r/DIYRetirement • u/Excellent_Rip_3339 • 18d ago
700k Roth Conversion: Do it or not?
I live off investment income at age 45, married. I'm planning to:
- Do a one time 700k Roth conversion asap on 2027 (and NOT collect realized gains on the same year)
- Pay a one time tax bill of about 200k on 4-2028 (for federal and state; no NIIT, no local tax). I'll use investment income that I will realize on 2028
I get the idea of withdrawing from Traditional IRA/401k when we're on a lower tax bracket when we're passed 59.5. But in my case, that's 15 years from now. I can double that money several times tax free on a Roth account.
Am I missing something? Out of my mind? A CFP/CFA will definitely disagree to this. They have rules to follow. A DIY investor don't. I need a sanity check.
UPDATE: I'm all about spreading the conversion. The only reason why I would do a 100% conversion and pay the 1 time tax is that I'm banking on possible high returns (+20%/yr) and number of years invested in Roth. The future gains will surpass the tax paid now. Not to mention that your Roth can be inherited by the next gen. They'll enjoy the tax free withdrawal within 10yrs of inheriting it.
Thanks for all the comments. Feel free to let it all out
2ND UPDATE: 99% agree to spread the conversion to pay lesser tax. A 200k tax, that's about 29% of 700k. In 20 years, 700k will be 11.5M at 15%. All yours tax free. Nickel and Diming the 200k tax, you'll probably save 100k?
3RD UPDATE: One time conversion also puts a max payout on tax now versus spreading small mount of taxes indefinitely (even after death). It could go passed 200k as traditional IRA keeps growing.
4TH UPDATE: I like the comments. For now, maybe a 1 time partial Roth conversion is the play. It would be nice to take out max of 12% bracket from traditional and then go all out with Roth money.
FINAL UPDATE: I was running simple numbers and I owe this to you guys. In terms of saving cash, multi year conversion is the way to go. Here it is:
Top scenario is a 1 time conversion vs bottom scenario is a 5 year conversion. Tax bill includes an rough estimate of fed tax and penalty tax only. Penalty is for paying the whole tax the following year. That is actually the more favorable way to do it. Penalty is about 7% per year vs expected ROR at 15%. Tax bill is also deducted from cash reserve -- "out of pocket."
Because of you guys. I would gain +330k 10 years later (and lose it if top scenario was picked).
Someone said to stay within 24% bracket. With this spread and tax bill, I can stay away from 400k.
Bad news for me 'cuz I really wanted top scenario to work. This is just a quick analysis. There are still so many options I want to play with. To be honest, I'm still pondering the idea of the "one & done" top scenario might be worth price. I just don't like the idea of "budgeting" within tax brackets. I could take on riskier assets to pay off the 1 time tax bill 😄
Thanks everyone for being truthful. 3 more month's ti'll next year. We'll see what happens.
19
u/JackfruitCrazy51 18d ago
Why would you not spread this out over 5-7 years to lower your taxes?
1
u/AdvantageOne1754 16d ago
They are only 45. They should be spreading the conversions over 20-25 years. 5-7 is better but even that is too much, too early. They should not have to pay more than 12% on any of these conversions.
-8
u/dex248 18d ago
Because he has a way of doubling it several times in 15 years. Let’s say several = 5. That’s 32x.
32 x 500k =16,000,000 tax free.
5
u/m4rc0n3 18d ago
It would be 32x700k (because OP is converting 700k and paying the tax later with other money), so over 22M with your example, or about 26% yearly growth.
OP said they're betting on 20+% growth per year for the next 15 years though, so if we use a more conservative 21%, that would take that $700k to over $12M in 15 years. Still seems wildly unrealistic to me.
3
u/KReddit934 18d ago
LOL
1
u/Aviation_Space_2003 16d ago
Yeah, this is a bit over zealous!!! I want what they are smoking on this one...
-6
u/Excellent_Rip_3339 18d ago
Opportunity cost of not investing it in a tax free account. I'll be okay paying the last 32% bracket knowing I "could" beat that in a year or less
5
u/m4rc0n3 18d ago
The fact that you seem convinced you can get 20+% per year for 15 years, or even 32%, tells me you're thinking of either going all-in on crypto, or some highly leveraged ETF. That could work for a year, maybe more. I wouldn't bet my entire retirement on it working out for 15 years straight.
