I found a new research article entitled When and for Whom are Roth Conversions Most Beneficial?. From the abstract:
While the benefits from a Roth conversion are often small and slow to arrive, a Roth conversion will almost
always pay off if given enough time, i.e., for life spans that extend past 90 and so long as annual distributions
from converted amounts are not taken. Roth conversions work because of compounding, which requires the
conversion to be left undisturbed for a long time.
• Future tax rates need not be higher for a conversion to pay off;
• Nor is it all that helpful to pay the tax on conversion from outside funds;
• Nor are Roth conversions especially beneficial for top bracket taxpayers as compared to middle
class taxpayers;
• Rather, the greatest benefit accrues to taxpayers who can make the conversion partly in the zero
percent tax bracket, i.e., during a year with no other taxable income.
An update to this paper (attached as page 1 to the report) states that paying the taxes on conversion from outside funds is more helpful than first determined.
@pizzaman Interesting article (I'll admit to skipping to the end!). In the conclusion it indicates needing to wait until age 90, + to see a payoff, and waiting to convert until you can get yourself into the 0% tax bracket. Whenever I've run the Roth conversion analysis in PRC I never see the "break-even point" in my (projected) lifetime, and usually only a few years before my wife is gone (again projected), never mind the very slim likelihood we can get down to the 0% bracket.
Reducing the TIRA balance to lessen the RMD seems another reason to convert, however, if one plans to donate to charities (leveraging QCD's to offset RMD's), that also dampens the desire to convert very much.
Yup, I agree. We have done enough Roth Conversions now so that our RMDs (well, my wife's RMD, since my regular IRA will be depleted before I am 72) are less than what we need to live on, so for us there is no point to doing more conversions.
Did you follow any of the authors guidance or just do it and bite the bullet on taxes and hope it pays off?
Well, we did a BIG Roth conversion in March 2020, a big market drop month, so that happened before the report was posted.
Found another newish article on Roth conversion from the Kitces group.
From the executive summary:
But what exactly is the tax rate that should be used to perform this analysis? It’s common to look at an individual’s current level of taxable income, determine which Federal and/or state income tax bracket they fall under based on that income, and assume that would be the rate at which the individual will be taxed on any funds they convert to Roth (or the amount of tax savings they would realize in the future by reducing the amount of their pre-tax withdrawals).
However, for many individuals, the tax bracket alone doesn’t accurately reflect the real impact of the Roth conversion. Because of the structure of the tax code, there are often ‘add-on’ effects created by adding or subtracting income – and these effects aren’t accounted for when simply looking at one’s tax bracket.
