Retired Thinking Thru Conversion Strategy

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
djmbob
Posts: 345
Joined: Thu Mar 15, 2007 6:16 pm

Retired Thinking Thru Conversion Strategy

Post by djmbob » Wed May 29, 2019 2:24 pm

I should have started this eight years ago after I retired, but here I am now.

Age: 61, retired Air Force + Spouse: 56, works part time/in school part time
My TSP (G Fund) $315K; Spouse TIRA $133K and 403b $16K (+100/mo)

My AF pension keeps us pretty far up the 12% bracket and will continue to increase, in addition to Spouse’s income for the next 5 or so years.

For 2018, I did a conversion of $8K from Spouse’s TIRA to take us just below the 22% bracket.

For 2019, our AGI will be ~$115K, so I know we will be firmly in the 22% bracket. Also nearing the point of inheriting my share of mom’s IRA and Vanguard Annuity.

1. I am considering conversion up to the top of the 22% bracket ~$50K +/- each year to remove most of the TIRA and TSP funds. Does this sound reasonable?

I tried doing the Retiree Portfolio Model, but it’s a bit confusing to set up. I will need to start rolling over TSP funds to a Rollover IRA. I’m also keeping in mind IRMAA limits, since they will count starting in the 2021 tax year. I have taxable funds to be able to pay the tax hit.

2. Should I keep TSP a couple more years while I continue to convert Spouse’s TIRA, or start now on the TSP since its balance is larger and I’m older?

Thanks for any advice.
Cheers, Ray :sharebeer :sharebeer
Last edited by djmbob on Wed May 29, 2019 3:36 pm, edited 1 time in total.

retiredjg
Posts: 36759
Joined: Thu Jan 10, 2008 12:56 pm

Re: Retired Thinking Thru Conversion Strategy

Post by retiredjg » Wed May 29, 2019 2:38 pm

1. I am considering conversion up to the top of the 22% bracket ~$50K +/- each year to remove most of the TIRA and TSP funds. Does this sound reasonable?
This is a mixed bag. It is not unusual for married people to be in the 12% (later may be 15%) bracket. If/when your spouse stops working, you may be back there as well. That's the "ideal" time for conversions.

However, one of you will likely survive the other and that person is almost certainly NOT going to be in the 12% bracket. So converting up a bracket makes sense since one of you will eventually be there. And when it happens that bracket may have reverted from 22% up to 25%.

So I think converting at least some at 22% is a reasonable plan.


I tried doing the RPM, but it’s a bit confusing to set up.
Maybe I'm having a dull moment, but I'm not sure what this is.

I will need to start rolling over TSP funds to a Rollover IRA.
There are several ways to handle this. You could take a lump sum now and convert at will. Or wait till after Sept 15 and convert directly from the TSP to Roth whenever you want.

I’m also keeping in mind IRMAA limits, since they will count starting in the 2021 tax year.
I beleive the IRMAA limit will be somewhat lower than the top of the 22% bracket - keep an eye on that.


2. Should I keep TSP a couple more years while I continue to convert Spouse’s TIRA, or start now on the TSP since its balance is larger and I’m older?
Not sure it matters much. Do whatever makes sense to you.

Topic Author
djmbob
Posts: 345
Joined: Thu Mar 15, 2007 6:16 pm

Re: Retired Thinking Thru Conversion Strategy

Post by djmbob » Wed May 29, 2019 3:03 pm

Thank you, retiredjg! I went back and edited my post to spell out Retiree Portfolio Model (RPM).

I agree ideal time is when my Spouse retires but I really have no clue and he can work well into his 70's (clergy). Will watch that IRMAA limit. I will also check on what the TSP conversion rules will be after the Sep change.

Cheers! Ray

retiredjg
Posts: 36759
Joined: Thu Jan 10, 2008 12:56 pm

Re: Retired Thinking Thru Conversion Strategy

Post by retiredjg » Wed May 29, 2019 3:09 pm

The TSP does not have conversion rules, but Sept 15 is when the new distributions rules go into effect - you will be able to take several distributions a year. It should be easy to leave most of your money there and just convert what you want each year by rolling it directly to Roth IRA.

User avatar
dratkinson
Posts: 4591
Joined: Thu Jul 26, 2007 6:23 pm
Location: Centennial CO

Re: Retired Thinking Thru Conversion Strategy

Post by dratkinson » Thu May 30, 2019 3:43 am

I remember looking into the IRMAA surcharge and didn't think it was too onerous. (May have been looking in the wrong place.)

So whether an IRMAA surcharge is due to conversions, RMDs (, RMDs on inherited IRA, inherited annuity, or SS benefits), I'd prefer to pay it on the conversions so that one day the RMDs would be minimized, so any IRMAA surcharge would be minimized.



Excel1040. When I've played whatifs with my tax return, I've used Excel1040.com.
--Download Excel1040 and enter your last tax return data to create a known exact baseline.
--To your baseline, enter your changes (Roth conversion, RMD on inherited IRA, SS benefit,...) to see how it affects your tax return.

