Every couple of years I brush up on my financial knowledge to make sure I'm on track.  Recent research looks like everyone is pushing Roth conversions like I don't remember them doing two years ago.  
Has something changed or is it just the current cash cow for advisers?  
If the math comes out the same for Traditional vs Roth how do they justify the hassle of conversions?
I'm currently 70% Roth in my IRA and 457s.  Is there an argument for me converting more?

Trumps income tax cut will expire Ina year or so - meaning your tax rate is about to go up.  So might as well go Roth now, before it gets more expensive.

The math does NOT come out the same.

1.  Taxes are lower now than they have been for a very long time. Starting in 2026, taxes will be going up significantly unless Congress does something (which they don’t have the votes for).

2.  Pre tax accounts come with RMD requirements. That means depending on your age the .gov will decide the minimum you have to take out each year. Roth doesn’t have this issue. When you pull out your RMD, you’ll be paying ordinary income rates at whatever the rates are at the time. So if you only want $20K but the .gov tells you to take out $35K your being taxed on $15K worth of income you didn’t want.

3.  If you are married now, you are probably paying married/joint tax rates. In retirement, usually one spouse dies earlier than the other so the surviving spouse is now paying taxes at individual tax rates. If you are at RMD age then the surviving spouse will still have to take those RMDs. In the example above, they could be paying taxes on that $15K as an individual tax rate.

4. Social security is taxed based on provisional income. Roth is not calculated in provisional income, but traditional pre-tax IRA/401K/457 is. You could end up not having your social security taxed at all if using Roth

5. Additional taxes like IRMAA are based on MAGI. Roth doesn’t increase IRMAA but pre-tax does. So your Medicare premiums (for both spouses) can increase substantially if using pre-tax accounts. This is especially true if you have RMDs.

6.  What about your heirs. Do you want to leave them a tax infested account (pre-tax) or would you rather leave it to them tax free. Roth isn’t intended for generational wealth planning, but it can be used that way.

When you are old do you want to be worrying about taxes or have as much of your income as possible tax free?  If you get social security plus a pension. (You mentioned a 457 plan) you should really look at putting as much in Roth as possible.

Tax planning isn’t just looking at taxes in the short term but taxes over your lifetime. Many good savers can avoid hundreds of thousands of dollars in taxes during retirement alone with proper planning.

I see people mention it often when people talk about conversions. If all your Ira contributions are after tax, or pre tax, it doesn’t matter. He has a 457 plan so he can’t make pre tax contributions to an IRA.

Most people with an IRA are either all pre tax or after tax.

I would recommend looking and rethinking the above statements as they might not be true.

I personally never wanted to have a Traditional IRA. After leaving previous jobs, my money needed to roll somewhere and Traditional IRA's were the answers and only solution.

So now, I can't do any backdoor roth ira conversions. The line item on the tax firm literally says "ALL BALANCES OF TRADITIONAL IRA's". So that changes things and I suspect folks get hit with that oversight often.

And then converting traditional ira's to roth is too sticky as the tax hit would be to great during your prime earning years.

We plan on using the RMD's as our "income" at 70 years old as we won't have an AGI.

So fortunately/unfortunately, I've got every combination under the sun of Traditional/Roth/Rollover/401k/401k-Roth/401k Safe  Harbor. This is after working in the professional world for 25 years.

Personally, we're not doing any ROTH conversions as we plan on having 4-6 "buckets" of money to be tapping from 57 - 90. With Traditional-RMD being one of them. AND our AGI will be at the lowest it's ever been.

I appreciate all the insight.  This is the way I saw things for the first part of my career.  Then I got convinced otherwise with all the "three bucket" promoters.  What would you respond to them?

Why not?  Asking for a "friend" who already has.

It depends on your MAGI if you have an employer retirement plan if you can make your IRA contributions pre-tax or not. I think the married filing joint limit is around 100K to be able to do pre tax for 2023.

If you have no retirement plan, then the MAGI limits don’t matter for pre-tax IRA contributions.

Bad wording in my part. I should have said “probably” can’t make pre-tax contributions.

If you can afford and pay the tax required on the Roth conversion, do it so you will get tax free dividends and stock value increases for the rest of your life.

Roth conversions count as taxable income, so as a single person, someone's total taxable income including the Roth conversion could be up to $182k while staying in the 24% tax bracket.  Anything above that jumps to a 32% tax rate. For married filing jointly, it jumps to $364k.

