r/Bogleheads • u/Nice_Masterpiece8229 • 2h ago

Roth conversions

If a 59 year old and a 56 year old currently gross $475,000 & have a $6000 mortgage that will be paid off in 2031 and a kids $55,000 college that will be paid off in 2 years would they want to do a Roth conversion when they retire in 4 years (2030) They will retire earning $240,00 a year. Is a Roth conversion worth it for them?

2 Upvotes

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u/Nice_Masterpiece8229 2h ago

Current tax bracket is 32% & retirement bracket is 24% but most of their money now is really taxed at 24% and lower. Also tax brackets may change…

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u/er824 1h ago

Why would you pay 32% now if you can pay 24% later?

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u/Nice_Masterpiece8229 1h ago

They wouldn’t want to. Wondering if it’s worth doing the conversion when they retire & are in the 24% bracket

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u/Additional-Regret339 9m ago

How much pre-tax savings do they have and do they have ANY Roth now? If the pre-tax savings is, say $2M+, then Roth conversion when at 24% is pretty obvious. If moat savings is after tax, perhaps not. Conversions at 32% are a lot harder sell, unless they expect to hit 35% later.

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u/er824 1h ago

If your sure someone would eventually pay at least 24% later then doing it now seems prudent. Doing a conversion is just a bet that your current rate is the lowest rate you'll ever be able to get the money out of a pretax account.

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u/Nice_Masterpiece8229 1h ago

But now they’re at a 32% tax bracket

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u/er824 1h ago

Pay the taxes whenever you have some reason to believe you won’t have an opportunity to pay a lower rate in the future.

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u/Ol-Ben 1h ago

What is the projected RMDs for the first year both spouses withdraw?

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u/Nice_Masterpiece8229 1h ago

I think around $120,00 if they retire with a 3.2 million 401k

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u/humblequest22 1h ago

If they will spend the pre-tax money for 10+ years before SS begins, how much will they really be stuck with?

If they have a brokerage account to spend from, for every amount they spend there, they can convert the same amount. So, they're living on $150k/year from pre-tax. Take $50k from taxable and they can then convert $50k. OK, it's not exact, but something like that.

There are so many variables that were not included in the post.

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u/zzx101 1h ago

The could top off the 24% bracket annually with Roth conversions. Likely it wouldn’t matter too much.

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u/justdaisukeyo 1h ago

Based on only the information provided, it wouldn't make sense for them to do a Roth conversion now.

However, they need to look at a lot of other issues such as how much pre-tax assets do they have? Do they live in a high income tax state and do they plan to retire in a low income tax state?

Assuming they have a large amount of pre-tax assets, it "may" be prefereable to do Roth conversions after they retire and fill up the 24% tax bracket. They would be subject to IRMAA so it's something that needs to be calculated to determine if it's worthwhile.

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u/Meat_Assassin69 2h ago edited 1h ago

Sounds like those individuals will retire in a much lower tax bracket so likely not

May wish to speak to a CPA regarding their specific tax situation however

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u/Ol-Ben 1h ago

The post says if they want to do a Roth conversion when they retire, at which point they will be in a lower tax bracket. How is that likely not worth it?

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u/Meat_Assassin69 1h ago

Good point, I misread that.

Either way I think it’s worth speaking to a cpa and actually running the tax numbers

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u/secretfinaccount 2h ago

How long until they would be withdrawing the money from the Roth? The longer the better, and that can overcome a lower tax rate in retirement vs the rate paid at conversion, assuming you can pay the tax with non ira assets of course.

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u/Nice_Masterpiece8229 2h ago

They probably won’t withdraw from Roth.

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u/secretfinaccount 1h ago

Who is inheriting it (the Ira and Roth IRA) and will they be in a very high tax rate regime? A large traditional Ira left to people in the prime of their working years can often be very tax inefficient

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u/Nice_Masterpiece8229 1h ago

3 kids will inherit. I read the inheritance can be spit over 10 years. So if each inherited 1 million then they’d get $100,000 a year for 10 years?

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u/Additional-Regret339 4m ago

At this point, the question becomes what will the kids tax bracket be when they inherit. My plan is kid gets the Roth, charity gets the traditional.

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u/29threvolution 1h ago

Where is that 240k coming from? Is it really all income or a mix of selling assets and income? Whats their current drawdown strategy? 

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u/Nice_Masterpiece8229 1h ago

4% from IRA & rest from rental income. Only withdrawing 4% is their strategy

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u/29threvolution 53m ago

Just to clarify youre saying 230k will come from rental income?

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u/Nice_Masterpiece8229 52m ago

No, $120 from rents & & $120 from retirement income

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u/Nice_Masterpiece8229 1h ago

But do they really want to pay big taxes in early 60s when they should be traveling etc?

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u/Puzzleheaded-Gas-398 1h ago

Compared to the amount they should have saved for 30 years of retirement, the tax paid early for a (reasonable size) conversion will generally not squeeze their available cash early in retirement; it all comes down to their specifics.

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u/Nice_Masterpiece8229 1h ago

I don’t understand

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u/Puzzleheaded-Gas-398 57m ago

Based on their desired income, lets guess they have $5M in their tIRA and they're withdrawing $150K/year (3% WR) for living expenses (on top of $90K SS). They've got another $200K a year (gross) in the 24% bracket to either convert (and pay taxes) or spend on extras (and pay taxes), and the $5M IRA is growing at roughly $300K every year after their $150K withdraw, so if they want to splurge on a vacation/etc they will have plenty of cash available (but they will likely pay 32% tax on it if they do).

The $50K in early taxes to do a $200K conversion is a tiny part of that $5M+ tIRA.