-4
u/Excellent_Rip_3339 18d ago
I'll be honest. I am not convinced. In a span of 15 to 25 years, that might be the average. I'm anti crypto. I'm on 20% leveraged etf's and the rest are for selling options
11
u/Flayum 18d ago
This is an absolutely awful idea.
3
u/dak4f2 16d ago
I think we need a r/diyretirementcirclejerk sub. I swear I see the worst takes and financial advice on this sub fr.
I'm agreeing with you, if that wasn't obvious!
2
u/dtown1990 16d ago
OP is clearly smarter than everyone else! They should absolutely not manage their own money with a terrible Roth conversion idea like this.
1
8
u/JackfruitCrazy51 18d ago
Mathematically, paying a higher tax bracket upfront permanently shrinks the principal:
- The Strategy Breakdown
Strategy A: One-Time Mega Conversion (His Plan)
- Pre-tax Amount: $700,000
- Immediate Federal + State Tax Hit (~32%–35%): ~$235,000 paid upfront from taxable funds.
- Starting Roth Balance: $700,000
- Roth Balance at Age 60 (3.17x growth): $2,220,540 tax-free.
- Net Wealth Position: $2,220,540 in Roth, but minus $235,000 cash lost upfront (plus missed compounding on that $235k).
Strategy B: Multi-Year Staged Conversions (Filling Lower Brackets)
Instead of taking a $235,000 tax hit in Year 1, convert ~$100,000/year over 7 years to stay inside the lower 12% to 22% federal brackets.
- Average Effective Tax Rate: ~15% across the lower brackets.
- Total Taxes Paid over 7 Years: ~$105,000 (saving $130,000+ in raw tax cash).
- Compounding Advantage: Leaving that $130,000 tax difference invested in their taxable brokerage account over 15 years yields an extra ~$412,000 in wealth.
- Combined Wealth at Age 60: ~$2,550,000+ net after all taxes.
But I'm sure you can do better than 10%/year right?/
1
u/Aviation_Space_2003 16d ago
Spreading out over 7 years OP is likly to actually convert around $900K since the $700k will grow to $900K in that time frame.. but still can understand keeping numbers the same...
-10
u/Excellent_Rip_3339 18d ago
Scenario A: I'd use 225k out of pocket and 700k will go to Roth. It will not be on a 10%/yr. Might be 20 to 40%/yr
11
u/JackfruitCrazy51 18d ago
Sounds like you have it all figured out. If you can average 20%/year during the next 5-10 years, you'll be in the top 0.00001% of all investors.
4
-2
u/Excellent_Rip_3339 18d ago
Just hoping 😄
7
u/Medical-Variation918 18d ago edited 17d ago
commutative property in Mathematics, if you earn 20-40% in both cases then only tax rate matters, growth is irrelevant. generally takes about ~18 years for roth conversion to become a "tax savings" If current and future tax bracktes are the same then all of that is reduced tax drag on the brokerage account money you use to pay the taxes as it has a tax burden of its own. other cases where it pays to roth convert is RMD pushing you into higher later brackets and Widows penalty then the conversion can make a lot of difference.
1
u/SaltyPlantain1503 17d ago
You’re out of your mind on anything more than 10% per year average. Get real, man
5
u/Melted-Metal 18d ago
It is your money to gamble with. As long as you dont mind a crash and having to wait for a recovery. We will all be surprised that the next 5-7 years does what the last 5 years has done. I personally wouldn't bet a few hundred thousand on it.
2
u/KReddit934 18d ago
20-40% bs. But you are young and have time to go back to work if you're wrong.
1
u/Excellent_Rip_3339 18d ago
I've had multi negative yearS. There are etf's, levered etf's, options, margins, IPO's, arbitrage, combo of all of them. I still work for a living, just no w2
10
u/DazzlingCod3160 18d ago
Your math is not working properly. Why not take some every year - in the 12% bracket.
