I don’t think it does. I’m 57 with a large traditional IRA account. But thanks to RSU’s at my new employer I’m in a position of being in a very high tax bracket. Which makes me think a Roth conversion makes zero sense - I’d be paying taxes at a high bracket, when in retirement I’m not going to be awarded stock any more and my tax bracket will be much lower. Am I missing something?
I guess that depends on what you expect the stock to do. If you put the RSU’s into a Roth it could be a home run. At least that is what Thiel did with his paypal shares.
It just depends on if the RMDs put you in a higher tax bracket once they start. If you’re only age 57, RMDs may not start for you until age 75 or later if there’s another tax law change. It may be hard to make that prediction 18+ years in advance.
I’m only a little over 5 years from the start of RMDs at age 73, so the picture is a bit clearer.
Roth conversions can make sense in a low tax year. Deferring Social Security and/or pension and living off your IRA to work down the balance can be one way to reduce RMDs. And create low tax years to allow a series of Roth conversions. But much depends on your situation. Not for everyone.
I wasn’t aware that anything except cash could be put into a ROTH, or an IRA for that matter. Is that actually possible? (Just curious, it has nothing to do with my financial situation,)
The only way to get RSUs into a Roth is to sell them, pay the taxes, and put what’s left into the Roth. There isn’t any way to get them into the Roth pre-tax.
I believe the PayPal shares Peter Thiel had in his Roth IRA were from an early round of venture capital financing when the company was still private. They are not RSUs.
If you are married filing jointly now, the tax bracket will certainly be higher for the surviving spouse when one of you dies.
At 57, you’re probably not thinking of that yet, but it’s always worth noting if there are any health issues or significant age difference.
I find myself in a similar predicament, with the vast majority of our retirement funds in traditional IRA and 401k. But there is no justification for doing conversions while at career peak earnings. In our case, that’s staring down a 35% tax rate. If there’s an opportunity to convert in the future, it’ll be after we start winding down our jobs and income.
I agree, currently it makes no sense to make a Roth Conversion except in one important instance.
If you do not currently have a Roth IRA, convert $1,000 from your trad IRA and create a Roth IRA. Same for your spouse.
The creation of a Roth IRA starts a 5 year clock beginning on January 1st of the year it is created. (Jan 1, 2023 if you do it before December 31, 2023)
This 5 year clock attaches a 10% withdrawal penalty until it expires that applies even if you are 59 1/2 when you take a withdrawal, unlike the 5 year clock on conversions.
Does that help you?
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