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Roth conversion

Posted: Tue Mar 05, 2019 5:45 am
by indexonlyplease
This year I would like to start converting my taxed deferred compensation (457 fund) to both our Roth IRA'a. I don't have much to fill up to the max 22% tax bracket after income from pension and part time work.

Question: does it matter if I pay the taxes with the monney in the 457 plan or cash I have saved? Can I ask them for more money and take the taxes out of the money I request?

What if any is the difference?
Does it make sense to go into the 24% tax bracket now also?
I will be 55 in April, wife 51 so I have many years to do this.
I will take SS at 70, no sure of wife.

Thanks,

Re: Roth conversion

Posted: Tue Mar 05, 2019 8:05 am
by lakpr
No it does not matter whether the taxes come from the funds within the 457 plan or from outside sources. You can shelter more in the Roth IRAs if you are able to pay the taxes from the cash you saved (as the amount you can convert to Roth is upper-bounded by the amount in the 457 plan)

I would say yes it would make sense to go into the 24% bracket too, given that the tax rates are poised to revert to 15%/25% tax bracket in 2025, 6 more years from now. So the ability to convert at 24% is a limited time offer.

Are you in a state with no income tax? or at least in a state like IL, which doesn't tax Roth conversions? If you are flexible, you might want to consider moving to such a state for a period of 2 to 3 years, and during such residency convert the max amounts you can to Roth (geographic arbitrage)

Leave enough in your traditional 401k/IRA funds to cover the upper limit of lower tax brackets in your golden years, multiplied by 20. That would be $78.6k + $24.4k for 2019 = $103k, multiplied by 20 = $2.06 million. Or if you consider you want to be in 15% bracket after 2025, $75k + $13k standard deduction = $88k, multiplied by 20 = $1.76 million.

I am using the multiplier of 20 because the RMDs start at 4% of the outstanding balance, and increase gradually from there, the assumption is that the average RMD withdrawal would be approximately 5%.

Re: Roth conversion

Posted: Tue Mar 05, 2019 10:01 am
by Eagle33
If you are 63 or older, remember to factor in IRMMA Medicare premium surcharges when calculating your conversion amount.

Re: Roth conversion

Posted: Tue Mar 05, 2019 10:15 am
by TheTimeLord
Eagle33 wrote:
Tue Mar 05, 2019 10:01 am
If you are 63 or older, remember to factor in IRMMA Medicare premium surcharges when calculating your conversion amount.
Excuse my ignorance but why 63 instead of 65?

Re: Roth conversion

Posted: Tue Mar 05, 2019 10:23 am
by lakpr
because IRMAA looks at the tax returns from the year when you are age 63.

Example: if you are 63 in 2017, you would have filed the tax return in 2018 when you are 64; and for the year 2019 when you are 65, IRMAA looks at the tax returns of 2018 to determine your Medicare surcharges.

Re: Roth conversion

Posted: Tue Mar 05, 2019 10:30 am
by TheTimeLord
lakpr wrote:
Tue Mar 05, 2019 10:23 am
because IRMAA looks at the tax returns from the year when you are age 63.
I found this, so your tax return at 63 only applies for a single year, correct?
The determination is made using the beneficiary’s most recent federal tax return—a two-year look back. For example, the IRMAA paid by your clients in 2019 would rely on 2017 tax returns.

Re: Roth conversion

Posted: Tue Mar 05, 2019 10:32 am
by lakpr
TheTimeLord wrote:
Tue Mar 05, 2019 10:30 am
I found this, so your tax return at 63 only applies for a single year, correct?
The determination is made using the beneficiary’s most recent federal tax return—a two-year look back. For example, the IRMAA paid by your clients in 2019 would rely on 2017 tax returns.
Yes, my understanding is that the IRMAA surcharges are on a rolling-forward basis. So your tax returns when you are age 63 determine the IRMAA surcharges for age 65; tax returns for the year when you are age 64 determine the IRMAA surcharges for age 66, etc.

Re: Roth conversion

Posted: Tue Mar 05, 2019 10:36 am
by marcopolo
indexonlyplease wrote:
Tue Mar 05, 2019 5:45 am
This year I would like to start converting my taxed deferred compensation (457 fund) to both our Roth IRA'a. I don't have much to fill up to the max 22% tax bracket after income from pension and part time work.

Question: does it matter if I pay the taxes with the monney in the 457 plan or cash I have saved? Can I ask them for more money and take the taxes out of the money I request?

What if any is the difference?
Does it make sense to go into the 24% tax bracket now also?
I will be 55 in April, wife 51 so I have many years to do this.
I will take SS at 70, no sure of wife.

Thanks,
I am not familiar with 457 plans, but are you sure you can take money from your plan and convert to BOTH OF YOUR Roths?
401k and Trad IRAs would not allow that, seems unlikely that a 457 would allow that, but i am not sure.

It works out better if you can pay the taxes due from outside funds. This allows more money to be sheltered from taxes going forward.

Re: Roth conversion

Posted: Tue Mar 05, 2019 10:55 am
by neilpilot
lakpr wrote:
Tue Mar 05, 2019 10:23 am
because IRMAA looks at the tax returns from the year when you are age 63.

Example: if you are 63 in 2017, you would have filed the tax return in 2018 when you are 64; and for the year 2019 when you are 65, IRMAA looks at the tax returns of 2018 to determine your Medicare surcharges.
Correct, but there's one very important and likely exception.

If either you or your spouse expect a drop in income between when your 63 and 65, and that decrease is due to a Medicare "Life Changing Event" such as retirement or a work reduction, then you can file an appeal. That appeal is a simple document in which you provide a projected income when you are 65 that falls below the IRMAA surcharge amount. If your appeal is accepted (which is usually the case) the higher income at 63 and/or 64 will be ignored.

Search "IRMAA appeal" for more information.

Re: Roth conversion

Posted: Tue Mar 05, 2019 11:01 am
by marcopolo
neilpilot wrote:
Tue Mar 05, 2019 10:55 am
lakpr wrote:
Tue Mar 05, 2019 10:23 am
because IRMAA looks at the tax returns from the year when you are age 63.

