Roth conversion taxes

Submitted by Tim Brown on Fri, 2019-12-27 00:01

Living in NY I see it will cost me 33-34% in taxes to convert my IRA to Roth. Does it make sense to spend that much money? Also, I would hate to start converting it to a Roth and then possibly losing the hard earned money I paid in taxes and the money in the IRA, what would make sense to invest in? I’m 58yrs and I will not need the IRA money for a long time probably.



Submitted by Alan - IRA critic on Fri, 2019-12-27 03:01

  • Losses and gains are temporary. Generally, you would invest your Roth money more aggressively (more stocks) or perhaps the same as your other accounts. You wouldn’t hold your Roth in a MM Fund or ST bond fund fearing a loss, particularly if you do not plan to tap it for several years. And there are no RMDs. But you still would not normally pay 33% if you expect your average marginal rate in retirement to be less. That said, if you have NO Roth assets now, tax diversification would suggest that you convert some even at 33% if you expect your average rate in retirement to be about the same. Once your Roth accounts represent something like 30% of your total retirement accounts balance, then you would be more selective and limit conversions to situations where you expect to being less for the conversion than your expected average rate in retirement. Since you would probably be planning for about a 30 year time horizon and do not need the Roth money soon, you can invest your conversions reasonably aggressively. That said, if you STILL cannot sleep at night then be more conservative with the investments. Note that if your are married, when the first spouse passes, the surviving spouse will inherit all the retirement funds and RMDs on the non Roth balance will put the surviving spouse in a much higher tax bracket. For joint filers then conversions shield against the inevitable period of time when the survivor files as single. Another thing to consider is whether you plan on staying in high tax NYS, which may account for 6 or 7 points of the 33-34. If you are planning to move to FL or other no income or low income tax state following decades of such migration, you may want to wait until you establish clear residence there before converting very much, since you will be paying less for the conversion. 
  • While you should have a general plan, you will also need to revisit it annually if your situation changes. High deduction years open up room for higher conversions and vice versa. If either spouse’s health declines, the window for conversions becomes much shorter and conversions would be ramped up. So you cannot set it and forget it.  Also, especially for the higher brackets, the sunset of the current rates in 2025 is another factor making conversions more attractive until that time, or until such time as rate increases appear to be close at hand. 
  • Due to the Secure Act, many people with larger retirement accounts are concerned with the new limited 10 year stretch period for their non spouse beneficiaries. This makes Roth conversions SOMEWHAT more attractive, however you still need to be careful not to go overboard and pay huge amounts in higher taxes, particularly if your tax rate is higher than you expect the beneficiaries rate to be. 

  

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