Roth Conversion Assistance

Thank you for the input. I am with Vanguard already. So that is great to hear that you completed the conversion process.
So no 8606 form is needed? That’s great news. So if I do the conversion tomorrow and send the IRS a check for the taxes a week from tomorrow does not the transaction go on next year’s (2024) tax return and not the 2023?

Here is the one and only truth about Roth conversion and and retirement advice and investment advice.

“One size does not fit all.”

My standard answer for any Clark Community or Reddit posts which ask “I’m a pre-retiree or retiree, what should I do???!!!” is becoming:

  1. Run one of the many fine pieces of retirement planning software to come up with an inflation adjusted after-tax retirement cash flow base case spending plan, with a high probability of success (90% or more) attached to it by Monte Carlo (or equivalent) analysis
  2. Put your proposed action into the software as an alternative case and see if you like the results better
  3. If you don’t know what software to choose, ask the community
  4. If you don’t know how to or don’t want to learn how to run such software, hire a CFP to do it for you
  5. None of us reading this post have all of the facts needed to actually give you sound advice, because the discovery process needed to dig out all of the facts is quite involved; therefore, if any of us actually offer you advice, you really shouldn’t take it, because the chances of it being right are pretty small; this is related to “you get what you pay for” (either in sweat equity or in money)

Thank you. I will check into it.

No short term goals for the cash at this moment.

Since the conversion will be made this year 2024 in a few weeks, and I want to pay the taxes on the conversion amount. now from cash on hand. How do make it known to IRS and State on the check that I will send? The Lind 4a and 4b entry will be for year 2024 not 2023 tax returns.

Great thanks!

Since the IRA is my wife’s IRA does her name go on the 1040ES and if it both does it matter what order? We typically file jointly.

Thank you.

With all you have going on there, you should have a sit down with a Fee Only money manager. Many of them also work with CPAs and lawyers. My son’s firm does. You should only keep enough liquid funds for 6 months or so of living expenses. The rest can be put in CD’s ladder style. Fixed rate annuities can be good too. With respect to the Roth Conversions, the current tax rate isn’t your problem, it future tax rates, which will have to increase due to the insane national debt. I’ve been converting mine when my tax status allowed. It’s not that the tax on the conversion hurts, it’s the tax on the growth that is a killer. Growth of a Roth is also tax free. Had you converted a 401k 10 years ago and paid the tax on that amount, you’d owe nothing on the total amount that it has grown to. Any monies you don’t need for 10 years s/d be in a Roth in the stock market. Spend a dime and have that visit with a money manager, but not a broker who sells stuff. A Fee Only advisor. But I wouldn’t spend a dime paying off a mortgage if it has a rate at 4% or less. That money can easily make more being invested. You’ve done well! Good Luck.

Thanks for the suggestions.

For me, financial advisors seem to concentrate on the tax differences, future tax rates, and so on, between various taxable and tax-free accounts. The big reason that I converted everything possible to Roth IRAs was those rotten Required Minimum Distributions. This is where you are forced to remove money from your tax-deferred accounts each year, when you probably don’t need it and would rather save it for future years when you may need lots of extra money to pay for a low-maintenance apartment, extensive medical care, a home health nurse, an assisted living facility, or a nursing home. The IRS forces you to take those RMD distributions so that you will exhaust your tax-deferred accounts by the time you die. That is NOT what most of us old codgers need. We need to keep all the extra retirement money until we need it for catastrophic care, probably in the last 5 years, near the end of our lives. Roth IRAs allow you to do that. Other types don’t, instead forcing you to take most of the money out before you need it. That, and only that, it the big reason to convert to Roth accounts. The tax benefits are only a nice side benefit.

If more people knew exactly how much that RMDs grow each year after age 73, more would consider converting to Roths. Here is a worksheet, once provided by the IRS, to calculate your RMD after age 72. Notice that from 73 to age 88, the RMD doubles. If you have $100,000 in your untaxed retirement account, your REQUIRED minimum withdrawal at age 73 will be $3,774

The tax issue is a long way from being a side effect. Say your IRA doubles in value and your Roth doubles as well. You could be paying nearly 40% tax on the Traditional IRA and Zero on the Roth. Unless there is some divine intervention, income taxes are going up. They have to. What worries me is the government taking over all retirement accounts. Sounds far fetched, but when politicians get this far behind in debt payments, anything can happen, and they have been working on this for 40+ years.

