Roth conversion ideas needed

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PSM
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Roth conversion ideas needed

Post by PSM »

My wife and I are 65. We retired about 4 years ago and structured our income to take advantage of Affordable Care Act health insurance. We have kept our taxable income low, since we have substantial cash on hand, enabling us to to benefit from the ACA subsidies. We saved $$ thousands in health costs. Now that we are going on Medicare, the next challenge is to deal with the $3 million+ we have in retirement accounts that will have RMD’s starting at age 72. We are delaying social security to age 70.

We continue to have enough cash and some current pension income to pay our expenses and have low taxes (12% bracket).

1) If we do some Roth conversions over the next few years, there is a 5 year holding period on each conversion, right? Is there any penalty for withdrawals prior to 5 year wait and is that penalty for any withdrawal or just earnings? (We don’t have any Roth accounts. We had some a few years ago, but closed them and focused on qualifying for ACA subsidies).

2) If we do Roth conversions, I can’t figure out if it’s better to use them to the top of the 12% bracket or go to the top of 22%.
By keeping dividends and interest low in our taxable accounts, we could probably convert about $50000 to the top of 12%.
When we start RMD’s at 72, initially it seems we would be firmly in the 22% bracket, but I know the RMD’s increase after that, not to mention the tax shock when one of us passes and the other begins paying single person rates on all of it.

3) There’s a part of me that says that Roth conversions is the smartest move. But there’s another part of me that would like to just keep it all simple by making withdrawals from retirement accounts into taxable, avoiding the 5 year holding periods, and using the taxable accounts to manage taxes as well as possible (using qualified dividends and long term capital gains).

4) We are neutral when it comes to whether or not we pay taxes or our heirs pay taxes on any money that passes as inheritance.

We won’t be doing anything until 2022, since we still have to keep income low this year for the ACA credits.
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BolderBoy
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Re: Roth conversion ideas needed

Post by BolderBoy »

PSM wrote: Tue Apr 06, 2021 10:22 am 1) If we do some Roth conversions over the next few years, there is a 5 year holding period on each conversion, right?
No.
Is there any penalty for withdrawals prior to 5 year wait and is that penalty for any withdrawal or just earnings? (We don’t have any Roth accounts. We had some a few years ago, but closed them and focused on qualifying for ACA subsidies).
I don't know if the 5 year clock has to start again because of the closed Roth IRAs
2) If we do Roth conversions, I can’t figure out if it’s better to use them to the top of the 12% bracket or go to the top of 22%.
I think to the top of the 22% bracket would be good. But keep an eye on the IRMAA cliff!
3) There’s a part of me that says that Roth conversions is the smartest move.
I think it is.
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Svensk Anga
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Re: Roth conversion ideas needed

Post by Svensk Anga »

The top of the 22% bracket might be too high for you. Medicare surcharges due to IRMAA kick in above about $176,000 for a couple and will increase your effective marginal rate above 22%. IRMAA could become a problem for you once SS starts and RMDs kick in. This would tip the scales to doing conversions, probably to near the IRMAA first tier at 176k.
FlamePoint
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Re: Roth conversion ideas needed

Post by FlamePoint »

If you haven’t done so already I recommend running your numbers through the I-Orp modeling tool. With a $3M tax deferred account, your RMD’s could become substantial over time. I-Orp can help illustrate several different tax scenarios to help you maximize your income.

At a minimum you may want to consider going to the top of the first IRMAA tier, but some additional modeling will help.
humblecoder
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Re: Roth conversion ideas needed

Post by humblecoder »

PSM wrote: Tue Apr 06, 2021 10:22 am 1) If we do some Roth conversions over the next few years, there is a 5 year holding period on each conversion, right? Is there any penalty for withdrawals prior to 5 year wait and is that penalty for any withdrawal or just earnings? (We don’t have any Roth accounts. We had some a few years ago, but closed them and focused on qualifying for ACA subsidies).
I wanted to try and address this point specifically. There are actually TWO "5 year rules". I think you might be getting them confused.

