Roth conversions. Am I done?

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Topic Author
Skeeter1
Posts: 297
Joined: Sat Jul 06, 2019 1:50 pm

Roth conversions. Am I done?

Post by Skeeter1 »

I have been crunching my numbers in the Retiree Portfolio Model and been having fun juggling the numbers. I have been doing Roth conversions for the last few years at the 22% rate,but after crunching the numbers recently I am coming to the conclusion that maybe I should slow down or maybe stop with the conversions altogether.

I am 68 years old and single and here are my numbers:
Taxable 2.4 million
Traditional 380k
Roth 300k
Inherited 120k

What I am looking at is ,if I slow down my conversions I will be in the mid-22% bracket and instead of more conversions maybe I should work down my inherited IRA so that by the time that I hit 72 and my IRA RMD's hit, I will actually be in the 12% going forward.

So my question is am I looking at this right Or should I keep converting to the maximum of the 22% bracket? I know that there is a benefit to having X amount in tIRA for future medical bills and perhaps QCD's, so where is that approximate point? Have I kinda won the conversion point and need to stop?

Thanks in advance.
Retiredron
Posts: 83
Joined: Mon Mar 27, 2017 9:43 pm

Re: Roth conversions. Am I done?

Post by Retiredron »

Have you created a simple spreadsheet estimating your taxable income and marginal tax bracket over the next 5 to 7 years? I think RPM does that but not 100% certain since it's been awhile since I've worked with that tool. If you are certain you will be in the 12% bracket when RMDs kick in I agree doing additional Roth conversions at 22% doesn't make sense. You didn't mention if you're taking SS yet and your taxable portfolio is probably generating 40K+ or so of interest and dividends so really important to chart out projected taxable income over next several years.
retiredjg
Posts: 42767
Joined: Thu Jan 10, 2008 12:56 pm

Re: Roth conversions. Am I done?

Post by retiredjg »

Skeeter1 wrote: Fri Oct 09, 2020 4:54 pm What I am looking at is ,if I slow down my conversions I will be in the mid-22% bracket and instead of more conversions maybe I should work down my inherited IRA so that by the time that I hit 72 and my IRA RMD's hit, I will actually be in the 12% going forward.

So my question is am I looking at this right Or should I keep converting to the maximum of the 22% bracket? I know that there is a benefit to having X amount in tIRA for future medical bills and perhaps QCD's, so where is that approximate point? Have I kinda won the conversion point and need to stop?
Interesting question. I think you may be approaching a good stopping point.

With about $500k in tax-deferred accounts, you may not "need" to do conversions to make sure that RMDs are not a problem.

I think I might consider conversions until tax rates go up in 2026 and then stop. However, I would not convert up to the top of the 22% bracket because that takes you into IRMAA territory - you will pay more for Medicare. Instead, convert (or use the inherited IRA) up to about $85k AGI to avoid paying more for Medicare.

Whatever you do, your situation seems golden to me.
tibbitts
Posts: 12531
Joined: Tue Feb 27, 2007 6:50 pm

Re: Roth conversions. Am I done?

Post by tibbitts »

Skeeter1 wrote: Fri Oct 09, 2020 4:54 pm I have been crunching my numbers in the Retiree Portfolio Model and been having fun juggling the numbers. I have been doing Roth conversions for the last few years at the 22% rate,but after crunching the numbers recently I am coming to the conclusion that maybe I should slow down or maybe stop with the conversions altogether.

I am 68 years old and single and here are my numbers:
Taxable 2.4 million
Traditional 380k
Roth 300k
Inherited 120k

What I am looking at is ,if I slow down my conversions I will be in the mid-22% bracket and instead of more conversions maybe I should work down my inherited IRA so that by the time that I hit 72 and my IRA RMD's hit, I will actually be in the 12% going forward.

So my question is am I looking at this right Or should I keep converting to the maximum of the 22% bracket? I know that there is a benefit to having X amount in tIRA for future medical bills and perhaps QCD's, so where is that approximate point? Have I kinda won the conversion point and need to stop?

