Converting to Roth
I spoke with my CPA about converting my rollover to a Roth. He said most people convert in one lump sum rather than stretching it out over several years. Is there a rule of thumb for this or a formula of any kind. Thanks for any input. Don
Permalink Submitted by Alan - IRA critic on Tue, 2016-12-13 18:38
Don, I disagree with your CPA. While some people do convert large sums, most people should try to control the tax cost of the conversion and convert to the top of their current bracket, or perhaps the next bracket. The higher the taxes on the conversion, the less likely that rate will be less than your average marginal rate in retirement. There is no rule of thumb because your tax situation can vary from year to year. Most people start out with a general plan but then re visit it every year since the best plans factor in both the cost of the conversion (tax due) as compared with their expected rate in retirement. While tax laws can change, the largest factors are those that apply to you individually as a taxpayer, such things as death of a spouse, potential costs of LTC or other health issues etc. Some people even do 2 or 3 conversions into different asset classes, planning to recharacterize the worst performers and only keep the best one. If you do only one conversion and your investments tank by a large %, then you would recharacterize it, but lose the benefit of the conversion in that tax year.
Permalink Submitted by David Mertz on Tue, 2016-12-13 19:12
I agree with Alan. Even if it was true (which I doubt) that most people convert the full amount, what “most people” do is entirely irrelevant. With regard to a Roth IRA conversion, what matters is that the CPA considers your personal tax situation, present and future, otherwise the CPA is not providing any useful service. Granted, you can always recharacterize by the tax-return deadline if doing what most people do ends up not in your best interest, but I don’t think that having an out like this is justification for blindly converting.