roth conversions and IRMAA tier questions

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john0608
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roth conversions and IRMAA tier questions

Post by john0608 »

I have done a series of small roth conversions this year - totaling $105k - my total project AGI for 2022 is now $211K

using my personal planning spreadsheets adding in wifes salary, dividends/capital gains guesstimates, small amt of rental income i am close to the projected 2024 IRMAA tier of 1.4 * Standard (using current projections this tier starts at $211k for MFJ, but assumes no inflation)
- is this correct? do others agree this tier will rise due to inflation at least 5% but maybe as high as 8%?
- i am trying to see if i am cutting it too close - should i stand pat for 2022 with Roth - should i just convert another $30k and accept the 1.4 tier?

another question & I have heard contrary opinions on this so i am asking the field here....
- when doing Roth - should you convert your worse performing assets (Mutual funds) with the hope they will roar back (talking about US growth mutuals that are still down 35%) - or is it better to convert broad based mutuals (like total stock fund) - down about 16% ytd right now?
or does it really not matter much - and just convert a combination based on overall ratios?

thanks.
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Re: roth conversions and IRMAA tier questions

Post by jebmke »

The 2023 IRMAA brackets are known. Here is a site that has them along with alternatives for 2024

https://thefinancebuff.com/medicare-irm ... ckets.html
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retired@50
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Re: roth conversions and IRMAA tier questions

Post by retired@50 »

john0608 wrote: Wed Nov 23, 2022 10:29 am ...
another question & I have heard contrary opinions on this so i am asking the field here....
- when doing Roth - should you convert your worse performing assets (Mutual funds) with the hope they will roar back (talking about US growth mutuals that are still down 35%) - or is it better to convert broad based mutuals (like total stock fund) - down about 16% ytd right now?
or does it really not matter much - and just convert a combination based on overall ratios?

thanks.
If you intend to keep the US growth mutual fund after it's converted to the Roth account, then yes, convert the worst performing asset. The hope that it will roar back is why.

Although, it seems you're cutting it close to the IRMAA tier. Is your tax-deferred account so large that paying the higher Medicare rate is worth it?

Regards,
This is one person's opinion. Nothing more.
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john0608
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Re: roth conversions and IRMAA tier questions

Post by john0608 »

retired@50 wrote: Wed Nov 23, 2022 10:39 am
john0608 wrote: Wed Nov 23, 2022 10:29 am ...
another question & I have heard contrary opinions on this so i am asking the field here....
- when doing Roth - should you convert your worse performing assets (Mutual funds) with the hope they will roar back (talking about US growth mutuals that are still down 35%) - or is it better to convert broad based mutuals (like total stock fund) - down about 16% ytd right now?
or does it really not matter much - and just convert a combination based on overall ratios?

thanks.
If you intend to keep the US growth mutual fund after it's converted to the Roth account, then yes, convert the worst performing asset. The hope that it will roar back is why.

Although, it seems you're cutting it close to the IRMAA tier. Is your tax-deferred account so large that paying the higher Medicare rate is worth it?

Regards,
my tax deferred account is right around $3m split 55/45 equities/fixed - the % shifts as the market underperforms all equities are mostly mutuals - down ytd from 10% to 35%, all fixed is in t-bills, also have another $1.5 in non-IRA with similar AA
currently living off non-IRA savings and wifes salary/benefits - deferring SS till 70 (4 more years) - but wife may take it next year (early) when she retires at age 64 to help pay for ACA medical insurance (we won't get a discount)
tax advisors have said to do roths as much as possible but i am on the fence about them and trying to decide if i want to do more than $100k per year but looking for other opinions.
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retired@50
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Re: roth conversions and IRMAA tier questions

Post by retired@50 »

john0608 wrote: Wed Nov 23, 2022 11:12 am
retired@50 wrote: Wed Nov 23, 2022 10:39 am
john0608 wrote: Wed Nov 23, 2022 10:29 am ...
another question & I have heard contrary opinions on this so i am asking the field here....
- when doing Roth - should you convert your worse performing assets (Mutual funds) with the hope they will roar back (talking about US growth mutuals that are still down 35%) - or is it better to convert broad based mutuals (like total stock fund) - down about 16% ytd right now?
or does it really not matter much - and just convert a combination based on overall ratios?

thanks.
If you intend to keep the US growth mutual fund after it's converted to the Roth account, then yes, convert the worst performing asset. The hope that it will roar back is why.

