roth conversion strategy questions

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
john0608
Posts: 79
Joined: Sat Dec 09, 2017 9:22 am

roth conversion strategy questions

Post by john0608 »

Hello all, couple of Roth conversion strategy comments/questions.

recently retired on 1/1/22 - age 66 - wife age 63 still working at least till year end
no pension, small amount of rental income, delaying SS till 70 (at least for me), drawing from non-qualified fixed for living expenses.

we are doing Roth conversions for '22 and plan to do some each year at least before collecting SS, for right now we are trying to decide between 2 levels of conversion
- we could convert up to the 2nd IRMA tier so AGI will be up to about $280k (IRMAA tier 2 cap for 2024 expected to be $284K)
- so the converted amount from T-IRA would be about $180K since wife's income plus div/cap gains will be about $100k for 2022.
- a less aggressive plan would be to convert about $125k and take AGI up to $225k (IRMA tier 1 cap for 2024 expected to be $228K)
- irma for 1 person in 2024 would be about $2000 per year difference between the 2 options/tiers.

questions
1. what is the best way to decide on what is the proper amount to convert or is it all a matter of personal preference (we have approx $3m in t-ira, $1.5m in non-qualified) split 60/40 equities to fixed (fixed all in t-bills, bank accounts, cds)
2. we are concerned that the higher the roth conversion the higher the tax bill and in todays market it may be better to be less aggressive.
3. what assets to convert first (worse performing mutual funds ie growth funds down 25%?)?
4. i have converted $95k so far in 2022 mostly using worse performing growth funds but wanted to see if there are any opinions.

thanks.
chemocean
Posts: 875
Joined: Mon Dec 19, 2016 9:45 pm

Re: roth conversion strategy questions

Post by chemocean »

Under normal circumstances, someone has to pay taxes within ten years after the death of the surviving spouse.

What will the tax rate be at the time of redemption by the person redeeming the present traditional IRA?
1) you as a couple after receiving SS,
2) the surviving spouse,
3) your beneficiaries.

You have not indicated what the balance of your traditional IRAs.
No need to convert funds that will not be taxable in the future:
a) Qualified charitable distributions during your and DW's lifespan.
b) medical expenses, including long-term care, that cause you to exceed the standard deduction after considering the 7.5% of AGI threshold.
User avatar
CAsage
Posts: 2393
Joined: Sun Mar 27, 2016 6:25 pm

Re: roth conversion strategy questions

Post by CAsage »

1) The best way is to pay the lowest possible total tax over your and your heirs' lifetimes. Do not be shortsighted! If you are excel-handy or can use some of the online modeling tools, AND you do your own taxes (always wise, hands on is good), see what your taxes are now, when you are both retired, when one of you departs for the HereAfter, and what your heirs will be stuck/blessed with. With a big chubby pretax IRA, I would guess that converting up to the top of the 22~24% bracket may be a good call. Note that I have no problem paying taxes out of such a big IRA as well - it must all be withdrawn at some point, and it will be taxed then for sure.
3) Converting assets while down is often like buying staples on sale! More shares in that Roth for the taxes paid.
It's also wise to plan for any QCD (if charitably inclined in the future...) and yes pretax money can be withdrawn and spent on long term medical care - oh fun. Well, you can balance somewhere in the middle.
You should also run your and your wife's SS predictions through the well regarded opensocialsecurity.com tool - most couples find that having the younger or less earned spouse claim ASAP and the older/higher earned spouse defer to 70 will maximize the overall payout,
And look into asset placement optimization - putting all/most stock in Roth and bonds in pretax will tend to minimize the pretax growth and lower overall taxes. It's primarily an iterative improvement problem; fine tune in any way and you are better off.
Salvia Clevelandii "Winifred Gilman" my favorite. YMMV; not a professional advisor.
RetiredCSProf
Posts: 980
Joined: Tue Feb 28, 2017 4:59 pm

Re: roth conversion strategy questions

Post by RetiredCSProf »

In response to the 1st question:
The numbers OP posted for estimated IRMAA brackets are inconsistent with the numbers considered as most reliable -- see https://thefinancebuff.com/medicare-irm ... ckets.html.

Currently, Finance Buff is showing a cap of $264K MAGI filing MFJ for the 1st IRMAA tier above the standard bracket (assuming 5% inflation) and a cap of $254K MAGI for MFJ for the 1st IRMAA tier (assuming 0% inflation). The cap for the 2nd IRMAA tier is a jump of $64K more in MAGI -- $328K cap MAGI for MFJ (5% inflation) and $318K MAGI for MFJ (0% inflation)

FinanceBuff adjusts the estimated numbers each month as inflation numbers are released. We will have a better idea by Nov 2022 but, of course, will not know the actual numbers until it is too late to do anything about it. I'm planning to finish my Roth conversions in early December, after I have a better idea of the brackets and of my interest income for 2022

Qt. #2: There is always a tradeoff with paying the tax bill now or later for taxes that were deferred when you received the income.

