Size of Roth conversion

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
hoops777
Posts: 3070
Joined: Sun Apr 10, 2011 12:23 pm

Size of Roth conversion

Post by hoops777 » Thu May 14, 2020 5:13 pm

Looking for advice on our Roth conversion amount.
I am 68 and wife is 70,both retired.
We are in the 12 pct tax bracket.
Our combined SS now is almost 30K and I am on spousal benefits.
When I turn 70 our combined SS will be 60K.
When I turn 72 our combined RMDs will be about 32,000.

Should I go into the next bracket and if so how much? Last year I converted about 65K. I have the 2 years before my SS doubles. Paying the taxes are not a problem.
Thanks
K.I.S.S........so easy to say so difficult to do.

rkhusky
Posts: 9500
Joined: Thu Aug 18, 2011 8:09 pm

Re: Size of Roth conversion

Post by rkhusky » Thu May 14, 2020 5:26 pm

How much do you need to live on? That is, how much more beyond RMD’s will you need to withdraw? And will that be from taxable or Traditional IRA/401k?

SS Rambo
Posts: 139
Joined: Wed Jan 29, 2020 10:55 am

Re: Size of Roth conversion

Post by SS Rambo » Thu May 14, 2020 5:35 pm

At first glance, yes, you should be doing Roth conversions. But of course there are more questions to answer before a recommendation could be made. Your total income is currently $30k? After the standard deduction for a joint filing, you’re in the 10% bracket, not twelve

You can convert ~$70k per year for the next two years and stay within the 12% bracket. After which that number becomes ~$40k for two years that you can convert annually and stay within the 12% bracket. At which point your RMD dollars will start being taxed at 22% (for the last couple thousand dollars) through retirement, unless you get enough converted over the next four years at 12% rates.

That’s one stategic approach you could take. Knowing the IRA balance would help.

Topic Author
hoops777
Posts: 3070
Joined: Sun Apr 10, 2011 12:23 pm

Re: Size of Roth conversion

Post by hoops777 » Thu May 14, 2020 6:12 pm

rkhusky wrote:
Thu May 14, 2020 5:26 pm
How much do you need to live on? That is, how much more beyond RMD’s will you need to withdraw? And will that be from taxable or Traditional IRA/401k?
When we start taking RMDs all of our spending will be covered by those and SS.
Any additional would come from taxable.
K.I.S.S........so easy to say so difficult to do.

rkhusky
Posts: 9500
Joined: Thu Aug 18, 2011 8:09 pm

Re: Size of Roth conversion

Post by rkhusky » Thu May 14, 2020 6:16 pm

Under the assumption that your total income will be $32K in RMD's and $60K in SS, then you will just be barely in the 22.2% marginal rate bracket. If you get your RMD down to $28K you will be in the 18.5% bracket, $16K you will be in the 0% bracket. So, it doesn't really pay to go beyond the 12% bracket in doing Roth conversions.

I find the heat map on this page to be useful in incorporating SS in tax rates: https://www.bogleheads.org/wiki/Taxatio ... y_benefits
Last edited by rkhusky on Fri May 15, 2020 7:16 am, edited 1 time in total.

Topic Author
hoops777
Posts: 3070
Joined: Sun Apr 10, 2011 12:23 pm

Re: Size of Roth conversion

Post by hoops777 » Thu May 14, 2020 6:18 pm

SS Rambo wrote:
Thu May 14, 2020 5:35 pm
At first glance, yes, you should be doing Roth conversions. But of course there are more questions to answer before a recommendation could be made. Your total income is currently $30k? After the standard deduction for a joint filing, you’re in the 10% bracket, not twelve

You can convert ~$70k per year for the next two years and stay within the 12% bracket. After which that number becomes ~$40k for two years that you can convert annually and stay within the 12% bracket. At which point your RMD dollars will start being taxed at 22% (for the last couple thousand dollars) through retirement, unless you get enough converted over the next four years at 12% rates.

That’s one stategic approach you could take. Knowing the IRA balance would help.
I say 12 pct because of the conversions. I know the 70k figure but am wondering about increasing it. Our combined IRAs are about 820,000.Our combined Roth’s about 260,000. My main question is on the wisdom of paying taxes now and is it worth it. If all goes as planned the Roth’s will go to the kids.
Last edited by hoops777 on Thu May 14, 2020 6:22 pm, edited 1 time in total.
K.I.S.S........so easy to say so difficult to do.

rkhusky
Posts: 9500
Joined: Thu Aug 18, 2011 8:09 pm

Re: Size of Roth conversion

Post by rkhusky » Thu May 14, 2020 6:22 pm

A first-year RMD of $32K implies a balance of $870K. A first-year RMD of $28K means a balance of $760K. If you can convert $110K+, you should be fine. $65K at 12% for two years would do nicely.

