Roth conversions when we will be in 22% bracket for indefinite future

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cadreamer2015
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Roth conversions when we will be in 22% bracket for indefinite future

Post by cadreamer2015 » Tue Sep 11, 2018 3:59 pm

Hi All,

I'm interested in getting perspectives on whether or not it is worth it to do Roth conversions before I turn 70 in 4 years. My best estimate is that we will be in the 22% Federal tax bracket (8% California) for the indefinite future, both before age 70 and probably even after age 70, depending on how our portfolio performs. Of course if the market zooms a lot higher in that time RMDs could push us into the 24% bracket. Does it make sense to do Roth conversions to the top of the 22% bracket now, just in case we might otherwise be in the 24% bracket after age 70? It would probably only require taking a $20,000 or so conversion to put us at the top of the 22% bracket, and that would probably also put us into the IRMAA penalty zone. It's hard for me to get enthusiastic about moving around less than 1% of our portfolio each year for the next 4 years - will that even move the dial significantly? Especially as I would prefer to avoid the IRMAA penalty as long as possible.

I can provide more detail if needed.

Thanks
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bradpevans
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Re: Roth conversions when we will be in 22% bracket for indefinite future

Post by bradpevans » Tue Sep 11, 2018 4:13 pm

cadreamer2015 wrote:
Tue Sep 11, 2018 3:59 pm
Hi All,

I'm interested in getting perspectives on whether or not it is worth it to do Roth conversions before I turn 70 in 4 years. My best estimate is that we will be in the 22% Federal tax bracket (8% California) for the indefinite future, both before age 70 and probably even after age 70, depending on how our portfolio performs. Of course if the market zooms a lot higher in that time RMDs could push us into the 24% bracket. Does it make sense to do Roth conversions to the top of the 22% bracket now, just in case we might otherwise be in the 24% bracket after age 70? It would probably only require taking a $20,000 or so conversion to put us at the top of the 22% bracket, and that would probably also put us into the IRMAA penalty zone. It's hard for me to get enthusiastic about moving around less than 1% of our portfolio each year for the next 4 years - will that even move the dial significantly? Especially as I would prefer to avoid the IRMAA penalty as long as possible.

I can provide more detail if needed.

Thanks
the IRMAA penalty may outweigh the (potential) tax rate savings.

Roth does add flexibility later: no RMDS, a large Roth withdraw (extravagant cruise, new car, lumpy expense) has no tax implications on your other taxes.

Some have the view that having both Roth and traditional gives a bit of a 'hedge' against not knowing your
exact income / the tax rate on that income.

The Wizard
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Re: Roth conversions when we will be in 22% bracket for indefinite future

Post by The Wizard » Tue Sep 11, 2018 4:33 pm

I'm doing Roth conversions in the 24% bracket for the next two years, so yes it's worth it.
Forget the "top of the xx% bracket".
Just Roth convert enough to levelize your AGI before and after age 70, with an eye on IRMAA tiers...
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Charlie Foxtrot
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Re: Roth conversions when we will be in 22% bracket for indefinite future

Post by Charlie Foxtrot » Tue Sep 11, 2018 5:01 pm

Hi cadreamer20,

We have the same question... we're in the 22% bracket now, we may jump up to the 24% tax bracket in the next few years, and at a minimum will be in the 22% tax bracket when both of us retire, if not the 24% tax bracket (assuming tax brackets remain the same, adjusted for inflation). The big difference is that I am just about to turn 59 1/2, so I have the next 11 years to do Roth conversions and you only have 4 years. To really make an educated guess (as opposed to a SWAG), you have to plug the numbers into one of those complicated spreadsheets. My hunch is that it wouldn't make much difference at all based on the information you provided. I haven't done the spreadsheets yet, but I am already leaning towards doing the conversion because of the possibility that my wife could inherit my Traditional IRA someday, and would be paying significantly higher taxes as a single taxpayer, rather than married filing jointly. Would that possibility influence your decision?
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grabiner
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Re: Roth conversions when we will be in 22% bracket for indefinite future

Post by grabiner » Wed Sep 12, 2018 7:49 pm

Can you pay the taxes with money that would be in your taxable account otherwise (either money that is already there, or RMDs you don't need to spend)? If so, then a conversion is a net gain even if you stay in the same bracket; you trade $10,000 in a traditional account (worth $7000 tax-free) and $3000 in a taxable account (worth less than $3000) for $10,000 in a Roth account (worth $10,000 tax-free).

