converting IRA funds to Roth, to avoid RMDs

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Topic Author
geranium
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Joined: Mon Mar 16, 2015 3:06 pm

converting IRA funds to Roth, to avoid RMDs

Post by geranium »

If I am retired, in the 15% tax bracket, how can I tell how much I can convert from my IRA to a Roth in any given year, without incurring extra taxes?
Last edited by geranium on Tue Apr 07, 2015 5:05 pm, edited 1 time in total.
mhalley
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Joined: Tue Nov 20, 2007 6:02 am

Re: converting IRA funds to Roth, to avoid RMDs

Post by mhalley »

Use TaxCaster. https://turbotax.intuit.com/tax-tools/c ... taxcaster/# They have an app also if you have a tablet.
Mike
retiredjg
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Re: converting IRA funds to Roth, to avoid RMDs

Post by retiredjg »

geranium wrote:If I am retired, in the 15% tax bracket, how can I tell how much I can convert from my IRA to a Roth in any given year, without incurring extra taxes?
You will have extra taxes unless the entire IRA is composed of non-deductible contributions (or Roth rollovers) which is pretty unlikely in today's market.

If what you meant to ask is how to stay in the 15% bracket, use TaxCaster. The TaxCaster I've been using is for 2014 - I don't know when 2015 becomes available. So if you use 2014, you need to realize you are getting a ball park answer.
Alan S.
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Re: converting IRA funds to Roth, to avoid RMDs

Post by Alan S. »

If you are collecting SS benefits, you may find that the first dollar converted raise your taxes more than additional dollars converted. The reason is that until 85% of your benefits are taxable, the marginal rate (27.75% in the 15% nominal bracket) is higher than spilling over to the 25% bracket. If you enter 5k conversion increments into taxcaster and make note of your total tax, you can tell how much each additional increment of 5k is costing you.

It is best to do conversion before claiming SS benefits, depending on how many years you have between retirement and when you start the SS benefits. Of course, there may be other factors in your personal financial situation to address as well.
Topic Author
geranium
Posts: 7
Joined: Mon Mar 16, 2015 3:06 pm

Re: converting IRA funds to Roth, to avoid RMDs

Post by geranium »

Wow, thanks for the TaxCaster tip! I entered my projected retirement pensions, and social security benefits minus the whiplash elimination provision, and TaxCaster calculated that I had no taxable income, and put me in the 10% tax bracket.

But I don't see where to enter 5k increments of IRA funds. There are little boxes for entering interest, capital gains, etc., but no IRA fund boxes.
classicjazzfan
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Joined: Tue Mar 10, 2015 8:44 pm

Re: converting IRA funds to Roth, to avoid RMDs

Post by classicjazzfan »

Alan S. wrote: It is best to do conversion before claiming SS benefits, depending on how many years you have between retirement and when you start the SS benefits. Of course, there may be other factors in your personal financial situation to address as well.
Alan S.:

Your statement above speaks to an issue about which I've been uncertain for some time. I'm hoping that you and other Bogleheads can help me to think it through more clearly.

I expect to retire in August 2020 at age 65. I will reach my SS full retirement age of 66 in October 2020 at which time I'm tentatively planning to file a restricted application for SS spousal benefits (projected to be about $13,000). I plan to file for my own benefits at age 70 (projected to be about $37,000 in current dollars). My no longer employed wife, age 61, is already drawing about $24,500 in SS disability benefits. In June, she will begin collecting an employer pension of about $7000 annually. We're comfortably below the ceiling for the 15% tax bracket and will remain so until I turn 70 1/2 when what I expect to be sizeable RMDs (based on a low seven-figure portfolio) begin their assault. Given that expectation, I've been planning on doing a Roth conversion in each of the four years between the time I turn 66 and then 70 1/2 (making sure to stay under the 15% ceiling).

