It will likely be more advantageous to wait until 2018 though.  If you don't have heirs, want to donate to charity, or have heirs at a lower marginal rate I have a hard time seeing why doing a Roth conversion makes sense, unless RMDs are going to push you into higher brackets in the future and have you pay more to Uncle Sam that you could have avoided by converting some early.

[disneydoc]

I am 61 now & at 70 my RMDS will start,  and my point is to decrease the RMDs & have retirement income from Tax free route also thru Roth.

If this new Tax Bill passes, is this conversion not being repealed ?

 

Thanks

[ENT Doc]

Looks like you should be fine.  The tax bill doesn't appear to do anything to conversions.  Now you just need to figure out what the ideal tax bracket is to convert up to, given your needs/goals.

[PhysicianOnFIRE]

You could convert up to the top of the 24% bracket each year, which is $315,000 for MFJ. I think we'll see a lot more retirees converting more money, and having an RMD "problem" an easier thing to avoid.