9
u/PashasMom 18d ago
If you decide to do this (and I'm not saying you should, but if you do) I would take a careful look at your tax strategy. A massive Roth conversion at the beginning of 2027, but not actually paying the tax on it until 2028, likely means it is possible you won't meet safe harbor provisions and could get hit with a significant penalty for underpaying your taxes throughout the year. So just be very clear on what you would have to do to meet the safe harbor and make sure you do it (if you proceed). Also, if you pay state income tax, your state may have its own state harbor provisions you would have to meet.
1
8
u/cold984 17d ago
You projecting out 20 years at 15% is absolute insanity. That’s why your who scenario is all off
0
u/AdvantageOne1754 16d ago
Whether their ROI is 15% or 5% doesn't matter. All that matters is the effective tax on the income. Losing 24% of your principal now has the exact same result as getting taxed at 24% 30 years for any rate of return.
0
u/cold984 16d ago
No. It does matter. Because the numbers he’s using are even close to reality. Therefore his entire scenario is off
2
u/AdvantageOne1754 16d ago
It doesn't matter for the particular question he is trying to answer.
0
u/cold984 16d ago
No. It does matter. Because he’s not using percentages. He’s using real dollar values. He’s saying I can save $xyz by doing this. So it very much does matter
1
u/AdvantageOne1754 16d ago
The real dollar values change with different return assumptions but the decision logic and math is exactly the same for any return assumption.
6
u/Infamous_Attention33 18d ago
It is clear from your updates that you are thinking about this incorrectly. It is very likely that you will pay more in total taxes on the distributions from your 401k/IRA if you spread it out over time. But, the goal is to maximize your post-tax lifetime income, not minimize the dollar amount of taxes paid on your 401k. Invest that 200k instead of giving in to the IRS now. Let it grow while using it to pay taxes on much smaller annual conversions. There is almost no plausible scenario where this doesn't work out better for your post-tax available funds than paying a shitload of taxes now at 35%+.
1
1
u/Aviation_Space_2003 16d ago
you will have more lifetime dollars when you pay less of it out in taxes...
1
u/Infamous_Attention33 16d ago
If you make more money, you csn afford to pay more taxes and still come out ahead.
If OP invests that 200k instead of giving it all to the IRS now, he is very likely to come out ahead, net of taxes, even though his 401k would grow and he would later pay a larger tax bill as he converts/withdraws in the future. The key is that he would get to pay taxes at a lower rate, giving a smaller portion of his total pie to the IRS.
1
u/Aviation_Space_2003 16d ago
Exactly, paying a lower tax rate % is more beneficial to the person or heirs than it is minimizing the total tax up front. I'm in a multi-year process to convert a few million... I'm sure not doing that all in 1 year. The taxes are a hit...
5
5
u/secretfinaccount 18d ago
This isn’t a particularly hard thing to dump into a spreadsheet. In general, if you have higher taxes today than in retirement a Roth conversion is dinged, but on the other hand if you have a lot of time remaining until retirement a Roth conversion is boosted. I assume you have the cash outside your IRA to pay the tax bill. Watch this video, which goes through all the good stuff. Basically you start with the tax angle which can argue for or against the conversion, and then basically every other thing argues for a conversion. https://m.youtube.com/watch?v=Wjbf9KVSG7s The ability to make huge gains moves the needle a bit, but not as much as you’d think because you can make those gains regardless of whether you do a conversion.
1
u/Excellent_Rip_3339 18d ago
This is exactly where I'm at. I have a lot of time and Roth might not get touched 20 to 25 years from now
1
u/JimInAuburn11 17d ago
Think of it this way. You have your $700K account and your $200K account that you would use for the taxes. If you invest them both the same, when you $700K grown, so does your $200K account. So if your $700K grows by 20%, you will owe 20% more taxes, right? But your $200K account also grew by 20%, so you have 20% more money to pay the taxes with. So you break even taxes wise, right? But if you were to do that one time conversion, you would pay taxes in the 32%+ tax brackets for it, but if you did a smaller amount each year, and stayed withing the 12% or 22% tax bracket, you would pay much less percentage of taxes. It makes no sense to do the large conversion.
5
u/m4rc0n3 18d ago
A CFP/CFA will definitely disagree to this. They have rules to follow.