The first is the 5 year conversion rule. If you do a taxable conversion (i.e. convert pre-tax Traditional IRA to a Roth IRA), if you withdraw any of the conversion amount prior to 5 years AND you are under 59.5, you pay a 10% penalty. However, since you are over 59.5, you don't have to pay this regardless of when you did the conversion.

The second is the 5 years earning rule. If you withdraw EARNINGS before you have held the Roth IRA account for 5 years, you will pay taxes on those earnings regardless of your age. Note that the 5 years are counted from Jan 1st of the year the account was opened. So if you open the account on 12/31, it is effectively a 4 year rule.

So to summarize for you:

1. Withdrawal of the conversion principal: No taxes and no penalty even if under 5 years.
2. Withdrawal of earnings: Taxes if withdrawn within 5 years of Jan 1st of the year that the account was opened. Otherwise, no taxes.

Even if you don't want to start doing conversions this year, my suggestion would be to open the Roth IRA and do a small conversion just to get the clock started on the second 5 year rule.
Exchme
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Re: Roth conversion ideas needed

Post by Exchme »

humblecoder wrote: Tue Apr 06, 2021 12:28 pm Even if you don't want to start doing conversions this year, my suggestion would be to open the Roth IRA and do a small conversion just to get the clock started on the second 5 year rule.
I don't think that's quite right. If these were Roth contributions from earned income, then it's 5 years from establishing the account. But Roth conversions each have their own 5 year clock. As you say, you can get the full converted amount out of the Roth at any time without taxes or penalties (since you just paid taxes to make the conversion), it's just the gains while the amount was in the Roth that need to gestate for 5 years.
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gobel
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Re: Roth conversion ideas needed

Post by gobel »

Exchme wrote: Tue Apr 06, 2021 12:41 pm
humblecoder wrote: Tue Apr 06, 2021 12:28 pm Even if you don't want to start doing conversions this year, my suggestion would be to open the Roth IRA and do a small conversion just to get the clock started on the second 5 year rule.
I don't think that's quite right. If these were Roth contributions from earned income, then it's 5 years from establishing the account. But Roth conversions each have their own 5 year clock. As you say, you can get the full converted amount out of the Roth at any time without taxes or penalties (since you just paid taxes to make the conversion), it's just the gains while the amount was in the Roth that need to gestate for 5 years.
OP mentioned he is 65 and had a Roth IRA many years ago (assuming >5), so it sounds like he is free and clear in both respects - ie. no waiting period.

Edit: I guess OP says "We had some a few years ago, but closed them and focused on qualifying for ACA subsidies)" which is a little ambiguous. If he opened and never funded, then the 5 year clock was not started. otw if he funded and then used up the money to keep AGI low for ACA, then he's ok assuming that first funding was >5 years ago.
humblecoder
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Re: Roth conversion ideas needed

Post by humblecoder »

Exchme wrote: Tue Apr 06, 2021 12:41 pm
humblecoder wrote: Tue Apr 06, 2021 12:28 pm Even if you don't want to start doing conversions this year, my suggestion would be to open the Roth IRA and do a small conversion just to get the clock started on the second 5 year rule.
I don't think that's quite right. If these were Roth contributions from earned income, then it's 5 years from establishing the account. But Roth conversions each have their own 5 year clock. As you say, you can get the full converted amount out of the Roth at any time without taxes or penalties (since you just paid taxes to make the conversion), it's just the gains while the amount was in the Roth that need to gestate for 5 years.
I think you are confusing the two five year rules. I mentioned that the 5 year clock was for the "second" 5 year rule (i.e. earnings withdrawn prior to the ACCOUNT being opened for 5 years are taxable). What I was suggesting that if the OP didn't have a Roth IRA opened, he/she should open it so that in 5 years, he/she could potentially withdraw earnings without paying taxes.
humblecoder
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Re: Roth conversion ideas needed

Post by humblecoder »

gobel wrote: Tue Apr 06, 2021 12:51 pm Edit: I guess OP says "We had some a few years ago, but closed them and focused on qualifying for ACA subsidies)" which is a little ambiguous. If he opened and never funded, then the 5 year clock was not started. otw if he funded and then used up the money to keep AGI low for ACA, then he's ok assuming that first funding was >5 years ago.
I agree that this was ambiguous. I was operating under the conservative assumption that the OP had no current Roth IRA which means that the 5 year clock hadn't started yet.
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FiveK
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Re: Roth conversion ideas needed

