Roth conversion strategy for 32% bracket now, 35% bracket in retirement

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radR investing
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Roth conversion strategy for 32% bracket now, 35% bracket in retirement

Post by radR investing »

I understand the basic strategy of filling up the lower tax brackets. I am interested in a strategy for someone who is in a higher tax bracket now, and expects to be in an equal-or-higher bracket in retirement. I am 65 now and plan to work 3 more years, mainly because I enjoy it and have my next 3-years of earnings earmarked for special projects (helping family).

Is there a recommended strategy for Roth conversion under these circumstances?
MrJedi
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Re: Roth conversion strategy for 32% bracket now, 35% bracket in retirement

Post by MrJedi »

If you expect to be higher in retirement, the strategy would be to Roth convert enough to level it out.

If you list out a full portfolio, the forum can do an analysis on the numbers to see if you do have a potential tax problem during retirement. Include any expected pensions, social security, etc., If you plan to move in retirement, etc.

Other factors would be your plans with the money. For example if you are charitably inclined, QCDs and charity beneficiaries on tax deferred accounts can make a difference on the analysis.
HomeStretch
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Re: Roth conversion strategy for 32% bracket now, 35% bracket in retirement

Post by HomeStretch »

In addition to MrJedi’s feedback about smoothing your marginal tax rate/aftertax $ by year and taking beneficiaries into account, also take a look at whether Roth conversions will help reduce IRMAA premium adjustments (if you will enroll in Medicare) and surviving spouse impact (if you are married).

If you will contribute to a Traditional 401k for the next 3 years, also consider whether you should switch to Roth 401k contributions.

If your 401k plan offers a mega backdoor Roth, consider whether that is helpful to move savings from Taxable accounts into Roth (thus reducing taxable dividends in future years).

Roth conversion strategies are highly individual so you will need to do analysis of your situation and post the results/more information in order to receive any specific feedback.
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grabiner
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Re: Roth conversion strategy for 32% bracket now, 35% bracket in retirement

Post by grabiner »

If you pay tax from a taxable account, a Roth conversion is a good deal even in the same tax bracket, because it allows you to effectively tax-defer more money. For example, if you convert $10,000 in a 35% bracket, you replace $10,000 in the traditional account with an equally good (after-tax) $6500 in the Roth account, and then replace $3500 in the taxable account with a clearly better $3500 in the Roth account. Even if you have to sell stock for a capital gain and thus don't get the full $3500, it's still a good deal.
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heavyseve
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Re: Roth conversion strategy for 32% bracket now, 35% bracket in retirement

Post by heavyseve »

grabiner wrote: Tue Oct 12, 2021 11:08 pm …and then replace $3500 in the taxable account with a clearly better $3500 in the Roth account. Even if you have to sell stock for a capital gain and thus don't get the full $3500, it's still a good deal.
I’m not sure what this means, or what the mechanics are. Can you please elaborate? Thanks.
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grabiner
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Re: Roth conversion strategy for 32% bracket now, 35% bracket in retirement

Post by grabiner »

heavyseve wrote: Wed Oct 13, 2021 8:51 am
grabiner wrote: Tue Oct 12, 2021 11:08 pm …and then replace $3500 in the taxable account with a clearly better $3500 in the Roth account. Even if you have to sell stock for a capital gain and thus don't get the full $3500, it's still a good deal.
I’m not sure what this means, or what the mechanics are. Can you please elaborate? Thanks.
If you will always be in a 35% tax bracket, then $10,000 in a traditional IRA is as good as $6500 in a Roth IRA, since you will lose 35% of the traditional IRA to taxes at some time. Thus, to decide whether the conversion is worthwhile, you need to look at the rest of the money,

If you pay the conversion tax with $3500 from the traditional IRA, there is no other money (you withdrew $10,000 from the traditional IRA and put $6500 in the Roth), so the conversion is break-even. (Even then, it may be a net gain if it reduces future RMDs that you don't need.)

If you pay the conversion tax with cash from the taxable account, you have $3500 less in the taxable account, and an additional $3500 in the Roth account. This makes the conversion a net gain.

If you sell stock in the taxable account, you have to take more than $3500 out of the taxable account to cover the $3500 tax. If the capital-gains tax on a $4000 stock sale is $500, then the conversion removed $4000 from your taxable account and put an additional $3500 in the Roth account. This is usually still a net gain, because the Roth grows tax-free in the future, while the taxable account would lose value to dividend tax every year, and the capital-gains tax would still be paid when you sold it eventually.
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heavyseve
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Re: Roth conversion strategy for 32% bracket now, 35% bracket in retirement

Post by heavyseve »

Thanks. I thought this is what you said before, but my mind was stuck on something I had brought up recently in a different thread about the withholding on the conversion.
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