Is this strategy at odds with your advice quoted above? Or does it fall into your category of "other factors in your personal financial situation"? Receiving SS benefits early is a fait accompli in my wife's case; and I'd prefer not to forfeit "free money" for four years in the form of a SS spousal benefit. At the same time, I expect our RMDs to push us into the 25% bracket. If my calculations are correct, we could convert a significant portion of our retirement funds into Roth money (still staying within the 15% bracket) so as to reduce the RMD blow later (even though we may end up in the 25% bracket nonetheless). In short, would doing the Roth conversions be advisable or not, given the presence of SS money?

I thank you (and any other members wishing to respond) in advance for your insights.
livesoft
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Re: converting IRA funds to Roth, to avoid RMDs

Post by livesoft »

geranium wrote:But I don't see where to enter 5k increments of IRA funds. There are little boxes for entering interest, capital gains, etc., but no IRA fund boxes.
Other income. IRA/pension distributions.

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Alan S.
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Re: converting IRA funds to Roth, to avoid RMDs

Post by Alan S. »

If you have basis in your IRA, for taxcaster forecasting treat your IRA as having no basis. But once you arrive at the optimum conversion amount, you will gross up the amount you entered to reflect your basis in the IRA. Do that by dividing the figure you entered by the taxable % of your IRA (1.000 less basis %).

For example, if 45,000 is the figure you entered into taxcaster that produces the tax bill you find acceptable, and your IRA has 10% basis per Form 8606, divide the 45,000 by .90. The result will be 50,000, the actual amount of the conversion you will do.

NOTE: The end goal is not to eliminate RMDs totally, just to reduce them to the point where your average marginal rate in retirement drops to the rate you are paying to convert. Once it gets down to that level, additional conversions may not be beneficial.
Alan S.
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Joined: Mon May 16, 2011 6:07 pm
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Re: converting IRA funds to Roth, to avoid RMDs

Post by Alan S. »

classicjazzfan wrote:
Alan S. wrote: It is best to do conversion before claiming SS benefits, depending on how many years you have between retirement and when you start the SS benefits. Of course, there may be other factors in your personal financial situation to address as well.
Alan S.:

Your statement above speaks to an issue about which I've been uncertain for some time. I'm hoping that you and other Bogleheads can help me to think it through more clearly.

I expect to retire in August 2020 at age 65. I will reach my SS full retirement age of 66 in October 2020 at which time I'm tentatively planning to file a restricted application for SS spousal benefits (projected to be about $13,000). I plan to file for my own benefits at age 70 (projected to be about $37,000 in current dollars). My no longer employed wife, age 61, is already drawing about $24,500 in SS disability benefits. In June, she will begin collecting an employer pension of about $7000 annually. We're comfortably below the ceiling for the 15% tax bracket and will remain so until I turn 70 1/2 when what I expect to be sizeable RMDs (based on a low seven-figure portfolio) begin their assault. Given that expectation, I've been planning on doing a Roth conversion in each of the four years between the time I turn 66 and then 70 1/2 (making sure to stay under the 15% ceiling).

Is this strategy at odds with your advice quoted above? Or does it fall into your category of "other factors in your personal financial situation"? Receiving SS benefits early is a fait accompli in my wife's case; and I'd prefer not to forfeit "free money" for four years in the form of a SS spousal benefit. At the same time, I expect our RMDs to push us into the 25% bracket. If my calculations are correct, we could convert a significant portion of our retirement funds into Roth money (still staying within the 15% bracket) so as to reduce the RMD blow later (even though we may end up in the 25% bracket nonetheless). In short, would doing the Roth conversions be advisable or not, given the presence of SS money?

I thank you (and any other members wishing to respond) in advance for your insights.
Actually, you are the typical case to take advantage of this 4 year window. Your SS strategy is excellent. At 70 you are adding 24k more SS and around 45k in RMDs which will push you into the 25% bracket by a decent amount. As such you might consider doing the conversions in amounts that exceed the top of the 15% bracket somewhat as insurance to keep you out of the 28% bracket longer. In effect, after 70 there is little you can do to avoid the paying the piper and you then have to look at things in terms of the amount you keep after taxes rather than the tax bill. Another philosophic approach is to realize that the IRS effectively owns x% of your IRA already, and taking those RMDs results in the RMD money going to your taxable account where your ownership is much closer to 100%.
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