Although, it seems you're cutting it close to the IRMAA tier. Is your tax-deferred account so large that paying the higher Medicare rate is worth it?

Regards,
my tax deferred account is right around $3m split 55/45 equities/fixed - the % shifts as the market underperforms all equities are mostly mutuals - down ytd from 10% to 35%, all fixed is in t-bills, also have another $1.5 in non-IRA with similar AA
currently living off non-IRA savings and wifes salary/benefits - deferring SS till 70 (4 more years) - but wife may take it next year (early) when she retires at age 64 to help pay for ACA medical insurance (we won't get a discount)
tax advisors have said to do roths as much as possible but i am on the fence about them and trying to decide if i want to do more than $100k per year but looking for other opinions.
You might be able to slow the growth of the ($3m) tax deferred account by allocating more to bond funds, and use the non-IRA (presumably this means a taxable account) space for more stock index funds (to keep your desired overall asset allocation in place). See the tax-efficient fund placement wiki page for details on this concept.

Regards,
This is one person's opinion. Nothing more.
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FiveK
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Re: roth conversions and IRMAA tier questions

Post by FiveK »

john0608 wrote: Wed Nov 23, 2022 10:29 am - i am trying to see if i am cutting it too close - should i stand pat for 2022 with Roth - should i just convert another $30k and accept the 1.4 tier?
Worth pushing through the Social Security hump and/or IRMAA cliffs? has some discussion about that question.
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Re: roth conversions and IRMAA tier questions

Post by FactualFran »

john0608 wrote: Wed Nov 23, 2022 10:29 am using my personal planning spreadsheets adding in wifes salary, dividends/capital gains guesstimates, small amt of rental income i am close to the projected 2024 IRMAA tier of 1.4 * Standard (using current projections this tier starts at $211k for MFJ, but assumes no inflation)
How can an IRMAA income threshold for MFJ be $211k when the thresholds for MFJ are twice the thresholds for filing status Single, excluding the highest threshold for which the MFJ/S factor is 1.5, and the thresholds for filing status single are rounded to units of $1,000?

If the average of the CPI-U for the months of Nov 2022 to Aug 2023 ends up being equal to the CPI-U for Oct 2022, then the first IRMAA threshold for 2024 premiums should be $103k for filing status single and $206k for filing status MFJ. However, a small decrease of the average relative to Oct will can cause those thresholds to decrease $1k and $2k, respectively.
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john0608
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Re: roth conversions and IRMAA tier questions

Post by john0608 »

FactualFran wrote: Wed Nov 23, 2022 3:25 pm
john0608 wrote: Wed Nov 23, 2022 10:29 am using my personal planning spreadsheets adding in wifes salary, dividends/capital gains guesstimates, small amt of rental income i am close to the projected 2024 IRMAA tier of 1.4 * Standard (using current projections this tier starts at $211k for MFJ, but assumes no inflation)
How can an IRMAA income threshold for MFJ be $211k when the thresholds for MFJ are twice the thresholds for filing status Single, excluding the highest threshold for which the MFJ/S factor is 1.5, and the thresholds for filing status single are rounded to units of $1,000?

If the average of the CPI-U for the months of Nov 2022 to Aug 2023 ends up being equal to the CPI-U for Oct 2022, then the first IRMAA threshold for 2024 premiums should be $103k for filing status single and $206k for filing status MFJ. However, a small decrease of the average relative to Oct will can cause those thresholds to decrease $1k and $2k, respectively.
maybe we are saying the same thing and nitpicking over something trivial, the MFJ threshold i listed as $211k was just for conversation - not meant as an exact figure since that is impossible to calculate till all inflation numbers are in, the logical assumption is there will be inflation increases
per thefinancebuff.com these 2023 and 2024 numbers are the MINIMUM - assuming 0% inflation
2023 IRMAA based on 2021 MAGI for MFJ - up to $194K standard, between $194K and $246k 1.4*standard, between $246K and $306K 2*standard
2024 IRMAA based on 2022 MAGI for MFJ - up to $204K standard, between $204K and $256k 1.4*standard, between $256K and $320K 2*standard
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john0608
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Re: roth conversions and IRMAA tier questions