Thanks in advance.
You're in such a good place compared to many of us that I honestly don't think it matters in a predictable way. You can try to avoid IRMAA but beyond that you just don't have a big RMD problem. But what's your "inherited" amount - what's different about that and what's the taxation on that?
HeelaMonster
Posts: 181
Joined: Sat Aug 10, 2019 11:46 am

Re: Roth conversions. Am I done?

Post by HeelaMonster »

I agree that this is an interesting scenario, that you are already approaching a good balance, and should avoid converting into a range that would trigger IRMAA penalties.

In another thread on Roth conversions (I'm sorry that I'm not remembering which, in order to link directly), someone suggested $1 million in tax-deferred accounts as a rough rule-of-thumb for a threshold to start worrying about RMDs. Below that amount, the RMDs were not large enough to bump you into higher brackets (taking into account the low percentage on which RMDs are calculated at age 72, offset by standard tax deduction). Of course, there are other variables to consider and individual circumstances vary, but the math seemed to support that general rule.
retiredjg
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Re: Roth conversions. Am I done?

Post by retiredjg »

When looking at a single person's situation, I start thinking about RMDs way before reaching the $1 million dollar number.
Topic Author
Skeeter1
Posts: 297
Joined: Sat Jul 06, 2019 1:50 pm

Re: Roth conversions. Am I done?

Post by Skeeter1 »

Retiredron wrote: Fri Oct 09, 2020 5:20 pm Have you created a simple spreadsheet estimating your taxable income and marginal tax bracket over the next 5 to 7 years? I think RPM does that but not 100% certain since it's been awhile since I've worked with that tool. If you are certain you will be in the 12% bracket when RMDs kick in I agree doing additional Roth conversions at 22% doesn't make sense. You didn't mention if you're taking SS yet and your taxable portfolio is probably generating 40K+ or so of interest and dividends so really important to chart out projected taxable income over next several years.
Yes, I have. I have played with RPM before but I was not very proficient with using it. I made a point to understand it better and after trial and error, I now feel comfortable with it. The eye opener ( and beauty ) in RPM is that it allows you to see, side by side, what the effects are with a Roth conversion and without. This was an eye opener for me. I then kept adjusting my Roth conversions to a point where I could continue the conversions until I am 72, when the IRA RMD begins and then stop converting and be in the 12% bracket moving forward! Wow, I never saw that before.
Yes I am collecting SS and my taxable is generating around $30 k, by design.
So I believe that I am close to a theoretical stopping point in my conversions and was seeking input into my thoughts.
Thanks
Topic Author
Skeeter1
Posts: 297
Joined: Sat Jul 06, 2019 1:50 pm

Re: Roth conversions. Am I done?

Post by Skeeter1 »

retiredjg wrote: Fri Oct 09, 2020 6:20 pm
Skeeter1 wrote: Fri Oct 09, 2020 4:54 pm What I am looking at is ,if I slow down my conversions I will be in the mid-22% bracket and instead of more conversions maybe I should work down my inherited IRA so that by the time that I hit 72 and my IRA RMD's hit, I will actually be in the 12% going forward.

So my question is am I looking at this right Or should I keep converting to the maximum of the 22% bracket? I know that there is a benefit to having X amount in tIRA for future medical bills and perhaps QCD's, so where is that approximate point? Have I kinda won the conversion point and need to stop?
Interesting question. I think you may be approaching a good stopping point.

With about $500k in tax-deferred accounts, you may not "need" to do conversions to make sure that RMDs are not a problem.

I think I might consider conversions until tax rates go up in 2026 and then stop. However, I would not convert up to the top of the 22% bracket because that takes you into IRMAA territory - you will pay more for Medicare. Instead, convert (or use the inherited IRA) up to about $85k AGI to avoid paying more for Medicare.

Whatever you do, your situation seems golden to me.
Thank you. I appreciate your input. My current thoughts (plan) would take me to 2024, where I would be 72 and the RMD's kick in. I will run the numbers again each year, but at current projections, at 72 ,if I stop with the conversions I might/will be in the 12% bracket. If I keep converting, it would take me to the 22% bracket, so If that were the case, I should stop with future conversions.
Yes, avoiding additional IRMAA costs would indeed be golden. Thanks again.
Topic Author
Skeeter1
Posts: 297
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Re: Roth conversions. Am I done?

