Trying To Understand the Utility of Roth Conversion

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eyemgh
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Trying To Understand the Utility of Roth Conversion

Post by eyemgh »

We're both 58. We have an upcoming window after we sell our business where we could live off of some of the after tax proceeds for a while. The money we pull from our rollover IRA to Roth convert could be the only income that would show up on our MAGI. We could manage that as to make enough not to qualify for Medicaid, but low enough to get the maximum ACA subsidy for a commercial plan until we are Medicare eligible. In retirement our tax bracket will be lower than it is now, but during that window it could be lower than it's ever been since we started practicing. We will have enough assets that RMDs will be an issue. Like everyone, we worry and plan to not run out of money, but the reality tis that it's very possible that we could have a lot left over too. Roth funds are better for inheritance. Is there any reason not to Roth convert some of our money? Any secrets that we'd need to know? Thanks!
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FiveK
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Re: Trying To Understand the Utility of Roth Conversion

Post by FiveK »

Don't see any reason not to convert some. As for how much, consider the Using a spreadsheet section of the Roth IRA conversion wiki article.
deltaneutral83
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Re: Trying To Understand the Utility of Roth Conversion

Post by deltaneutral83 »

I think you just need to look at how much converting and how that impacts the 4x FPL ACA subsidy. I don't sense that IRMAA will come into play once you turn 65, which operates on a two year look back on AGI I believe. I know the new legislation is out there to soften the 4x cliff, but I do not know the extent. Even then with MFJ, you should probably look into creating AGI up to the 4x level which would easily keep you in the 12% marginal rate for the next few years on Roth conversions.

I see that FPL for 2 people is $17,240, and 4x that is $68,960. I'd assume you want to keep AGI below that and maybe even build in some cushion in case you get a surprise along the year. Not sure if your capital gain from the business was in 2020 or 2021 wrt to strategy going forward but assuming it was 2020 you will want to keep AGI in line with 4x FPL for 2021 once you talk with someone who knows taxes and how the new legislation affects the ACA cliff. It may even makes sense to work up to $104k AGI to fill up the 12% federal tax bucket and just pay the higher ACA premium (again, with new legislation factored in).

ETA- I think the new legislation charges you a maximum of 8.5% of your AGI on ACA premiums above 4x FPL. It may make sense to just fill up the 12% tax bucket which for MFJ is $104k for the next few years, but your situation and numbers will dictate that. If you can use the 65-72 years to go up to IRMAA and not cross that and exhaust Trad and 401k into Roth's, you may want to keep AGI as low as possible to avoid high premiums. Curious to see what others think about this.
Last edited by deltaneutral83 on Thu May 06, 2021 1:06 pm, edited 3 times in total.
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David Jay
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Re: Trying To Understand the Utility of Roth Conversion

Post by David Jay »

The real issue is the tax rate for the surviving spouse in later years as the RMD percentage increases. Imagine at age 90 having an RMD of, say, $120,000 as a single filer. That puts one in the 28% tax bracket (after 2026 tax rate reversion).

I agree with the necessity of observing ACA and IRMAA limits. I am using ACA and I have targeted 250% FPL, that allows for small Roth conversions and essentially a zero-cost ($17/mo.) bronze plan. I hit Medicare next year and I will convert below IRMAA of ~$180,000.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
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eyemgh
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Re: Trying To Understand the Utility of Roth Conversion

Post by eyemgh »

deltaneutral83 wrote: Thu May 06, 2021 12:53 pm I think you just need to look at how much converting and how that impacts the 4x FPL ACA subsidy. I don't sense that IRMAA will come into play once you turn 65, which operates on a two year look back on AGI I believe. I know the new legislation is out there to soften the 4x cliff, but I do not know the extent. Even then with MFJ, you should probably look into creating AGI up to the 4x level which would easily keep you in the 12% marginal rate for the next few years on Roth conversions.

I see that FPL for 2 people is $17,240, and 4x that is $68,960. I'd assume you want to keep AGI below that and maybe even build in some cushion in case you get a surprise along the year. Not sure if your capital gain from the business was in 2020 or 2021 wrt to strategy going forward but assuming it was 2020 you will want to keep AGI in line with 4x FPL for 2021 once you talk with someone who knows taxes and how the new legislation affects the ACA cliff. It may even makes sense to work up to $104k AGI to fill up the 12% federal tax bucket and just pay the higher ACA premium (again, with new legislation factored in).

ETA- I think the new legislation charges you a maximum of 8.5% of your AGI on ACA premiums above 4x FPL. It may make sense to just fill up the 12% tax bucket which for MFJ is $104k for the next few years, but your situation and numbers will dictate that. If you can use the 65-72 years to go up to IRMAA and not cross that and exhaust Trad and 401k into Roth's, you may want to keep AGI as low as possible to avoid high premiums. Curious to see what others think about this.
Thanks everyone!

I know I could run to Google, but if you could let me know what the acronyms (in bold and underlined) are I'd GREATLY appreciate it. I was good at getting money in, bu treally clueless on how to get money out. I've got a copy of McClung's book, but it'll take me some time to digest it.
deltaneutral83
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Re: Trying To Understand the Utility of Roth Conversion

Post by deltaneutral83 »

eyemgh wrote: Thu May 06, 2021 1:28 pm Thanks everyone!

I know I could run to Google, but if you could let me know what the acronyms (in bold and underlined) are I'd GREATLY appreciate it. I was good at getting money in, bu treally clueless on how to get money out. I've got a copy of McClung's book, but it'll take me some time to digest it.
Federal poverty level. Feds use 4x for your household size to determine your ACA subsidy, of your MAGI is $4x FPL +1, you would have gone over the cliff. New legislation has changed it substantially though. IRMAA is income retirement monthly adjustment amount for Medicare premiums. Once you hit $176K for 2021 you get hit with surcharges as of the tax return you filed two years prior, so when 65 and enroll in Medicare, your tax return at 63 will be the one they use to determine premiums.
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eyemgh
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Re: Trying To Understand the Utility of Roth Conversion

Post by eyemgh »

deltaneutral83 wrote: Thu May 06, 2021 1:38 pm
eyemgh wrote: Thu May 06, 2021 1:28 pm Thanks everyone!

I know I could run to Google, but if you could let me know what the acronyms (in bold and underlined) are I'd GREATLY appreciate it. I was good at getting money in, bu treally clueless on how to get money out. I've got a copy of McClung's book, but it'll take me some time to digest it.
Federal poverty level. Feds use 4x for your household size to determine your ACA subsidy, of your MAGI is $4x FPL +1, you would have gone over the cliff. New legislation has changed it substantially though. IRMAA is income retirement monthly adjustment amount for Medicare premiums. Once you hit $176K for 2021 you get hit with surcharges as of the tax return you filed two years prior, so when 65 and enroll in Medicare, your tax return at 63 will be the one they use to determine premiums.
Thank you!

In my world IRMA is intraretinal microvascular anomaly. :D
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Nestegg_User
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Re: Trying To Understand the Utility of Roth Conversion

Post by Nestegg_User »

If you are retiring at 58/59, then you would have either four or five years to maximize any Roth conversions (they look back to age 63 (two years) to determine medicare cost)
so I would max income for those 4/5 five years (until 63) and then only convert to just below the first IRMAA level until 71... or until you've reached the level you want to keep your IRA {That would minimize your medicare cost while pushing monies into Roth... yeah, we pay taxes (currently, we get ~11-12% effective tax versus the 31% we otherwise would have paid on the contributions...but then the Roth is an effective emergency fund/non-taxed income addition to the surviving spouse or both of us. (We'll both have SS and I have pension...plus significant savings in taxable and tax-deferred... Roth will enable us to pull in the most tax advantaged way while still preserving any desired income level)}
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eyemgh
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Re: Trying To Understand the Utility of Roth Conversion

Post by eyemgh »

Nestegg_User wrote: Thu May 06, 2021 6:56 pm If you are retiring at 58/59, then you would have either four or five years to maximize any Roth conversions (they look back to age 63 (two years) to determine medicare cost)
so I would max income for those 4/5 five years (until 63) and then only convert to just below the first IRMAA level until 71... or until you've reached the level you want to keep your IRA {That would minimize your medicare cost while pushing monies into Roth... yeah, we pay taxes (currently, we get ~11-12% effective tax versus the 31% we otherwise would have paid on the contributions...but then the Roth is an effective emergency fund/non-taxed income addition to the surviving spouse or both of us. (We'll both have SS and I have pension...plus significant savings in taxable and tax-deferred... Roth will enable us to pull in the most tax advantaged way while still preserving any desired income level)}
Very helpful! Thanks!
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Re: Trying To Understand the Utility of Roth Conversion

Post by curmudgeon »

I would keep a few factors in mind:

1) There are a couple of different "five-year clocks" that can apply to Roth IRAs. If you don't have any Roth, it can be worth converting a little bit even at high tax rates to start the clock ticking (one of them won't apply if you'll be past age 59.5 before you might withdraw from the Roth). It probably won't matter, but hard to know for sure.