Post by FiveK »

PSM wrote: Tue Apr 06, 2021 10:22 am My wife and I are 65. ...the next challenge is to deal with the $3 million+ we have in retirement accounts that will have RMD’s starting at age 72. We are delaying social security to age 70.
Even accounting for IRMAA tiers, converting to the top of the 24% bracket is worth considering if you think any of the following are likely:
- tax law changes will increase your tax rates
- one spouse surviving the other will increase the survivor's tax rates
- RMDs will increase your tax rates

None of those are guaranteed to happen, so you could also reasonably choose not to convert that much. See Roth IRA conversion for more discussion.
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Nestegg_User
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Re: Roth conversion ideas needed

Post by Nestegg_User »

PSM

I'd suggest, like others, that converting to just below the IRMAA tier (below it so that you're medicare won't be at higher rates) would be your best move (and you wouldn't be needing the funds in the Roth before any penalty clock ran out anyway, since you have funds in taxable to draw to make up any shortfall to keep you below the next bracket). Roth's are best kept for the surviving spouse; the RMD's plus SS at single rates will be what they will be (hopefully not beyond 22%) and the Roths then serve as funds that might be needed beyond SS/RMD, say for an unexpected emergency cost or desirable travel at that time, without having additional tax consequences.

Like you, we also won't be able to convert much of our IRA's but wanted to convert enough while still in somewhat lower bracket (we didn't need to worry about health insurance ACA since we are on health insurance from prior employer).
Lalamimi
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Re: Roth conversion ideas needed

Post by Lalamimi »

We only have $1.3m, but converted to top of 12% past 2 yrs, and possibly high into 22% this year, but staying under IRMMA. I turn 70 the year DH has to make first RMD, (2 yrs) so my higher SS will be added in with his RMD for 2 yrs, then my RMDs kick in. Talking to an FA tomorrow to see if she confirms high Roth conversions are the best idea for us. I agree, you might want to make just a small conversion this year to start the clock.
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FiveK
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Re: Roth conversion ideas needed

Post by FiveK »

Nestegg_User wrote: Tue Apr 06, 2021 3:19 pm ...the RMD's plus SS at single rates will be what they will be (hopefully not beyond 22%)....
One can hope, but with a $3MM+ traditional account, even a 4%/yr withdrawal rate on that balance alone will put a single filer in the 24% bracket using 2021 rates, and the 28% bracket if one believes rates will revert in 2026. That is with no other income. Of course, one could also assume QCDs and/or extremely high itemizable expenses....
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PSM
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Re: Roth conversion ideas needed

Post by PSM »

Hi. I’m the original poster. Thanks for the good discussion.
One thing that hasn’t been clear is the fact that eve though we had opened some Roth IRA’s a few years ago, with
small conversions, when we discovered the ACA benefits, we cashed out the accounts to 0 balances and closed them (and paid tax on the earnings). I would think that those old closed accounts count for nothing on any 5 year period....so,
If we start some conversions next year, we could do something like:
$100,000 in 2022, $100,000 in 2023, etc. start SS when we are 70, and still be under IRRMA.
We would convert about $500000 at 22%. At least might save something...
The earliest we could draw from the 2022 conversion principle and earnings would be 2027 with no penalty?
Thanks
JoinToday
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Re: Roth conversion ideas needed

Post by JoinToday »

FiveK wrote: Tue Apr 06, 2021 1:54 pm
PSM wrote: Tue Apr 06, 2021 10:22 am My wife and I are 65. ...the next challenge is to deal with the $3 million+ we have in retirement accounts that will have RMD’s starting at age 72. We are delaying social security to age 70.
Even accounting for IRMAA tiers, converting to the top of the 24% bracket is worth considering if you think any of the following are likely:
- tax law changes will increase your tax rates
- one spouse surviving the other will increase the survivor's tax rates
- RMDs will increase your tax rates

None of those are guaranteed to happen, so you could also reasonably choose not to convert that much. See Roth IRA conversion for more discussion.
Another thing to consider is the possible or likely tax rates of your heirs with a 10 year payout of any remaining 401k or Traditional IRA. If my wife & I were to die in our early 70's, my heir would be in only God know what bracket, but it won't be less than 24%.