Example: if you are 63 in 2017, you would have filed the tax return in 2018 when you are 64; and for the year 2019 when you are 65, IRMAA looks at the tax returns of 2018 to determine your Medicare surcharges.
Correct, but there's one very important and likely exception.

If either you or your spouse expect a drop in income between when your 63 and 65, and that decrease is due to a Medicare "Life Changing Event" such as retirement or a work reduction, then you can file an appeal. That appeal is a simple document in which you provide a projected income when you are 65 that falls below the IRMAA surcharge amount. If your appeal is accepted (which is usually the case) the higher income at 63 and/or 64 will be ignored.

Search "IRMAA appeal" for more information.
I don't think stopping/reducing Roth Conversions counts as one of those exceptions.

Re: Roth conversion

Posted: Tue Mar 05, 2019 11:10 am
by neilpilot
marcopolo wrote:
Tue Mar 05, 2019 11:01 am
neilpilot wrote:
Tue Mar 05, 2019 10:55 am
lakpr wrote:
Tue Mar 05, 2019 10:23 am
because IRMAA looks at the tax returns from the year when you are age 63.

Example: if you are 63 in 2017, you would have filed the tax return in 2018 when you are 64; and for the year 2019 when you are 65, IRMAA looks at the tax returns of 2018 to determine your Medicare surcharges.
Correct, but there's one very important and likely exception.

If either you or your spouse expect a drop in income between when your 63 and 65, and that decrease is due to a Medicare "Life Changing Event" such as retirement or a work reduction, then you can file an appeal. That appeal is a simple document in which you provide a projected income when you are 65 that falls below the IRMAA surcharge amount. If your appeal is accepted (which is usually the case) the higher income at 63 and/or 64 will be ignored.

Search "IRMAA appeal" for more information.
I don't think stopping/reducing Roth Conversions counts as one of those exceptions.
...and I never said or implied that a conversion was an exception.

OP & spouse are in their 50s, so IRMAA isn't yet a factor. However, Eagle33 warned that if you are 63 you need to be careful about keeping your income under IRMAA surcharge limits. I simply indicate that it's common for someone to retire in their 60s, and retirement can easily negate the impact of a high income at 63 and/or 64.

There are many threads here, including this one, where a 63 y/o planning to retire at 65 might otherwise be influenced to reduce their amount of conversion in fear of IRMAA needlessly.

Re: Roth conversion

Posted: Tue Mar 05, 2019 11:11 am
by marcopolo
neilpilot wrote:
Tue Mar 05, 2019 11:10 am
marcopolo wrote:
Tue Mar 05, 2019 11:01 am
neilpilot wrote:
Tue Mar 05, 2019 10:55 am
lakpr wrote:
Tue Mar 05, 2019 10:23 am
because IRMAA looks at the tax returns from the year when you are age 63.

Example: if you are 63 in 2017, you would have filed the tax return in 2018 when you are 64; and for the year 2019 when you are 65, IRMAA looks at the tax returns of 2018 to determine your Medicare surcharges.
Correct, but there's one very important and likely exception.

If either you or your spouse expect a drop in income between when your 63 and 65, and that decrease is due to a Medicare "Life Changing Event" such as retirement or a work reduction, then you can file an appeal. That appeal is a simple document in which you provide a projected income when you are 65 that falls below the IRMAA surcharge amount. If your appeal is accepted (which is usually the case) the higher income at 63 and/or 64 will be ignored.

Search "IRMAA appeal" for more information.
I don't think stopping/reducing Roth Conversions counts as one of those exceptions.
...and I never said or implied that a conversion was an exception.

OP & spouse are in their 50s, so IRMAA isn't yet a factor. However, Eagle33 warned that if you are 63 you need to be careful about keeping your income under IRMAA surcharge limits. I simply indicate that it's common for someone to retire in their 60s, and retirement can easily negate the impact of a high income at 63 and/or 64.

There are many threads here, including this one, where a 63 y/o planning to retire at 65 might otherwise be influenced to reduce their amount of conversion in fear of IRMAA needlessly.
Perhaps I was confused by the thread title.

Many people contemplating conversions in their early 60s have already retired, they would be wise to at least consider keeping their conversions u see IRMAA limits.

Re: Roth conversion

Posted: Tue Mar 05, 2019 12:26 pm
by ByThePond
OP, with regard to your question of whether to Roth convert into your 24% bracket, you can get a good handle on it by using the Retiree Portfolio Model (RPM) https://www.bogleheads.org/wiki/Retiree_Portfolio_Model in the wiki.
I had much the same question and found a counterintuitive solution that projects to save quite a bundle over the course of my retirement.
The RPM has a learning curve and takes a fair bit of setting up, but the info generated in invaluable, IMO. There's a section that lets you input various conversion amounts and times and shows the impact on taxes and overall balance. Just fiddle with your conversion input data to find the sweet spot.

Re: Roth conversion

Posted: Wed Mar 06, 2019 4:38 pm
by sawdust60
lakpr wrote:
Tue Mar 05, 2019 8:05 am
No it does not matter whether the taxes come from the funds within the 457 plan or from outside sources. You can shelter more in the Roth IRAs if you are able to pay the taxes from the cash you saved (as the amount you can convert to Roth is upper-bounded by the amount in the 457 plan)

I would say yes it would make sense to go into the 24% bracket too, given that the tax rates are poised to revert to 15%/25% tax bracket in 2025, 6 more years from now. So the ability to convert at 24% is a limited time offer.

Are you in a state with no income tax? or at least in a state like IL, which doesn't tax Roth conversions? If you are flexible, you might want to consider moving to such a state for a period of 2 to 3 years, and during such residency convert the max amounts you can to Roth (geographic arbitrage)

Leave enough in your traditional 401k/IRA funds to cover the upper limit of lower tax brackets in your golden years, multiplied by 20. That would be $78.6k + $24.4k for 2019 = $103k, multiplied by 20 = $2.06 million. Or if you consider you want to be in 15% bracket after 2025, $75k + $13k standard deduction = $88k, multiplied by 20 = $1.76 million.