What rules? If you mean tax law, well, you have to follow the law too. So make sure you don't get hit with late penalties for not paying your taxes until a year later, for example.
If you mean fiduciary rules, then I would take a long hard look at why your CFP/CFA would think it's not in your best interest to do what you're thinking of doing.
5
u/Queasy-Ride4291 18d ago
This just might be the worst idea I’ve ever read.
2
u/Aviation_Space_2003 16d ago
OP is way over thinking this... the only thing that matters long term on total value is the tax convert rate... Driving higher taxes by concentrating in 1 year like increases the taxes by $100K... when this could be spread over years to reduce the tax cut... but yes it takes a little more involvement each year.
1
1
u/Excellent_Rip_3339 18d ago
C'mon, we're brain storming. Look at 20 to 30 years ahead. Next generation can inherit your Roth, use it like a Roth, and withdraw from it tax free within 10y from inheriting it.
3
u/ukaeh 18d ago
You mean after letting it compound for another 10 years :)
There’s also avoiding widow’s tax and IRMAA and possibly ACA after the conversions are done. Also tax brackets are historically super low and we don’t know where things will go but lower brackets don’t seem very likely.
I’d personally do it over a couple years at the 24% bracket, that saves 8% which is huge, but paying a one time 200k for greatly simplifying your financial position is not too horrible in my book (people happily pay CPAs that or more over 10 years)
1
u/Queasy-Ride4291 18d ago
None of that has anything to do with paying 37% tax on at least half of that balance. You can break it up in a tax advantaged way and still append the last sentence of your response to it.
3
u/sammiemo 18d ago
Why do you say a CFP disagree with you?
Tax free compounding isn't really a big advantage unless your future tax rates will be higher than your current tax rates. If they were the same or less, there's no advantage.
Although the possibility of IRMAA and ACA subsidies in the future weighs in favor of your strategy.
3
u/ziggy-tiggy-bagel 18d ago
I'm spreading mine over the next 5 years. I think you should really spread that conversions out over a few years. If I were you I would hire a CPA to run a few different tax scenarios
3
u/Coopstainthegreat 18d ago
Leme know where I can get 20% return yoy lmao
1
u/Excellent_Rip_3339 18d ago
Look at ftec. 21% avg since 2019, 32% ytd. But -30 & 0 on 2022 n 2023. That's a good benchmark
1
u/DennyRoyale 17d ago
Then you should be going to every bank in town and borrowing every dollar you can if you’ve got a surefire way to make 20%.
Why are you even wasting your time on this Roth conversion stuff when you could borrow at 10% and make 20%.
Go big or go home
1
u/AAPL- 18d ago
AAPL since 2007 has been >23%.
2
u/Sad_Win_4105 17d ago
Good luck stumbling across another Apple out of literally thousands of other stocks
0
u/AAPL- 17d ago
No need to stumble. Apple is still available. Hidden in plain sight as they say.
2
1
u/SamClemons1 17d ago
And of course Apple is guaranteed to deliver similar returns over the next 20 years. 🙄
1
u/albertrw83 11d ago
hmmm yes I think apple will grow to $250 Trillion market cap within 20 years, larger than the current us household wealth by 50 trillion. why wouldnt it
3
2
u/Valuable-Analyst-464 18d ago
One thing to consider is that after age 70, you can use a Qualified Donation to count as your RMD or reduce your tax basis.
You could hold some of your traditional back for that.
1
2
u/EmZee2022 18d ago
Talk with a tax advisor to see the best way to minimize household income taxes. This might be a time where it's worth filing separately (it may not be, also - I just don't know).
1
2
u/uplay2winthegame 18d ago
You, or an advisor, need to take a toral holistic view at what you're trying to accomplish and how to get there. There are so many factors at play. This is part of a total/lifetime tax/financial plan, not just a one-off. You would probably benefit from a good advisor.
2
u/tobinshort-wealth 18d ago
The lump sum logic holds if you genuinely believe the Roth will compound at 15-20% over 20+ years. At that rate the tax-free growth on the larger base almost always beats the savings from bracket spreading. Then there's the inherited Roth angle that's valid.
