patrick.net

The basic Roth contribution for after tax money is fine for investment parking, but many talk about rolling over entire or large amounts of IRA's, in which taxes become due at rollover. That is a long run for a short slide and too much of a gamble against future prospects.

I don't see any possible way to lose by converting as much as possible from a 401(k) or IRA to a Roth. There is no gambling involved at all.

You pay taxes on the conversion, but you'll have to pay taxes anyway no matter when you take it out. Just pick a low tax year to do it.

The key is that the money converted to Roth grows tax-free forever. Roth is the better deal than 401(k) or IRA by miles.

zzyzzx says

leaving me no room to do Roth conversions

@zzyzzx I don't know what you mean by this.

401(k)/IRA conversion to Roth is unlimited (well, limited to the funds you have in those tax-deferred accounts).

Do you mean that your tax rate will be really high? Probably going to be really high anyway if you have a lot in your 401(k) like I do.

You don't lose money over the long term converting to a Roth, but keep your conversion down to an amount which won't impact your overall tax picture in the year(s) that you do the conversion.

But, over time the tax result to you of not converting may be the same as converting; this is assuming tax rates do NOT go up.

E.G. Convert $100,000 to Roth, (20% tax) pay $20,000 tax=$80,000 left to keep invested. Let it ride for 10 years=$160,000 (owe no tax on withdrawal).
Do not convert $100,000, keep it invested. Let it ride for 10 years=$200,000. (20% tax) $40,000 tax liability=$160,000 after taxes.
The example above assumes a total withdrawal after 10 years which you won't likely do.

I'm only converting a little bit each year ($10,000).

The advantages of the 401K are 1. sometimes free money from employer match 2. encourages saving/investing 3. changes of the investments are not taxable events 4. grows tax deferred; no 1099 every year.

I used to look at an investing website and almost nobody mentioned taxes although taxes are what really impact the money you end up with.

clambo says

Convert $100,000 to Roth, (20% tax) ...
Do not convert $100,000, keep it invested. Let it ride for 10 years=$200,000. (20% tax)

Here's the rub:

If you convert $100K right now, your top marginal tax rate may be 20%.

But if you convert $200K later, your top marginal tax rate is likely to be much higher than 20%.

So the right thing to do is always convert every 401(k) or IRA to Roth if you can do it below maximum regular income tax rates which will hit you later because of growth.

Roth also gives you protection from future regular income tax rate increases.

zzyzzx says

I don't see how it's possible for them to put me in a higher tax bracket because I'd need income over $626,351 for that to happen.

Inflation. Let's say you are anticipating a $500k income when you retire in 12 years or so. But during those 12 years, we have inflation that pushes up prices in your stock portfolio and raises your SS COLA. So, along with your RMDs, SS, and other inflated income you are now puling in $700k, even though that $700k won't buy anything near what $500k would buy in 2026.

clambo says

I used to look at an investing website and almost nobody mentioned taxes although taxes are what really impact the money you end up with.

That is because in the days before heavy inflation, people anticipated the retirement years would be interest and dividends on accumulated savings, and thus below high tax thresholds. A guy in 1990 planning to retire in 2026 was imagining living a in a paid-for $250k dream home while living well on his $50k per year income.

HeadSet says

RMDs

That's the other thing I don't like about a 401K. But when I do I'll be converting it to my Roth in a small amounts as possible. That's the plan anyway.

Forced selling...

I don't like the RMDs either.

The smaller amounts you convert, the lower your income and the lower your taxes, but if you don't convert enough, you're screwed with RMDs at high tax rates anyway.

The brackets are not kind to single filers. I’m into the 22% bracket with $66K of income taking into account the standard deduction. The usual advice to use Roth conversions to fill the 12% bracket feels like a cruel joke to me.

I plan to use the 22% and 24% brackets for conversions in retirement, even though it’s not obviously a good deal, tax-rate-wise.

It’s simply hedging against policy changes.

I believe there are significant changes for taxes for 2026.

People over 65 get a $6000 addition to the standard deduction (single), so $12,000 for a couple.
Income limits apply and I don't remember the amount.

This means the standard deduction I recall is about $23,000 for single, so $46,000 for a couple.

Enjoy low tax rates while you can; Uncle Sam is in deep debt and he knows where the money is.