I am using the multiplier of 20 because the RMDs start at 4% of the outstanding balance, and increase gradually from there, the assumption is that the average RMD withdrawal would be approximately 5%.
$2 million in tax deferred could result in many years of IRMAA penalty. Model your future income stream. Don't forget about your other sources of income. Marginal tax rates for pension, and other non-SS income are different once you begin SS. refer to prior post link to wiki and other examples/discussion

Re: Roth conversion

Posted: Wed Mar 06, 2019 4:54 pm
by indexonlyplease
Thank you for all the responses.

I am waiting to finish my taxes to see how much I can convert for 2019. Since wife and I are still working part time I assume we would have to wait until the end of each year to see what is left in the 22% bracket before going into the 24%s bracket.

I will play with the numbers.

Re: Roth conversion

Posted: Thu Mar 07, 2019 7:22 am
by indexonlyplease
lakpr wrote:
Tue Mar 05, 2019 8:05 am
No it does not matter whether the taxes come from the funds within the 457 plan or from outside sources. You can shelter more in the Roth IRAs if you are able to pay the taxes from the cash you saved (as the amount you can convert to Roth is upper-bounded by the amount in the 457 plan) So having them withhold the tax is the same until you are at the end of the conversation. Years away.

I would say yes it would make sense to go into the 24% bracket too, given that the tax rates are poised to revert to 15%/25% tax bracket in 2025, 6 more years from now. So the ability to convert at 24% is a limited time offer. This is a concern of mine. Yes I think I will have to go into the 24% bracket.

Are you in a state with no income tax? or at least in a state like IL, which doesn't tax Roth conversions? If you are flexible, you might want to consider moving to such a state for a period of 2 to 3 years, and during such residency convert the max amounts you can to Roth (geographic arbitrage) Live in Florida no state tax.

Leave enough in your traditional 401k/IRA funds to cover the upper limit of lower tax brackets in your golden years, multiplied by 20. That would be $78.6k + $24.4k for 2019 = $103k, multiplied by 20 = $2.06 million. Or if you consider you want to be in 15% bracket after 2025, $75k + $13k standard deduction = $88k, multiplied by 20 = $1.76 million. I am thinking of moving all stock funds (2 funds) to Vanguard then leaving the fixed money in the 457 plan. The fixed money is in a stable value fund that pays 3.25%. My AA is 50/50

I am using the multiplier of 20 because the RMDs start at 4% of the outstanding balance, and increase gradually from there, the assumption is that the average RMD withdrawal would be approximately 5%.
Can you explain the 2 paragraphs better. Why keep money in 457 for latter years. My pension will always keep me in the 22% bracket. How will this effect me.
Also, many state about the medicare insurance I will pay extra, so I guess it would be better to stop conversion 2 years before 65. What income decideds this extra money.

Thank You,

Re: Roth conversion

Posted: Thu Mar 07, 2019 7:26 am
by indexonlyplease
marcopolo wrote:
Tue Mar 05, 2019 10:36 am
indexonlyplease wrote:
Tue Mar 05, 2019 5:45 am
This year I would like to start converting my taxed deferred compensation (457 fund) to both our Roth IRA'a. I don't have much to fill up to the max 22% tax bracket after income from pension and part time work.

Question: does it matter if I pay the taxes with the monney in the 457 plan or cash I have saved? Can I ask them for more money and take the taxes out of the money I request?

What if any is the difference?
Does it make sense to go into the 24% tax bracket now also?
I will be 55 in April, wife 51 so I have many years to do this.
I will take SS at 70, no sure of wife.

Thanks,
I am not familiar with 457 plans, but are you sure you can take money from your plan and convert to BOTH OF YOUR Roths?
401k and Trad IRAs would not allow that, seems unlikely that a 457 would allow that, but i am not sure.

It works out better if you can pay the taxes due from outside funds. This allows more money to be sheltered from taxes going forward.
Yes, it does as but taxes must be paid and it counts as income for the year.

Re: Roth conversion

Posted: Thu Mar 07, 2019 7:59 am
by lakpr
indexonlyplease wrote:
Thu Mar 07, 2019 7:22 am
Can you explain the 2 paragraphs better. Why keep money in 457 for latter years. My pension will always keep me in the 22% bracket. How will this effect me.
Also, many state about the medicare insurance I will pay extra, so I guess it would be better to stop conversion 2 years before 65. What income decideds this extra money.

Thank You,
If you are going to be in 22% bracket because of your pension, ignore my calculations above. I was trying to say, keep enough in the tax advantaged plan so that when you withdraw, the RMD withdrawals would fill out up to the top of 10% and 12% brackets. No more than that. The top of 12% bracket for MFJ is $78k taxable income, so multiply that by 20. The idea is contributions escape 22% taxes but withdrawals incur only 12%.

Re: Roth conversion

Posted: Thu Mar 07, 2019 11:21 am
by marcopolo
indexonlyplease wrote:
Thu Mar 07, 2019 7:26 am
marcopolo wrote:
Tue Mar 05, 2019 10:36 am
indexonlyplease wrote:
Tue Mar 05, 2019 5:45 am
This year I would like to start converting my taxed deferred compensation (457 fund) to both our Roth IRA'a. I don't have much to fill up to the max 22% tax bracket after income from pension and part time work.

Question: does it matter if I pay the taxes with the monney in the 457 plan or cash I have saved? Can I ask them for more money and take the taxes out of the money I request?

What if any is the difference?
Does it make sense to go into the 24% tax bracket now also?
I will be 55 in April, wife 51 so I have many years to do this.
I will take SS at 70, no sure of wife.

Thanks,
I am not familiar with 457 plans, but are you sure you can take money from your plan and convert to BOTH OF YOUR Roths?
401k and Trad IRAs would not allow that, seems unlikely that a 457 would allow that, but i am not sure.