Otherwise, the conversion is break-even. This may still be beneficial. since you might wind up in a higher bracket in the future, either because RMDs force you into the 24% bracket, or because the 22% bracket is scheduled to become a 25% bracket in 2026.
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hawkfan55
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Re: Roth conversions when we will be in 22% bracket for indefinite future

Post by hawkfan55 » Wed Sep 12, 2018 9:42 pm

Try www.i-orp.com. Use the Extended Version of the Optimal Retirement Planner.
We are doing Roth Conversions up to MAGI $170k, the IRMAA threshold for MFJ where additional Medicare surcharges/premiums are not required. I do want to try to protect my DW from the "filing single" tax burden in the event of my early demise. By converting in the 22% bracket now, we estimate the balance of our retirement years will be spent in the 15% bracket after we start SS. Our Roth accounts will enable us to spend as if we were in the 25% bracket. :D
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NotWhoYouThink
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Re: Roth conversions when we will be in 22% bracket for indefinite future

Post by NotWhoYouThink » Wed Sep 12, 2018 9:53 pm

We are a couple of years away, but i-orp tells me that we'll want to convert even into the 24% bracket. We're kind of stuck with most of the IRMAA anyway. The kids will thank us some day.

cadreamer2015
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Re: Roth conversions when we will be in 22% bracket for indefinite future

Post by cadreamer2015 » Thu Sep 13, 2018 6:57 am

Thanks to all who replied. I've run i-orp (extended version) and here is a summary of the results:

No Roth conversions: Annual disposable income $152,000
Roth conversions up to the top of the 22% bracket: Annual disposable income $153,000
Unlimited Roth conversions: Annual disposable income $154,000

Although one or two thousand dollars is real money, it is not very much money in the scheme of things. I think I may do as hawkfan plans and convert up to the IRMAA limit.
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Dottie57
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Re: Roth conversions when we will be in 22% bracket for indefinite future

Post by Dottie57 » Thu Sep 13, 2018 7:16 am

cadreamer2015 wrote:
Thu Sep 13, 2018 6:57 am
Thanks to all who replied. I've run i-orp (extended version) and here is a summary of the results:

No Roth conversions: Annual disposable income $152,000
Roth conversions up to the top of the 22% bracket: Annual disposable income $153,000
Unlimited Roth conversions: Annual disposable income $154,000

Although one or two thousand dollars is real money, it is not very much money in the scheme of things. I think I may do as hawkfan plans and convert up to the IRMAA limit.
I do think Roth would help for bigger ticket items. No income tax for a big vacation or car, etc.

Dottie57
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Re: Roth conversions when we will be in 22% bracket for indefinite future

Post by Dottie57 » Thu Sep 13, 2018 7:17 am

cadreamer2015 wrote:
Thu Sep 13, 2018 6:57 am
Thanks to all who replied. I've run i-orp (extended version) and here is a summary of the results:

No Roth conversions: Annual disposable income $152,000
Roth conversions up to the top of the 22% bracket: Annual disposable income $153,000
Unlimited Roth conversions: Annual disposable income $154,000

Although one or two thousand dollars is real money, it is not very much money in the scheme of things. I think I may do as hawkfan plans and convert up to the IRMAA limit.
I do think Roth would help for bigger ticket items. No income tax for a big vacation or car, etc.

.