Yeah, me too. But why wouldn’t they try to take over Roths in addition to traditional? That’s why I’m not overly concerned about converting traditional to Roth and paying more taxes now.

It’s fundamentally misleading to say “You could be paying nearly 40% tax on the Traditional IRA and Zero on the Roth” because you simply pay the tax in advance on the Roth. Hardly anyone ever pays “Zero on the Roth” because people in 0% tax brackets don’t generally save in any kind of IRA.

First, I was talking about all retirement accounts, not just Traditional IRAs. If they get to that point, nothing will be safe, including savings account. Retirement accounts, investments and savings are something of “privilege.”

Yes, you do pay taxes on the initial amount, but not the growth. Had you put that $10k bonus in a Roth 30 years ago and left it there. You’d have about $150k total but only paid taxes on the initial $10k and none on the $140k returns. That’s a low average tax rate to me. The tax impact is in the growth. The longer you hold it the less the taxes impact you. But even if I paid taxes relatively late in the process it’s still not going to be worse than the taxes you’ll pay when withdrawn. The Traditional IRA was based on the fact your tax rate will be lower when you retire, but I don’t think that will be the case for many of us.

Except you wouldn’t because some of the $10k would have gone to pay taxes before you could put it into a Roth. The additional amount you’d have in your account with traditional would exactly be enough to cover the taxes, assuming tax rates are the same. Of course, tax rates can go up, but even if they do, deducting contributions at your highest marginal rate and then paying taxes on distributions across multiple rates (some much lower) means all but the thriftiest of super-savers or early-career savers will come out ahead by deferring.

OK if you want to use $7500 after taxes and you would only have about $110k to not pay taxes on. I don’t know how an effective tax rate could be much lower, but I’m no mathematician and I haven’t worked it out. That’s where the money advisors and CPAs come in. And, If one is banking on taxes going down anytime soon, that’s a risky chance to take. We already know that they are going up in '25, and the current administration is signalling that they need more. When you are running a deficit and a total debt of >$32 Trillion dollars, something has to give. And, to those that think the Billionaires should pay it, I say why, and even if they all dissolved their wealth, they could barely pay one years interest on the total debt. I hope you are right!

You act like $10,000 that you’d pay taxes on is comparable to $10,000 thirty years from now. It’s not, and not even close.

There are only three ways I know of to make Roth come out ahead every time: 1) ignore the taxes paid up front before the contribution is made, 2) ignore the time value of money and inflation changes in tax brackets, while assuming the investments grow, 3) assume large tax rate increases. Without these 3 things (two mistakes and one assumption), the answer will be “it depends.” Luckily, it doesn’t make that much difference for most people, so doing it the “wrong” way isn’t likely to be catastrophic.

Edit to add: I’m not banking on tax rates going down. Even if they stay the same, most people will be in a lower tax bracket when they retire because you don’t need as much income if you’re not paying Social Security and Medicare taxes or contributing to retirement accounts. Also, most people suck at saving for retirement, so will probably have to cut back anyway.

I don’t really understand the problem. If you need the money to live, RMDs aren’t an issue because you’ll withdraw that money (and report it as taxable income) anyway. Then you’re back to the tax rate question already discussed. If you don’t need the money to live, you can just invest the RMD amounts in a taxable account. If you don’t ever sell, your heirs will get the stepped-up value, making all the growth until you die tax-free. In that case, you’ll still be paying income tax (potentially, at least) each year based on the RMDs. Your heirs won’t get ten extra years of tax-free growth.

But if you’re down to the difference between having enough money to pay for long-term care or not, you’re likely to be in the former category, and very likely to be paying 0% income tax, either because your income is too low, or because your medical expense deduction is so high.

Which is great, but converting to Roth during peak earning years (which is what this thread is about) is generally going to cost more in taxes than doing it over time in lower tax brackets after retirement (or not doing it all, if RMDs aren’t going to be an issue). RMDs can also be saved in taxable accounts until needed for those who don’t ever convert. You’d still have the freedom to what you want with your money. The government just wants its share. You can pay it early if you want (i.e., convert to Roth). Or you can delay it for a while. But maybe not as long as you might like.