When I looked at it, converting to the top of the 12% bracket or 22% bracket didn't reduce my traditional IRA a huge amount. As painful as it is, I just sucked up the IRMAA surcharge and 3.8% NIIT, and am converting to the top of the 24% bracket. Yes it is painful, but someone will need to pay tax on withdrawals (except for charity, QCD. I am expecting to increase charity & utilize QCD at age 70 1/2 or 72, whenever it it).
I wish I had learned about index funds 25 years ago
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Nestegg_User
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Re: Roth conversion ideas needed

Post by Nestegg_User »

FiveK wrote: Tue Apr 06, 2021 3:48 pm
Nestegg_User wrote: Tue Apr 06, 2021 3:19 pm ...the RMD's plus SS at single rates will be what they will be (hopefully not beyond 22%)....
One can hope, but with a $3MM+ traditional account, even a 4%/yr withdrawal rate on that balance alone will put a single filer in the 24% bracket using 2021 rates, and the 28% bracket if one believes rates will revert in 2026. That is with no other income. Of course, one could also assume QCDs and/or extremely high itemizable expenses....
FiveK

That's why I recommended going up to the IRMAA threshold with that level of balance...so they can start dropping it some before the RMD's put them too high in bracket. They didn't mention any pension, so I think they get to manage their income better than others... and if they are in tax-efficient holdings in their taxable (so as to not get hit with additional income) they might be able to just stay below the threshold. (I know I've been converting ~80k/ pa to drop ours, but we've got pension income that also limits amounts, but also have only a few years before SS and then later RMD's.)
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FiveK
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Re: Roth conversion ideas needed

Post by FiveK »

PSM wrote: Tue Apr 06, 2021 6:04 pm The earliest we could draw from the 2022 conversion principle and earnings would be 2027 with no penalty?
You have much more flexibility. :)

See the withdrawal rules in table form: due to your age, all your conversions are immediately available to you!
diy60
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Re: Roth conversion ideas needed

Post by diy60 »

PSM wrote: Tue Apr 06, 2021 6:04 pm Hi. I’m the original poster. Thanks for the good discussion.
One thing that hasn’t been clear is the fact that eve though we had opened some Roth IRA’s a few years ago, with
small conversions, when we discovered the ACA benefits, we cashed out the accounts to 0 balances and closed them (and paid tax on the earnings). I would think that those old closed accounts count for nothing on any 5 year period....so,
You may want to highlight this, maybe someone will read this post and comment. I'm not so sure it matters if you closed the Roth account. My understanding is the clock starts after your very 1st contribution in any Roth. Again, you may want to highlight and ask. If in fact closing the Roth doesn't matter, than since you are over 59.5 and you contributed to a Roth over 5 years ago your Roth funds are fully qualified (no taxes, no penalties, no matter how or when the funds got into the Roth). Again, maybe someone will come along and comment.
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WoodSpinner
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Re: Roth conversion ideas needed

Post by WoodSpinner »

OP,

Can you provide some additional information?

1. Expected income when RMDs begin at 72 (other than RMDs)?

2. Expected annual growth rate for your investments in the IRA?

3. Have you done any modeling or used any tools to look at your income and Fed/State taxes during Retirement?

4. Are you charitable inclined — do you plan to make Qualified Charitable Distributions from the IRA starting at 70 1/2?

5. How are you handling Long Term Care ? Self Funding? LTC Policy?

6. What are your estate plans in regards to who inherits the IRA? What are their expected marginal tax brackets ?

I suspect Roth Conversions will make lots of sense in your situation.$3MM is a great deal of money in an IRA and the RMDs will be significant.

