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The Social Security Hump and Roth Conversions

Posted: Thu Nov 07, 2019 9:04 pm
by corn18
So I was mapping out my taxes from 55 to death and the impact of Roth Conversions on taxes. Something weird was happening when I was converting less than 100% of what I could from 55-69. My total taxes were going down as I converted more, but then they started going back up.

This is what the data show:

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My calculation take into account the taxable portion of SS, so I thought I would take a look at that. I used the spreadsheet on here to calculate the hump:

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Sure enough, if I convert all of my 401k before age 70, I am firmly entrenched in the dreaded hump. I can convert less and put myself above the hump @ age 70, or I can stick with this and stay in the hump from 70 on.

The reason I was running this test was to see if I could reduce SOR risk by not doing conversions at all (pay a lot less taxes at the beginning of retirement). That costs me an extra $13k in taxes overall, but leaves me over the hump from 70 on.

So my question is, if you have a choice, would you pay much lower taxes at the beginning of retirement? This means higher taxes from 70 on, but I don't mind that. My SS + COLA pension cover all of my base expenses at that point.

Re: The Social Security Hump and Roth Conversions

Posted: Thu Nov 07, 2019 9:27 pm
by Silk McCue
In order to go “above” the Hump in a given year you must pass through the entire Hump where you are paying your highest marginal rate until 85% of SS is taxed and your rate drops down again. If you stay in the Hump without passing through you pay fewer taxes that year than if you went above it. That is a positive, not a negative.

Based upon our modeled plans, while both of us are living we will stay below the Hump entirely due to Roth Conversions and using QCDs to fully consume RMDs. When one of us dies the survivor will immediately pass through the Hump each year and there is nothing that can be done about it.

Cheers

Re: The Social Security Hump and Roth Conversions

Posted: Thu Nov 07, 2019 9:47 pm
by Watty
A couple of things;

1) I really liked that spreadsheet but it was never updated after the tax rate changes a few years ago so you should be careful in using it.

2) You also need to look at state taxes and what your taxes will be if one spouse survives the other and is filing in the higher tax brackets.

3) Tax rates may change and I would think that they are more likely to go up than down.

4) Your model may not reflect your actual spending and taxable income. Just because an income of $X might put you into the hump does not mean that you will have that much taxable income that year. It is just anecdotal but I have seen people that spend less as they get to be in their 70s and become less active. When people get older and move into assisted living they may have high deductions.

Re: The Social Security Hump and Roth Conversions

Posted: Thu Nov 07, 2019 10:13 pm
by curmudgeon
The general shape of the taxes paid curve in your estimate makes sense to me, regardless of the hump. It depends on the absolute size of the tax-deferred and SS benefits, but forcing taxation of all your tax-deferred into fewer years would logically result in higher tax given the progressive tax rates. Of course, the exact rates and position (or existence) of the hump will likely change in the future as well.

I've made a general goal to convert about half of our tax-deferred before RMDs start. I've really only got the age 65-70 years to do large conversions as I'm staying under the ACA cliff for now. That conversion may or may not put us in the SS hump high marginal rates. If it does, I will probably do a large additional Roth conversion to take us up to the top of the base bracket (or the next IRMAA tier) that year. After doing a few of those, the RMDs might be low enough to creep under the hump. Alternately I might choose to do QCDs instead of some/all of the RMD to get us under the hump.

It's definitely good to look ahead, but the further out you go, the more uncertainty there is.

Re: The Social Security Hump and Roth Conversions

Posted: Fri Nov 08, 2019 3:54 pm
by 557880yvi
Very nice to see the visual effect on taxes for doing Roth conversions. Is this something you created yourself from Excel data or is this from a tool (perhaps a Boglehead tool)? I have been doing these calculations on my own Excel set-ups and if there is a tool to produce the graphs (or against which to compare my computations) it would be great to try out.

Thanks for sharing!

Re: The Social Security Hump and Roth Conversions

Posted: Fri Nov 08, 2019 5:14 pm
by corn18
557880yvi wrote:
Fri Nov 08, 2019 3:54 pm
Very nice to see the visual effect on taxes for doing Roth conversions. Is this something you created yourself from Excel data or is this from a tool (perhaps a Boglehead tool)? I have been doing these calculations on my own Excel set-ups and if there is a tool to produce the graphs (or against which to compare my computations) it would be great to try out.

Thanks for sharing!
I made a spreadsheet on my own. I used IRS Pub 915 to calculate my taxable SS (there is an excel file on the web that I pasted into my spreadsheet). Then I added a model of taxes including the change back to pre-2018 brackets. It's not simple, but it works.

Re: The Social Security Hump and Roth Conversions

Posted: Fri Nov 08, 2019 5:23 pm
by Silk McCue
corn18 wrote:
Fri Nov 08, 2019 5:14 pm
557880yvi wrote:
Fri Nov 08, 2019 3:54 pm
Very nice to see the visual effect on taxes for doing Roth conversions. Is this something you created yourself from Excel data or is this from a tool (perhaps a Boglehead tool)? I have been doing these calculations on my own Excel set-ups and if there is a tool to produce the graphs (or against which to compare my computations) it would be great to try out.

Thanks for sharing!
I made a spreadsheet on my own. I used IRS Pub 915 to calculate my taxable SS (there is an excel file on the web that I pasted into my spreadsheet). Then I added a model of taxes including the change back to pre-2018 brackets. It's not simple, but it works.
I think you are saying that you created the curved graph and not the that you created the 2nd graphic "The Hump". Correct?

Cheers

Re: The Social Security Hump and Roth Conversions

Posted: Fri Nov 08, 2019 5:27 pm
by corn18
Silk McCue wrote:
Fri Nov 08, 2019 5:23 pm
corn18 wrote:
Fri Nov 08, 2019 5:14 pm
557880yvi wrote:
Fri Nov 08, 2019 3:54 pm
Very nice to see the visual effect on taxes for doing Roth conversions. Is this something you created yourself from Excel data or is this from a tool (perhaps a Boglehead tool)? I have been doing these calculations on my own Excel set-ups and if there is a tool to produce the graphs (or against which to compare my computations) it would be great to try out.

Thanks for sharing!
I made a spreadsheet on my own. I used IRS Pub 915 to calculate my taxable SS (there is an excel file on the web that I pasted into my spreadsheet). Then I added a model of taxes including the change back to pre-2018 brackets. It's not simple, but it works.
I think you are saying that you created the curved graph and not the that you created the 2nd graphic "The Hump". Correct?

Cheers
Correct. The hump graph came from the BH wiki: https://www.bogleheads.org/wiki/Social_ ... calculator