It works out better if you can pay the taxes due from outside funds. This allows more money to be sheltered from taxes going forward.
Yes, it does as but taxes must be paid and it counts as income for the year.
Sure, I get the taxes due part. That is how a rollover from YOUR 457/403/401k to YOUR Roth IRA would work.
I am surprised you can take distributions from YOUR 457 plan and rollover to your SPOUSE's Roth IRA. Certainly can't do that with any other type of retirement plans that i am aware of. But, like i said, i am not familiar with 457 plans.

Re: Roth conversion

Posted: Thu Mar 07, 2019 11:27 am
by cherijoh
TheTimeLord wrote:
Tue Mar 05, 2019 10:30 am
lakpr wrote:
Tue Mar 05, 2019 10:23 am
because IRMAA looks at the tax returns from the year when you are age 63.
I found this, so your tax return at 63 only applies for a single year, correct?
The determination is made using the beneficiary’s most recent federal tax return—a two-year look back. For example, the IRMAA paid by your clients in 2019 would rely on 2017 tax returns.
When you are 66, they'll look back at your tax return for age 64, etc. The IRMAA determination is made every year so it is one of the limiting factors in the size of the Roth Conversion.

Re: Roth conversion

Posted: Sun Mar 10, 2019 8:13 am
by indexonlyplease
marcopolo wrote:
Thu Mar 07, 2019 11:21 am
indexonlyplease wrote:
Thu Mar 07, 2019 7:26 am
marcopolo wrote:
Tue Mar 05, 2019 10:36 am
indexonlyplease wrote:
Tue Mar 05, 2019 5:45 am
This year I would like to start converting my taxed deferred compensation (457 fund) to both our Roth IRA'a. I don't have much to fill up to the max 22% tax bracket after income from pension and part time work.

Question: does it matter if I pay the taxes with the monney in the 457 plan or cash I have saved? Can I ask them for more money and take the taxes out of the money I request?

What if any is the difference?
Does it make sense to go into the 24% tax bracket now also?
I will be 55 in April, wife 51 so I have many years to do this.
I will take SS at 70, no sure of wife.

Thanks,
I am not familiar with 457 plans, but are you sure you can take money from your plan and convert to BOTH OF YOUR Roths?
401k and Trad IRAs would not allow that, seems unlikely that a 457 would allow that, but i am not sure.

It works out better if you can pay the taxes due from outside funds. This allows more money to be sheltered from taxes going forward.
Yes, it does as but taxes must be paid and it counts as income for the year.
Sure, I get the taxes due part. That is how a rollover from YOUR 457/403/401k to YOUR Roth IRA would work.
I am surprised you can take distributions from YOUR 457 plan and rollover to your SPOUSE's Roth IRA. Certainly can't do that with any other type of retirement plans that i am aware of. But, like i said, i am not familiar with 457 plans.
I miss understod you. Yes, I can only roll into my Roth IRA not my wife's.

Re: Roth conversion

Posted: Sun Mar 10, 2019 8:23 am
by indexonlyplease
neilpilot wrote:
Tue Mar 05, 2019 10:55 am
lakpr wrote:
Tue Mar 05, 2019 10:23 am
because IRMAA looks at the tax returns from the year when you are age 63.

Example: if you are 63 in 2017, you would have filed the tax return in 2018 when you are 64; and for the year 2019 when you are 65, IRMAA looks at the tax returns of 2018 to determine your Medicare surcharges.
Correct, but there's one very important and likely exception.

If either you or your spouse expect a drop in income between when your 63 and 65, and that decrease is due to a Medicare "Life Changing Event" such as retirement or a work reduction, then you can file an appeal. That appeal is a simple document in which you provide a projected income when you are 65 that falls below the IRMAA surcharge amount. If your appeal is accepted (which is usually the case) the higher income at 63 and/or 64 will be ignored.

Search "IRMAA appeal" for more information.
This is a good point. Looks like married filling jointly no IRMMA tax under 170k. I am 10 years away but I will have to check if Roth conversions count. I may have to stop for a couple of years. I could easily be converting to age 70 if I don't go into the 24% bracket. Like someone said we have 6 years until we know if we would convert back to 25% or worse.

Re: Roth conversion

Posted: Sun Mar 10, 2019 8:25 am
by indexonlyplease
cherijoh wrote:
Thu Mar 07, 2019 11:27 am
TheTimeLord wrote:
Tue Mar 05, 2019 10:30 am
lakpr wrote:
Tue Mar 05, 2019 10:23 am
because IRMAA looks at the tax returns from the year when you are age 63.
I found this, so your tax return at 63 only applies for a single year, correct?
The determination is made using the beneficiary’s most recent federal tax return—a two-year look back. For example, the IRMAA paid by your clients in 2019 would rely on 2017 tax returns.
When you are 66, they'll look back at your tax return for age 64, etc. The IRMAA determination is made every year so it is one of the limiting factors in the size of the Roth Conversion.
So, they look every year. Then it does not matter if you stop and then start Roth conversions?

Re: Roth conversion

Posted: Sun Mar 10, 2019 8:40 am
by cherijoh
indexonlyplease wrote:
Sun Mar 10, 2019 8:25 am
cherijoh wrote:
Thu Mar 07, 2019 11:27 am
TheTimeLord wrote:
Tue Mar 05, 2019 10:30 am
lakpr wrote:
Tue Mar 05, 2019 10:23 am
because IRMAA looks at the tax returns from the year when you are age 63.
I found this, so your tax return at 63 only applies for a single year, correct?
The determination is made using the beneficiary’s most recent federal tax return—a two-year look back. For example, the IRMAA paid by your clients in 2019 would rely on 2017 tax returns.
When you are 66, they'll look back at your tax return for age 64, etc. The IRMAA determination is made every year so it is one of the limiting factors in the size of the Roth Conversion.
So, they look every year. Then it does not matter if you stop and then start Roth conversions?
You have to decide which is better for you - more Roth conversions or getting hit with IRMAA. The good news/bad news is that you make this decision every year. If you do more Roth conversions early it might save you from higher IRMA tiers when it comes time for RMDs from your traditional retirement accounts.