I got married in December, so I maxed out in the Roth conversion from my traditional IRA (used to be my 401k at work before I retired) while keeping in the 24% tax rate.  Had to pay a $70k tax bill between state and Federal.

Just a FYI, Federal and State taxes paid on the Roth conversion MUST be paid in the same year and not when you file the following year in April or there will be large penalties. A friend of mine found this out the hard way last year when he relied on his Edward Jones advisor to do the conversion in 2022, but taxes were not paid in that year.  He got hit with $4k in penalties.

If by three buckets you mean taxable, tax free and tax deferred, it is an individual situation based on income and tax planning.

People with low income needs might do ok with tax deferred (trad IRA). Tax the tax deduction now and be in a low tax rate.

People with high SS plus a pension taxed at ordinary income are likely being taxed more in retirement and tax free (Roth) is highly favored. These people are also most likely to have more of their SS taken with IRMAA.

The real issue is look at your situation and calculate where you get the biggest benefit over your lifespan. What is important to you also comes into play with things like surviving spouses and heirs and how their tax situation will be when you are gone.

Now you can do things with RMDs to offset things like IRMAA if you want to give up to 100K to charity each year. Things like QCDs can help if you don’t need the money the RMD is forcing you to take.

You can also do things like retire early to spend down the pre tax accounts, delay social security till 70 and use the years between when you retire and start SS to do conversions or spend down the pre tax accounts.

Start with your income needs. Subtract your guaranteed income (social security, pension, annuity, etc). Is there a gap between income and income needs. What sources can you pull from that manages your tax situation. Then get into complex stuff like social security taxation, spouse death, inheritance, etc.

@KILLERB6

See my thread in here about rolling over tax exempt traditional (pre-tax) TSP money into my roth IRA at fidelity.  
It might be what you're looking for?  

The Pro Rata issue only applies if you have or are going to have a mix of pre-tax and after tax IRA contributions.

If all your money in your IRAs is pre-tax, Pro Rata doesn't matter if you are just doing normal conversion (not backdoor).

If all your money in your IRAs is after tax, Pro Rata doesn't matter.

In both cases you will have to pay the tax on either the entire balance (pre-tax), or the previously untaxed gains (after tax scenario), when you do a conversion to Roth.

Generally, a Roth conversion is focused on moving Pre-Tax money into Roth.  A Backdoor Roth moves after tax money into Roth.

Pro Rata usually hits those focused on Backdoor Rother conversions, where an individual has an IRA of some sort and then wants to start contributing AFTER tax dollars to that IRA and move those AFTER tax contributions to Roth.

The question above didn't ask about Backdoor conversions, just general Roth conversions.

Also, the Pro-Rata doesn't apply to 401K/457.  You can convert pre-tax to Roth inside those accounts (provided your plan allows it), even if you have a mixture of pre-tax, after-tax, and Roth balances inside the account.

Pretty good post and thanks for outlining that for everyone, including myself. You put into clear language what quite a few of us were also saying. Just curious, are you an accountant, engineer or financial guy?

No offense, this makes me laugh. It's just nasty. That might be money that you literally never touch, do anything with or enjoy! Last bucket of money at EOL. Or "F-it, let's cash it out for fun and see what happens with the gubment!" money.

I could see that bucket of money, no matter what/how you cash it out, it will be the wrong way and mrtaxman will try and get his cut.

Just as an aside, I believe that Roth money in a 457b will still have RMD requirements, but it can be rolled out into a Roth IRA before you get to that point…

Damn good answer.   Added a couple variables I hadn’t heard of.

I assume the push is by design. There will be another new rule or tax to fuck over Roth accounts coming up. There's nothing these Commies want more than bigger and bigger pieces of your retirement. Then one day, under the premise of some declared emergency, they will just take the whole thing. That's what the 401K programs and "tax breaks" were about all along.

Tax planning, where you pay more now, and assume the government won't change the rules and taxes later... It's one hell of an assumption these days. Maybe if you're 50+ that's the smart thing, maybe. For us young guys, it starting to look pretty foolish.

https://www.forbes.com/advisor/retirement/required-minimum-distribution-rmd/#:~:text=RMDs%20are%20not%20required%20for%20Roth%20accounts%2C%20including%20Roth%20IRAs,to%20retirement%20investing%20especially%20useful.