Excel1040 will handle all MAGI calculations based on the tax code (taxation of SS benefit,...), but it does not handle IRMAA effects, so you're on your own to figure that.

You might find you will need to advance tax brackets to complete your conversions before the other benefits kick in.


Simplifying assumptions. Assume the tax code will undergo no major changes until the current changes sunset. Assume the only minor changes until sunset will be the indexing for inflation.

So the answers you get from Excel1040 2018, after applying your changes (Roth conversion, RMDs on inherited IRA, SS benefits,...), will be be good-enough ballpark answers until the sunset. So you can use Excel1040 2018 to map out your conversion strategy for the next several years.


Idea. You can plan to delay taking your (plural) SS benefits to give you more time for your conversions. Unfortunately, if you delay taking your SS benefits, you'll have to take higher benefits when you do apply.

It's a thankless job but someone has to do it.


Idea. Rhetorical question. What does Excel1040 say would happen if you withdrew all of your inherited IRA and converted it into taxable account/investments? How many tax brackets would you advance? What would be your IRMAA surcharge and for how long? Why? With no inherited IRA you would have no RMDs on an inherited IRA. So roll the idea of converting your inherited IRA into taxable investments before taking your SS benefits.

The idea being that you try for zero RMDs by completing all conversions (your tax-deferred accounts have been converted to Roth accounts, and your inherited IRA has been converted to a taxable account), before age 70, when you start your SS benefits.


Since Excel1040 is a tool for your mental exercises, you can figure your situation multiple ways to see which works best for you.
d.r.a, not dr.a. | I'm a novice investor, you are forewarned.

Topic Author
djmbob
Posts: 345
Joined: Thu Mar 15, 2007 6:16 pm

Re: Retired Thinking Thru Conversion Strategy

Post by djmbob » Thu May 30, 2019 2:08 pm

Wow! Thank you, dratkinson!!

I will definitely look at the Excel1040. That route may be a bit easier for me than the Retiree Portfolio Model. I will respond back on how that goes.

Towards the end of my conversion process, I might leave a couple years' worth of RMDs in Traditional to use for Qualified Charitable Deductions. That will depend on how things are positioned when inheritance occurs. I am my mom's Executor, and currently handle all of her financial transactions, so am very familiar with what's there.

Cheers,
Ray

retiredjg
Posts: 36759
Joined: Thu Jan 10, 2008 12:56 pm

Re: Retired Thinking Thru Conversion Strategy

Post by retiredjg » Thu May 30, 2019 3:43 pm

You might also leave some for medical bills for an expensive illness. If your medical bills are large enough, you can deduct them from your taxable income. This means that money never gets taxed.

User avatar
dratkinson
Posts: 4591
Joined: Thu Jul 26, 2007 6:23 pm
Location: Centennial CO

Re: Retired Thinking Thru Conversion Strategy

Post by dratkinson » Thu May 30, 2019 5:46 pm

djmbob wrote:
Thu May 30, 2019 2:08 pm
...
I will definitely look at the Excel1040. That route may be a bit easier for me than the Retiree Portfolio Model. I will respond back on how that goes.

Towards the end of my conversion process, I might leave a couple years' worth of RMDs in Traditional to use for Qualified Charitable Deductions. That will depend on how things are positioned when inheritance occurs. I am my mom's Executor, and currently handle all of her financial transactions, so am very familiar with what's there.

Cheers,
Ray
Thanks. We'd like to hear what you learn and your conversion plan going forward. It's always nice to know if we've been able to help.



Idea. You can play with the idea of making QCDs all along to see if you can convert your traditional accounts more quickly. Your choice.



Idea. Recall hearing that rich people plan for three generations, poor people plan for Friday night. So believe this means it's okay to make tax plans across generations.

If your mother understands and agrees, you might be able to do some of the inherited tIRA conversions for fewer tax dollars, and with an increased tax ceiling. How?

Since you control your mother's finances:
--Assuming you do not advance her tax bracket and with her permission and understanding,
--She could begin converting her tIRA into a rIRA, now. (But you do the work.)
--You would need to reimburse her for the additional tax paid due to the conversion, plus IRMAA increase.
--But the additional tax owed should be less at her assumed lower tax rate, than converting the inherited tIRA at your assumed higher tax rate.

So you would need to figure your mother's tax returns (fed + state) twice: once without the conversion, and once with the conversion.

As the conversion will affect her fed MAGIs, you would owe her the tax difference due to the increased tax on the conversion + any increased tax on her SS + ... + any increase in state taxes owed due to her higher federal taxable income input into her state tax return + any increase due to IRMAA.

Search. http://www.google.com/search?q=RMD+on+i ... d+Roth+IRA
Search. http://www.google.com/search?q=is+inher ... RA+taxable

So at the end of the process each year, you would give your mother:
--Tax returns (fed + state) without the conversion (for documentation, but not filed).
--Tax returns (fed + state) with the conversion (as filed).
--A check for the difference in total (fed + state) tax owed due to the conversion, plus any additional for any IRMAA increase, which she puts into her taxable investments.

I don't know if this idea violates, or is subject to any other IRS guidelines. So might what to run it by a CPA or tax lawyer.