From an online article I found:
The government determines whether you qualify for IRMAA by finding your modified adjusted gross income (MAGI). Your monthly IRMAA payment for each year is determined by your MAGI from two years prior. Your MAGI is your adjusted gross income (AGI) with certain costs added back to it. Your AGI is a commonly used income figure to determine your income bracket for tax purposes. AGI includes your total income for a year with certain deductions subtracted. Your MAGI adjusts by adding some deductions back, and so it might, in some cases, be higher than your AGI. Most people’s MAGI is identical to or slightly higher than their AGI. Deductions added back to your MAGI can include:

Re: Roth conversion

Posted: Sun Mar 10, 2019 9:00 am
by indexonlyplease
All good responses.

Thanks

Re: Roth conversion

Posted: Sun Mar 10, 2019 1:05 pm
by indexonlyplease
lakpr wrote:
Tue Mar 05, 2019 8:05 am
No it does not matter whether the taxes come from the funds within the 457 plan or from outside sources. You can shelter more in the Roth IRAs if you are able to pay the taxes from the cash you saved (as the amount you can convert to Roth is upper-bounded by the amount in the 457 plan)

I would say yes it would make sense to go into the 24% bracket too, given that the tax rates are poised to revert to 15%/25% tax bracket in 2025, 6 more years from now. So the ability to convert at 24% is a limited time offer.

Are you in a state with no income tax? or at least in a state like IL, which doesn't tax Roth conversions? If you are flexible, you might want to consider moving to such a state for a period of 2 to 3 years, and during such residency convert the max amounts you can to Roth (geographic arbitrage)

Leave enough in your traditional 401k/IRA funds to cover the upper limit of lower tax brackets in your golden years, multiplied by 20. That would be $78.6k + $24.4k for 2019 = $103k, multiplied by 20 = $2.06 million. Or if you consider you want to be in 15% bracket after 2025, $75k + $13k standard deduction = $88k, multiplied by 20 = $1.76 million.

I am using the multiplier of 20 because the RMDs start at 4% of the outstanding balance, and increase gradually from there, the assumption is that the average RMD withdrawal would be approximately 5%.
Follow up question on paying taxes from savings. I can see I owe a lot more in taxes than I have in savings. So, I assume I could start paying taxes with savings but then would run out of money fast. I would think this would be the case for most people??

Re: Roth conversion

Posted: Sun Mar 10, 2019 2:22 pm
by neilpilot
indexonlyplease wrote:
Sun Mar 10, 2019 1:05 pm

Follow up question on paying taxes from savings. I can see I owe a lot more in taxes than I have in savings. So, I assume I could start paying taxes with savings but then would run out of money fast. I would think this would be the case for most people??
No....most people's savings exceed their tax liability :twisted:

Re: Roth conversion

Posted: Sun Mar 10, 2019 5:20 pm
by indexonlyplease
neilpilot wrote:
Sun Mar 10, 2019 2:22 pm
indexonlyplease wrote:
Sun Mar 10, 2019 1:05 pm

Follow up question on paying taxes from savings. I can see I owe a lot more in taxes than I have in savings. So, I assume I could start paying taxes with savings but then would run out of money fast. I would think this would be the case for most people??
No....most people's savings exceed their tax liability :twisted:
What I mean is having enough savings after tax money to pay for the taxes on the conversion to the Roth IRA.

Re: Roth conversion

Posted: Sun Mar 10, 2019 7:00 pm
by sergeant
indexonlyplease wrote:
Sun Mar 10, 2019 5:20 pm
neilpilot wrote:
Sun Mar 10, 2019 2:22 pm
indexonlyplease wrote:
Sun Mar 10, 2019 1:05 pm

Follow up question on paying taxes from savings. I can see I owe a lot more in taxes than I have in savings. So, I assume I could start paying taxes with savings but then would run out of money fast. I would think this would be the case for most people??
No....most people's savings exceed their tax liability :twisted:
What I mean is having enough savings after tax money to pay for the taxes on the conversion to the Roth IRA.
Most here do have more than enough in after tax money to pay the tax on our conversions. Paying the tax from a taxable account allows us to enjoy the full benefit of the conversion. Usually to convert to Roth from a 457 account you have to rollover the 457 to a traditional IRA and then do the rollover. There is a lot of info in the wiki.

Re: Roth conversion

Posted: Fri Mar 15, 2019 7:26 am
by indexonlyplease
sergeant wrote:
Sun Mar 10, 2019 7:00 pm
indexonlyplease wrote:
Sun Mar 10, 2019 5:20 pm
neilpilot wrote:
Sun Mar 10, 2019 2:22 pm
indexonlyplease wrote:
Sun Mar 10, 2019 1:05 pm

Follow up question on paying taxes from savings. I can see I owe a lot more in taxes than I have in savings. So, I assume I could start paying taxes with savings but then would run out of money fast. I would think this would be the case for most people??
No....most people's savings exceed their tax liability :twisted:
What I mean is having enough savings after tax money to pay for the taxes on the conversion to the Roth IRA.
Most here do have more than enough in after tax money to pay the tax on our conversions. Paying the tax from a taxable account allows us to enjoy the full benefit of the conversion. Usually to convert to Roth from a 457 account you have to rollover the 457 to a traditional IRA and then do the rollover. There is a lot of info in the wiki.
Did not know about the rollover. I will read wiki
Thanks

Re: Roth conversion

Posted: Fri Mar 15, 2019 9:11 pm
by CAsage
I must be the odd duck that doesn't wish to part with any after-tax funds to pay taxes. I am driving my IRA down as fast as I can, prior to IRMAA and SS and RMD.... so the next several years, I am doing Roth conversions and IRA withdrawals for Tax withholding in December to cover 99% of my federal and state taxes - out of my IRA, and yes I know the it might be better not to. Carefully calculated to the top dollar of the 24% bracket. You gotta pay taxes on it one way or the other, and none of us really know... but I don't think my top tax bracket will ever be lower.
And don't let the IRMAA tail wag the dog - I'm going to max out my Roth Conversions at 63 and 64 anyway; it will drive my effective marginal tax rate from 24% to 28%, which is still better than 32%. Something to reevaluate each year, see what you think.