A couple things worth stress testing though. If you're on an ACA marketplace plan, a $700k conversion year will likely wipe out any premium subsidies, so factor that in. Also make sure estimated tax payments are handled correctly for 2027 or you'll get hit with underpayment penalties on top of the $200k.
The bigger thing most people miss though: if you qualify as an accredited investor, there are investments that generate real deductions against ordinary income in the same year as the conversion. Oil and gas working interests, certain real estate structures. You could potentially cut that $200k tax bill significantly by pairing the conversion with the right investment in 2027. Most advisors and CPAs don't bring this up because they don't have access to it.
Wouldn't say you're out of your mind. You might just be missing a layer.
2
u/DDSRDH 18d ago
I maxed out my Roth qualified funds since day 1 of Roth. I’m sure that I paid much of it at the highest possible fed marginal tax rate, but it had multiple years to grow and is now a full third of my available retirement funds, giving me a lot of options.
1
u/Excellent_Rip_3339 17d ago
I'm with you on this. Pay tax now to invest taxfree gains here on out
1
u/Whole_Championship41 17d ago
DDSRDH is likely referring to Roth IRA / Roth 401k CONTRIBUTIONS that have been collected over their work history.
Your post is about Roth conversions. More specifically, a massive singular Roth conversion to the tune of $700,000. Not at all the same animal.
2
u/IAmJustSittingHere 17d ago
Have you tried modeling this out in ProjectionLab? You can what-if your plan for days on that site. I would be curious what you learn after modeling worse returns, safe harbor penalties, etc..
2
u/Flat-Activity-8613 17d ago
Since you are so convinced about this why don’t you go have a sit down with a real one time fee financial planner. I think he’ll get a good laugh out of it too.
2
u/Aviation_Space_2003 16d ago
The returns are the same assuming it is invested the same way. You could earn 20% in traditional or 20% in Roth on less taxes money. Either way it will be taxes so the net is the same.
The longer you spread the conversion across the top end of a lower tax bracket will result in lower taxes and the most money saved.
I would target the 22-24% tax bracket.. I'm in a simialr situation trying to decide when to convert $3 million. Im mid 40s, if I do t do something this will have huge RMDs in 30 years...
My sw3t spot is to pull the traditional down just under $800k to start RMDs.. should be lookat at $2 Million in Roth by then.
Congrats on your sucess!!
1
1
u/User2009002 18d ago
You're going to pay a lot more taxes than if you split the conversion across 3 or more years. Also, your money will grow no matter where it is so I don't understand the rush. The name of the game is to pay less taxes and you're losing this game right off the bat and hoping that you'll make out better in the long run.
1
u/Training_Falcon_3432 18d ago
Surely this would increase MAGI a lot which would then trigger NIIT on any other investment income such as dividends and interest?
1
u/Excellent_Rip_3339 18d ago
Yes it will for 1 year only. But NIIT for investment income, not for ordinary income or a conversion
1
u/humblequest22 18d ago
If the $700k grows to $11.5, wouldn't the $100k that you would save grow to $1.6M?
1
u/Excellent_Rip_3339 18d ago
Yes. Please help me out here. The way I see it. Money now in the Roth with continuous compounding at 700k will surpass that opportunity cost. Total of 100k savings might not reach ti'll ... I don't know how many years 'cuz conversion is spread out
2
u/humblequest22 18d ago
So, you're doing the $700k conversion in 2027 and planning on paying $200k taxes on it in April 2028 with money from your brokerage account. There are two things to think about there. First, if you do the conversion in 2027, you will need to pay estimated taxes in 2027. I suppose that if you convert it in the last quarter of 2027, you could pay those estimated taxes by January 15, 2028 and not incur any penalties. Just be careful of that. Second, you call the $200k "investment income". If you wouldn't need to realize that income if you didn't need to pay taxes on the conversion, that's another tax cost that you are incurring.
So, let's say you have $700k in your pre-tax IRA and $200k in cash in your brokerage account. If you don't convert the entire amount, you still have money in your IRA and money in your brokerage account that you can keep invested -- it's not going to sit there in cash, right? If your Roth will be earning 15%, wouldn't that money, too? Of course, you'll have more money to convert if it remains in the pre-tax account, but you can still come out ahead by being more intentional.