If your mother understands and agrees, you might be able to do some of the inherited tIRA conversions for fewer dollars.

You’re on your own to figure all of this out if her tIRA will be spread among multiple siblings. In which case, it might be more trouble than it’s worth. In which case, never mind.



Idea. Assuming your mother's income is less than $66K (2018, adjusted gross income), she can be getting her taxes done for free.

I suggest using the IRS OLT (Online Tax) software because it is quick to figure both fed + state taxes. And it’s quick to make changes.

I've used the OLT software for several years and like it. (SS benefit kicked me over the $66K limit this year for free tax returns (fed, state, efile), so OLT charged me $16---$8 fed + $8 state. One of the disadvantages of delaying SS until age 70.)

Search. http://www.google.com/search?q=OLT+free ... %3Airs.gov

OLT offers no handholding and is table entry format after the interview section that gathers personal information.
--So it's fast to enter/change data for our tax returns.
--So for her documentation, it would be fast to figure your mother's taxes both ways (with/out the conversion) and determine the additional (fed + state) tax owed.



Idea. Excel1040 would be faster to wag your mother's tax returns (with/out the conversions) to see if this idea of spreading your mother's tIRA conversion across generations would work.

But for filing her tax returns, I'd use OLT. Why? Because OLT does fed + state + efile. Excel1040 only does fed + mailed paper tax return.

Time required.
--Excel1040 takes about ~30min for me to enter my tax data to play whatif.
--OLT’s learning curve caused me to take about ~4hrs the first time I entered my tax data to create my draft (fed + state) tax returns. (Subsequent returns have required ~2hrs to create my draft tax returns. My returns are simple: USAF pension + SS + investment dividends/transactions.)

So for a quick and dirty first look, Excel1040 should give you a decent guesstimate about whether or not the idea of spreading conversions across generations, is worth the effort. (Believe the only pieces missing are the effects on her state tax return and IRMAA.)



Edit. I forgot about IRMAA.
Last edited by dratkinson on Fri May 31, 2019 3:11 am, edited 1 time in total.
d.r.a, not dr.a. | I'm a novice investor, you are forewarned.

BigJohn
Posts: 1715
Joined: Wed Apr 02, 2014 11:27 pm

Re: Retired Thinking Thru Conversion Strategy

Post by BigJohn » Thu May 30, 2019 5:55 pm

There are a lot of forum discussions on Roth conversion strategy that might be helpful to read. I’m personally not a fan of “to the top of the X% bracket” approach as there are a lot of discontinuities in the tax code (eg IRMAA tiers) as well as way too many variables. Here’s one recent discussion which contains comments on my strategy which is to try to keep AGI about flat before and after RMD/SS kick in.

viewtopic.php?f=2&t=277601&hilit=Roth+c ... s#p4472134

The Wizard
Posts: 13355
Joined: Tue Mar 23, 2010 1:45 pm
Location: Reading, MA

Re: Retired Thinking Thru Conversion Strategy

Post by The Wizard » Thu May 30, 2019 7:39 pm

BigJohn wrote:
Thu May 30, 2019 5:55 pm
There are a lot of forum discussions on Roth conversion strategy that might be helpful to read. I’m personally not a fan of “to the top of the X% bracket” approach as there are a lot of discontinuities in the tax code (eg IRMAA tiers) as well as way too many variables. Here’s one recent discussion which contains comments on my strategy which is to try to keep AGI about flat before and after RMD/SS kick in.

viewtopic.php?f=2&t=277601&hilit=Roth+c ... s#p4472134
I totally agree, with a few exceptions.
Levelizing your AGI through age 70 tends to be close to optimal taxwise for many of us.

The exceptions are:

1) IRMAA tiers. I was just below an IRMAA tier a few years ago, so I declined to do additional Roth conversions that year.
Following year I was just over that tier based on my early December computations, so I did a chunk more of Roth conversion before 12/31.

2) Surviving spouse considerations. I'm single nowadays, but if MFJ, then perhaps do larger conversions than levelizing strategy depending on projected situation of eventual survivor...
Attempted new signature...

BigJohn
Posts: 1715
Joined: Wed Apr 02, 2014 11:27 pm

Re: Retired Thinking Thru Conversion Strategy

Post by BigJohn » Thu May 30, 2019 8:18 pm

The Wizard wrote:
Thu May 30, 2019 7:39 pm
The exceptions are:

1) IRMAA tiers. I was just below an IRMAA tier a few years ago, so I declined to do additional Roth conversions that year.
Following year I was just over that tier based on my early December computations, so I did a chunk more of Roth conversion before 12/31.

2) Surviving spouse considerations. I'm single nowadays, but if MFJ, then perhaps do larger conversions than levelizing strategy depending on projected situation of eventual survivor...
Good points. I'm not to the age yet where I have to worry about IRMAA tiers but will need to watch that next year to see if it's a close call. Filing single for the first time in 2018 was quite a shock even though I had done the calculations and knew what was coming. I also went a bit higher than flat AGI in the few years I had between retirement and starting to file single.

Post Reply