Re: Roth conversion

Posted: Sun Mar 24, 2019 8:36 am
by indexonlyplease
Eagle33 wrote:
Tue Mar 05, 2019 10:01 am
If you are 63 or older, remember to factor in IRMMA Medicare premium surcharges when calculating your conversion amount.
We are turning 55 and 51 this year. Many years before Medicare. Also, with the tax brackets going back up maybe, I think we will take advantage of the 22 and 24 percent tax brackets. So 6 years of conversions and leave rest for RMD's maybe.

Re: Roth conversion

Posted: Sun Mar 24, 2019 10:46 am
by TBillT
I accidentally bumped over the IRMAA when I was 63, so I have one year of higher Medicare premiums, but my spouse does not. That year I was making a big move related to a 401k rollover, so I am still glad I did it. At least I went well over the first level.

That year I was trying to stay below the MAGI of the 4% medicare surcharge tax on weathier taxpayers, but a better plan might have been to stay below the third tier of the Medicare Premiums, which I managed to just avoid going over.

Re: Roth conversion

Posted: Thu Mar 28, 2019 3:36 pm
by indexonlyplease
Follow up thought on Roth IRA conversions.

If I leave the money in the taxed deferred it will grow but I will still pay taxes on the growth. But the growth is on the full amount. If I convert the money to the Roth IRA then it will only grow after the taxes.

Where is the break point of letting it grow in taxed deferred to letting it grow in the Roth IRA?

Meaning is it better to have 1 mill. in taxed deferred growning or 750k in the Roth IRA growing.

Remember I will always be retired in the 22% or higher bracket.

Re: Roth conversion

Posted: Thu Mar 28, 2019 4:19 pm
by marcopolo
indexonlyplease wrote:
Thu Mar 28, 2019 3:36 pm
Follow up thought on Roth IRA conversions.

If I leave the money in the taxed deferred it will grow but I will still pay taxes on the growth. But the growth is on the full amount. If I convert the money to the Roth IRA then it will only grow after the taxes.

Where is the break point of letting it grow in taxed deferred to letting it grow in the Roth IRA?

Meaning is it better to have 1 mill. in taxed deferred growning or 750k in the Roth IRA growing.

Remember I will always be retired in the 22% or higher bracket.
If the growth and tax rate stays the same, they are identical.
Transitive property of multiplication

Re: Roth conversion

Posted: Thu Mar 28, 2019 6:38 pm
by indexonlyplease
marcopolo wrote:
Thu Mar 28, 2019 4:19 pm
indexonlyplease wrote:
Thu Mar 28, 2019 3:36 pm
Follow up thought on Roth IRA conversions.

If I leave the money in the taxed deferred it will grow but I will still pay taxes on the growth. But the growth is on the full amount. If I convert the money to the Roth IRA then it will only grow after the taxes.

Where is the break point of letting it grow in taxed deferred to letting it grow in the Roth IRA?

Meaning is it better to have 1 mill. in taxed deferred growning or 750k in the Roth IRA growing.

Remember I will always be retired in the 22% or higher bracket.
If the growth and tax rate stays the same, they are identical.
Transitive property of multiplication
Just seems like you would make extra money on holding the taxes and gaining growth on the tax part also. But I have not done the math. I do see many other benefits to having your money in the Roth IRA,

Re: Roth conversion

Posted: Thu Mar 28, 2019 7:20 pm
by marcopolo
indexonlyplease wrote:
Thu Mar 28, 2019 6:38 pm
marcopolo wrote:
Thu Mar 28, 2019 4:19 pm
indexonlyplease wrote:
Thu Mar 28, 2019 3:36 pm
Follow up thought on Roth IRA conversions.

If I leave the money in the taxed deferred it will grow but I will still pay taxes on the growth. But the growth is on the full amount. If I convert the money to the Roth IRA then it will only grow after the taxes.

Where is the break point of letting it grow in taxed deferred to letting it grow in the Roth IRA?

Meaning is it better to have 1 mill. in taxed deferred growning or 750k in the Roth IRA growing.

Remember I will always be retired in the 22% or higher bracket.
If the growth and tax rate stays the same, they are identical.
Transitive property of multiplication
Just seems like you would make extra money on holding the taxes and gaining growth on the tax part also. But I have not done the math. I do see many other benefits to having your money in the Roth IRA,
The math is pretty easy for same growth and tax.

Let's say you start with $100. 25% tax rate, and doubling your money due to growth.

In Trad, the entire $100 double to $200, then you pay 25% tax, so $50 goes to tax, leaving you with $150.

For Roth, you pay 25% tax on the $100, leaving $75, then it doubles, producing $150, no taxes due, so same as Trad.

Trad is (100 * 2) * .75
Roth is (100 * .75) * 2

Re: Roth conversion

Posted: Fri Mar 29, 2019 6:05 am
by indexonlyplease
marcopolo wrote:
Thu Mar 28, 2019 7:20 pm
indexonlyplease wrote:
Thu Mar 28, 2019 6:38 pm
marcopolo wrote:
Thu Mar 28, 2019 4:19 pm
indexonlyplease wrote:
Thu Mar 28, 2019 3:36 pm
Follow up thought on Roth IRA conversions.

If I leave the money in the taxed deferred it will grow but I will still pay taxes on the growth. But the growth is on the full amount. If I convert the money to the Roth IRA then it will only grow after the taxes.

Where is the break point of letting it grow in taxed deferred to letting it grow in the Roth IRA?

Meaning is it better to have 1 mill. in taxed deferred growning or 750k in the Roth IRA growing.

