Richard from CA posted over 6 years ago:

Whoever did this infographic missed something! Being retired I do not ask myself "Can you pay for the conversion with money from a takable account?" Rather the question should generically be: "Can you pay for the conversion with money from takable income (salary, RMD, etc.) or a takable account?" If you are retired and do not need all of your RMD, then as long as you do not impact your Medicare premiums and your tax rate stays at an acceptable point a ROTH conversion looks promising. I suggest AAII update this infographic appropriately.

Bob from FLORIDA posted over 6 years ago:

Remember you can not convert an RMD to a Roth. Either has to be done before RMDs are required (before age 70) or you can take your RMD plus whatever amount you want to convert (keeping it below a tax rate change and the Medicare premium cap). I'm currently converting some each year and will get a lot of it done before I hit 70, which will shrink my RMD down a lot.

Dave G from WA posted over 6 years ago:

This chart and the linked-to article from 2009 are a terrible explanation of how investors should think about this topic. There have at least been other more recent articles where the authors at least understand the basic principle, but this article shows none of that and frankly should be taken down. In the first place, the first arrow off the lefthand box where taxes are lower in retirement should point to "A Roth IRA conversion may NOT make sense." This is the number one rule of when NOT to put money into a Roth - when retirement taxes are lower, because you are wasting money that will just lower your retirement after-tax spendable income.

Dave G from WA posted over 6 years ago:

Richard, In actual fact paying the tax for the conversion from outside the IRA does not necessarily give you more spendable after-tax income in retirement or to your heirs. In most cases, it probably does just the opposite, since in most cases (at least recently) the marginal tax rate for ALL spendable income in retirement is lower than when you do a conversion or when you were working, just given the fact that retirement income can span many of the lower tax brackets as you withdraw the income in retirement. While working or doing conversions this tax is right off the top at the very highest level. The only small advantage is you are taking after-tax money and putting it in a tax-advantaged account. The larger issue is if you are putting it in the "wrong" tax-advantaged account you are probably doing yourself more harm than good. Here is a link to an article I wrote in 2016 that addresses many of the myths propagated by articles like the above two: https://seekingalpha.com/article/3979557-myths-concerning-roths-iras-rmds

Jim M from New Jersey posted over 6 years ago:

I agree with Richard from CA that the question "Can you pay for the conversion with money from a taxable account?" is poorly worded. A better question might be "Can you pay the income taxes for the Roth IRA conversion using after tax money or income?" A Roth IRA conversion is a taxable distribution from a tax deferred account (e.g. IRA, 401K) to the extent the converted amount exceeds a pro rata share of a taxpayer's basis in their tax deferred accounts. The tax obligation for a Roth IRA conversion has to be paid using funds or income on which taxes have been or will be paid. Distributions from tax deferred accounts, including Roth IRA conversions, are not taxable to the extent they involve distributions of after tax contributions made to tax deferred accounts. ...... Roth IRA conversions can be used to help smooth future income tax obligations and create a pool of money that can be withdrawn without incurring income taxes. ..... Roth IRA conversions may appear to be less than beneficial unless one considers the future income tax obligation on amounts held in tax deferred accounts.

Craig E from CA posted over 6 years ago:

Sorry, but I agree with the other posters.... this is a terribly confusing "flowchart". First of all, starting right at the top, if you expect your future tax to be higher (often due to RMD's kicking in...), why wouldn't you consider a Roth conversion (pre-70th b-day) to take advantage of your lower tax bracket in the current year, and leveling out your income in later years?

Bob Mann from Michigan posted over 6 years ago:

Another item to consider for doing conversions, as I read in a previous AAII article, is to do conversions while there are still two of you. When one passes, the surviving spouse now has to (or will have to) take RMD on the total estate at higher single income tax rates.

Charles Rotblut from IL posted over 6 years ago:

The chart has been corrected.

My apologies for the confusion. I simply was thinking in the opposite direction of what the chart was showing and unintentionally crossed where “higher” and “lower” should be placed.

The rule of thumb is to opt for the lower tax rate. If you think your withdrawals will be taxed a higher rate in the future, then you’d want to lock in the lower tax rate now by converting. Conversely, if you think your tax rate will be lower then you would want to keep the funds in a traditional IRA (or similar tax-deferred account.)

There are other considerations before making the final decision, including when the converted amounts will be needed and how your Medicare premiums will be impacted as shown above. Some of you may also need to factor state taxes, estate planning needs and other factors not included in the chart for the sake of simplicity.

Charles Rotblut from IL posted over 6 years ago:

Richard and Jim,

We used the term "taxable account" to refer to a broad variety of non-retirement accounts including brokerage, checking and savings accounts. Whether the money flows into such accounts from dividends, salary, rental income, etc. is less important than not using money intended for retirement to pay for the tax costs of the conversion.

-Charles

Steve Alexander from OH posted over 6 years ago:

The calculation is more confusing than the chart. Of course tax brackets matter during conversion but there are "tripwire" AGIs levels for medicare premiums, and the 3.8%NII surtax. My marginal rate on the rollover varies from ~22% to 48% over a modest dollar range, and generally exceeds 27%! After some analysis I believe I may be better off selling some dividend issuing stocks in taxable accounts to reduce my necessarily taxable income.

John Wiltse from NE posted over 6 years ago:

Would be interested to know how the SECURE Act would affect contents of this article.

Peter GE from TX posted over 6 years ago:

I have a very basic knowledge of re-characterization rules and regulations. Can you guys comments on the following. I am now over the age of 59 1/2. If I undersratns the IRS rules correctly, I can convert all my Non-IRA and Regular IRA mutual funds that I have had invested for more than 5 years, to a ROTH IRA account and do not have to pay any tax at all. Pl. help me.

Charles Rotblut from IL posted over 6 years ago:

Peter, Conversions from a traditional IRA to a Roth IRA are considered to be a withdrawal from the traditional IRA and are taxable in the year they occur based on the date the funds leave the traditional IRA account. Contributions of taxable dollars to a Roth IRA are only allowed up to the maximum amount allowed for a given year. YOu must have enough earned income to make the contribution. -Charles

Charles Rotblut from IL posted over 6 years ago:

John, the SECURE Act impacts the decision if the assets held in the IRA are intended to be passed onto heirs. I'm intending to update my 2017 article on inherited IRAs sometime in 2020. -Charles

MIKE S from IN posted over 5 years ago:

One other missing thing is that after 59 1/2 the 5 year waiting rule no longer applies.

Francis S from TX posted over 5 years ago:

2020 is a special year since RMD's are waived, therefore the conversion does not have to be above your existing RMD. Also since you earn essentially nothing in your cash anywhere, I suggest use all your cash to pay the taxes for the conversion. If anyone sees something wrong in my analysis, I would appreciate feedback.