I have Roth conversion aversion.
Psychologically, I know I probably won’t touch any of the money in it. So why convert it?
I will have a pension, brokerage account, pre-tax 457, and social security to draw from.
When are you planning to touch your Roth accounts, knowing that it compounds and can be withdrawn tax free.
Seems like it is earmarked for my children……
Roth accounts are about 30% of my retirement accounts
sorry, just ranting…..
There are a few reasons why people convert. Here are key ones:
If it stays in a Traditional-style retirement account, RMDs force withdrawals beginning around age 75 for you (if I remember your age correctly). That can add both tax costs and Medicare income-related premium costs due to the forced withdrawal. By converting early, you may be able to reduce or eliminate those costs.
If you are married, there is a chance that you and your spouse will pass away in different years. Combine that with RMDs above, and there are scenarios where the flip from filing taxes jointly to filing taxes singly adds costs while lowering income for the survivor.
If you have kids or grandkids who will ultimately inherit the money, withdrawals from inherited Roth accounts are not taxable for the recipient, while withdrawals from inherited Traditional accounts are taxable for the recipient. Since that inheritance must generally be withdrawn within 10 years, that could make a significant difference, particularly for high-income heirs.
If you have low-income years during retirement, it may make sense to convert traditional money to Roth money to pay taxes at a low rate, vs. being required to take the money out at a higher rate later in retirement. This scenario is common for folks who retire before taking Social Security and for folks who get higher pension payments by starting to collect at a later age than immediately upon separation.
That said, there are also reasons to consider keeping at least some money in Traditional-style accounts. Key ones include:
If you’re charitably minded, “qualified charitable distributions” from traditional IRAs can help satisfy your RMD while not counting as income to you. That is generally a more efficient way of donating than withdrawing money for yourself and then donating it.
If you anticipate high medical expenses in your senior years, those medical expenses can be tax deductible above a certain income floor. That makes withdrawing from traditional style retirement accounts to pay those costs less painful.
If you don’t expect your Traditional style account balances to get big enough to where the RMDs and related taxes/surcharges to be an issue.
If you expect to pass away early and thus not have any of those later-in-life costs/gotchas hit, it may make sense to directly withdraw and enjoy the money while you still can…
Regards,
-Chuck
That is a very strong reason to do it due to the Secure Act 2.0 10 year rule.
Great reasons to convert.
It just feels like it is a Big compounding piggy bank that I will never crack open because I cannot switch over from saving decades to now “freeing” myself to use it.
Anybody else have a hard time “spending” from their Roth accounts?
I think it is very common for diligent savers to have difficulty switching to being spenders regardless of the account type.
Re: money goes to die
Roth gives you many investment opportunities. You can invest it aggressively and do very well. Tax free for your heirs. Not a bad deal (until you cross the estate tax exemption).
Hi @darrellquock,
I built and paid for our current home from our Roth IRA’s. If I had only trad IRA’s, the taxes would have been quite high.
I initially did conversions to “level” our tax burden. When RMD’s were supposed to start in the year we turned 70 1/2 (old law), Quicken showed our income taxes dramatically increasing. Digging into it, I found it was the RMD’s.
I made a 10 year plan to do partial conversions. That kept the taxes level going forward. Then the tax rates were reduced and I could convert more for the same tax.
When year 11 came along, I decided to continue but at a lower level. I did the 11th and 12th conversion, my ONLY RMD followed the next day by my last conversion.
As mentioned, being able to take a huge withdrawal without tax consequences was important to us.
Another, less important issue is simplicity for my wife. She will not have to deal with RMD’s. She knows how to transfer cash from Roth to checking. She can do that without being concerned about tax withholding.
So, yes, I can spend from our Roth IRA’s without getting all wrapped-around-the-axle.
You might consider leaving your expense cash in Roth rather than a taxable account.
As long as the IRA has been open for 5 years and you are older than 59.5, you can do conversions and not worry about the availability of the funds.
If you are younger than 59.5, a 5 year clock attaches to each conversion. If you get to 59 .5 before the end of a conversion clock, that clock expires.
Does that help you?
Gene
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I am still working and generally saving/investing new money. That said, with two kids in college and a very expensive home improvement project (solar panels) this year, I am also spending from my portfolio at the moment.
What I am finding is that using a bond and CD ladder makes it much easier to spend the money than when I was “all in” on stocks. The maturing bonds and CDs turn to cash at maturity. It’s a lot easier to then take from the accounts’ cash balances to cover the bills.
In essence, I sign my “permission slip to spend” months-to-years in advance, and then the maturing CD or bond serves as confirmation that the plan is still a “go”.
Of course, that spending is not coming from my Roth accounts, which are still getting funded with new money. I suspect that the Roth accounts will generally be my “last to tap”, but I can also see myself spending from them earlier if it helps me stay below a key AGI threshold while still meeting a key life goal…
Regards,
-Chuck
Chuck,
Would you ever consider buying your children their primary 
or do you not want to spoil them if you could afford to do so?
It is highly unlikely that I will find myself in a position where I could buy homes for my kids — at least without jeopardizing my own financial stability. And if I do end up in that spot, it would likely be well after they have established themselves as independent adults.
In addition, even if I could, I’m not sure either they or I would want the baggage that would inevitably come along with that type of gift…
Regards,
-Chuck
My IRA is about 74%, ROTH 26%, of my retirement savings.
I turn 73 this year, so I had to take my first RMD. So far I have taken nothing from the ROTH; I’ve been living off the IRA, and each December doing a ROTH conversion up to around the limit of my tax bracket.
There are two opposite factors I try to be ready for. One is what to do if I live a long time. To handle that my approach is simple: have as much money as possible, and otherwise wait and see.
The other is what happens if I die soon, which is to say with all the funds I have at the moment. The family members who inherit my IRA have ten years to withdraw ALL that taxable money. The tax bill on 1/10th of my IRA would be really brutal. Bad enough that I am considering that THIS year, rather than convert up to the top of my tax bracket, maybe converting up to the top of the NEXT tax bracket.
Just be mindful of IRMAA. You likely are but just in case.
I haven’t tried to tap those yet. We were doing ROTH conversions while we were still working, but our TIRA accounts are much larger. Probably should have started years earlier.
For me, if I were trying to get funds without increasing my income, I’d tap the ROTH. One obvious situation would be minimizing income for ACA subsidies, but there might be other situations one would want to do that.
Otherwise, I’m thinking of tapping my TIRAs so as to minimize the inevitable RMDs after I’m taking SS. Wouldn’t want to be bumped into a higher bracket if I can avoid it.