This one is more significant than many realize.  When my father passed, I had to step in and help Mom with their finances.  I found out that my Dad had an IRA that he was only taking the minimum RMD from.  However, their taxable income was less than the standard deduction.  He SHOULD have been doing Roth conversions up to the amount where taxable income = standard deduction.

Now, Mom only gets a single standard deduction, and cannot tap the money in her IRA without it getting taxed, AND now more of her Social Security income becomes taxable.  This was totally avoidable at no cost and zero tax.

The biggest likelihood I see coming for Roth accounts from a Tax perspective is to add annual Roth withdrawals into MAGI (Modified Adjusted Gross Income) for purposes of determining how much of your Social Security income is taxed, and for IRMAA.  As Joe said it is not part of that calculation today, but I don't see a blocker to doing that.

What data do you have to base that assumption on?

Simply compare Marx's Communist Manifesto and Stalin's decrees, to the current Democrat party platform.

Then read the Gulag Archipelago to see what comes next.

If that's not convincing, read a bit about Mao.

Sounds very plausible. Certainly they take the low hanging fruit first.

Good to know, goes against what I was told by Voya when I did a big conversion, but happy to hear it none the less.  Trying to recall what they said at the time, might have said because it was originally traditional 457b money, it would always have RMD’s attached?  So maybe it was because it was a conversion versus being deposited originally as Roth funds?  Or they were just wrong…

Not a well documented aspect of my 457 account, nobody I talked to at work even knew they offered a Roth component until I had already retired!

Employer Roth retirement plans used to have RMDs until the Secure Act 2.0 went into law. Now the Roth portion of those plans do not have RMDs.


Secure Act 2.0

I don’t see that as very likely. Congress looks in the short term, not in the long term generally.

Congress knows how much Roth conversions are bringing in tax wise each year. Doing this basically kills the biggest incentive for Roth conversions of pre-tax money. If Roth conversions stop from all those people with 7 figure pre tax balances, revenues are not going up like they want. When the secure act 1.0 went into effect, they were shocked by how many people began doing Roth conversions as the income limit was removed.

I know for myself I’d probably also stop contributing to Roth 401k and just do pre-tax. Those of us doing that would also reduce current revenue.

You also might see things like people putting money into whole life insurance over even pre-tax accounts. That way they can leave tax free money to heirs or a spouse can end up with cash that isn’t taxed at a single filer rate.

The biggest voting block are retirees. Congress has to tread cautiously when it comes to messing with their money. All those older people who did conversions to make retirement easier now don’t get that benefit is gonna make re-election a lot harder.

I'd wager percentage wise, the overall number of retirees that actually did Roth conversions is incredibly small.  I could not find any data on that, but just my gut.

Ahh- appreciate you posting that, was trying to figure out if it was part of that or not, all the old info everywhere still said they were required.  Nobody ever takes down old info on the internet!  My conversion was in 2021 of course so that makes sense.  

Saves me a step then, no rollover to a Roth IRA required to avoid RMD’s, plus I don’t have to reset my eligibility to withdraw money from today to age 59 1/2.  Good deal all the way around then!

Those with big pre tax accounts are the ones doing it. It may be a minority, but it has a huge impact. As the thread is titled, there is a big push now for Roth conversions.

Since 2020 I’ve converted about $700K. I paid six figures in taxes during that time.

I am guessing that you are fine with 70% already in Roth accounts.  Unless you have very large pre tax accounts already and/or a very generous pension pre tax accounts are probably the better choice for most people.

Are you doing this now because you believe tax rates will be higher in the future, or because your RMD's will force you into a much higher bracket later?

Both. By mid my 40s I was already well over 7 figures in pre-tax accounts (I didn’t have a Roth option in my 401K until 2015). Doing some basic analysis I was going to be in a bad state for RMD' in 27 years. Running an RMD calculator, I was going to be forced to take high 6 figures and possibly 7 figures at the peak.

Considering social security, my wife’s and my pension, we have no need to touch our retirement accounts. This is all intended to be legacy anyway. I definitely don’t want her to end up in a bad tax situation when I’m gone. Considering what I expect tax rates to be when both my wife and I pass, I’d rather pay the taxes than make my kids do it. So I’ve been maxing the 24% bracket for several years now.

I’m just trying to get my balances in pre tax down to where I can QCD any RMD so I have to keep the RMD to less than $100K.