JBTX
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Re: Roth conversions when we will be in 22% bracket for indefinite future

Post by JBTX » Thu Sep 13, 2018 8:35 am

Once you start drawing social security your marginal rate can increase as a major portion of social security becomes taxable. Plus looking down the road there is always the possibility that tax rates will revert to prior levels, as they are scheduled to do by law in 2026.

MnD
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Re: Roth conversions when we will be in 22% bracket for indefinite future

Post by MnD » Thu Sep 13, 2018 8:55 am

We're not and will be in the middle of the 22% bracket at age 56 newly retired next year and for the foreseeable future. Deferring income taxes for as long as possible has served us well and all the advice I've received to date over the years to contribute to Roth's or do Roth conversions has (in retrospect) been very poor advice that I'm glad I have not followed.

I've run a number of projections and I'm comfortable with where i see our position in brackets many years out. If equity provides very outsized returns over the next 10-20 years (which everyone says is not going to be the case) we might jump a bracket for just a small portion of our income quite later in life. But an unexpected plethora of wealth and income is kind of a first-world problem to have. We have a traditional inherited IRA and we thank and toast my departed folks every year when we take an RMD and make plans for it. This idea that the kids will be unhappy with inherited traditional IRA's is just nonsense.

retiredjg
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Re: Roth conversions when we will be in 22% bracket for indefinite future

Post by retiredjg » Thu Sep 13, 2018 8:59 am

I believe your IRMAA limit is $170k - MAGI, not taxable income. I would convert up to that number, not the top of the 22% tax bracket which would be a higher number. The IRMAA penalty for one person is about $600 and I assume it is twice that for a couple. That's a lot to pay for just increasing your conversion a little.

It is true that conversions will be break even as long as both of you are alive, but when one dies, the survivor will be pushed into the 24% bracket which might then be the 28% bracket again. This brings up the possibility of converting into the 24% bracket now - to the top of the next IRMAA cliff. Hard to say if it is worth that or not.

bighatnohorse
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Re: Roth conversions when we will be in 22% bracket for indefinite future

Post by bighatnohorse » Thu Sep 13, 2018 9:06 am

A BIG charitable donation, such as highly appreciated real estate, to a Charitable Remainder Trust can provide you with a hefty deduction. One can then time the IRA recharacterization with the donation deduction - there are multiple benefits if that is available to you and properly structured.

tomd37
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Re: Roth conversions when we will be in 22% bracket for indefinite future

Post by tomd37 » Thu Sep 13, 2018 9:14 am

retiredjg - The current limit is $170K Modified AGI. At age 81 I am looking ahead to see what the tax rate for either of us might be when filing single as a result of the death of one of us. I am considering a Roth conversion up to Modified AGI of $170K. Combined with previous (years ago) conversions it might give us some additional tax-free funds at that time should we need a pot of money to make a significant purchase of some type, without having to tap taxable funds (traditional IRA) for such a large amount.
Tom D.

SGM
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Re: Roth conversions when we will be in 22% bracket for indefinite future

Post by SGM » Fri Sep 14, 2018 2:54 am

We converted over several years since 2010 when conversion was allowed regardless of income. Income taxes were paid out of a taxable account. Soon we will reach the age where we would have needed to make RMDs from tax deferred accounts if we hadn't converted all of it. We have already reaped a small advantage by decreasing the taxable account slightly and increasing the never taxed component. The issue of a widow having higher tax rates is somewhat improved because there won't be RMDs. If the Roth is inherited the heirs won't have to pay taxes on withdrawals.

The only look back I will do is to calculate what I would have had to pay in additional taxes and IRMMA at age 70 1/2 if we had not converted. Not having RMDs will decrease the amount of taxes going forward for possibly over 30 years given expected longevity.

The Wizard
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Re: Roth conversions when we will be in 22% bracket for indefinite future

Post by The Wizard » Fri Sep 14, 2018 7:38 am

SGM wrote:
Fri Sep 14, 2018 2:54 am
We converted over several years since 2010 when conversion was allowed regardless of income...
To be clear, Roth conversion is STILL allowed regardless of income...
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