I would convert to the top of the 12% bracket for the next 4 years, in order to reduce the amount subject to 18.5% and provide a little slack.
Last edited by rkhusky on Fri May 15, 2020 7:17 am, edited 3 times in total.

SS Rambo
Posts: 139
Joined: Wed Jan 29, 2020 10:55 am

Re: Size of Roth conversion

Post by SS Rambo » Thu May 14, 2020 7:24 pm

hoops777 wrote:
Thu May 14, 2020 6:18 pm
SS Rambo wrote:
Thu May 14, 2020 5:35 pm
At first glance, yes, you should be doing Roth conversions. But of course there are more questions to answer before a recommendation could be made. Your total income is currently $30k? After the standard deduction for a joint filing, you’re in the 10% bracket, not twelve

You can convert ~$70k per year for the next two years and stay within the 12% bracket. After which that number becomes ~$40k for two years that you can convert annually and stay within the 12% bracket. At which point your RMD dollars will start being taxed at 22% (for the last couple thousand dollars) through retirement, unless you get enough converted over the next four years at 12% rates.

That’s one stategic approach you could take. Knowing the IRA balance would help.
I say 12 pct because of the conversions. I know the 70k figure but am wondering about increasing it. Our combined IRAs are about 820,000.Our combined Roth’s about 260,000. My main question is on the wisdom of paying taxes now and is it worth it. If all goes as planned the Roth’s will go to the kids.
Sounds like you’ve got a great grasp on the numbers/strategies. As others mentioned, it sounds like doing conversions up to the top of the 12% bracket (after accounting for a nice standard deduction) for the next 2-4 years should save any RMDS from being taxed at 22%. That’s the plan I would go with, and congratulations!

Topic Author
hoops777
Posts: 3070
Joined: Sun Apr 10, 2011 12:23 pm

Re: Size of Roth conversion

Post by hoops777 » Thu May 14, 2020 9:08 pm

Thank you.
K.I.S.S........so easy to say so difficult to do.

User avatar
FiveK
Posts: 9318
Joined: Sun Mar 16, 2014 2:43 pm

Re: Size of Roth conversion

Post by FiveK » Fri May 15, 2020 5:03 pm

hoops777 wrote:
Thu May 14, 2020 5:13 pm
Looking for advice on our Roth conversion amount.
I am 68 and wife is 70,both retired.
We are in the 12 pct tax bracket.
Our combined SS now is almost 30K and I am on spousal benefits.
When I turn 70 our combined SS will be 60K.
When I turn 72 our combined RMDs will be about 32,000.

Should I go into the next bracket and if so how much?
Assuming the $30K SS and traditional withdrawals are your only income, you don't pay 12% on traditional withdrawals (converted to Roth or not) until you have withdrawn ~$52K. Before that you are paying either 0%, 15%, 18.5%, or 22.2%. It stays at 12% until the total withdrawn is ~$82K, then jumps to 22% until you hit the first IRMAA tier at ~$148.5K.

When your SS benefit jumps to $60K and there is a $32K RMD, you'll be paying 0%, 15%, 22.2% on portions of your RMD. For withdrawals above that, the rates are 22.2%, 40.7%, then back to 22% until you hit the first IRMAA tier at ~$123K.

You can use the personal finance toolbox if you are at all comfortable with Excel to get a more accurate picture based on how much you expect in taxable interest, dividends, etc.

In short, one can make a very good case for converting at least to the top of the 12% bracket. Converting into the 22% bracket up to the first IRMAA tier is also worth considering, especially if you expect your kids will have at least a 22% marginal rate when withdrawing inherited tIRA money.

User avatar
LilyFleur
Posts: 1271
Joined: Fri Mar 02, 2018 10:36 pm

Re: Size of Roth conversion

Post by LilyFleur » Fri May 15, 2020 5:23 pm

hoops777 wrote:
Thu May 14, 2020 5:13 pm
Looking for advice on our Roth conversion amount.
I am 68 and wife is 70,both retired.
We are in the 12 pct tax bracket.
Our combined SS now is almost 30K and I am on spousal benefits.
When I turn 70 our combined SS will be 60K.
When I turn 72 our combined RMDs will be about 32,000.

Should I go into the next bracket and if so how much? Last year I converted about 65K. I have the 2 years before my SS doubles. Paying the taxes are not a problem.
Thanks
Have you looked at what your RMDs will be when you are 80 or 85?