My 401K (not self employed 401K) had an employer match of up to 5%. So I contributed 5% to ensure I received the 5% match.

I did not contribute any more than 5%, as I wanted to invest it in something other than what was in the Thrift Savings Plan.

And also as Patrick mentions, I realized at age 60 that I was going to be in a high tax bracket and that traditional/rollover IRA is taxed at an ordinary income tax rate.

When I used 401k to Roth 401k calculator, I remember it make sense only if you have low income and not near retirement age otherwise it makes no sense to convert! Again, your parameters could be different.

For most people having average middle class income that can last for let’s say 25 years after the retirement is a great goal while fighting with unstoppable inflation. In this scenario, tax rates would be much lower.

But if you end up lots of money in pretax accounts like 401k, then you have a good to have problem. You can just live on RMD, SS and kick the remaining stuff down to kids, charity etc.

Patrick says

I don't see any possible way to lose by converting as much as possible from a 401(k) or IRA to a Roth. There is no gambling involved at all.

You pay taxes on the conversion, but you'll have to pay taxes anyway no matter when you take it out. Just pick a low tax year to do it.

The key is that the money converted to Roth grows tax-free forever. Roth is the better deal than 401(k) or IRA by miles.

Every 10 years or so there is a quite vocal group of people (funded by billionaires, of course) that really push the idea of doing away with income taxes altogether and going with a national sales tax. If this ever gets passed, it would make the conversion look silly.

Just like the tax code changed with capital gains, it can change in other ways too.

Misc says

it would make the conversion look silly.

That's my feeling as well. We are discussing strategies (Roth Conversions, Back Door Roths) that typically won't break even for 20 or 30 years in a best case scenario - knowing full well predicting future tax rates is akin to predicting the weather.

And no one has even brought up the net effects on ACA PTC, IRMMA, and NIIT. It's so complicated you need a Pralana subscription to figure it out.

Seems like the biggest problem of PatNetters is having too much money!

Patrick says

I don't like the RMDs either.

The smaller amounts you convert, the lower your income and the lower your taxes, but if you don't convert enough, you're screwed with RMDs at high tax rates anyway.

Leaving me no room at a lower tax rate.

stfu says

We are discussing strategies (Roth Conversions, Back Door Roths) that typically won't break even for 20 or 30 years in a best case scenario

I will save vast amounts of money by doing Roth conversions every year starting now, to avoid forced withdrawals at higher rates later.

Unless somehow income tax rates fall a lot within the next 10 to 20 years, which seems unlikely to me.

Misc says

Every 10 years or so there is a quite vocal group of people (funded by billionaires, of course) that really push the idea of doing away with income taxes altogether and going with a national sales tax. If this ever gets passed, it would make the conversion look silly.

If that happens, then indeed the conversion would be silly.

Blue says

When I used 401k to Roth 401k calculator, I remember it make sense only if you have low income and not near retirement age otherwise it makes no sense to convert! Again, your parameters could be different.

Those are exactly my parameters. Low income now, and retired.

But yes, I suppose it's a good problem to have a lot of money trapped by ruinous taxes in a 401(k) rollover.

Patrick says

Blue says

When I used 401k to Roth 401k calculator, I remember it make sense only if you have low income and not near retirement age otherwise it makes no sense to convert! Again, your parameters could be different.

Those are exactly my parameters. Low income now, and retired.

But yes, I suppose it's a good problem to have a lot of money trapped by ruinous taxes in a 401(k) rollover.

It’s good to have problem then!
Now, you need to slow down and find optimal solution(s).

Here is some gambling involved!
Like I mentioned above, plan for next 2 to 3 decades of both growth to offset inflation that’s underestimated by many and withdraw at not too high tax ranges.
I need to mention one thing here that in my observation even in states like CA, majority won’t hit the 13% rate particularly year over year basis.
Stop hating too much on this basis alone.

The other option is convert it in few years at much higher rates. To regain those excess taxes paid on investments needs quite a few years or decades in moderate investment choices. At the same time, it’s not really worth chasing fancy stocks late in retirement except some minor percentage.

It’s not quite trivial but by exploring some strategies including contacting reputed financial experts can help minimize taxes.
Be careful as we all know most “experts” are stupid people before making any changes.