2) It's good to somewhat smooth out your taxable income across the years. Do some projections for various intervals into the future, including when you start SS and when RMDs start. While it seems nice to have a few years with minimal taxes, if you've got large IRA/401K balances, conversions during the low income years are usually a good idea. Take some thought to what happens when one of you passes and the survivor is filing using single tax brackets.

3) There are a significant set of people for whom Roth conversions don't matter very much. Maybe they have substantial pensions, or modest IRA balances and will be living largely on SS.

4) I think it's reasonable to leave a portion of your IRAs unconverted. Maybe $500K between a couple. The RMDs on that would be more manageable, and there may be times when you can draw from the IRA with little tax impact (a year with large medical expenses, for example). There is also the option to do charitable contributions directly from your IRA in place of RMDs (called QCDs).

5) There is no "right" amount of Roth conversion knowable in advance. Tax rates and laws change, as well as your own personal circumstances. Having some flexibility in your sources of retirement resources can be quite helpful to avoiding higher tax brackets. It can be nice to be able to pull money out of a Roth for a large expense without worrying about paying extra taxes.
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22twain
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Re: Trying To Understand the Utility of Roth Conversion

Post by 22twain »

deltaneutral83 wrote: Thu May 06, 2021 1:38 pm IRMAA is income retirement monthly adjustment amount for Medicare premiums.
Nit-pick: Make that "Income-Related Monthly Adjustment Amount".
It's "Roth", not "ROTH". Senator William Roth was a person, not an acronym.
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Re: Trying To Understand the Utility of Roth Conversion

Post by Fat Tails »

FiveK wrote: Thu May 06, 2021 12:44 pm Don't see any reason not to convert some. As for how much, consider the Using a spreadsheet section of the Roth IRA conversion wiki article.
+1. With the OP’s lack of detail (tax bracket lower in retirement... RMDs will be an issue) nobody here can offer much specific advice other than to complete the spreadsheet. The main factors are the amount of assets in tax deferred, estimated growth rate, other income, income/tax bracket for Married filing joint or single filer at age 72+.

Cheers
“If you would be wealthy, think of saving as well as getting.” ― Benjamin Franklin
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eyemgh
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Re: Trying To Understand the Utility of Roth Conversion

Post by eyemgh »

Fat Tails wrote: Fri May 07, 2021 2:24 am
FiveK wrote: Thu May 06, 2021 12:44 pm Don't see any reason not to convert some. As for how much, consider the Using a spreadsheet section of the Roth IRA conversion wiki article.
+1. With the OP’s lack of detail (tax bracket lower in retirement... RMDs will be an issue) nobody here can offer much specific advice other than to complete the spreadsheet. The main factors are the amount of assets in tax deferred, estimated growth rate, other income, income/tax bracket for Married filing joint or single filer at age 72+.

Cheers
To this date I’ve never learned how to use Excel. Doh! :oops:

Does the prefilled spreadsheet in the Wiki work on a desktop? It won’t in my tablet.

We have about $3M in qualified plans and will get just under $5500/mo if we both start SS at 67, more if I wait until 70. The house will be paid off so we won’t have any long term debt. Strange things happen, but we’re both healthy and have longevity in our families. We can live off $80k or so per year. The RMD on $3M plus SS will be well above that.
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Re: Trying To Understand the Utility of Roth Conversion

Post by Exchme »

I think you have too much money in tax deferred to gain from trying to get ACA subsidies. At 58, your tax deferred accounts could more than double by the time RMDs start (6% return would be almost $7M, 10% return would be $11M!) if you don't start working them down with Roth conversions. The first year RMD at 72 is around 4%, but rises to 6-7% by age 77, so your tax brackets will be very high later on.

I'm not an expert on the ACA subsidy, but I put in some different AGIs and roughly the change in subsidy was about 10% of the change in AGI, so doing a $10,000 Roth conversion would lose you $1,000 in subsidy. However, you have so much money in your tax deferred, that you will be in the 28% or 33% bracket during RMDs and if one of you passes earlier than the other, the remaining one will for sure be in the 33% bracket. So for the years that you would try to get the subsidy, you might pay no taxes, but that gives up the 10%, 12% and even 22% and 24% bracket opportunities for Roth conversions. The TCJA tax cuts are due to expire after 2025, so 22% will become 25% and 24% will become 28%. So, unlike most people, you could very easily end up worse off by subsidy chasing.

Similarly, for you the goal will be to stay in one of the lower 3 IRMAA tiers throughout life, you are going to pay some IRMAA taxes, but I think those effects are smaller than the Roth opportunities for you.
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eyemgh
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Re: Trying To Understand the Utility of Roth Conversion

Post by eyemgh »

Exchme wrote: Fri May 07, 2021 10:58 am I think you have too much money in tax deferred to gain from trying to get ACA subsidies. At 58, your tax deferred accounts could more than double by the time RMDs start (6% return would be almost $7M, 10% return would be $11M!) if you don't start working them down with Roth conversions. The first year RMD at 72 is around 4%, but rises to 6-7% by age 77, so your tax brackets will be very high later on.

I'm not an expert on the ACA subsidy, but I put in some different AGIs and roughly the change in subsidy was about 10% of the change in AGI, so doing a $10,000 Roth conversion would lose you $1,000 in subsidy. However, you have so much money in your tax deferred, that you will be in the 28% or 33% bracket during RMDs and if one of you passes earlier than the other, the remaining one will for sure be in the 33% bracket. So for the years that you would try to get the subsidy, you might pay no taxes, but that gives up the 10%, 12% and even 22% and 24% bracket opportunities for Roth conversions. The TCJA tax cuts are due to expire after 2025, so 22% will become 25% and 24% will become 28%. So, unlike most people, you could very easily end up worse off by subsidy chasing.

Similarly, for you the goal will be to stay in one of the lower 3 IRMAA tiers throughout life, you are going to pay some IRMAA taxes, but I think those effects are smaller than the Roth opportunities for you.
Thanks! Like I said, I've been good at saving, but clueless on how to efficiently spending it. I'm not sure I'm following. Please correct me if I'm getting this wrong. Are you saying that converting little enough to get a good ACA subsidy might not convert enough to be helpful to keep taxes lower on RMDs?
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FiveK
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Re: Trying To Understand the Utility of Roth Conversion

Post by FiveK »

eyemgh wrote: Fri May 07, 2021 10:19 am
Fat Tails wrote: Fri May 07, 2021 2:24 am
FiveK wrote: Thu May 06, 2021 12:44 pm Don't see any reason not to convert some. As for how much, consider the Using a spreadsheet section of the Roth IRA conversion wiki article.
+1. With the OP’s lack of detail (tax bracket lower in retirement... RMDs will be an issue) nobody here can offer much specific advice other than to complete the spreadsheet. The main factors are the amount of assets in tax deferred, estimated growth rate, other income, income/tax bracket for Married filing joint or single filer at age 72+.
To this date I’ve never learned how to use Excel. Doh! :oops:

Does the prefilled spreadsheet in the Wiki work on a desktop? It won’t in my tablet.

We have about $3M in qualified plans and will get just under $5500/mo if we both start SS at 67, more if I wait until 70....
Yes, Excel works on a desktop. If you are interested to learn, excel for beginners - Google Search may be useful.