WoodSpinner
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FiveK
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Re: Roth conversion ideas needed

Post by FiveK »

Nestegg_User wrote: Tue Apr 06, 2021 6:44 pm
FiveK wrote: Tue Apr 06, 2021 3:48 pm
Nestegg_User wrote: Tue Apr 06, 2021 3:19 pm ...the RMD's plus SS at single rates will be what they will be (hopefully not beyond 22%)....
One can hope, but with a $3MM+ traditional account, even a 4%/yr withdrawal rate on that balance alone will put a single filer in the 24% bracket using 2021 rates, and the 28% bracket if one believes rates will revert in 2026. That is with no other income. Of course, one could also assume QCDs and/or extremely high itemizable expenses....
FiveK

That's why I recommended going up to the IRMAA threshold with that level of balance...so they can start dropping it some before the RMD's put them too high in bracket. They didn't mention any pension, so I think they get to manage their income better than others... and if they are in tax-efficient holdings in their taxable (so as to not get hit with additional income) they might be able to just stay below the threshold. (I know I've been converting ~80k/ pa to drop ours, but we've got pension income that also limits amounts, but also have only a few years before SS and then later RMD's.)
Going only up to the IRMAA threshold might indeed be best.

We don't know enough about the current situation (let alone have a working crystal ball). There is a mention in the OP of "...some current pension income to pay our expenses and have low taxes (12% bracket)."

Another OP quote, "...keeping dividends and interest low in our taxable accounts, we could probably convert about $50000 to the top of 12%," implies a pension of ~$50K or so. If a survivor gets that much, then...?

As with most traditional vs. Roth questions, it really depends on the specific situation - and that elusive crystal ball. :)

With a $3 million balance, 5%/yr growth would be $150K/yr and require at least that much conversion to reduce the balance. Of course, this is a good problem to have. ;)
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AndrewXnn
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Re: Roth conversion ideas needed

Post by AndrewXnn »

More than anything, it depends on your rate of return in the Tax Deferred Accounts.

If you are adverse to Risk and invest conservatively such that your returns will be less than inflations (say 1% annually), then if you convert about $81K/year (up to the top of the 12% bracket), then you RMDs if SS is about $72K/year will be within the 22% bracket.

If you don't convert, then you could have a small amount of your RMDs taxed in the 24% bracket.

If on the other you invest aggressively (say 5% annually) then you will eventually be visiting the 32% bracket if you live long enough.

This is just a rough calc!
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celia
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Re: Roth conversion ideas needed

Post by celia »

Here’s how I see the OP’s situation:

By the time you are 72, your $3M will likely be about $4M. RMDs will then start at $160K and keep increasing until your late 80s. That income alone puts you at the top of the 24% tax bracket. The next tax bracket is 32% and tax brackets are scheduled to revert to 2017 levels in 2026.

So anyone who says to convert to the top of the 12% or 22% bracket doesn’t realize the problem will only get worse as time goes by. Even converting to the top of the 24% tax bracket is ‘only treading water’, as I see it.

So what should you do? First read this thread and when you see my posts, follow my links. The first link will help you see the upcoming problem. The second link will show you one way of calculating how much to convert each year, using a spreadsheet and current tax software.

Then you need to understand how IRMAA surcharges work for those on Medicare. These are higher premiums for Part B and Part D for those whose joint MAGI was above $176K (as of 2019) two years earlier. Then consider not taking the ACA subsidy this year so you can start large Roth conversions while also comparing the subsidy you would lose this year against how future IRMAA might be held down two years from now instead. (For example, if you are eligible for a $20K subsidy but you would have to pay an extra $25K in IRMAA for each year going forward, why not forget about the subsidy this year and do a huge Roth conversion and only pay $10K in IRMAA surcharges in future years?). You will have to run your numbers and can track it in the spreadsheet like my sample spreadsheet shows.
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.
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PSM
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Re: Roth conversion ideas needed

Post by PSM »

