## Standard Deduction & Roth Conversion

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Topic Author
hammockman
Posts: 54
Joined: Thu Feb 09, 2017 10:31 am

### Standard Deduction & Roth Conversion

For this upcoming 2022 tax year here’s our scenario; We’re living on after tax cash completely so effectively have no income initially. (Not taking any IRA distributions) We’re using the Affordable Care Act for healthcare so we need to generate income to get above the poverty ceiling ( to stay above the Medicaid threshold) and hit the sweet spot so to speak for tax credits (around \$52k) I have a small pension that starts April 1st, 2022 that should total \$13,725 for the partial year. (taxable income) Then we plan to do a ROTH conversion within one of my 401ks at Fidelity to generate a taxable event to get us to the sweet spot about \$52k taxable income. This 401k already has a portion in a ROTH so it’s an easy in plan conversion. Our question is, should we only convert \$38,275 ( 38,275 + \$13,725 =\$52,00) assuming we file taxes for this year using the standard deduction of \$25,900 for MFJ,(not itemizing) or can we basically convert \$38,275 plus \$25,900 for a total conversion of \$64,175 and still end up at the \$52k sweet spot we need to be at for taxable income after taking the standard deduction?

I'm assuming our tax rate will still be 12% since we're under the \$83k and change income. So the total income would be \$38,275 + \$13,725 + \$25,900 = \$77,900. Any guidance is appreciated as we need to do this conversion sooner than later.
livesoft
Posts: 78839
Joined: Thu Mar 01, 2007 8:00 pm

### Re: Standard Deduction & Roth Conversion

Why do you have to do this conversion soon? Why not October? Or December?

I would use tax-prep software and not trust anything I read on this forum.
This signature message sponsored by sscritic: Learn to fish.
Chip
Posts: 3649
Joined: Wed Feb 21, 2007 4:57 am

### Re: Standard Deduction & Roth Conversion

I think there are a couple misconceptions in your post.

1. Is the "sweet spot" 52k of taxable income or 52k of modified adjusted gross income (MAGI)? I think it's the latter for ACA purposes.
2. If it's MAGI, the correct conversion is the 38,275 you mentioned, assuming there is no income other than the pension.
3. But is there really no income other than the pension? No interest, no dividends?
hammockman wrote: Fri Jan 14, 2022 7:10 am I'm assuming our tax rate will still be 12% since we're under the \$83k and change income. So the total income would be \$38,275 + \$13,725 + \$25,900 = \$77,900. Any guidance is appreciated as we need to do this conversion sooner than later.
12% bracket is correct, but total income is just 38,275+13,725 = 52,000
Topic Author
hammockman
Posts: 54
Joined: Thu Feb 09, 2017 10:31 am

### Re: Standard Deduction & Roth Conversion

Livesoft - The Maryland Health Connection makes you submit an affidavit by mid Feb attesting to your estimated income along with supporting documentation as best as you can for ACA credits
Topic Author
hammockman
Posts: 54
Joined: Thu Feb 09, 2017 10:31 am

### Re: Standard Deduction & Roth Conversion

Chip, yes MAGI is the target here. Can you clarify why we couldn't convert more assuming the standard deduction would ultimately reduce the overall taxable income? And yes no other income aside from pension & conversion. Thank you for your insights
ThankYouJack
Posts: 4212
Joined: Wed Oct 08, 2014 7:27 pm

### Re: Standard Deduction & Roth Conversion

It hasn't been updated for 2022 yet, but the Personal Finance Toolbox on the wiki helped me determine my conversion amount last year -

nolesrule
Posts: 2264
Joined: Thu Feb 26, 2015 10:59 am

### Re: Standard Deduction & Roth Conversion

hammockman wrote: Fri Jan 14, 2022 8:00 am Chip, yes MAGI is the target here. Can you clarify why we couldn't convert more assuming the standard deduction would ultimately reduce the overall taxable income? And yes no other income aside from pension & conversion. Thank you for your insights
The standard deduction is subtracted from AGI to get your taxable income. MAGI is based on AGI and does not include the standard deduction. So if you convert more, your AGI and MAGI will be too high.
Chip
Posts: 3649
Joined: Wed Feb 21, 2007 4:57 am

### Re: Standard Deduction & Roth Conversion

hammockman wrote: Fri Jan 14, 2022 8:00 am Chip, yes MAGI is the target here. Can you clarify why we couldn't convert more assuming the standard deduction would ultimately reduce the overall taxable income? And yes no other income aside from pension & conversion. Thank you for your insights
As nolesrule points out, it's MAGI that matters for ACA, not taxable income. If by "sweet spot" you meant qualifying for a Silver cost-sharing reduction (CSR) plan you will likely blow up your plan if you convert more. If I remember correctly, CSR plans are available if MAGI is below 250% of the Federal poverty level (FPL). The lower the MAGI the better the CSRs are, as long as you're above the Medicaid floor.
Topic Author
hammockman
Posts: 54
Joined: Thu Feb 09, 2017 10:31 am

### Re: Standard Deduction & Roth Conversion

Thanks all for the clarity, I see the difference now
retired@50
Posts: 7013
Joined: Tue Oct 01, 2019 2:36 pm
Location: Living in the U.S.A.

### Re: Standard Deduction & Roth Conversion

hammockman wrote: Fri Jan 14, 2022 7:55 am Livesoft - The Maryland Health Connection makes you submit an affidavit by mid Feb attesting to your estimated income along with supporting documentation as best as you can for ACA credits
An affidavit of estimated income...

In other words, I swear to God that this is my best guess at how much I'll earn this year. How could they possibly punish people for getting this wrong?

Regards,
This is one person's opinion. Nothing more.
furwut
Posts: 1880
Joined: Tue Jun 05, 2012 8:54 pm