Using the spreadsheets takes significantly less knowledge than creating such spreadsheets. :)
tibbitts
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Re: Trying To Understand the Utility of Roth Conversion

Post by tibbitts »

I wish I had educated myself on my conversion needs about six months earlier, in time for the market drop last year. If we get that this year, don't mess around with calculators, just convert all of the equity portion of your deferred accounts. Of course if we get a 40% drop you won't catch that at the bottom without a ton of luck, but even 25% off would probably be a good deal given 2021 tax rates vs. even currently legislated increases.
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Nestegg_User
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Re: Trying To Understand the Utility of Roth Conversion

Post by Nestegg_User »

That would be correct. The taxes you would be paying from 72 onward {or somewhat later if current proposal is adopted, where it could start at ~75 for you... which would give you more years to do conversions just below the IRMAA tier} for a $3M + (which might get to 5-6 M in that time) would push you into higher brackets, likely for the remaining years for either. (admittedly, we don't have ACA plan as we are on retiree insurance so don't have thoses issues)

{Alas, you'll have to learn Excel or comparable so as to do what-if/planning for periods both before and after RMDs, including SS and any pensions... I know you are up to it.... I'm mid-60's and have been doing that stuff for many decades (back to even the visicalc days :shock: )}
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Re: Trying To Understand the Utility of Roth Conversion

Post by Exchme »

eyemgh wrote: Fri May 07, 2021 11:45 am
Exchme wrote: Fri May 07, 2021 10:58 am I think you have too much money in tax deferred to gain from trying to get ACA subsidies. At 58, your tax deferred accounts could more than double by the time RMDs start (6% return would be almost $7M, 10% return would be $11M!) if you don't start working them down with Roth conversions. The first year RMD at 72 is around 4%, but rises to 6-7% by age 77, so your tax brackets will be very high later on.

I'm not an expert on the ACA subsidy, but I put in some different AGIs and roughly the change in subsidy was about 10% of the change in AGI, so doing a $10,000 Roth conversion would lose you $1,000 in subsidy. However, you have so much money in your tax deferred, that you will be in the 28% or 33% bracket during RMDs and if one of you passes earlier than the other, the remaining one will for sure be in the 33% bracket. So for the years that you would try to get the subsidy, you might pay no taxes, but that gives up the 10%, 12% and even 22% and 24% bracket opportunities for Roth conversions. The TCJA tax cuts are due to expire after 2025, so 22% will become 25% and 24% will become 28%. So, unlike most people, you could very easily end up worse off by subsidy chasing.

Similarly, for you the goal will be to stay in one of the lower 3 IRMAA tiers throughout life, you are going to pay some IRMAA taxes, but I think those effects are smaller than the Roth opportunities for you.
Thanks! Like I said, I've been good at saving, but clueless on how to efficiently spending it. I'm not sure I'm following. Please correct me if I'm getting this wrong. Are you saying that converting little enough to get a good ACA subsidy might not convert enough to be helpful to keep taxes lower on RMDs?
Yep, for most people, controlling their income to get the subsidies is a winner, but you have so much in tax deferred that if you don't do some good size Roth conversions, you will pay very high taxes down the road, likely ending up worse off than if you had just ignored the subsidy option. Possibly there is a combination where where you convert into the 24% bracket now through age 62 to take advantage of the TCJA rates and then at age 63 you try to capture a couple years of subsidies while also avoiding any IRMAA taxes. Since you don't have the computer equipment or Excel knowledge, you might think about getting a fee-only certified financial planner to look. This site can help you a lot, but there are some detailed calculations to do. Avoid financial advisors that takes a % of your assets each year - they are like drug dealers, making you think you feel good while they line their pockets with far, far more of your money in fees and high fund costs than any bad decisions you might make on this topic.

Also note that you should be holding the bond part of your portfolio preferentially in your tax deferred to slow down growth in that account. Put stocks in your Roth to maximize after tax growth.
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eyemgh
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Re: Trying To Understand the Utility of Roth Conversion

Post by eyemgh »

Exchme wrote: Fri May 07, 2021 1:36 pm
eyemgh wrote: Fri May 07, 2021 11:45 am
Exchme wrote: Fri May 07, 2021 10:58 am I think you have too much money in tax deferred to gain from trying to get ACA subsidies. At 58, your tax deferred accounts could more than double by the time RMDs start (6% return would be almost $7M, 10% return would be $11M!) if you don't start working them down with Roth conversions. The first year RMD at 72 is around 4%, but rises to 6-7% by age 77, so your tax brackets will be very high later on.

I'm not an expert on the ACA subsidy, but I put in some different AGIs and roughly the change in subsidy was about 10% of the change in AGI, so doing a $10,000 Roth conversion would lose you $1,000 in subsidy. However, you have so much money in your tax deferred, that you will be in the 28% or 33% bracket during RMDs and if one of you passes earlier than the other, the remaining one will for sure be in the 33% bracket. So for the years that you would try to get the subsidy, you might pay no taxes, but that gives up the 10%, 12% and even 22% and 24% bracket opportunities for Roth conversions. The TCJA tax cuts are due to expire after 2025, so 22% will become 25% and 24% will become 28%. So, unlike most people, you could very easily end up worse off by subsidy chasing.

Similarly, for you the goal will be to stay in one of the lower 3 IRMAA tiers throughout life, you are going to pay some IRMAA taxes, but I think those effects are smaller than the Roth opportunities for you.
Thanks! Like I said, I've been good at saving, but clueless on how to efficiently spending it. I'm not sure I'm following. Please correct me if I'm getting this wrong. Are you saying that converting little enough to get a good ACA subsidy might not convert enough to be helpful to keep taxes lower on RMDs?
Yep, for most people, controlling their income to get the subsidies is a winner, but you have so much in tax deferred that if you don't do some good size Roth conversions, you will pay very high taxes down the road, likely ending up worse off than if you had just ignored the subsidy option. Possibly there is a combination where where you convert into the 24% bracket now through age 62 to take advantage of the TCJA rates and then at age 63 you try to capture a couple years of subsidies while also avoiding any IRMAA taxes. Since you don't have the computer equipment or Excel knowledge, you might think about getting a fee-only certified financial planner to look. This site can help you a lot, but there are some detailed calculations to do. Avoid financial advisors that takes a % of your assets each year - they are like drug dealers, making you think you feel good while they line their pockets with far, far more of your money in fees and high fund costs than any bad decisions you might make on this topic.

Also note that you should be holding the bond part of your portfolio preferentially in your tax deferred to slow down growth in that account. Put stocks in your Roth to maximize after tax growth.
Thank you!

We're both 58. We're selling a business, closing in 6 weeks. As a result, we'll have the highest income we've ever had, even if we put over $800K in a CBP. We will then work for two more years, but with lower taxable income than we've had recently. It will still be around $150k in earnings, plus we have another business that nets about $25k/year. We'll probably cut back substantially after 2 years, because we still enjoy it, or maybe quit all together. With that, I have several questions.

1) should we convert something now and just pay the full bore tax.

2) if we do, does every contribution have to "season" for 5 years, or just the first contribution? I really don't understand the full 5 year thing.

3) any thing else? :D
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Re: Trying To Understand the Utility of Roth Conversion

Post by tibbitts »

Exchme wrote: Fri May 07, 2021 1:36 pm Also note that you should be holding the bond part of your portfolio preferentially in your tax deferred to slow down growth in that account. Put stocks in your Roth to maximize after tax growth.
I agree except, especially if you're spending down all your taxable to pay taxes on conversions, you probably want at least a little in short-term or other fairly stable funds in your Roth, in case large expenditures come up. Otherwise a large expense in addition to conversions you might have already made during a year might result in higher-than-expected taxes if you have to tap into those deferred funds (or force a sale in the Roth during a market downturn.)
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FiveK
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Re: Trying To Understand the Utility of Roth Conversion

Post by FiveK »

eyemgh wrote: Fri May 07, 2021 5:27 pmWe're both 58.
As a result, we'll have the highest income we've ever had, even if we put over $800K in a CBP. We will then work for two more years, but with lower taxable income than we've had recently. It will still be around $150k in earnings, plus we have another business that nets about $25k/year. We'll probably cut back substantially after 2 years, because we still enjoy it, or maybe quit all together. With that, I have several questions.

1) should we convert something now and just pay the full bore tax.
If you have no Roth IRAs at all, you could start that 5 year clock by converting some minimal amount (e.g., $100 each). It would not be worth paying a high marginal rate to convert a large amount, and that would likely be the case for "the highest income we've ever had." Probably no real need to start the "first Roth IRA" clock because after age 59.5 you're good to withdraw anything except earnings w/o penalty, but if you don't want to worry about Roth withdrawals at all then the earlier you can do so the better.