Original poster here.
Good suggestions.
Previously, I had only tried to calculate what RMD’s might be around 72, at current asset values. It’s really hard to project what returns we might get get, especially when I waffle so much with my asset allocation and risk comfort.
We do have long term care insurance, but we are still pondering whether we will need to pay a big entrance fee for a continuing care community someday, even though the sale of our paid up house will provide some of those costs.
One other factor: For about a million of our retirement assets, our employer will have an annuity option. We could choose a company private annuity, with inflation protection and survivor options. Of course, that will be straight-out taxable income with nothing left for heirs. If we go with the RMD and withdrawal option, the money can still grow and be left to heirs (if the account is not depleted).
Too many variables and some unknowns in play...like how much we will need for health and long term care, and how long we will live....problems common to all!
shess
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Re: Roth conversion ideas needed

Post by shess »

PSM wrote: Tue Apr 06, 2021 8:47 pm Too many variables and some unknowns in play...like how much we will need for health and long term care, and how long we will live....problems common to all!
I have 20 years to RMDs, but I also found that there were too many variables and unknowns to really be able to create a plan where I could say "Yea, verily, this plan is correct."

So, instead, I just played around with some scenarios, and decided that while I couldn't make anything perfect, I could at least make progress. So I picked a target marginal rate, and we convert to the top of that rate. I leave some wiggle room so I can do a pencil run of our taxes before committing the last bit, just in case something pushes us a bit higher than expected.

In 20 years, I suspect I'll look back and wish I had picked the next bracket higher to convert to. Of course, I'll wish that because I'm still alive and dealing with taxes, so it seems like a firm win :-).
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celia
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Re: Roth conversion ideas needed

Post by celia »

PSM wrote: Tue Apr 06, 2021 8:47 pm Previously, I had only tried to calculate what RMD’s might be around 72, at current asset values.
It is quite common that people forget that the tax-deferred will continue to grow until 72 and after. I recently saw a case in the forum where someone had $1M in tax-deferred at age 62. I started my comments with that it could double by 72. Someone called me on that and asked what fantasyland I lived in (or something to that effect) and for me to give a plausible example. So I explained the Rule of 72 which says to divide the number of years you have into 72 to see what growth rate would be needed. So 72 / 10 = 7.2. A compound growth rate of 7.2% for 10 years is plausible. Using it on $3M would show that if you didn’t touch the tax-differed account for 7 years, it could double if you had a growth rate of 10.3%. I might not be that optimistic and bet the OP does ‘something’ to the account in the meantime.
:D
One other factor: For about a million of our retirement assets, our employer will have an annuity option. We could choose a company private annuity, with inflation protection and survivor options. Of course, that will be straight-out taxable income with nothing left for heirs. If we go with the RMD and withdrawal option, the money can still grow and be left to heirs (if the account is not depleted).
If you took the annuity option, that would be more income using up room in your tax brackets that Roth conversions could have used. But you would be likely to not need to spend any IRA withdrawals since your monthly income would be more.
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.
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celia
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Re: Roth conversion ideas needed

Post by celia »

shess wrote: Tue Apr 06, 2021 10:40 pm In 20 years, I suspect I'll look back and wish I had picked the next bracket higher to convert to. Of course, I'll wish that because I'm still alive and dealing with taxes, so it seems like a firm win :-).
You could do it one year if you think you might end up with a targe tax-deferred account. And you don’t even have to fill up the next tax bracket. But if you do it, sooner rather than later is better (so more of the future growth can happen tax-free in the Roth). Another option is to convert more than usual during a market downturn.
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.
Fat Tails
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Re: Roth conversion ideas needed

Post by Fat Tails »

celia wrote: Tue Apr 06, 2021 8:28 pm Here’s how I see the OP’s situation:

By the time you are 72, your $3M will likely be about $4M. RMDs will then start at $160K and keep increasing until your late 80s. That income alone puts you at the top of the 24% tax bracket. The next tax bracket is 32% and tax brackets are scheduled to revert to 2017 levels in 2026.

So anyone who says to convert to the top of the 12% or 22% bracket doesn’t realize the problem will only get worse as time goes by. Even converting to the top of the 24% tax bracket is ‘only treading water’, as I see it.

So what should you do? First read this thread and when you see my posts, follow my links. The first link will help you see the upcoming problem. The second link will show you one way of calculating how much to convert each year, using a spreadsheet and current tax software.

