Roth conversion taxes- how to pay them?

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Topic Author
abqguy
Posts: 21
Joined: Thu Oct 25, 2018 3:37 pm

Roth conversion taxes- how to pay them?

Post by abqguy »

Hello,

This a follow-up posting, to my posting back in October 2018. I have about 75% of my retirement savings in pre-tax IRA's, 25% in a Vanguard variable annuity, and no taxable accounts. I have a tiny amount in Roth IRA's. The IRA's plus annuity total about $1m.

I am 63 years old, single, retired, and I receive rental income that is almost enough to support me. But I find that I pull perhaps $20K per year from IRA's. Also I will be paying for some home repairs soon. This all will total about $60K over the next two years.

Until I qualify for Medicare, for the next 2 years, I am trying to keep my yearly income under the ACA cap of about $48K. That way I can qualify for an ACA subsidy.

So, my plan is to move sufficient money from the IRA's to a Roth, in 2018, to yield $60K after taxes, and then use this money over the next two years.

I created a spreadsheet that includes the various federal income tax brackets and IRMAA breakpoints, so that I could fully understand what taxes I will owe, and the cost of IRMAA penalties. Federal and state taxes will come to about $32K (reflecting being pushed into the 24% bracket.) I will need to move $92K, to net the $60K.

My question is, should I withdraw $60K from the IRA's to move to the Roth; but pay the $32K of taxes from the Vanguard annuity? The first $200K that comes out of the annuity is taxed just the same as the IRA money i.e. as regular income (I learned this from Vanguard). My thinking is, the annuity money can never be converted to a Roth (because I will likely have no earned income)... I pay an additional .5% year of management fees on the annuity... So it makes sense to sacrifice the annuity money for taxes. Does anyone see any error in this thinking? Thanks!
mnvalue
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Joined: Sun May 05, 2013 2:22 pm

Re: Roth conversion taxes- how to pay them?

Post by mnvalue »

That seems like a reasonable plan to me.
krow36
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Location: WA

Re: Roth conversion taxes- how to pay them?

Post by krow36 »

Have you read about the 5 year clock on distributions of Roth conversions?
https://www.bogleheads.org/wiki/Roth_IRA
There's more details in this article: https://www.kitces.com/blog/understandi ... nversions/
Topic Author
abqguy
Posts: 21
Joined: Thu Oct 25, 2018 3:37 pm

Re: Roth conversion taxes- how to pay them?

Post by abqguy »

This posting by KAWill, seems to put this question to rest... I am older than 59 1/2, and I opened a Roth more than 5 years ago. Or am I mis-interpreting this?

Here is the table version of the Roth Conversion chart that many here reference:

Re: Roth IRA Rules - Table Approach
Posted by: KAWill (IP Logged)
Date: October 14, 2010 11:57PM


Roth IRA Distribution Table

UNDER AGE 59.5
FIVE YEAR CONVERSION HOLDING PERIOD NOT MET

Contributions: Tax-No; Penalty-No
Conversions: Tax-No; Penalty-Yes (Taxable Portion)
Conversions: Tax-No ;Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes; Penalty-Yes

UNDER AGE 59.5
FIVE YEAR CONVERSION HOLDING PERIOD MET

Contributions: Tax-No; Penalty-No
Conversions: Tax-No; Penalty-No (Taxable Portion)
Conversions: Tax-No; Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes; Penalty-Yes

OVER AGE 59.5
LESS THAN FIVE YEARS SINCE OPENING FIRST ROTH IRA

Contributions: Tax-No ;Penalty-No
Conversions: Tax-No; Penalty-No (Taxable Portion)
Conversions: Tax-No; Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes; Penalty-No

OVER AGE 59.5
FIVE YEARS OR MORE SINCE OPENING FIRST ROTH IRA

All Distributions Are Qualified
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FiveK
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Re: Roth conversion taxes- how to pay them?

Post by FiveK »

abqguy wrote: Sun Dec 09, 2018 3:17 pmSo it makes sense to sacrifice the annuity money for taxes. Does anyone see any error in this thinking? Thanks!
Less annuity and more Roth - what's not to like? Seems a fine plan.
krow36
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Location: WA

Re: Roth conversion taxes- how to pay them?

Post by krow36 »

abqguy wrote: Sun Dec 09, 2018 4:31 pm This posting by KAWill, seems to put this question to rest... I am older than 59 1/2, and I opened a Roth more than 5 years ago. Or am I mis-interpreting this?

Here is the table version of the Roth Conversion chart that many here reference:

Re: Roth IRA Rules - Table Approach
Posted by: KAWill (IP Logged)
Date: October 14, 2010 11:57PM


Roth IRA Distribution Table

UNDER AGE 59.5
FIVE YEAR CONVERSION HOLDING PERIOD NOT MET

Contributions: Tax-No; Penalty-No
Conversions: Tax-No; Penalty-Yes (Taxable Portion)
Conversions: Tax-No ;Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes; Penalty-Yes

UNDER AGE 59.5
FIVE YEAR CONVERSION HOLDING PERIOD MET

Contributions: Tax-No; Penalty-No
Conversions: Tax-No; Penalty-No (Taxable Portion)
Conversions: Tax-No; Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes; Penalty-Yes

OVER AGE 59.5
LESS THAN FIVE YEARS SINCE OPENING FIRST ROTH IRA

Contributions: Tax-No ;Penalty-No
Conversions: Tax-No; Penalty-No (Taxable Portion)
Conversions: Tax-No; Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes; Penalty-No

OVER AGE 59.5
FIVE YEARS OR MORE SINCE OPENING FIRST ROTH IRA

All Distributions Are Qualified
Yes, it certainly does! I thought I knew that too? :oops:
Shallowpockets
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Joined: Fri Nov 20, 2015 9:26 am

Re: Roth conversion taxes- how to pay them?