Post by john0608 »

retired@50 wrote: Wed Nov 23, 2022 11:19 am
john0608 wrote: Wed Nov 23, 2022 11:12 am
retired@50 wrote: Wed Nov 23, 2022 10:39 am
john0608 wrote: Wed Nov 23, 2022 10:29 am ...
another question & I have heard contrary opinions on this so i am asking the field here....
- when doing Roth - should you convert your worse performing assets (Mutual funds) with the hope they will roar back (talking about US growth mutuals that are still down 35%) - or is it better to convert broad based mutuals (like total stock fund) - down about 16% ytd right now?
or does it really not matter much - and just convert a combination based on overall ratios?

thanks.
If you intend to keep the US growth mutual fund after it's converted to the Roth account, then yes, convert the worst performing asset. The hope that it will roar back is why.

Although, it seems you're cutting it close to the IRMAA tier. Is your tax-deferred account so large that paying the higher Medicare rate is worth it?

Regards,
my tax deferred account is right around $3m split 55/45 equities/fixed - the % shifts as the market underperforms all equities are mostly mutuals - down ytd from 10% to 35%, all fixed is in t-bills, also have another $1.5 in non-IRA with similar AA
currently living off non-IRA savings and wifes salary/benefits - deferring SS till 70 (4 more years) - but wife may take it next year (early) when she retires at age 64 to help pay for ACA medical insurance (we won't get a discount)
tax advisors have said to do roths as much as possible but i am on the fence about them and trying to decide if i want to do more than $100k per year but looking for other opinions.
You might be able to slow the growth of the ($3m) tax deferred account by allocating more to bond funds, and use the non-IRA (presumably this means a taxable account) space for more stock index funds (to keep your desired overall asset allocation in place). See the tax-efficient fund placement wiki page for details on this concept.

Regards,
yes i did mean taxable when mentioning non-IRA, the problem with reallocation in a down market is you have eat the loss if you convert equities to fixed but when things come back that is an option - until then i will stand pat with my AA - hopefully after the fed is finished everything recovers but i will assume that won't be before 3rd/4th qtr 2023
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Re: roth conversions and IRMAA tier questions

Post by livesoft »

When my spouse retired and started Medicare, I switched to COBRA health insurance rather than ACA. Since she appears to be close to 65, would COBRA be an option instead of ACA?
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Riprap
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Re: roth conversions and IRMAA tier questions

Post by Riprap »

I've been scratching my head on why folks place so much emphasis on avoiding the next IRMAA bracket. If a married couple jumps from the lowest bracket to the second lowest, the way I understnd it Part B and Part D increase by $937.20 per person or 1874.40 combined PER YEAR.

That's still a bargain!

I've paid my own healthcare premiums almost all of my adult life. I'm not yet 65 but we're paying well over $2000 per month with a pretty high deductible. The .85% surcharge/tax on would incur on top of the base premium is still WAY lower than a pre retirement health care policy premium.

This almost seems like a tail wagging the dog situation. IRMMA bracket avoidance doesn't seem like a good basis for sound investment strategy.

I feel like there's a lot of hand wringing over something that's almost trivial. I say that, because I've seen up close the massive costs medicare pays from chronic disease and expensive end of life care.

It seems like if the marginal return exceeds marginal cost in an investment decision, then do it and move on.

So what am I missing?
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Re: roth conversions and IRMAA tier questions

Post by diy60 »

Riprap wrote: Thu Nov 24, 2022 8:14 am It seems like if the marginal return exceeds marginal cost in an investment decision, then do it and move on.

So what am I missing?
It's marginal rate now (conversion / no conversion) vs future marginal rate as a result of said conversion / no conversion. IRMAA adds approximately 4% to the marginal rate calculation (adds to the numerator). That's pretty influential to a lot of folks, including myself.
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Re: roth conversions and IRMAA tier questions

Post by Riprap »

diy60 wrote: Thu Nov 24, 2022 8:34 am
Riprap wrote: Thu Nov 24, 2022 8:14 am It seems like if the marginal return exceeds marginal cost in an investment decision, then do it and move on.