I used to list to Steve Peasely invest stock show 1220AM that he kept saying ‘Experts are always wrong’!

Blue says

plan for next 2 to 3 decades

One issue is that I probably don't have three decades left, maybe not even two. So I'm inclining toward spending some money soon.

stfu says

Seems like the biggest problem of PatNetters is having too much money!

More money than was expected or planned for in retirement.

Patrick says

Blue says

plan for next 2 to 3 decades

One issue is that I probably don't have three decades left, maybe not even two. So I'm inclining toward spending some money soon.

You're healthy as a horse, make that a centenarian!

Blue says

You can just live on RMD, SS and kick the remaining stuff down to kids

One quirk if you plan to leave stuff for the kids. Stocks left to heirs in an IRA must be RMD each year and totally withdrawn by year 10, with a Trad IRA distributions taxed. If you collect stocks over time outside any IRA, you pay no tax on the capital gains if you do not sell and the basis resets when the kid inherits it. For example, someone bought 1,000 of Apple at $3 per share in the 2000s. Now that $3,000 initial investment is worth $259/share or a total of $259,000. When the kid inherits, the basis resets to $259/share so he could cash out with no capital gains tax. The only tax for the parent was the tax on the $1 per year dividend that Apple paid.

HeadSet says

stfu says

Seems like the biggest problem of PatNetters is having too much money!

More money than was expected or planned for in retirement.

That's actually true in my case. I have more than I expected to have, but it's mostly trapped.

This discussion has got me going down the rabbit hole again. From my work using modeling programs including Pralana (subscription service) and the "Retirement Portfolio Model" spreadsheet on Bogleheads I have concluded that you have to pick one goal and pursue that goal:

1) Minimize Taxes
2) Maximize What you want to leave (sub categories - maximize tax advantages for heirs and/or give to charities)
3) Maximize what you want to spend on yourself during your lifetime.

I find that these three goals are often at odds with one another - I can't do one without negatively effecting the others. Anyone else spent time on trying to obtain different goals? I'm always up for new perspectives.

Note: There's some profound differences between the planners. For example "when to take SS". Pralana has wife and I both taking before 63 years old. Open social Security has one taking at 62 and one at 70. The Boglehead RPM shows clear advantages (depending on your chosen goal) of both of us waiting until 70.

Patrick says

I have more than I expected to have, but it's mostly trapped.

I see what you did there. You get to gloat about being rich, but if any relative asks you to share, "it's trapped."

Lol it is kind of convenient in that way.

But frustrating as well.

https://m.youtube.com/watch?v=LIP63k2uGuk

Maga_Chaos_Monkey says

https://m.youtube.com/watch?v=LIP63k2uGuk

An excellent but flawed explanation. In her scenario, you pay $35K in taxes on a Roth conversion with cash or by selling income-generating (tax inefficient) assets from an after-tax account. Then she compares the “lost” income on the $35K with the growth she expects to achieve in the Roth.

Well, you significantly changed your asset balance in the conversion, so it’s not an apples to apples comparison. Of course you come out way ahead if you convert cash (or other poor performing assets) to equities - and the stock market rally keeps going - especially if the money ends up in a Roth.

I have cash for a reason. If that reason didn’t exist, I’d have nothing but growth stocks in my after-tax portfolio. And if that were the case, her math wouldn’t come out so good.

To be clear, I think there are reasons for doing Roth conversions. I just hate how complicated it is. And I really wanted to like this chick, too.

I think part of her point (or all? I was falling asleep watching it) was to not use part of the rollover to pay the taxes, so you maximize $ going into the tax shelter. But yeah, good to have cash.

"Brevity is the soul of wit."
That girl takes too long.

The problem with all those Roth conversion videos is that they are for poor people filling up their 12% federal tax bracket.

Because my retirement investments are IRA, Roth IRA, a modest SEP-IRA, and a variable annuity, my actual net worth is largely in non-retirement accounts. IRA contribution limits previously were low ($2000) unlike today.

I think my first RMD from the IRAs will be about $20,000; so the tax owed won't be that bad.
The variable annuity doesn't have an RMD and of course my other accounts don't either.

I gave some money to a couple people and decided to just transfer some shares to them; they'll get stuck with the capital gains tax.
Boo hoo.