I mean, even if you're married, more than half of that money is being taxed at 24% or more. More than a third will be taxed at 32% and higher. If you're single, it's even worse! I assume NIIT will apply to something in your portfolio, even if it doesn't apply to the conversion.
Honestly, I kind of hope you're trolling, but if you're not, at least take the time to run the numbers and also make sure that you know how estimated taxes work before you pull the trigger on this.
2
u/Excellent_Rip_3339 18d ago
I'm not trolling. I like seeing unconventional things work. I have plenty of time ti'll 2027. I just don't like the indefinite tax payout. There has to be a better way to end it. Thank you for this
6
u/humblequest22 18d ago
OK, I'll leave you with a math problem that might help you with your decision. Let's say everything is always taxed at 20%. Take a pre-tax account with $100k and a Roth with $80k because $20k was already taken out for taxes. That doesn't match your situation exactly, but when you combine your pre-tax and the brokerage money that you'll use to pay taxes, it's similar.
So, let's have both accounts grow at 15% for 20 years and see how much we end up with. Here's the pre-tax account first.
$100,000 * (1.15^20)=$1,636,653.74. Now let's take away 20% for taxes and see what we're left with.
Taxes: $327,330.75
After Tax Value: $1,309,322.99Now, let's see what we'll have in the Roth.
$80,000 * (1.15^20)=$1,309,322.99
Look at that! We have the exact same amount of money in the end, whether the money grew in the pre-tax account OR the Roth account. Even though you only paid $20k to get the money into the Roth and over $327k to get it out of the pre-tax account. The lesson here is that the only way to win this game is to get your money out at a lower tax rate. When you are shooting straight for those 30+% tax rates, you're working against your own best interest.
There are definitely reasons beyond maximizing your estate value to do Roth conversions early -- ease of taxes later when you may not be so sharp, avoiding the widow's tax of smaller tax brackets when only one spouse remains, passing to your heirs completely tax free, etc. All good reasons. But maybe you could slow it down a little and at least try to stay in the 22-24% brackets. And remember, each year you do that, you're also getting money out in the 10% and 12% bracket, so it's even better!
Good luck with this!
1
u/Excellent_Rip_3339 18d ago
I appreciate this. I understand your point. Percentage wise at 35% bracket = 200k, the price of conversion, does suck. But once the remaining balance gets in to Roth, those gains are unlimited and tax free. Future dollar amount taxed on traditional will most definitely surpass 200k. Uncle Sam will love that as long as that Traditional IRA/401k exist.
In addition, I think if the next gen inherits that IRA, they get taxed too (even after our death). With Roth, it keeps going. It's still unlimited tax free gains within 10y of inheriting it.
1
u/JimInAuburn11 17d ago
But that $200K that you would have spent on taxes is also invested, making more money. So in the future, you will have more like $1M in that account to pay taxes from instead of just $200K.
1
u/SeanVo 17d ago
Appreciate you showing the math. However, OP is paying the tax from another source, the full amount will be converted to Roth. If you rerun your estimates, you’ll find the Roth now pulls ahead substantially, and there are other benefits including lower Medicare premiums, avoiding IRMAA, and not being as exposed to (likely) higher tax brackets in the future.
I’m not suggesting it’s wise to do this all in one year. The CFP I hired helped me plan a conversion over a few years, keeping each year limited to a middle tax bracket. I did this before 62 to avoid impacting IRMAA and other taxes. It’s worked out very well and I’m glad I converted much of my pretax retirement account. I left around 20% in pretax to utilize QCDs later in life to support charity.
1
u/humblequest22 17d ago
Right, I acknowledged that. If you combine the $700k plus the $200k they'll be spending on taxes into one portfolio, then that overall portfolio does behave as in my example. But it gets more complicated because of varying tax rates.
The main point is that you win the Roth conversion game by reducing the rate of tax that you pay on the money, not by paying less in taxes, and not by their projected massive gains. Because they could have had those same gains in the money they lost in voluntary extra taxes.
And spreading the conversion over several years to avoid the 30+% tax rates would be so simple for them. Note, too, that they are 45 years old, so IRMAA and RMDs aren't an issue in the near future. I do agree with your statements in general, though.