Remember I will always be retired in the 22% or higher bracket.
If the growth and tax rate stays the same, they are identical.
Transitive property of multiplication
Just seems like you would make extra money on holding the taxes and gaining growth on the tax part also. But I have not done the math. I do see many other benefits to having your money in the Roth IRA,
The math is pretty easy for same growth and tax.

Let's say you start with $100. 25% tax rate, and doubling your money due to growth.

In Trad, the entire $100 double to $200, then you pay 25% tax, so $50 goes to tax, leaving you with $150.

For Roth, you pay 25% tax on the $100, leaving $75, then it doubles, producing $150, no taxes due, so same as Trad.

Trad is (100 * 2) * .75
Roth is (100 * .75) * 2
ok I get that Thanks,

Question, what if you have the money already in the taxed deferred and must sell to put in the Roth. The same $100. To me it seems you are making money on the $25 tax also in the deferred account. So this means there is no benefit of the taxed deferred for someone staying in the same tax bracket. Except for the limit on amount you can put in the Roth.
I have always maxed my Roth IRA before the taxed deferred
I know there are other great parts of the Roth

Re: Roth conversion

Posted: Fri Mar 29, 2019 8:39 am
by marcopolo
indexonlyplease wrote:
Fri Mar 29, 2019 6:05 am
marcopolo wrote:
Thu Mar 28, 2019 7:20 pm
indexonlyplease wrote:
Thu Mar 28, 2019 6:38 pm
marcopolo wrote:
Thu Mar 28, 2019 4:19 pm
indexonlyplease wrote:
Thu Mar 28, 2019 3:36 pm
Follow up thought on Roth IRA conversions.

If I leave the money in the taxed deferred it will grow but I will still pay taxes on the growth. But the growth is on the full amount. If I convert the money to the Roth IRA then it will only grow after the taxes.

Where is the break point of letting it grow in taxed deferred to letting it grow in the Roth IRA?

Meaning is it better to have 1 mill. in taxed deferred growning or 750k in the Roth IRA growing.

Remember I will always be retired in the 22% or higher bracket.
If the growth and tax rate stays the same, they are identical.
Transitive property of multiplication
Just seems like you would make extra money on holding the taxes and gaining growth on the tax part also. But I have not done the math. I do see many other benefits to having your money in the Roth IRA,
The math is pretty easy for same growth and tax.

Let's say you start with $100. 25% tax rate, and doubling your money due to growth.

In Trad, the entire $100 double to $200, then you pay 25% tax, so $50 goes to tax, leaving you with $150.

For Roth, you pay 25% tax on the $100, leaving $75, then it doubles, producing $150, no taxes due, so same as Trad.

Trad is (100 * 2) * .75
Roth is (100 * .75) * 2
ok I get that Thanks,

Question, what if you have the money already in the taxed deferred and must sell to put in the Roth. The same $100. To me it seems you are making money on the $25 tax also in the deferred account. So this means there is no benefit of the taxed deferred for someone staying in the same tax bracket. Except for the limit on amount you can put in the Roth.
I have always maxed my Roth IRA before the taxed deferred
I know there are other great parts of the Roth
In that scenario, it depends on where the money comes from to pay the $25 tax due when you sell the tax-deferred $100.
If you pay it out of that $100 and put the remaining $75 dollars into Roth, then it is equivalent, and the math is the same as above.
Where you can get an advantage is if you pay the $25 tax due from your taxable accounts and put the entire $100 into the Roth.
You have effectively put more money into a tax sheltered space.

Re: Roth conversion

Posted: Fri Mar 29, 2019 3:27 pm
by indexonlyplease
marcopolo wrote:
Fri Mar 29, 2019 8:39 am
indexonlyplease wrote:
Fri Mar 29, 2019 6:05 am
marcopolo wrote:
Thu Mar 28, 2019 7:20 pm
indexonlyplease wrote:
Thu Mar 28, 2019 6:38 pm
marcopolo wrote:
Thu Mar 28, 2019 4:19 pm


If the growth and tax rate stays the same, they are identical.
Transitive property of multiplication
Just seems like you would make extra money on holding the taxes and gaining growth on the tax part also. But I have not done the math. I do see many other benefits to having your money in the Roth IRA,
The math is pretty easy for same growth and tax.

Let's say you start with $100. 25% tax rate, and doubling your money due to growth.

In Trad, the entire $100 double to $200, then you pay 25% tax, so $50 goes to tax, leaving you with $150.

For Roth, you pay 25% tax on the $100, leaving $75, then it doubles, producing $150, no taxes due, so same as Trad.

Trad is (100 * 2) * .75
Roth is (100 * .75) * 2
ok I get that Thanks,

Question, what if you have the money already in the taxed deferred and must sell to put in the Roth. The same $100. To me it seems you are making money on the $25 tax also in the deferred account. So this means there is no benefit of the taxed deferred for someone staying in the same tax bracket. Except for the limit on amount you can put in the Roth.
I have always maxed my Roth IRA before the taxed deferred
I know there are other great parts of the Roth
In that scenario, it depends on where the money comes from to pay the $25 tax due when you sell the tax-deferred $100.
If you pay it out of that $100 and put the remaining $75 dollars into Roth, then it is equivalent, and the math is the same as above.
Where you can get an advantage is if you pay the $25 tax due from your taxable accounts and put the entire $100 into the Roth.

Thanks
You have effectively put more money into a tax sheltered space.

Re: Roth conversion

Posted: Fri Mar 29, 2019 3:35 pm
by Salmonid
Depending on how far out you're thinking, converting to Roth can be a killer estate planning move. Roth funds aren't subject to RMDs and retain their tax-free status indefinitely. I'm not an expert in that area, but it might be something to think about.

Re: Roth conversion

Posted: Mon Apr 01, 2019 3:43 pm
by indexonlyplease
Salmonid wrote:
Fri Mar 29, 2019 3:35 pm
Depending on how far out you're thinking, converting to Roth can be a killer estate planning move. Roth funds aren't subject to RMDs and retain their tax-free status indefinitely. I'm not an expert in that area, but it might be something to think about.
Why a killer estate planning move?