See the Treatment of distributions summarised in table form.
2) if we do, does every contribution have to "season" for 5 years, or just the first contribution? I really don't understand the full 5 year thing.
After age 59.5, it's only the age (in tax years) of the oldest Roth IRA that matters.
3) any thing else? :D
"When to convert?" really boils down to "when you expect your marginal tax rate on those conversions to be lowest." There is some guesswork involved for future years, but you should at least determine what it would be for the current year.
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Re: Trying To Understand the Utility of Roth Conversion

Post by Exchme »

eyemgh wrote: Fri May 07, 2021 5:27 pm 1) should we convert something now and just pay the full bore tax.

2) if we do, does every contribution have to "season" for 5 years, or just the first contribution? I really don't understand the full 5 year thing.

3) any thing else?
1)Comments above are good, don't do anything but a token amount of conversion this year as you will be in a high tax bracket. Use Roth conversions to even out your tax brackets, not make high earning years worse.

2 & 3)The Bogleheads Wiki has an encyclopedia of important information. You don't have to memorize it, but know it's your first line of defense. Below is the link to Wiki entry Roth distributions.

https://www.bogleheads.org/wiki/Roth_IRA#Distributions
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Re: Trying To Understand the Utility of Roth Conversion

Post by willthrill81 »

eyemgh wrote: Thu May 06, 2021 12:11 pmIn retirement our tax bracket will be lower than it is now...
Once you start SS benefits, that may easily not be the case due to the (difficult for me to fully understand) taxation of SS benefits. The table below is from the Wiki page on taxation of SS benefits and illustrates this.

Image

A MFJ couple with only $30k of SS benefits and $30k of other income will have a marginal tax rate of 18.5%. At $36k of other income, their marginal tax rate will increase to 22.2%.

And it's even worse for singles, which will very likely happen to you or your spouse at some point.

Image

As such, Roth conversions in the 12% bracket are a slam dunk, and at least some conversions in the 22% or 24% bracket may make good sense.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
smitcat
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Re: Trying To Understand the Utility of Roth Conversion

Post by smitcat »

eyemgh wrote: Fri May 07, 2021 5:27 pm
Exchme wrote: Fri May 07, 2021 1:36 pm
eyemgh wrote: Fri May 07, 2021 11:45 am
Exchme wrote: Fri May 07, 2021 10:58 am I think you have too much money in tax deferred to gain from trying to get ACA subsidies. At 58, your tax deferred accounts could more than double by the time RMDs start (6% return would be almost $7M, 10% return would be $11M!) if you don't start working them down with Roth conversions. The first year RMD at 72 is around 4%, but rises to 6-7% by age 77, so your tax brackets will be very high later on.

I'm not an expert on the ACA subsidy, but I put in some different AGIs and roughly the change in subsidy was about 10% of the change in AGI, so doing a $10,000 Roth conversion would lose you $1,000 in subsidy. However, you have so much money in your tax deferred, that you will be in the 28% or 33% bracket during RMDs and if one of you passes earlier than the other, the remaining one will for sure be in the 33% bracket. So for the years that you would try to get the subsidy, you might pay no taxes, but that gives up the 10%, 12% and even 22% and 24% bracket opportunities for Roth conversions. The TCJA tax cuts are due to expire after 2025, so 22% will become 25% and 24% will become 28%. So, unlike most people, you could very easily end up worse off by subsidy chasing.

Similarly, for you the goal will be to stay in one of the lower 3 IRMAA tiers throughout life, you are going to pay some IRMAA taxes, but I think those effects are smaller than the Roth opportunities for you.
Thanks! Like I said, I've been good at saving, but clueless on how to efficiently spending it. I'm not sure I'm following. Please correct me if I'm getting this wrong. Are you saying that converting little enough to get a good ACA subsidy might not convert enough to be helpful to keep taxes lower on RMDs?
Yep, for most people, controlling their income to get the subsidies is a winner, but you have so much in tax deferred that if you don't do some good size Roth conversions, you will pay very high taxes down the road, likely ending up worse off than if you had just ignored the subsidy option. Possibly there is a combination where where you convert into the 24% bracket now through age 62 to take advantage of the TCJA rates and then at age 63 you try to capture a couple years of subsidies while also avoiding any IRMAA taxes. Since you don't have the computer equipment or Excel knowledge, you might think about getting a fee-only certified financial planner to look. This site can help you a lot, but there are some detailed calculations to do. Avoid financial advisors that takes a % of your assets each year - they are like drug dealers, making you think you feel good while they line their pockets with far, far more of your money in fees and high fund costs than any bad decisions you might make on this topic.

Also note that you should be holding the bond part of your portfolio preferentially in your tax deferred to slow down growth in that account. Put stocks in your Roth to maximize after tax growth.
Thank you!

We're both 58. We're selling a business, closing in 6 weeks. As a result, we'll have the highest income we've ever had, even if we put over $800K in a CBP. We will then work for two more years, but with lower taxable income than we've had recently. It will still be around $150k in earnings, plus we have another business that nets about $25k/year. We'll probably cut back substantially after 2 years, because we still enjoy it, or maybe quit all together. With that, I have several questions.

1) should we convert something now and just pay the full bore tax.

2) if we do, does every contribution have to "season" for 5 years, or just the first contribution? I really don't understand the full 5 year thing.

3) any thing else? :D
"We're both 58. We're selling a business, closing in 6 weeks. As a result, we'll have the highest income we've ever had, even if we put over $800K in a CBP. We will then work for two more years, but with lower taxable income than we've had recently. It will still be around $150k in earnings, plus we have another business that nets about $25k/year."
Based on this I do not see much of the 'window' you are looking to use for a few years.

"1) should we convert something now and just pay the full bore tax."
We would never convert in a year of a business sale - taxes were never higher than that year.
smitcat
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Re: Trying To Understand the Utility of Roth Conversion

Post by smitcat »

willthrill81 wrote: Fri May 07, 2021 9:41 pm
eyemgh wrote: Thu May 06, 2021 12:11 pmIn retirement our tax bracket will be lower than it is now...
Once you start SS benefits, that may easily not be the case due to the (difficult for me to fully understand) taxation of SS benefits. The table below is from the Wiki page on taxation of SS benefits and illustrates this.

Image

A MFJ couple with only $30k of SS benefits and $30k of other income will have a marginal tax rate of 18.5%. At $36k of other income, their marginal tax rate will increase to 22.2%.

And it's even worse for singles, which will very likely happen to you or your spouse at some point.

Image

As such, Roth conversions in the 12% bracket are a slam dunk, and at least some conversions in the 22% or 24% bracket may make good sense.
"A MFJ couple with only $30k of SS benefits and $30k of other income will have a marginal tax rate of 18.5%. At $36k of other income, their marginal tax rate will increase to 22.2%."
In his/her case the taxes might be like $70K SS and $80K other with potential RMD's that could raise those taxes much higher.
They will likely be above the 'hump' that often catches some folks.
Working the Roth conversion options will likely be very good idea for this situation.
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eyemgh
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Re: Trying To Understand the Utility of Roth Conversion

Post by eyemgh »

smitcat wrote: Sat May 08, 2021 7:00 am
eyemgh wrote: Fri May 07, 2021 5:27 pm
Exchme wrote: Fri May 07, 2021 1:36 pm
eyemgh wrote: Fri May 07, 2021 11:45 am
Exchme wrote: Fri May 07, 2021 10:58 am I think you have too much money in tax deferred to gain from trying to get ACA subsidies. At 58, your tax deferred accounts could more than double by the time RMDs start (6% return would be almost $7M, 10% return would be $11M!) if you don't start working them down with Roth conversions. The first year RMD at 72 is around 4%, but rises to 6-7% by age 77, so your tax brackets will be very high later on.