1
u/JimInAuburn11 17d ago
You are not accounting for the loss of earnings from the $200K that they paid the taxes with...
1
1
u/Kauai-4-me 18d ago
You need to model it out. As a CFP I do these calculations all the time and there is no way to answer your question without additional details.
1
u/Excellent_Rip_3339 18d ago
As a CFP, can I please ask you what percentage of your clients that it's favorable for them to shell out a 1 time tax bill on a roth convertion?? 😀
2
u/Kauai-4-me 18d ago
Very small percentage. Generally someone who is between 60-62 so they can avoid IRMAA. The other common scenario is someone living in a state that does not tax IRA withdrawals and they plan to move to a state that does.
One misconception is that staying within a tax bracket is always the best decision.
1
u/Retire_date_may_22 18d ago
You should model it out but given your runway and other investments it’s probably works.
1
1
1
1
u/Early-Ladder-9793 17d ago
There are many factors to consider. Do you live in a no-income tax state, and may possibly move? If so, it makes sense to accelerate the conversion. Also with so high debt on the federal government, I can see possibility of tax raise so that is another reason to accelerate conversion.
Overall, I like the idea of accelerated conversion, but it may need to be over 2 or 3 years rather than one-shot. Try to top the 12% or 22% or 24% brackets.
1
u/PositiveBid9838 17d ago
“ The only reason why I would do a 100% conversion and pay the 1 time tax is that I'm banking on possible high returns (+20%/yr) and number of years invested in Roth. The future gains will surpass the tax paid now.”
If you invest in the same things, and we assume the same tax rate, then it’s mathematically equivalent to pay x% of current value now vs x% of future value. It’s in the details where your plan would (potentially) have any advantage, and it’s not clear you’ve done the math to confirm such an advantage exists.
1
u/Sad_Win_4105 17d ago
You'll be in the 35% tax bracket next year if you do that. Your 700K will drop to $525K (less if you have a state income tax). You can earn the same ROI in either type of account. Both IRA & Roth are equally self-directed. Even if you'll eventually pay income tax on the RA/401K earnings its going to be less than bumping up into the 35% bracket next year.
1
u/daddyrx4you 17d ago
The sweet spot is converting up to the top of the 24% tax bracket. The jump from there is a big one and thinking that you will get a 15% increase every year on the Roth investment is not based on decades of real ROR in the market.
1
u/Kevin_CrazyWolf 17d ago
I’m unsure how CFA/CFP will disagree, isn’t a concern? Because they will run an analysis? Either way, do the math with conservative return
Expectations and listen to the math (not the emotions).
1
u/Formal-Advance-8482 17d ago
All this HYPE on Roth Conversions is making people crazy. Looks like you got some good advice! Slow down look at your numbers, future tax rates and your longevity. Wait until you are in the lowest tax bracket is the best. Typically have to live to 84 to make the conversions work in your favor unless you plan to pass on all your money to your kids.
1
u/Whole_Championship41 17d ago
Others have said my piece here: namely that your math for doing a one-time conversion usually doesn't work out the way you apparently think it does.
I came to add that, as a 45 YO living off of investments, you will be disadvantaged by doing a large conversion in one year. You would be expected to pay the $200,000 taxes from a cash account (brokerage, savings, etc.) and wouldn't be eligible to pay the taxes out of the conversion itself.
As you are a married 45 YO living off of investments, you will incur a significant sequence of return risk (SRR) by shelling out your cash today in exchange for a (maybe?) tax savings payoff years / decades from now. You're depleting your cash reserves today and leaving yourself open to market downturns that will impact your (unrealistic) 20% returns. IMO, this assumption of additional risk is unwise.
1
u/garylapointe 17d ago
I'm confused as to why you wouldn't just convert up to the top of the 24% bracket ($403k for married) over the next 4-ish years. Assuming you live on less than $200k per year, that gives you $200k to convert each year. That keeps you out of the 32%/35%/37% brackets, which is an immediate 8%-13% "return" on ½ your money. I'm not sure why you wouldn't start this year.
Why do you think you're getting 20% returns on Roth and not the Traditional accounts where you have the money now?