Qt. #3: Similar to the OP, I have been converting my worst performing funds (growth) in 2022 -- this has resulted in a lop-sided portfolio, where my Roth is growth-heavy and my tIRA is value-heavy. I assume that my Roth will be spent last and has a longer time to recover from a downturn.
niagara_guy
Posts: 706
Joined: Tue Feb 11, 2020 8:32 am

Re: roth conversion strategy questions

Post by niagara_guy »

I always use tax software to model my taxes, so in the fall I will use 2021 tax software (close enough) to model my taxes and convert some to Roth depending on the model results. Your income will be lower in 2023 (assuming your spouse retires), so you will be in a lower tax bracket.

I also think it's better to stop working midway through the year since that keeps you in a lower bracket, just my opinion.

I agree with the view that you should only convert when working if you think you will be in a higher tax bracket later. I did convert some to Roth before I retired and now (looking back) I think it was not a good move.

If you have money in a fund in a t-ira that goes down (like the 20% drop this year) and you convert to Roth you will convert more with the same tax dollars compared to converting it on 1/1/22, assuming it goes back up.

It sounds like you are holding bonds in taxable, I agree with the view that it's not very tax efficient. I hold VFIAX (vanguard s&p 500 index) in taxable, most dividends are qualified so they are taxed at lower rate. I hold bonds in my t-ira only.
User avatar
retiredjg
Posts: 48768
Joined: Thu Jan 10, 2008 12:56 pm

Re: roth conversion strategy questions

Post by retiredjg »

Your tIRA is $3 million - that's a lot and it may be wise to be considering Roth conversions.

But is it possible that all you actually need to do is start spending that money? If your living expenses are very low, that won't drain the tIRA fast enough. But if your living expenses are say $140k a year (including taxes)...maybe you don't need to do the large conversions at all.

The other thing to consider is where you money will go when you have both died. If the money will go to charity, the Roth conversions don't make a lot of sense.

It sounds like most of your fixed income assets are in a taxable account. If all the bonds were in the tIRA, it would grow slower and reduce the amount you need to convert.


If conversions are a good idea in your situation, I'd convert more while tax rates are lower (through 2025) and only 1 person is paying for Medicare. When both are on Medicare and tax rates go back up, convert smaller amounts.

There is no need to convert it all. You only need to convert enough to keep RMDs from being onerous. Even getting that balance down to $2 million might be enough.
FlamePoint
Posts: 135
Joined: Wed Nov 11, 2020 10:45 pm

Re: roth conversion strategy questions

Post by FlamePoint »

john0608 wrote: Thu Aug 04, 2022 11:33 am Hello all, couple of Roth conversion strategy comments/questions.

recently retired on 1/1/22 - age 66 - wife age 63 still working at least till year end
no pension, small amount of rental income, delaying SS till 70 (at least for me), drawing from non-qualified fixed for living expenses.

we are doing Roth conversions for '22 and plan to do some each year at least before collecting SS, for right now we are trying to decide between 2 levels of conversion
- we could convert up to the 2nd IRMA tier so AGI will be up to about $280k (IRMAA tier 2 cap for 2024 expected to be $284K)
- so the converted amount from T-IRA would be about $180K since wife's income plus div/cap gains will be about $100k for 2022.
- a less aggressive plan would be to convert about $125k and take AGI up to $225k (IRMA tier 1 cap for 2024 expected to be $228K)
- irma for 1 person in 2024 would be about $2000 per year difference between the 2 options/tiers.

questions
1. what is the best way to decide on what is the proper amount to convert or is it all a matter of personal preference (we have approx $3m in t-ira, $1.5m in non-qualified) split 60/40 equities to fixed (fixed all in t-bills, bank accounts, cds)
2. we are concerned that the higher the roth conversion the higher the tax bill and in todays market it may be better to be less aggressive.
3. what assets to convert first (worse performing mutual funds ie growth funds down 25%?)?
4. i have converted $95k so far in 2022 mostly using worse performing growth funds but wanted to see if there are any opinions.

thanks.
Since everyone’s situation is a little different, it’s difficult to provide you with definitive guidance. Best thing you can do is to try and model out some different scenarios. We are in a similar situation (large IRA…$4M to be exact), but are younger than you and with less table funds. However, we are taking advantage of the years before Medicare kicks in and are converting up to the top of the 24% tax bracket. Once we hit 63 we will dial things back a bit and convert up to the top of the first IRMAA bracket. Hopefully we’ll be able to get at least 50% of our IRA into a Roth by then. The Roth only holds equity, and our IRA will be our fixed income bucket. Plan is to take SS at age 70 and use RMD’s for any additional needs. Most of the RMD will go into a taxable account. Good chance we’ll never need to touch the Roth and it will go to our kids.

Also, the TCJA is scheduled to sunset at the end of 2025, so you’ll want to factor in the possibility of higher tax rates after that.
Post Reply