I'm not an expert on the ACA subsidy, but I put in some different AGIs and roughly the change in subsidy was about 10% of the change in AGI, so doing a $10,000 Roth conversion would lose you $1,000 in subsidy. However, you have so much money in your tax deferred, that you will be in the 28% or 33% bracket during RMDs and if one of you passes earlier than the other, the remaining one will for sure be in the 33% bracket. So for the years that you would try to get the subsidy, you might pay no taxes, but that gives up the 10%, 12% and even 22% and 24% bracket opportunities for Roth conversions. The TCJA tax cuts are due to expire after 2025, so 22% will become 25% and 24% will become 28%. So, unlike most people, you could very easily end up worse off by subsidy chasing.

Similarly, for you the goal will be to stay in one of the lower 3 IRMAA tiers throughout life, you are going to pay some IRMAA taxes, but I think those effects are smaller than the Roth opportunities for you.
Thanks! Like I said, I've been good at saving, but clueless on how to efficiently spending it. I'm not sure I'm following. Please correct me if I'm getting this wrong. Are you saying that converting little enough to get a good ACA subsidy might not convert enough to be helpful to keep taxes lower on RMDs?
Yep, for most people, controlling their income to get the subsidies is a winner, but you have so much in tax deferred that if you don't do some good size Roth conversions, you will pay very high taxes down the road, likely ending up worse off than if you had just ignored the subsidy option. Possibly there is a combination where where you convert into the 24% bracket now through age 62 to take advantage of the TCJA rates and then at age 63 you try to capture a couple years of subsidies while also avoiding any IRMAA taxes. Since you don't have the computer equipment or Excel knowledge, you might think about getting a fee-only certified financial planner to look. This site can help you a lot, but there are some detailed calculations to do. Avoid financial advisors that takes a % of your assets each year - they are like drug dealers, making you think you feel good while they line their pockets with far, far more of your money in fees and high fund costs than any bad decisions you might make on this topic.

Also note that you should be holding the bond part of your portfolio preferentially in your tax deferred to slow down growth in that account. Put stocks in your Roth to maximize after tax growth.
Thank you!

We're both 58. We're selling a business, closing in 6 weeks. As a result, we'll have the highest income we've ever had, even if we put over $800K in a CBP. We will then work for two more years, but with lower taxable income than we've had recently. It will still be around $150k in earnings, plus we have another business that nets about $25k/year. We'll probably cut back substantially after 2 years, because we still enjoy it, or maybe quit all together. With that, I have several questions.

1) should we convert something now and just pay the full bore tax.

2) if we do, does every contribution have to "season" for 5 years, or just the first contribution? I really don't understand the full 5 year thing.

3) any thing else? :D
"We're both 58. We're selling a business, closing in 6 weeks. As a result, we'll have the highest income we've ever had, even if we put over $800K in a CBP. We will then work for two more years, but with lower taxable income than we've had recently. It will still be around $150k in earnings, plus we have another business that nets about $25k/year."
Based on this I do not see much of the 'window' you are looking to use for a few years.

"1) should we convert something now and just pay the full bore tax."
We would never convert in a year of a business sale - taxes were never higher than that year.
I’m 58.5 and my wife is 58. At the time we both hit the end of the two years we are contractually obligated to work, we will be 60.5 and 60 respectively. IF we quit then, we could live off of cash from the sale and Roth convert a pretty decent amount for several years.

The idea of converting some now, even in a sale year is to start the 5 year clock. It would only be a very small amount though.
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eyemgh
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Re: Trying To Understand the Utility of Roth Conversion

Post by eyemgh »

smitcat wrote: Sat May 08, 2021 7:03 am
willthrill81 wrote: Fri May 07, 2021 9:41 pm
eyemgh wrote: Thu May 06, 2021 12:11 pmIn retirement our tax bracket will be lower than it is now...
Once you start SS benefits, that may easily not be the case due to the (difficult for me to fully understand) taxation of SS benefits. The table below is from the Wiki page on taxation of SS benefits and illustrates this.

Image

A MFJ couple with only $30k of SS benefits and $30k of other income will have a marginal tax rate of 18.5%. At $36k of other income, their marginal tax rate will increase to 22.2%.

And it's even worse for singles, which will very likely happen to you or your spouse at some point.

Image

As such, Roth conversions in the 12% bracket are a slam dunk, and at least some conversions in the 22% or 24% bracket may make good sense.
"A MFJ couple with only $30k of SS benefits and $30k of other income will have a marginal tax rate of 18.5%. At $36k of other income, their marginal tax rate will increase to 22.2%."
In his/her case the taxes might be like $70K SS and $80K other with potential RMD's that could raise those taxes much higher.
They will likely be above the 'hump' that often catches some folks.
Working the Roth conversion options will likely be very good idea for this situation.
Will you expand a bit on the ‘hump’?

Thanks!
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willthrill81
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Re: Trying To Understand the Utility of Roth Conversion

Post by willthrill81 »

eyemgh wrote: Sat May 08, 2021 10:25 am
smitcat wrote: Sat May 08, 2021 7:03 am
willthrill81 wrote: Fri May 07, 2021 9:41 pm
eyemgh wrote: Thu May 06, 2021 12:11 pmIn retirement our tax bracket will be lower than it is now...
Once you start SS benefits, that may easily not be the case due to the (difficult for me to fully understand) taxation of SS benefits. The table below is from the Wiki page on taxation of SS benefits and illustrates this.

Image

A MFJ couple with only $30k of SS benefits and $30k of other income will have a marginal tax rate of 18.5%. At $36k of other income, their marginal tax rate will increase to 22.2%.

And it's even worse for singles, which will very likely happen to you or your spouse at some point.

Image

As such, Roth conversions in the 12% bracket are a slam dunk, and at least some conversions in the 22% or 24% bracket may make good sense.
"A MFJ couple with only $30k of SS benefits and $30k of other income will have a marginal tax rate of 18.5%. At $36k of other income, their marginal tax rate will increase to 22.2%."
In his/her case the taxes might be like $70K SS and $80K other with potential RMD's that could raise those taxes much higher.
They will likely be above the 'hump' that often catches some folks.
Working the Roth conversion options will likely be very good idea for this situation.
Will you expand a bit on the ‘hump’?

Thanks!
It's the red area highlighted in the tables above. The marginal tax rate goes up from 22.2% to 40.7% before then falling to 22.0%.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
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Re: Trying To Understand the Utility of Roth Conversion

Post by neurosphere »

eyemgh wrote: Sat May 08, 2021 10:25 am
Will you expand a bit on the ‘hump’?

Thanks!
Look at one of those colored charts, and assume SS income towards the right of the page. Starting at "low" other income, you can see that as you add other income your marginal rate can enter the "red" zone, but as you increase other income you come back out of the red and go "up" into the lower/yellow rates.

The hump is the red area, where essentially there is a window in which your marginal income tax rate jumps up, but as you add additional income it drops back down, e.g. getting over the hump. So on needs to be aware of this in hopes one can massage yearly income to either stay on the low end of the hump, or alternately is far enough past the hump that it does not affect most income/spending decisions. That's not the most eloquent way to describe it, but it's a start of your journey learning about the SS hump. :)
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes".
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Re: Trying To Understand the Utility of Roth Conversion

Post by FiveK »

eyemgh wrote: Sat May 08, 2021 10:25 am Will you expand a bit on the ‘hump’?
Social Security tax impact calculator - Bogleheads goes into details. Don't know if that article/poster is responsible for the name tag.
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Re: Trying To Understand the Utility of Roth Conversion

Post by smitcat »

eyemgh wrote: Sat May 08, 2021 10:23 am
smitcat wrote: Sat May 08, 2021 7:00 am
eyemgh wrote: Fri May 07, 2021 5:27 pm
Exchme wrote: Fri May 07, 2021 1:36 pm
eyemgh wrote: Fri May 07, 2021 11:45 am

Thanks! Like I said, I've been good at saving, but clueless on how to efficiently spending it. I'm not sure I'm following. Please correct me if I'm getting this wrong. Are you saying that converting little enough to get a good ACA subsidy might not convert enough to be helpful to keep taxes lower on RMDs?
Yep, for most people, controlling their income to get the subsidies is a winner, but you have so much in tax deferred that if you don't do some good size Roth conversions, you will pay very high taxes down the road, likely ending up worse off than if you had just ignored the subsidy option. Possibly there is a combination where where you convert into the 24% bracket now through age 62 to take advantage of the TCJA rates and then at age 63 you try to capture a couple years of subsidies while also avoiding any IRMAA taxes. Since you don't have the computer equipment or Excel knowledge, you might think about getting a fee-only certified financial planner to look. This site can help you a lot, but there are some detailed calculations to do. Avoid financial advisors that takes a % of your assets each year - they are like drug dealers, making you think you feel good while they line their pockets with far, far more of your money in fees and high fund costs than any bad decisions you might make on this topic.