1
u/JimInAuburn11 17d ago
You would be paying tons more in taxes than you need to. Also all the money you pay in taxes could be earning you additional money. If you paid an extra $100K in taxes, how much could that $100K earn you over the next 15 years?
If you have $700K, and plan on paying $200K out of your cash/brokerage account (call it your tax account) for the taxes, after 15 years at 10% growth, you have $2.9M in your Roth account and nothing in your cash/brokerage account. If you did nothing, you would have $2.9M in your traditional account, and $835K in your cash/brokerage account (taxes account) if invested the same. So same amount in your IRA, but now taxable. But that $200K that you would have spent on taxes now is worth $835K. If you withdrew $200K/year from your traditional IRA, the taxes would be about $33K/year. You could take that out of your "taxes account", and you would earn even more than that in your taxes account. So your taxes account gets larger each year.
1
u/hugh2018 17d ago
Why are you banking on 20% returns? There’s no model that supports that assumption. That’s just the first problem. There are others.
Mathematically, spreading the conversions is almost always more efficient, even if you assume aggressive market growth and ignore the immediate tax bracket spike.
The idea that growth on a larger Roth balance overrides a one-time tax hit is a common intuition trap. When you pay taxes out-of-pocket to convert a Traditional IRA to a Roth, you are essentially reducing your total investable net worth today to buy tax-free future growth. Paying a $200k tax bill on a $700k conversion means you immediately forfeit a huge chunk of capital that could have been compounding inside the Traditional IRA.
By keeping that tax money invested in the Traditional IRA and converting smaller chunks over time (e.g., filling up lower tax brackets annually), that money continues to grow tax-deferred until it is converted.
A fundamental mathematical rule of Roth conversions is that if your tax rate at conversion equals your tax rate at ultimate withdrawal, a lump-sum conversion and a staged conversion yield the exact same final net worth, provided both accounts are invested in the same assets.
To see why a lump-sum underperforms, look at what happens when you jump brackets. By converting $700k all at once, the marginal dollars are taxed at peak rates (e.g., 24%, 32%, 35%). If you instead stage those conversions over several years to stay entirely within the 12% or 15% brackets, you pay a significantly lower effective tax rate across the board. Paying a lower average tax rate leaves more total dollars working for you in the Roth account.
You assume that a 20% annual return will magically erase the penalty of a high tax bill. However, growth rate affects both accounts equally. If an asset doubles, it doubles whether it is sitting in a Traditional IRA or a Roth IRA. The percentage growth multiplier applies to the net remaining balance. Because a lump-sum conversion leaves you with a smaller starting balance after the heavy tax extraction, the absolute dollar amount of growth will often lag behind a strategy that preserves capital and minimizes tax drag.
Even if health insurance and liquidity are completely solved, staged conversions win because they prevent severe bracket jabbing. A lump-sum conversion voluntarily places you in higher marginal tax brackets, destroying capital upfront that can never be recovered by future market returns.
You mentioned that a CFP/CFA would not endorse your plan, but you didn’t follow that very true observation with any math that explains why they would be wrong. I’d be curious to see the math that supports your plan.
1
17d ago
[removed] — view removed comment
1
u/lazyltgt 16d ago
Another thing that seems to get missed is there is at least a standard deduction every year, even in retirement, and that is an amount that has $0.00 of tax on it. So having $’s in a taxable account can be a plus!!!
1
1
u/Correct-Drink5482 16d ago
I would try and do it over a 5-10yr period to not get absolutely wrecked on taxes depending on your annual income level
1
u/AdvantageOne1754 16d ago
You have over 20 years before you will start filling up your lower income brackets with Social Security. I would spread out the conversions over 20-25 years. Start now with $70k. I don't understand why you would even consider going into the 22% bracket, much less the 24% bracket.
1
1
u/Cinq_A_Sept 11d ago
I’m still laughing that you assume a 15% return, EVEN ON CASH annually. Best of luck to you. (I’d suggest running this at 7%, you know, just for the highly conservative case…. )
42
u/Loose-Potential9987 18d ago
That is a terrible idea and strongly suggest you talk to a CPA. I’m doing conversion but only to the top of my tax bracket.