Roth Convert: To the max of your likely future bracket or the one just below?

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Ron Scott
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Roth Convert: To the max of your likely future bracket or the one just below?

Post by Ron Scott » Sun Oct 15, 2017 10:16 pm

For those of you who are converting this year or plan to Roth convert what is your strategy?

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FiveK
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Re: Roth Convert: To the max of your likely future bracket or the one just below?

Post by FiveK » Mon Oct 16, 2017 12:22 am

Ron Scott wrote:
Sun Oct 15, 2017 10:16 pm
For those of you who are converting this year or plan to Roth convert what is your strategy?
If you can pay the taxes from cash on hand, converting even at the same marginal rate is favorable because in effect you are converting both traditional and taxable funds into the Roth account.

Spirit Rider
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Re: Roth Convert: To the max of your likely future bracket or the one just below?

Post by Spirit Rider » Mon Oct 16, 2017 12:48 am

I think it depends on the difference in brackets and other likely factors.

In the past I actually converted to a bracket one higher than my pretty certain retirement bracket. This was during the two major dips in the stock markets in 2002 and 2009 when I was uncompensated. Of course, the higher bracket was the 28% vs 25 % rackets, 3% isn't actually fair.

I have also known people in higher brackets do so as a tax diversification measure to be able to control IRMAA payments.

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House Blend
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Re: Roth Convert: To the max of your likely future bracket or the one just below?

Post by House Blend » Mon Oct 16, 2017 11:01 am

If you are a typical oversaving Boglehead and expect to leave behind a large estate...

1. You should be including your beneficiaries future tax rates in the calculation.

2. Don't Roth convert dollars that would otherwise be directed to charity. In other words, why do that last $100K of Roth conversions if instead you would be willing and able to direct the difference in RMDs to charity via QCD?

BigJohn
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Re: Roth Convert: To the max of your likely future bracket or the one just below?

Post by BigJohn » Mon Oct 16, 2017 5:35 pm

All good advice above and consistent with my plans to convert at about the same tax rate. However, there are a lot of unknowns and your heirs tax rate can be as or more important than yours. It can also be less than obvious what your marginal tax rate really is with all the phase-in, phase-out break points that can create a very different actual marginal rate than the official bracket in which you happen to fall. Here are a couple of discussions with examples
viewtopic.php?p=2645133#p2645133
viewtopic.php?p=2570101#p2570101

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celia
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Re: Roth Convert: To the max of your likely future bracket or the one just below?

Post by celia » Mon Oct 16, 2017 8:09 pm

We've been converting with the goal of trying to keep our Taxable Income (Form 1040, line 43) steady for the rest of our lives. This includes figuring out what our SS will be when it starts as well as RMDs, including from our Inherited traditional IRAs (which may be emptied during our lifetime).
House Blend wrote:
Mon Oct 16, 2017 11:01 am
If you are a typical oversaving Boglehead and expect to leave behind a large estate...

1. You should be including your beneficiaries future tax rates in the calculation.
I think many people don't think of their heirs' tax brackets correctly (even if they know what it is today). What you should be thinking about is what your hers' tax bracket may be WHEN YOU DIE. That could be 30 or more years in the future. Or it could be tomorrow. Maybe they will be retired by then or maybe you will have a different mix of assets then.

Since my heirs have different tax brackets now and will probably also have different tax brackets later (even the lowest one now could be the highest one later), I think giving them Roths would be fair in ensuring they all have the same spending power. They each could choose when to withdraw more than the RMDs to fit their own situations.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

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