Also note that you should be holding the bond part of your portfolio preferentially in your tax deferred to slow down growth in that account. Put stocks in your Roth to maximize after tax growth.
Thank you!

We're both 58. We're selling a business, closing in 6 weeks. As a result, we'll have the highest income we've ever had, even if we put over $800K in a CBP. We will then work for two more years, but with lower taxable income than we've had recently. It will still be around $150k in earnings, plus we have another business that nets about $25k/year. We'll probably cut back substantially after 2 years, because we still enjoy it, or maybe quit all together. With that, I have several questions.

1) should we convert something now and just pay the full bore tax.

2) if we do, does every contribution have to "season" for 5 years, or just the first contribution? I really don't understand the full 5 year thing.

3) any thing else? :D
"We're both 58. We're selling a business, closing in 6 weeks. As a result, we'll have the highest income we've ever had, even if we put over $800K in a CBP. We will then work for two more years, but with lower taxable income than we've had recently. It will still be around $150k in earnings, plus we have another business that nets about $25k/year."
Based on this I do not see much of the 'window' you are looking to use for a few years.

"1) should we convert something now and just pay the full bore tax."
We would never convert in a year of a business sale - taxes were never higher than that year.
I’m 58.5 and my wife is 58. At the time we both hit the end of the two years we are contractually obligated to work, we will be 60.5 and 60 respectively. IF we quit then, we could live off of cash from the sale and Roth convert a pretty decent amount for several years.

The idea of converting some now, even in a sale year is to start the 5 year clock. It would only be a very small amount though.
"The idea of converting some now, even in a sale year is to start the 5 year clock. It would only be a very small amount though."
This makes great sense if you do not have any Roth now.

"I’m 58.5 and my wife is 58. At the time we both hit the end of the two years we are contractually obligated to work, we will be 60.5 and 60 respectively. IF we quit then, we could live off of cash from the sale and Roth convert a pretty decent amount for several years."
You did not post what your overall portfolio/situation is but it looks very good indeed. If you have the business sale proceeds and other after tax funds in fixed income investments that would leave your equities in 401K's earning higher performance for more years. If you place your equities in after tax funds (like we have) your immediate and future taxable incomes maybe larger than you are anticipating all added up.
I think all good problems to have a great you are thinking this through now.
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Re: Trying To Understand the Utility of Roth Conversion

Post by smitcat »

eyemgh wrote: Sat May 08, 2021 10:25 am
smitcat wrote: Sat May 08, 2021 7:03 am
willthrill81 wrote: Fri May 07, 2021 9:41 pm
eyemgh wrote: Thu May 06, 2021 12:11 pmIn retirement our tax bracket will be lower than it is now...
Once you start SS benefits, that may easily not be the case due to the (difficult for me to fully understand) taxation of SS benefits. The table below is from the Wiki page on taxation of SS benefits and illustrates this.

Image

A MFJ couple with only $30k of SS benefits and $30k of other income will have a marginal tax rate of 18.5%. At $36k of other income, their marginal tax rate will increase to 22.2%.

And it's even worse for singles, which will very likely happen to you or your spouse at some point.

Image

As such, Roth conversions in the 12% bracket are a slam dunk, and at least some conversions in the 22% or 24% bracket may make good sense.
"A MFJ couple with only $30k of SS benefits and $30k of other income will have a marginal tax rate of 18.5%. At $36k of other income, their marginal tax rate will increase to 22.2%."
In his/her case the taxes might be like $70K SS and $80K other with potential RMD's that could raise those taxes much higher.
They will likely be above the 'hump' that often catches some folks.
Working the Roth conversion options will likely be very good idea for this situation.
Will you expand a bit on the ‘hump’?

Thanks!
I do not think I could do better explaining the hump than the link above that Willthrill has expertly attached.
Between that link and viewing the posted charts axis's numbers you can see how the tax hump (effective tax rates) is engaged at certain levels of but lessens at both smaller and larger incomes.
See how the 'red' zones creep in at the middle and not the top or bottom combinations of incomes.
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Re: Trying To Understand the Utility of Roth Conversion

Post by willthrill81 »

smitcat wrote: Sat May 08, 2021 10:54 am See how the 'red' zones creep in at the middle and not the top or bottom combinations of incomes.
TMK, the red zones will continue to creep into lower incomes over time due to certain aspects of SS taxation not being adjusted for inflation. For that reason, those who won't claim SS benefits for decades may need to tentatively plan on having at least 50% of their SS benefits taxed, and 85% is more likely for many here.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
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Re: Trying To Understand the Utility of Roth Conversion

Post by czaj »

willthrill81 wrote: Sat May 08, 2021 10:58 am
smitcat wrote: Sat May 08, 2021 10:54 am See how the 'red' zones creep in at the middle and not the top or bottom combinations of incomes.
TMK, the red zones will continue to creep into lower incomes over time due to certain aspects of SS taxation not being adjusted for inflation. For that reason, those who won't claim SS benefits for decades may need to tentatively plan on having at least 50% of their SS benefits taxed, and 85% is more likely for many here.
This is part of the reason my modeling has suggested staying in the 0% bracket (below standard deduction) once SS benefits begin. Because the 10% bracket turns into a marginal tax rate of 18.5%.
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Re: Trying To Understand the Utility of Roth Conversion

Post by willthrill81 »

czaj wrote: Sat May 08, 2021 11:15 am
willthrill81 wrote: Sat May 08, 2021 10:58 am
smitcat wrote: Sat May 08, 2021 10:54 am See how the 'red' zones creep in at the middle and not the top or bottom combinations of incomes.
TMK, the red zones will continue to creep into lower incomes over time due to certain aspects of SS taxation not being adjusted for inflation. For that reason, those who won't claim SS benefits for decades may need to tentatively plan on having at least 50% of their SS benefits taxed, and 85% is more likely for many here.
This is part of the reason my modeling has suggested staying in the 0% bracket (below standard deduction) once SS benefits begin. Because the 10% bracket turns into a marginal tax rate of 18.5%.
If you're able to do Roth contributions and conversions in the 12% bracket between now and then, that sounds like a great strategy.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
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eyemgh
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Re: Trying To Understand the Utility of Roth Conversion

Post by eyemgh »

willthrill81 wrote: Sat May 08, 2021 10:27 am
eyemgh wrote: Sat May 08, 2021 10:25 am
smitcat wrote: Sat May 08, 2021 7:03 am
willthrill81 wrote: Fri May 07, 2021 9:41 pm
eyemgh wrote: Thu May 06, 2021 12:11 pmIn retirement our tax bracket will be lower than it is now...
Once you start SS benefits, that may easily not be the case due to the (difficult for me to fully understand) taxation of SS benefits. The table below is from the Wiki page on taxation of SS benefits and illustrates this.

Image

A MFJ couple with only $30k of SS benefits and $30k of other income will have a marginal tax rate of 18.5%. At $36k of other income, their marginal tax rate will increase to 22.2%.

And it's even worse for singles, which will very likely happen to you or your spouse at some point.

Image

As such, Roth conversions in the 12% bracket are a slam dunk, and at least some conversions in the 22% or 24% bracket may make good sense.
"A MFJ couple with only $30k of SS benefits and $30k of other income will have a marginal tax rate of 18.5%. At $36k of other income, their marginal tax rate will increase to 22.2%."
In his/her case the taxes might be like $70K SS and $80K other with potential RMD's that could raise those taxes much higher.
They will likely be above the 'hump' that often catches some folks.
Working the Roth conversion options will likely be very good idea for this situation.
Will you expand a bit on the ‘hump’?

Thanks!
It's the red area highlighted in the tables above. The marginal tax rate goes up from 22.2% to 40.7% before then falling to 22.0%.
woW...wOW...WOWWW! :shock:

This seems like a classic “only in America” wrinkle!

