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Roth Conversion

#11
You can convert to a Roth IRA and pay the taxes out of your existing IRA, you just need to call Fidelity with your withholding instructions, I have.
 
I am now retired , and I pull money out of my IRA to my Roth IRA, as a way to fund my living expenses. Tax wise it is essentially the same as if you were to pull the money out of the IRA directly to your brokerage account.
 
I see the advantage of having the Roth as an intermediate step in funding my retirement, in that any funds I do not use for living expenses, can be invested tax free.
 
Again, if you pay the taxes on the converted funds out of the IRA proceeds, it is the same as if you withdraw the monies to fund your retirement ,paying the taxes on what you withdrawal.
 
it’s all a manner of your financial planning choices. Certainly , you cannot use non IRA monies to pay the taxes, if you do not have the funds elsewhere.
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#12
A BIG thank you to all of you. great ideas and suggestions from many of you. I very much appreciate it. I am newbie for conversion. Having retired recently, only this year my income is low enough to consider a conversion. I have about 4-5years to do the conversion before other income (pension, SS etc) start kicking.
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#13
I'll be the party-pooper.
 
Roth conversions have little economic value. Fidelity's (and other's) conversions tools show a benefit because they allow individuals to input bad data.  Bad data results in bad answers.  Paying the conversion taxes out of IRA funds is an economic loser.
 
Assume I have $1 in an IRA today.  After some years the investment grows by 10x.  I then have $10.  I sell the asset and being in the 25% tax bracket put $7.5 in my pocket to do with as I like.
 
Assume I have $1 in an IRA today.  I convert $1 into a Roth.  From another pocket I pay $0.25 in conversion taxes as one is in the 25% tax bracket.  After some years the Roth investment grows by 10x.  I then have $10 in the Roth.  I sell the asset and as it is tax free I put $10 in my pocket.  But the $0.25 I paid long ago to cover the conversion taxes would have grown by the same 10x and be worth $2.5.  A $2.5 that I don't have, but would have if I never converted.  While I have $10 in the Roth it is really worth $7.5 when all the factors are accounted for.
 
This is the simple case.  It can be made much more complicated by introducing all sorts of scenarios and what-ifs.  The scenarios only serve to cloud the picture, not change the results. The most typical scenario is "I may be in the 15% tax bracket today but when I'm forced to take RMDs from the IRA I'll be forced into the 25% tax bracket".  Some think they will be forced into the 28% or even the 33% bracket.  Thus converting now saves taxes in the future. 
 
Analyzing this scenario is complicated.  I'll be brief.  Basically, one is in error if one just looks at tax brackets.  One needs to understand the income levels that map to the brackets.  The change in income level necessary to move from the 15% bracket to the 25% for married filing jointly is roughly $80k, into the 28% $160k, and into the 33% $360k.  How likely is it for one to have RMDs of $80k/yr let alone $160k/yr or $360k/yr.
 
Furthermore, the 80k/yr case assumes one is at the top of the 15% bracket.  Any additional dollar of income will be taxed at not 15%, but 25%.  So a dollar converted to a Roth will require a conversion tax of 25%.  The same tax rate the $80k/yr will be taxed at.  Thus no tax savings.
 
To further beat a dead horse.  Allow the IRA to be so large one expects to see RMDs of $160k/yr.  Converting to a Roth produces the same 25% tax, but one is avoiding being taxed at 28% via RMDs.  But hold on.  One can only convert $80k/yr as anything above that will be taxed at the 28% one is seeking to avoid.  So conversion allows one to pay a rate of 25% instead of 28% on the converted $80/yr.  A savings of 3% or $2.4k/yr.  While $2.4k/yr is not zero it is not that much for one seeing $160k/yr via RMDs.  If one had a smaller RMD, say $120k/yr, the tax savings would be $1.2k/yr.
 
Still hitting that horse.  A RMD of $120k/yr requires an IRA valued at roughly $3M at age 70.5.
 
I apologize for spoiling the party.
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#14
Quote:Analyzing this scenario is complicated.  I'll be brief.  Basically, one is in error if one just looks at tax brackets.  One needs to understand the income levels that map to the brackets.  The change in income level necessary to move from the 15% bracket to the 25% for married filing jointly is roughly $80k, into the 28% $160k, and into the 33% $360k.  How likely is it for one to have RMDs of $80k/yr let alone $160k/yr or $360k/yr.

I would agree that it isn't likely that as long as your filing status (MFJ) remains the same it isn't likely that RMDs will push anyone up two marginal tax brackets.  Is that what you are saying? What do you mean by the $80k difference between the 15% and 25% brackets? 
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#15
While one may move up two full tax brackets via RMDs, I'm seeking to show the magnitude of assets in an IRA to do so. Each individual needs to assess what their assets might be.

The top of the 15% tax bracket is roughly 76k/yr for married filing jointly. The top of the 25% bracket is roughly 153k/yr. So to move from the top of the 15% to the top of the 25% requires a bump in income of roughly 80k/yr (77k to be more precise). To see an RMD of 80k/yr one's IRA needs to be worth roughly 2M at age 70 1/2. Or more precisely, 77k / 0.0365 = 2.1M.

I agree that when a spouse passes things change a great deal as income levels assigned to tax brackets are much different. However, looking at the general couple each will likely live to about 85. Maybe longer. Decisions about IRA conversions start at about 60 and might end at 65 due to income from Soc. Sec., Pensions, etc. pushing income too high to make the conversion still have value. My thought is does one really wish to embark of a tax savings plan that might not pay off for another 25+ yrs. A lot of things can happen in 25 yrs. Thus I make the calculation at age 70 1/2 when RMDs start and both spouses are very likely to be alive.
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