Post by Skeeter1 »

tibbitts wrote: Fri Oct 09, 2020 7:33 pm
Skeeter1 wrote: Fri Oct 09, 2020 4:54 pm I have been crunching my numbers in the Retiree Portfolio Model and been having fun juggling the numbers. I have been doing Roth conversions for the last few years at the 22% rate,but after crunching the numbers recently I am coming to the conclusion that maybe I should slow down or maybe stop with the conversions altogether.

I am 68 years old and single and here are my numbers:
Taxable 2.4 million
Traditional 380k
Roth 300k
Inherited 120k

What I am looking at is ,if I slow down my conversions I will be in the mid-22% bracket and instead of more conversions maybe I should work down my inherited IRA so that by the time that I hit 72 and my IRA RMD's hit, I will actually be in the 12% going forward.

So my question is am I looking at this right Or should I keep converting to the maximum of the 22% bracket? I know that there is a benefit to having X amount in tIRA for future medical bills and perhaps QCD's, so where is that approximate point? Have I kinda won the conversion point and need to stop?

Thanks in advance.
You're in such a good place compared to many of us that I honestly don't think it matters in a predictable way. You can try to avoid IRMAA but beyond that you just don't have a big RMD problem. But what's your "inherited" amount - what's different about that and what's the taxation on that?
The inherited amount is $120k and I have been taking $8-10k a year to try to whittle that down before 72, but have been using the rest of my 22% bracket to do Roth conversions. The taxation on the Inherited is the same as the conversion, it counts as ordinary income, so in this case 22%. If I actually am in the 12% bracket in the future I would probably max out my 12% with additional withdrawals from my Inherited so my children do not inherit my inherited.
HeelaMonster
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Re: Roth conversions. Am I done?

Post by HeelaMonster »

retiredjg wrote: Sat Oct 10, 2020 6:57 am When looking at a single person's situation, I start thinking about RMDs way before reaching the $1 million dollar number.
Yes, as I said, individual circumstances will vary, and I don't believe that rough rule-of-thumb was intended as one-size-fits-all. But here is the thread where I saw that discussed, for those who are interested in the reasoning (and counter arguments). viewtopic.php?p=4833243#p4833243
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grabiner
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Re: Roth conversions. Am I done?

Post by grabiner »

If you are going to use your personal IRA to make QCDs, it's probably best not to convert at all, since the IRA is relatively small. If you do convert and donate the same amount to charity, you will pay more in taxes than if you left the money in the IRA and made QCDs from the RMDs. (There are several reasons for this. You waste some of the itemized deduction unless your other deductions exceed your standard deduction. You may hit various income-based phase-ins or phase-outs in the tax code, such as the taxation of Social Security or the IRMAA adjustments to Medicare premiums.)
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JoinToday
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Re: Roth conversions. Am I done?

Post by JoinToday »

I am not quite sure of how your plan shows you can be in the 12% bracket with $2.4M in after tax assets x 2% (approx) dividends + Trad IRA RMD + Social Security. I don't see the details of you spending, etc., so this is only a guess.

My general guidelines is to reduce after tax account to reduce tax drag, and to reduce traditional IRA to reduce RMDs. I wouldn't take unnecessary RMDs from the inherited IRA unless there is some compelling reason. While it reduces the RMDs, it also moves the money to your taxable account where it will generate taxable income, and is subject to tax drag. Again, we are not seeing the total picture here, so I could be off base.

I would be looking at doing roth conversions to the top of the 24% bracket and get rid the traditional IRA entirely. Maybe you need to suck it up and pay the extra 3.8% NIIT.

Keep in mind the (stealthy) 27% marginal tax bracket between the 12% and 22% bracket: for each additional dollar of taxable income in the 12% bracket, it pushes an additional dollar of qualified dividends into the the 15% qualified dividend tax bracket, for an effective marginal tax bracket of 27% for ordinary income. If you are close, I would do what I could now to keep the future total taxable income below the top of the 12% bracket, even if it means paying a few percent more now.
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Wenonah
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Re: Roth conversions. Am I done?