Thanks for pointing it out!!!
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Re: Trying To Understand the Utility of Roth Conversion

Post by Fat Tails »

Exchme wrote: Fri May 07, 2021 1:36 pm
eyemgh wrote: Fri May 07, 2021 11:45 am
Exchme wrote: Fri May 07, 2021 10:58 am I think you have too much money in tax deferred to gain from trying to get ACA subsidies. At 58, your tax deferred accounts could more than double by the time RMDs start (6% return would be almost $7M, 10% return would be $11M!) if you don't start working them down with Roth conversions. The first year RMD at 72 is around 4%, but rises to 6-7% by age 77, so your tax brackets will be very high later on.

I'm not an expert on the ACA subsidy, but I put in some different AGIs and roughly the change in subsidy was about 10% of the change in AGI, so doing a $10,000 Roth conversion would lose you $1,000 in subsidy. However, you have so much money in your tax deferred, that you will be in the 28% or 33% bracket during RMDs and if one of you passes earlier than the other, the remaining one will for sure be in the 33% bracket. So for the years that you would try to get the subsidy, you might pay no taxes, but that gives up the 10%, 12% and even 22% and 24% bracket opportunities for Roth conversions. The TCJA tax cuts are due to expire after 2025, so 22% will become 25% and 24% will become 28%. So, unlike most people, you could very easily end up worse off by subsidy chasing.

Similarly, for you the goal will be to stay in one of the lower 3 IRMAA tiers throughout life, you are going to pay some IRMAA taxes, but I think those effects are smaller than the Roth opportunities for you.
Thanks! Like I said, I've been good at saving, but clueless on how to efficiently spending it. I'm not sure I'm following. Please correct me if I'm getting this wrong. Are you saying that converting little enough to get a good ACA subsidy might not convert enough to be helpful to keep taxes lower on RMDs?
Yep, for most people, controlling their income to get the subsidies is a winner, but you have so much in tax deferred that if you don't do some good size Roth conversions, you will pay very high taxes down the road, likely ending up worse off than if you had just ignored the subsidy option. Possibly there is a combination where where you convert into the 24% bracket now through age 62 to take advantage of the TCJA rates and then at age 63 you try to capture a couple years of subsidies while also avoiding any IRMAA taxes. Since you don't have the computer equipment or Excel knowledge, you might think about getting a fee-only certified financial planner to look. This site can help you a lot, but there are some detailed calculations to do. Avoid financial advisors that takes a % of your assets each year - they are like drug dealers, making you think you feel good while they line their pockets with far, far more of your money in fees and high fund costs than any bad decisions you might make on this topic.

Also note that you should be holding the bond part of your portfolio preferentially in your tax deferred to slow down growth in that account. Put stocks in your Roth to maximize after tax growth.
+1, have a CFA with expertise in Roth conversions run your situation through their software and they will do a comprehensive look, including when to take social security. And to echo what was said above, you don’t need anybody to manage your investments for an annual fee. You just need the Roth conversion analysis. Then you should go back and have them update the analysis every couple of years or so to insure you stay on track given any changes in your situation, tax rates, etc.

You are asking the right questions.

Cheers
“If you would be wealthy, think of saving as well as getting.” ― Benjamin Franklin
Topic Author
eyemgh
Posts: 165
Joined: Thu Aug 29, 2013 11:50 am

Re: Trying To Understand the Utility of Roth Conversion

Post by eyemgh »

Fat Tails wrote: Sun May 09, 2021 1:52 am
Exchme wrote: Fri May 07, 2021 1:36 pm
eyemgh wrote: Fri May 07, 2021 11:45 am
Exchme wrote: Fri May 07, 2021 10:58 am I think you have too much money in tax deferred to gain from trying to get ACA subsidies. At 58, your tax deferred accounts could more than double by the time RMDs start (6% return would be almost $7M, 10% return would be $11M!) if you don't start working them down with Roth conversions. The first year RMD at 72 is around 4%, but rises to 6-7% by age 77, so your tax brackets will be very high later on.

I'm not an expert on the ACA subsidy, but I put in some different AGIs and roughly the change in subsidy was about 10% of the change in AGI, so doing a $10,000 Roth conversion would lose you $1,000 in subsidy. However, you have so much money in your tax deferred, that you will be in the 28% or 33% bracket during RMDs and if one of you passes earlier than the other, the remaining one will for sure be in the 33% bracket. So for the years that you would try to get the subsidy, you might pay no taxes, but that gives up the 10%, 12% and even 22% and 24% bracket opportunities for Roth conversions. The TCJA tax cuts are due to expire after 2025, so 22% will become 25% and 24% will become 28%. So, unlike most people, you could very easily end up worse off by subsidy chasing.

Similarly, for you the goal will be to stay in one of the lower 3 IRMAA tiers throughout life, you are going to pay some IRMAA taxes, but I think those effects are smaller than the Roth opportunities for you.
Thanks! Like I said, I've been good at saving, but clueless on how to efficiently spending it. I'm not sure I'm following. Please correct me if I'm getting this wrong. Are you saying that converting little enough to get a good ACA subsidy might not convert enough to be helpful to keep taxes lower on RMDs?
Yep, for most people, controlling their income to get the subsidies is a winner, but you have so much in tax deferred that if you don't do some good size Roth conversions, you will pay very high taxes down the road, likely ending up worse off than if you had just ignored the subsidy option. Possibly there is a combination where where you convert into the 24% bracket now through age 62 to take advantage of the TCJA rates and then at age 63 you try to capture a couple years of subsidies while also avoiding any IRMAA taxes. Since you don't have the computer equipment or Excel knowledge, you might think about getting a fee-only certified financial planner to look. This site can help you a lot, but there are some detailed calculations to do. Avoid financial advisors that takes a % of your assets each year - they are like drug dealers, making you think you feel good while they line their pockets with far, far more of your money in fees and high fund costs than any bad decisions you might make on this topic.

Also note that you should be holding the bond part of your portfolio preferentially in your tax deferred to slow down growth in that account. Put stocks in your Roth to maximize after tax growth.
+1, have a CFA with expertise in Roth conversions run your situation through their software and they will do a comprehensive look, including when to take social security. And to echo what was said above, you don’t need anybody to manage your investments for an annual fee. You just need the Roth conversion analysis. Then you should go back and have them update the analysis every couple of years or so to insure you stay on track given any changes in your situation, tax rates, etc.

You are asking the right questions.

Cheers
Thanks!
smitcat
Posts: 7941
Joined: Mon Nov 07, 2016 10:51 am

Re: Trying To Understand the Utility of Roth Conversion

Post by smitcat »

Fat Tails wrote: Sun May 09, 2021 1:52 am
Exchme wrote: Fri May 07, 2021 1:36 pm
eyemgh wrote: Fri May 07, 2021 11:45 am
Exchme wrote: Fri May 07, 2021 10:58 am I think you have too much money in tax deferred to gain from trying to get ACA subsidies. At 58, your tax deferred accounts could more than double by the time RMDs start (6% return would be almost $7M, 10% return would be $11M!) if you don't start working them down with Roth conversions. The first year RMD at 72 is around 4%, but rises to 6-7% by age 77, so your tax brackets will be very high later on.

I'm not an expert on the ACA subsidy, but I put in some different AGIs and roughly the change in subsidy was about 10% of the change in AGI, so doing a $10,000 Roth conversion would lose you $1,000 in subsidy. However, you have so much money in your tax deferred, that you will be in the 28% or 33% bracket during RMDs and if one of you passes earlier than the other, the remaining one will for sure be in the 33% bracket. So for the years that you would try to get the subsidy, you might pay no taxes, but that gives up the 10%, 12% and even 22% and 24% bracket opportunities for Roth conversions. The TCJA tax cuts are due to expire after 2025, so 22% will become 25% and 24% will become 28%. So, unlike most people, you could very easily end up worse off by subsidy chasing.

