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Does anyone have experience converting part of an IRA to a Roth IRA? In light of the anticipated growth of BO recommendations over 5+ years it seems it could be advantageous to do so for tax reasons but want to hear if other Fools have opinions. Thanks
It was suggested I ask aj___ but I'm a newbie and lost his/her exact name.
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light of the anticipated growth of BO recommendations over 5+ years it seems it could be advantageous to do so for tax reasons

Growth of the investment won't really make that much difference in whether to have it in a Roth or regular IRA.

What matters is tax rate now (when converting) vs. tax rate when retiring and taking the money out.

Higher tax rate now == better to keep in a regular IRA.
Higher tax rate when retirng == better to convert to Roth

If tax rate is the same, it's the same $ amount that you have when you retire.

For example, a regular IRA:
$100 now with 200% growth over years == $300.
$300 at 20% tax rate (when retire) = $60
$300 - $60 == $240 final cash out.

A conversion to Roth where current tax rate is 20% would be:
$100 now ==> $80 into the Roth ($20 paid in tax)
$80 with 200% growth == $240
$0 taxes when pulling it out means $240 final cash out.
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Does anyone have experience converting part of an IRA to a Roth IRA?

Yes, I have done so.

In light of the anticipated growth of BO recommendations over 5+ years it seems it could be advantageous to do so for tax reasons but want to hear if other Fools have opinions.

Well it depends on what you think your tax rates will be in the future vs. what they are now. If you expect to be in a higher tax bracket during retirement than you are now, then conversions will likely help you come out ahead financially. If you expect to be in a lower tax bracket in retirement than you are now, then you will likely won't come out ahead financially. But since it's hard to predict correctly what Congress and your income will do, it's mostly a judgement call, based on what you think your tax situation will be.

I think it is useful in retirement to have all 3 types of accounts: Traditional (pre-tax); Roth (tax-free) and regular taxable/brokerage accounts. That way, you can choose which account(s) to use for spending to minimize your taxes, after considering what other income (SS, pension, dividends, etc.) you have.

It was suggested I ask aj___ but I'm a newbie and lost his/her exact name.

That would probably be me.

Since you didn't ask any specific questions, here are some general rules of thumb:

- Remember that you will be taxed on the amount that you withdraw from the T-IRA, whether or not you convert it all. This is important to understand if you have some of the withdrawal withheld to pay the taxes. If you are under 59 1/2 and meet no other exception, you will be penalized on the amount withheld, in addition to being taxed on it. So it's typically best to be able pay the taxes from funds other than the account.

- To avoid penalties for not withholding enough when doing conversions, you should either increase withholding or pay estimated taxes in order to meet a safe harbor.

- The taxes will be based on your marginal rate, including pushing you up into the next marginal bracket if you convert too much. Pushing your income from the 22% bracket to the 24% bracket probably isn't a huge deal - it's an extra $2 for every $100 you are over. But if you push yourself from the 12% bracket to the 22% bracket without meaning to, that's an extra $10 out over every $100 you are over. Or if you push yourself from the 24% bracket to the 32% bracket, that's an extra $8 in taxes for every $100 you are over. So those misses might be more of a big deal.

- That said, I will point out that under current law, the current 10%/12%/22%/24%/etc. brackets are going to revert to the previous 10%/15%/25%/28%/etc. brackets beginning in 2026. So all conversions that you do in the current 24% bracket and below are going to be taxed at a lower rate than they would if you are in the 25% bracket or above in 2026.

- Conversions cannot be undone, so be sure you really want to do a conversion before you pull the trigger

- Be sure to look into any taxes your state might impose on conversions

- Even if withdrawals from your Roth IRA aren't qualified withdrawals, you can take the converted amount out tax and penalty-free after 5 years. This is not quite as lenient as taking out regular contributions tax and penalty-free, since you can take those out at any time. But can be a useful strategy for those wanting to retire early and not wanting to pay penalties because of withdrawing money too early.

AJ
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The tax rate now vs in retirement has always been a consideration. But note also its more expensive to convert when stock prices are high; much more economical when stock prices are down.

Other things being equal, wait for lower stock prices.

But then possible increases in tax rates can also.matter. They say only for incomes over $400k, but we shall see. Something to keep an eye on.
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We are doing partial conversions for the few years between retirement and starting RMD.

The previous posts covered many items. Two other items for ROTH conversion is managing RMDs and estate planning.

An inherited asset that carries the most income taxes is a traditional IRA (and other pre-tax retirement plans) and an inherited asset with the least income taxes is a fully qualified ROTH IRA (ROTH 401K).

Conversions during low income years minimizes income taxes. Converting to a ROTH IRA decreases RMDs. ROTH 401Ks require RMDs. A ROTH 401K can be rolled over to a ROTH IRA which doesn't require RMDs.

The most "successful" ROTH conversions are for assets that aren't planned on being used for a long time or are part of an estate plan.

Many will require long term care. Once long term care qualifies as a medical expense then long term care expenses are deductible as a medical expenses. At that point the issue normally becomes a cash flow problem more than a tax issue.
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Many will require long term care. Once long term care qualifies as a medical expense then long term care expenses are deductible as a medical expenses. At that point the issue normally becomes a cash flow problem more than a tax issue.
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True. And at that point, you would rather have the traditional IRA with the larger balance. Which was the case with my father. He spent his last 9 years in a nursing home, and the last couple of years, with extra charges for additional nursing care, he paid no taxes on his IRA withdrawals.

In his case, a Roth conversion would have just been a gift to the Government.

Bill
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vkg and Wradical,
Thanks for bringing up the points on long term care, as my mind has been/is wrestling with amounts to do for more Roth conversions.

I never considered benefits for traditional IRA's withdrawals in certain circumstances.

nag
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