Then you need to understand how IRMAA surcharges work for those on Medicare. These are higher premiums for Part B and Part D for those whose joint MAGI was above $176K (as of 2019) two years earlier. Then consider not taking the ACA subsidy this year so you can start large Roth conversions while also comparing the subsidy you would lose this year against how future IRMAA might be held down two years from now instead. (For example, if you are eligible for a $20K subsidy but you would have to pay an extra $25K in IRMAA for each year going forward, why not forget about the subsidy this year and do a huge Roth conversion and only pay $10K in IRMAA surcharges in future years?). You will have to run your numbers and can track it in the spreadsheet like my sample spreadsheet shows.
+1, and if/when one of you passes, then the 32% tax bracket starts at $163,301 (2020 numbers) for the remaining person filing single.

Cheers
“It's tough to make predictions, especially about the future.” ― Yogi Berra
Derpalator
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Re: Roth conversion ideas needed

Post by Derpalator »

FiveK wrote: Tue Apr 06, 2021 6:59 pm
PSM wrote: Tue Apr 06, 2021 6:04 pm The earliest we could draw from the 2022 conversion principle and earnings would be 2027 with no penalty?
You have much more flexibility. :)

See the withdrawal rules in table form: due to your age, all your conversions are immediately available to you!
Thanks for the table link, it really simplifies tax/penalty issues with Roth contributions/conversions. I am over 59.5 with old Roths, so it is clear sailing!
FlamePoint
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Re: Roth conversion ideas needed

Post by FlamePoint »

Fat Tails wrote: Tue Apr 06, 2021 11:52 pm
celia wrote: Tue Apr 06, 2021 8:28 pm Here’s how I see the OP’s situation:

By the time you are 72, your $3M will likely be about $4M. RMDs will then start at $160K and keep increasing until your late 80s. That income alone puts you at the top of the 24% tax bracket. The next tax bracket is 32% and tax brackets are scheduled to revert to 2017 levels in 2026.

So anyone who says to convert to the top of the 12% or 22% bracket doesn’t realize the problem will only get worse as time goes by. Even converting to the top of the 24% tax bracket is ‘only treading water’, as I see it.

So what should you do? First read this thread and when you see my posts, follow my links. The first link will help you see the upcoming problem. The second link will show you one way of calculating how much to convert each year, using a spreadsheet and current tax software.

Then you need to understand how IRMAA surcharges work for those on Medicare. These are higher premiums for Part B and Part D for those whose joint MAGI was above $176K (as of 2019) two years earlier. Then consider not taking the ACA subsidy this year so you can start large Roth conversions while also comparing the subsidy you would lose this year against how future IRMAA might be held down two years from now instead. (For example, if you are eligible for a $20K subsidy but you would have to pay an extra $25K in IRMAA for each year going forward, why not forget about the subsidy this year and do a huge Roth conversion and only pay $10K in IRMAA surcharges in future years?). You will have to run your numbers and can track it in the spreadsheet like my sample spreadsheet shows.
+1, and if/when one of you passes, then the 32% tax bracket starts at $163,301 (2020 numbers) for the remaining person filing single.

Cheers
This!

We just retired the end of last year at the age of 58. With a tax deferred account of $4M, and a heathy SS amount ($86k per year at age 70) I’m doing heavy Roth conversions up to the top of the 24% tax bracket for the next 4 years. Then, starting at age 63 I’ll pay close attention to IRMAA tiers to determine max conversion amount (tax return 2 years prior is used to determine Medicare premium). I’ll continue converting until we’re 72. This should allow us to convert close to 60% to Roth, a lot of which will be legacy funds for our kids. All equities will be held in Roth, and bonds in tax deferred.

$800k of the $4M is a pension I opted to take as a lump sum rather than an annuity to better control taxable income and free up space for large conversions in the early years.