Re: Roth conversion

Posted: Mon Apr 01, 2019 3:49 pm
by indexonlyplease
CAsage wrote:
Fri Mar 15, 2019 9:11 pm
I must be the odd duck that doesn't wish to part with any after-tax funds to pay taxes. I am driving my IRA down as fast as I can, prior to IRMAA and SS and RMD.... so the next several years, I am doing Roth conversions and IRA withdrawals for Tax withholding in December to cover 99% of my federal and state taxes - out of my IRA, and yes I know the it might be better not to. Carefully calculated to the top dollar of the 24% bracket. You gotta pay taxes on it one way or the other, and none of us really know... but I don't think my top tax bracket will ever be lower.
And don't let the IRMAA tail wag the dog - I'm going to max out my Roth Conversions at 63 and 64 anyway; it will drive my effective marginal tax rate from 24% to 28%, which is still better than 32%. Something to reevaluate each year, see what you think.
I just finished my taxes and with with part time work we are in the 24% tax bracket. So I can fill the bracket starting this year. I also don't like using cash I have sitting in money markets or cd's. But if I can move 100k into the Roth IRA and pay the tax 24k in taxes I realize what they are saying about getting more money into the Roth. The only problem I have is it will take me many years to complete this. Also, we have no idea what will happen in 6 years. Maybe back to the higher tax brackets. Dam, but like my wife states, good problem to have. Now lets spend some.

Re: Roth conversion

Posted: Mon Apr 01, 2019 4:00 pm
by lakpr
indexonlyplease wrote:
Mon Apr 01, 2019 3:43 pm
Salmonid wrote:
Fri Mar 29, 2019 3:35 pm
Depending on how far out you're thinking, converting to Roth can be a killer estate planning move. Roth funds aren't subject to RMDs and retain their tax-free status indefinitely. I'm not an expert in that area, but it might be something to think about.
Why a killer estate planning move?
Roth 401k /Roth 403b /Roth 457 plans ARE subject to RMDs during the lifetime of the owner, based on life expectancy.

Roth IRAs are not subject to RMDs for the owner, they can be bequeathed to heirs with no tax consequences; except that the heirs will have to take RMDs based on their life expectancy.

It is not fully true therefore to say Roth are not subject to RMD rules. At the same time they can be a great estate planning tool indeed. Once you name Roth beneficiaries, they can be passed to intended heirs outside of estate, tax free!

Re: Roth conversion

Posted: Mon Apr 01, 2019 4:05 pm
by indexonlyplease
lakpr wrote:
Mon Apr 01, 2019 4:00 pm
indexonlyplease wrote:
Mon Apr 01, 2019 3:43 pm
Salmonid wrote:
Fri Mar 29, 2019 3:35 pm
Depending on how far out you're thinking, converting to Roth can be a killer estate planning move. Roth funds aren't subject to RMDs and retain their tax-free status indefinitely. I'm not an expert in that area, but it might be something to think about.
Why a killer estate planning move?
Roth 401k /Roth 403b /Roth 457 plans ARE subject to RMDs during the lifetime of the owner, based on life expectancy.

Roth IRAs are not subject to RMDs for the owner, they can be bequeathed to heirs with no tax consequences; except that the heirs will have to take RMDs based on their life expectancy.

It is not fully true therefore to say Roth are not subject to RMD rules. At the same time they can be a great estate planning tool indeed. Once you name Roth beneficiaries, they can be passed to intended heirs outside of estate, tax free!
Maybe he means killer estate planing move = good. I read as bad.

Yes, we have our Roths IRA set to our kids as beneficiaries. They are a great estate planning tool agreed. Conversions start this year so evern better for us and them in the future.

Re: Roth conversion

Posted: Tue Oct 08, 2019 11:57 am
by donall
Copied from: https://budgeting.thenest.com/can-conti ... 27284.html
Conversion Doesn't Affect MAGI
Roth IRAs limit your ability to contribute if your modified adjusted gross income is too high. However, even though your Roth IRA conversion counts as taxable income, it isn’t included in your modified adjusted gross income. The IRS makes a special tweak in the modified adjusted gross income formula that takes out any income from a Roth IRA conversion. For example, say your adjusted gross income is $115,000, including a $10,000 Roth IRA conversion. When you go to figure your modified adjusted gross income, you take out that $10,000 so your modified adjusted gross income is only $105,000.
Does anyone know if this is true?

Re: Roth conversion

Posted: Tue Oct 08, 2019 12:29 pm
by Silk McCue
This was an old post. You would likely do better opening a new thread for such a question in the future.
donall wrote:
Tue Oct 08, 2019 11:57 am
Copied from: https://budgeting.thenest.com/can-conti ... 27284.html
Conversion Doesn't Affect MAGI
Roth IRAs limit your ability to contribute if your modified adjusted gross income is too high. However, even though your Roth IRA conversion counts as taxable income, it isn’t included in your modified adjusted gross income. The IRS makes a special tweak in the modified adjusted gross income formula that takes out any income from a Roth IRA conversion. For example, say your adjusted gross income is $115,000, including a $10,000 Roth IRA conversion. When you go to figure your modified adjusted gross income, you take out that $10,000 so your modified adjusted gross income is only $105,000.
Does anyone know if this is true?
Yes. It is true.

It took a while but I found this prior post to confirm that for you written by our resident expert Alan S.

viewtopic.php?t=175518#p2652795

Cheers

Re: Roth conversion

Posted: Tue Oct 08, 2019 1:51 pm
by donall
Thanks! This paragraph also indicates converted Roth not added to MAGI. Does that mean that a converted Roth is not included in MAGI for IRMAA?

Re: Roth conversion

Posted: Tue Oct 08, 2019 1:56 pm
by Silk McCue
donall wrote:
Tue Oct 08, 2019 1:51 pm
Thanks! This paragraph also indicates converted Roth not added to MAGI. Does that mean that a converted Roth is not included in MAGI for IRMAA?
No that is a different flavor of MAGI. It definitely counts towards IRMAA but many folks would love it if it didn't.

Cheers