Post by Wenonah »

The OP talked about RPM's. Can you tell me what this is? (Not revolutions per minute, I figure...) Thanks.
sandramjet
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Re: Roth conversions. Am I done?

Post by sandramjet »

Retiree Portfolio Model
sycamore
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Re: Roth conversions. Am I done?

Post by sycamore »

retiredjg
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Re: Roth conversions. Am I done?

Post by retiredjg »

JoinToday wrote: Sat Oct 10, 2020 7:08 pm I would be looking at doing roth conversions to the top of the 24% bracket and get rid the traditional IRA entirely. Maybe you need to suck it up and pay the extra 3.8% NIIT.
Some people believe there is no reason to get rid of everything in traditional IRA. In fact, there can be a benefit to keeping some.

In years when medical bills are quite high (think long term care, nursing home, etc.) that money can be used for the medical bills and deducted from income. So some of the money comes out of tIRA without ever being taxed.
Topic Author
Skeeter1
Posts: 297
Joined: Sat Jul 06, 2019 1:50 pm

Re: Roth conversions. Am I done?

Post by Skeeter1 »

grabiner wrote: Sat Oct 10, 2020 5:41 pm If you are going to use your personal IRA to make QCDs, it's probably best not to convert at all, since the IRA is relatively small. If you do convert and donate the same amount to charity, you will pay more in taxes than if you left the money in the IRA and made QCDs from the RMDs. (There are several reasons for this. You waste some of the itemized deduction unless your other deductions exceed your standard deduction. You may hit various income-based phase-ins or phase-outs in the tax code, such as the taxation of Social Security or the IRMAA adjustments to Medicare premiums.)
Yes, thank you for that analysis. That is why I believe I am done with further conversions and was looking for input from members like you to confirm my calculations.
Thanks for your advice.
Topic Author
Skeeter1
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Re: Roth conversions. Am I done?

Post by Skeeter1 »

JoinToday wrote: Sat Oct 10, 2020 7:08 pm I am not quite sure of how your plan shows you can be in the 12% bracket with $2.4M in after tax assets x 2% (approx) dividends + Trad IRA RMD + Social Security. I don't see the details of you spending, etc., so this is only a guess.

My general guidelines is to reduce after tax account to reduce tax drag, and to reduce traditional IRA to reduce RMDs. I wouldn't take unnecessary RMDs from the inherited IRA unless there is some compelling reason. While it reduces the RMDs, it also moves the money to your taxable account where it will generate taxable income, and is subject to tax drag. Again, we are not seeing the total picture here, so I could be off base.

I would be looking at doing roth conversions to the top of the 24% bracket and get rid the traditional IRA entirely. Maybe you need to suck it up and pay the extra 3.8% NIIT.

Keep in mind the (stealthy) 27% marginal tax bracket between the 12% and 22% bracket: for each additional dollar of taxable income in the 12% bracket, it pushes an additional dollar of qualified dividends into the the 15% qualified dividend tax bracket, for an effective marginal tax bracket of 27% for ordinary income. If you are close, I would do what I could now to keep the future total taxable income below the top of the 12% bracket, even if it means paying a few percent more now.
I ran the RPM tool several times and I would have to continue to convert at the top of my 22% bracket for the next 4 years when I would turn 72 and the tIRA RMD's kick in. According to the projections, I would be within the top of the 12% bracket in my 73rd year. I of course will re-evaluate my projections often and make sure that my data is correct. It is possible that I am inputting something incorrectly, but I have not found that to be true, yet.
I am done with my RMD's for this year, so next year will help validate if my numbers are indeed correct. Yes I would only take from my inherited IRA if there was a need.
I appreciate you pointing out the problem with the stealthy 27% marginal rate. I remember reading about this before, but need to find the thread(s) here and learn more about it.
Thank you for you detailed analysis and time spent helping me.
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