Similarly, for you the goal will be to stay in one of the lower 3 IRMAA tiers throughout life, you are going to pay some IRMAA taxes, but I think those effects are smaller than the Roth opportunities for you.
Thanks! Like I said, I've been good at saving, but clueless on how to efficiently spending it. I'm not sure I'm following. Please correct me if I'm getting this wrong. Are you saying that converting little enough to get a good ACA subsidy might not convert enough to be helpful to keep taxes lower on RMDs?
Yep, for most people, controlling their income to get the subsidies is a winner, but you have so much in tax deferred that if you don't do some good size Roth conversions, you will pay very high taxes down the road, likely ending up worse off than if you had just ignored the subsidy option. Possibly there is a combination where where you convert into the 24% bracket now through age 62 to take advantage of the TCJA rates and then at age 63 you try to capture a couple years of subsidies while also avoiding any IRMAA taxes. Since you don't have the computer equipment or Excel knowledge, you might think about getting a fee-only certified financial planner to look. This site can help you a lot, but there are some detailed calculations to do. Avoid financial advisors that takes a % of your assets each year - they are like drug dealers, making you think you feel good while they line their pockets with far, far more of your money in fees and high fund costs than any bad decisions you might make on this topic.

Also note that you should be holding the bond part of your portfolio preferentially in your tax deferred to slow down growth in that account. Put stocks in your Roth to maximize after tax growth.
+1, have a CFA with expertise in Roth conversions run your situation through their software and they will do a comprehensive look, including when to take social security. And to echo what was said above, you don’t need anybody to manage your investments for an annual fee. You just need the Roth conversion analysis. Then you should go back and have them update the analysis every couple of years or so to insure you stay on track given any changes in your situation, tax rates, etc.

You are asking the right questions.

Cheers
"+1, have a CFA with expertise in Roth conversions run your situation through their software and they will do a comprehensive look, including when to take social security."

Have you done this with a CFA? If yes what software do they use and how helpful was it? Do you know how it compared with other tools such as RPM , Pralana, IORP etc?
Topic Author
eyemgh
Posts: 165
Joined: Thu Aug 29, 2013 11:50 am

Re: Trying To Understand the Utility of Roth Conversion

Post by eyemgh »

smitcat wrote: Sun May 09, 2021 12:28 pm
Fat Tails wrote: Sun May 09, 2021 1:52 am
Exchme wrote: Fri May 07, 2021 1:36 pm
eyemgh wrote: Fri May 07, 2021 11:45 am
Exchme wrote: Fri May 07, 2021 10:58 am I think you have too much money in tax deferred to gain from trying to get ACA subsidies. At 58, your tax deferred accounts could more than double by the time RMDs start (6% return would be almost $7M, 10% return would be $11M!) if you don't start working them down with Roth conversions. The first year RMD at 72 is around 4%, but rises to 6-7% by age 77, so your tax brackets will be very high later on.

I'm not an expert on the ACA subsidy, but I put in some different AGIs and roughly the change in subsidy was about 10% of the change in AGI, so doing a $10,000 Roth conversion would lose you $1,000 in subsidy. However, you have so much money in your tax deferred, that you will be in the 28% or 33% bracket during RMDs and if one of you passes earlier than the other, the remaining one will for sure be in the 33% bracket. So for the years that you would try to get the subsidy, you might pay no taxes, but that gives up the 10%, 12% and even 22% and 24% bracket opportunities for Roth conversions. The TCJA tax cuts are due to expire after 2025, so 22% will become 25% and 24% will become 28%. So, unlike most people, you could very easily end up worse off by subsidy chasing.

Similarly, for you the goal will be to stay in one of the lower 3 IRMAA tiers throughout life, you are going to pay some IRMAA taxes, but I think those effects are smaller than the Roth opportunities for you.
Thanks! Like I said, I've been good at saving, but clueless on how to efficiently spending it. I'm not sure I'm following. Please correct me if I'm getting this wrong. Are you saying that converting little enough to get a good ACA subsidy might not convert enough to be helpful to keep taxes lower on RMDs?
Yep, for most people, controlling their income to get the subsidies is a winner, but you have so much in tax deferred that if you don't do some good size Roth conversions, you will pay very high taxes down the road, likely ending up worse off than if you had just ignored the subsidy option. Possibly there is a combination where where you convert into the 24% bracket now through age 62 to take advantage of the TCJA rates and then at age 63 you try to capture a couple years of subsidies while also avoiding any IRMAA taxes. Since you don't have the computer equipment or Excel knowledge, you might think about getting a fee-only certified financial planner to look. This site can help you a lot, but there are some detailed calculations to do. Avoid financial advisors that takes a % of your assets each year - they are like drug dealers, making you think you feel good while they line their pockets with far, far more of your money in fees and high fund costs than any bad decisions you might make on this topic.

Also note that you should be holding the bond part of your portfolio preferentially in your tax deferred to slow down growth in that account. Put stocks in your Roth to maximize after tax growth.
+1, have a CFA with expertise in Roth conversions run your situation through their software and they will do a comprehensive look, including when to take social security. And to echo what was said above, you don’t need anybody to manage your investments for an annual fee. You just need the Roth conversion analysis. Then you should go back and have them update the analysis every couple of years or so to insure you stay on track given any changes in your situation, tax rates, etc.

You are asking the right questions.

Cheers
"+1, have a CFA with expertise in Roth conversions run your situation through their software and they will do a comprehensive look, including when to take social security."

Have you done this with a CFA? If yes what software do they use and how helpful was it? Do you know how it compared with other tools such as RPM , Pralana, IORP etc?
I have not done this yet. I'm just getting ready to reach out to a few candidates. :D
smitcat
Posts: 7941
Joined: Mon Nov 07, 2016 10:51 am

Re: Trying To Understand the Utility of Roth Conversion

Post by smitcat »

eyemgh wrote: Sun May 09, 2021 1:05 pm
smitcat wrote: Sun May 09, 2021 12:28 pm
Fat Tails wrote: Sun May 09, 2021 1:52 am
Exchme wrote: Fri May 07, 2021 1:36 pm
eyemgh wrote: Fri May 07, 2021 11:45 am

Thanks! Like I said, I've been good at saving, but clueless on how to efficiently spending it. I'm not sure I'm following. Please correct me if I'm getting this wrong. Are you saying that converting little enough to get a good ACA subsidy might not convert enough to be helpful to keep taxes lower on RMDs?
Yep, for most people, controlling their income to get the subsidies is a winner, but you have so much in tax deferred that if you don't do some good size Roth conversions, you will pay very high taxes down the road, likely ending up worse off than if you had just ignored the subsidy option. Possibly there is a combination where where you convert into the 24% bracket now through age 62 to take advantage of the TCJA rates and then at age 63 you try to capture a couple years of subsidies while also avoiding any IRMAA taxes. Since you don't have the computer equipment or Excel knowledge, you might think about getting a fee-only certified financial planner to look. This site can help you a lot, but there are some detailed calculations to do. Avoid financial advisors that takes a % of your assets each year - they are like drug dealers, making you think you feel good while they line their pockets with far, far more of your money in fees and high fund costs than any bad decisions you might make on this topic.

Also note that you should be holding the bond part of your portfolio preferentially in your tax deferred to slow down growth in that account. Put stocks in your Roth to maximize after tax growth.
+1, have a CFA with expertise in Roth conversions run your situation through their software and they will do a comprehensive look, including when to take social security. And to echo what was said above, you don’t need anybody to manage your investments for an annual fee. You just need the Roth conversion analysis. Then you should go back and have them update the analysis every couple of years or so to insure you stay on track given any changes in your situation, tax rates, etc.

You are asking the right questions.

Cheers
"+1, have a CFA with expertise in Roth conversions run your situation through their software and they will do a comprehensive look, including when to take social security."

Have you done this with a CFA? If yes what software do they use and how helpful was it? Do you know how it compared with other tools such as RPM , Pralana, IORP etc?
I have not done this yet. I'm just getting ready to reach out to a few candidates. :D
I will be interested to see if the results are significantly different from those other tools.
User avatar
FiveK
Posts: 11559
Joined: Sun Mar 16, 2014 2:43 pm

Re: Trying To Understand the Utility of Roth Conversion

Post by FiveK »

eyemgh wrote: Fri May 07, 2021 10:19 am We have about $3M in qualified plans and will get just under $5500/mo if we both start SS at 67, more if I wait until 70. The house will be paid off so we won’t have any long term debt. Strange things happen, but we’re both healthy and have longevity in our families. We can live off $80k or so per year. The RMD on $3M plus SS will be well above that.
You could use Open Social Security: Free, Open-Source Social Security Calculator (OSS) to analyze when each of you should start taking SS. Given the large pre-tax balance and the consequent tax effect of withdrawals (which OSS does not consider), treating the OSS results as "no earlier than..." would be reasonable.
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