Post by Shallowpockets »

You have a few areas here to play with to keep yourself right for the ACA. First, do you need the repairs? Do you need repairs totaling 60k, and what is the timeframe they need to be done?
You already are taking 20k as needed from your IRAs. Maybe you could work on that, I.e. , lifestyle, budget changes.
Why would you need to take the full 60k out in one year? Spread it over two years.
Do you have any TLH you could do?
Longdog
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Location: Philadelphia

Re: Roth conversion taxes- how to pay them?

Post by Longdog »

abqguy wrote: Sun Dec 09, 2018 3:17 pm Until I qualify for Medicare, for the next 2 years, I am trying to keep my yearly income under the ACA cap of about $48K. That way I can qualify for an ACA subsidy.

So, my plan is to move sufficient money from the IRA's to a Roth, in 2018, to yield $60K after taxes, and then use this money over the next two years.
I'm struggling to reconcile these two statements, which seem mutually exclusive. If you're trying to keep your income under $48K and simultaneously intend to yield $60K after taxes (implying even more than $60K before taxes), how can both conditions be met?
Steve
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David Jay
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Location: Michigan

Re: Roth conversion taxes- how to pay them?

Post by David Jay »

abqguy wrote: Sun Dec 09, 2018 3:17 pm My question is, should I withdraw $60K from the IRA's to move to the Roth; but pay the $32K of taxes...
The entire $60K coming out of the tIRA is taxable as normal income and thus is added to your MAGI (modified adjusted gross income). For ACA eligibility, how you pay the taxes does not matter, the entire 60K is income.

[edit] I am retiring next month @ 62 so I have been exploring these issues. Uncle Sam wants to be paid on those tIRA pre-tax contributions, no easy way around it.
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
cas
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Re: Roth conversion taxes- how to pay them?

Post by cas »

Longdog wrote: Mon Dec 10, 2018 7:24 am
abqguy wrote: Sun Dec 09, 2018 3:17 pm Until I qualify for Medicare, for the next 2 years, I am trying to keep my yearly income under the ACA cap of about $48K. That way I can qualify for an ACA subsidy.

So, my plan is to move sufficient money from the IRA's to a Roth, in 2018, to yield $60K after taxes, and then use this money over the next two years.
I'm struggling to reconcile these two statements, which seem mutually exclusive. If you're trying to keep your income under $48K and simultaneously intend to yield $60K after taxes (implying even more than $60K before taxes), how can both conditions be met?
I wondered that initially, as well. OP will have to clarify, but what I think he may have meant is that he needs to stay under $48K for 2019 and 2020. But, he also sees large one-time expenses coming up in 2019 and 2020. So he's trying to bunch taxable income into 2018, so that he can pay the one-time expenses in 2019 and 2020 without generating additional income in 2019 and 2020.
Topic Author
abqguy
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Joined: Thu Oct 25, 2018 3:37 pm

Re: Roth conversion taxes- how to pay them?

Post by abqguy »

That is it exactly.
hawkfan55
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Re: Roth conversion taxes- how to pay them?

Post by hawkfan55 »

Money is fungible. You could say taxes are coming from your rental income or from your annuity. Either way, sounds like you are going to need to withdraw the $92k from your annuity to have the money for your spending plans. However, I'm not sure how you would do that AND stay under the ACA cap?
We are retired, early 60s (63 and 60) and have a pension as our only current income stream We withdraw from our IRA for additional spending needs, are doing Roth Conversions and withdrawing the taxes from our IRA as well. The pension and all IRA withdrawals are taxed and counted towards our MAGI for Medicare's IRMAA calculations. Our plan is to limit our withdrawals so that we do not have to pay additional premiums for Medicare.
Forum Library of Investing Advice: https://www.bogleheads.org/wiki/Main_Page
Topic Author
abqguy
Posts: 21
Joined: Thu Oct 25, 2018 3:37 pm

Re: Roth conversion taxes- how to pay them?

Post by abqguy »

To clarify, my plan is to do the IRA to Roth conversion in 2018. I will far exceed the ACA cap in 2018. But in 2019 and 2020, I will make withdrawals from the new Roth, and thereby stay under the ACA cap.
magicbunny
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Re: Roth conversion taxes- how to pay them?

Post by magicbunny »

Hallo! One suggestion... since it looks as if you might have a big tax bill in 2018

You might consider putting some assets in 2018 to either or both
  • 1) a charitable gift annuity (probably with a deferred payout after 2019 and 2020)
  • 2) a charitable remainder unitrust (CRUT) (you might be able to use a NIMCRUT to minimize payout in 2019 and 2020)
to get a nice tax deduction in 2018 to help pay for the Roth conversion. Also you will get a bit of lifetime payout of income to protect a little against longevity risk. You can donate appreciated assets from wherever. This gives you an immediate tax deduction for 2018, and then eventual lifetime income. The drawback is that your donated assets will go to the charity and not to your heirs.

Setting this up is not hard... a sophisticated donee will usually pay all the expenses and set up everything for you subject to perhaps a final review by your lawyer. Just start calling around universities to start with, to do some initial research. I personally find university planned giving departments to be very competent, they provide accurate info, and they try to be very trustworthy as they want you to donate again.

Edit: Wups, I'm so sorry, I just realized you have little time left in 2018. Try a big university if you are inclined to explore this route. The donees can move fast, especially if they know it's for a 2018 deduction.

magicbunny
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