Without these conversions we were on track for a tax bomb starting at age 72. And the picture is even worse when one of us passes away.
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celia
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Re: Roth conversion ideas needed

Post by celia »

FlamePoint wrote: Wed Apr 07, 2021 9:59 am $800k of the $4M is a pension I opted to take as a lump sum rather than an annuity to better control taxable income and free up space for large conversions in the early years.
Did you convert the $800K? The taxes would be the same whether you converted it or put it in taxable.
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.
FlamePoint
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Re: Roth conversion ideas needed

Post by FlamePoint »

celia wrote: Wed Apr 07, 2021 5:07 pm
FlamePoint wrote: Wed Apr 07, 2021 9:59 am $800k of the $4M is a pension I opted to take as a lump sum rather than an annuity to better control taxable income and free up space for large conversions in the early years.
Did you convert the $800K? The taxes would be the same whether you converted it or put it in taxable.
The $800k was rolled into my and my spouses IRA (we each qualified for a pension). It will be part of the funds I’ll be converting over the next 12 years. I did my first large conversion last month for each of us to the tune of $300k. I’ll top it off at year end once I have a clearer picture of all earned income for the year (we received some bonus $’s from our prior company, and will have a small amount of taxable interest/dividends).
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PSM
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Re: Roth conversion ideas needed

Post by PSM »

Is there any reason to open a Roth account for each spouse for conversions? Each of us has IRA’s that have more than we would ever convert, and since one of us would inherit the other’s account, would there be any reason to have 2 accounts?
Aelron
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Re: Roth conversion ideas needed

Post by Aelron »

PSM wrote: Thu Apr 08, 2021 11:13 am Is there any reason to open a Roth account for each spouse for conversions? Each of us has IRA’s that have more than we would ever convert, and since one of us would inherit the other’s account, would there be any reason to have 2 accounts?
The only reason I've found is to get extra SIPC insurance. Is it worth opening another account to get more free insurance? I think so, but others may prefer the simplicity of fewer accounts or they don't plan to ever have enough Roth balance for it to matter.
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Re: Roth conversion ideas needed

Post by FactualFran »

PSM wrote: Thu Apr 08, 2021 11:13 am Is there any reason to open a Roth account for each spouse for conversions? Each of us has IRA’s that have more than we would ever convert, and since one of us would inherit the other’s account, would there be any reason to have 2 accounts?
Each spouse will do Roth conversion(s) to his or her own Roth IRA. The "I" in "IRA" stands for Individual. Each conversion will be from the IRA for the Individual. When an account is inherited from a spouse, the surviving spouse will have the option of making the IRA his or her own.
diy60
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Re: Roth conversion ideas needed

Post by diy60 »

PSM wrote: Thu Apr 08, 2021 11:13 am Is there any reason to open a Roth account for each spouse for conversions? Each of us has IRA’s that have more than we would ever convert, and since one of us would inherit the other’s account, would there be any reason to have 2 accounts?
If each of your tax deferred accounts separately exceed the grand total as a couple that you would anticipate converting, then there would not be a mathematical reason to have 2 Roth accounts, but I would probably do so anyway. You just never know what the future brings.
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Eagle33
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Re: Roth conversion ideas needed

Post by Eagle33 »

You should each have a Roth IRA so you each can complete the 5-year clock on each account.
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Exchme
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Re: Roth conversion ideas needed

Post by Exchme »

FlamePoint wrote: Wed Apr 07, 2021 9:59 am We just retired the end of last year at the age of 58. With a tax deferred account of $4M, and a heathy SS amount ($86k per year at age 70) I’m doing heavy Roth conversions up to the top of the 24% tax bracket for the next 4 years. Then, starting at age 63 I’ll pay close attention to IRMAA tiers to determine max conversion amount (tax return 2 years prior is used to determine Medicare premium). I’ll continue converting until we’re 72. This should allow us to convert close to 60% to Roth, a lot of which will be legacy funds for our kids. All equities will be held in Roth, and bonds in tax deferred.
I predict that the math will show you should keep converting to the top of the 24% bracket all the way to age 72 and maybe even some small conversions at age 72. Since hopefully your $4MM is still generating a nice return, conversions to the top of the 24% bracket will probably barely make a dent in your tax deferred balance (At ~8% return, the balance doesn't go down at all and the S&P is already up by more than that this year). IRMAA taxes are annoying but a secondary impact to getting the 8-15% lower tax rate on the conversions than taking them later at worse tax rates (especially if one of you lives a lot longer than the other).
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