User avatar
celia
Posts: 10826
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

Re: Size of Roth conversion

Post by celia » Fri May 15, 2020 6:56 pm

Here’s a different way of looking at it. Write down how much you converted the last few years. For each year also write down how much the total tax-deferred balances grew despite doing the conversion (minus contributions for the year).

If the year-end account balances stayed about the same, think of that as treading water as the yearly gain was removed each year without the balance decreasing. If the balance decreased, I consider that a good Roth conversion as you made progress in putting assets into Roth. Do you now wish you had made more progress those years? Then convert even more!

Now, here is the interesting dilemma for when markets go down (like they did this year and might do again). During a down market, you can convert more shares for the same tax bill as share prices drop. I think of shares ‘on sale’ as being candidates for Roth conversion as ‘taxes are on sale’ (compared to when the shares were fully priced).

What I’m implying is the balance decreasing (or not) is your motivator while the market being down is the technique to use, should it become available again.


Other motivators are:

* When either spouse dies, if the survivor inherits the remaining tax-deferred, they will then have to file as Single the following year and take the same RMD similar to what it would be if both were alive. The space in each tax bracket for Singles is half as much as for MFJ, so it is quite possible the survivor will bump up a bracket or more.

* If you leave your estate to relatives, the law recently changed that all beneficiaries have to empty out IRAs within 10 years (with a few exceptions). If your heirs inherit a tax-deferred account during their high-income years, the withdrawals will likely make their taxes increase to a higher tax bracket. If the IRAs are Roth, they can let that money instead grow tax-free for about 10 years when they then need to withdraw.

* Setting the markets aside, we are now in historically low tax brackets. Unless Congress changes the law, tax rates are scheduled to revert to 2017 levels in 2026.

When you were making the contributions to tax-deferred accounts, you were agreeing to pay the taxes later. ‘Later’ is almost here and you can decide when you want to pay the tax. Now? Or after the accounts have grown some more (which itself increases how much more in taxes will be owed)?

I’d prepare for another round of Roth conversions, assuming the markets drop again and for a smaller conversion should the markets not drop.

You should be aware of current tax brackets compared to your likely future ones as many forum members would say. But I’d also look at the dollar amount of the increased taxes now compared to later.

PS. Please be aware of Medicare Premiums: Rules for Higher-Income Beneficiaries which is also referred to as IRMAA.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

BluesH
Posts: 83
Joined: Mon Nov 19, 2018 1:31 pm

Re: Size of Roth conversion

Post by BluesH » Fri May 15, 2020 7:11 pm

hoops777 wrote:
Thu May 14, 2020 6:18 pm
I say 12 pct because of the conversions. I know the 70k figure but am wondering about increasing it. Our combined IRAs are about 820,000.Our combined Roth’s about 260,000. My main question is on the wisdom of paying taxes now and is it worth it. If all goes as planned the Roth’s will go to the kids.
We're in the same situation - not expecting to spend the Roth money. And we're implementing the same solution -- convert to the top of the 12% bracket. I am a bit concerned with the other issues raised here, particularly the rise in tax bracket for the survivor when one of us dies. But not concerned enough to pay additional tax at the 22% (or higher) bracket.
Last edited by BluesH on Fri May 15, 2020 7:23 pm, edited 2 times in total.

BluesH
Posts: 83
Joined: Mon Nov 19, 2018 1:31 pm

Re: Size of Roth conversion

Post by BluesH » Fri May 15, 2020 7:16 pm

P.S. Our IRAs are a bit bigger than yours. I calculate that if one of us dies, the other will be in the 24% bracket. And if we both survive to 2026 and the individual tax laws revert to their former brackets, as a couple we'll likely hit the 28% bracket. Sobering thoughts. Still, I don't feel incentivized to prepay lots of taxes now in the 22% bracket. YMMV.

BluesH
Posts: 83
Joined: Mon Nov 19, 2018 1:31 pm

Re: Size of Roth conversion

Post by BluesH » Fri May 15, 2020 7:35 pm

P.P.S. When deciding on your conversion number, don't forget to include the effect on capital gains taxes. The limit to keep cap gains and qualified dividends tax-free is $80,000 for a married couple. That's marginally below the top of the 12% bracket, which is $80,250. Depending on the amounts of cap gains and qualified dividends you have, exceeding $80K can cause quite a hit on your taxes.

Topic Author
hoops777
Posts: 3070
Joined: Sun Apr 10, 2011 12:23 pm

Re: Size of Roth conversion

Post by hoops777 » Fri May 15, 2020 9:16 pm

Great suggestions and info. Thank you.
I was considering going about 50 K into the 22 pct bracket but it is a tough call for me. I think I may do it if the market retraces back close to the lows in March.
K.I.S.S........so easy to say so difficult to do.

Post Reply