So what am I missing?
It's marginal rate now (conversion / no conversion) vs future marginal rate as a result of said conversion / no conversion. IRMAA adds approximately 4% to the marginal rate calculation (adds to the numerator). That's pretty influential to a lot of folks, including myself.
Could you provide an example with numbers please?

By at the margin, I mean a conversion in a world without IRMAA vs a world with IRMAA. No need to address current vs future marginal income tax rates, I get that.
diy60
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Re: roth conversions and IRMAA tier questions

Post by diy60 »

Riprap wrote: Thu Nov 24, 2022 8:40 am
diy60 wrote: Thu Nov 24, 2022 8:34 am
Riprap wrote: Thu Nov 24, 2022 8:14 am It seems like if the marginal return exceeds marginal cost in an investment decision, then do it and move on.

So what am I missing?
It's marginal rate now (conversion / no conversion) vs future marginal rate as a result of said conversion / no conversion. IRMAA adds approximately 4% to the marginal rate calculation (adds to the numerator). That's pretty influential to a lot of folks, including myself.
Could you provide an example with numbers please?

By at the margin, I mean a conversion in a world without IRMAA vs a world with IRMAA. No need to address current vs future marginal income tax rates, I get that.
Standard to 1st tier ($194K to $246K)

Numerator:
Part B: 65.90 x 12 = $790.80
Part D: 12.20 x 12 = $146.40
Total: $937.20 x 2 people = $1874.40
Denominator:
246k - 194K = $52K

Marginal rate when hitting IRMAA is minimized by almost bumping up against the next tier, so . . .

Added marginal rate 1874.4/52000 = 3.6%. This ignores other costs that would go in the numerator if applicable, e.g. loss of senior tax breaks, etc.

Only you can judge if the extra ~4% is worth it.
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Re: roth conversions and IRMAA tier questions

Post by Riprap »

diy60 wrote: Thu Nov 24, 2022 9:09 am Standard to 1st tier ($194K to $246K)

Numerator:
Part B: 65.90 x 12 = $790.80
Part D: 12.20 x 12 = $146.40
Total: $937.20 x 2 people = $1874.40
Denominator:
246k - 194K = $52K

Marginal rate when hitting IRMAA is minimized by almost bumping up against the next tier, so . . .

Added marginal rate 1874.4/52000 = 3.6%. This ignores other costs that would go in the numerator if applicable, e.g. loss of senior tax breaks, etc.

Only you can judge if the extra ~4% is worth it.
Thanks. I agree with your math and it correct for comparing at the margin.

For the denominator I was using $220,000 which is the average modified adjust gross income from the next bracket. I was essentially comparing it to an income tax.

Bottom line, I seem to have an understanding.
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Re: roth conversions and IRMAA tier questions

Post by Riprap »

diy60 wrote: Thu Nov 24, 2022 9:09 am Standard to 1st tier ($194K to $246K)

Numerator:
Part B: 65.90 x 12 = $790.80
Part D: 12.20 x 12 = $146.40
Total: $937.20 x 2 people = $1874.40
Denominator:
246k - 194K = $52K

Marginal rate when hitting IRMAA is minimized by almost bumping up against the next tier, so . . .

Added marginal rate 1874.4/52000 = 3.6%. This ignores other costs that would go in the numerator if applicable, e.g. loss of senior tax breaks, etc.

Only you can judge if the extra ~4% is worth it.
One quibble would be marginal return isn't the marginal change in IRMMA brackets. Margin return would be NPV of future tax effects, which would be a tough number to come up with. Lots of unknowns and assumptions; future tax rates, appropriate discount rate etc.
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Re: roth conversions and IRMAA tier questions

Post by tibbitts »

john0608 wrote: Wed Nov 23, 2022 11:12 am tax advisors have said to do roths as much as possible but i am on the fence about them and trying to decide if i want to do more than $100k per year but looking for other opinions.
$3M deferred isn't a huge "problem" for MFJ. It is for filing single, so the biggest factor for you may be how long you plan to be filing MFJ, and that may be part of what the advisers are getting at.
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Re: roth conversions and IRMAA tier questions

Post by WoodSpinner »

OP,

Planning Roth conversions is a probabilistic exercise and there is rarely a concrete right answer. That said, I think you are considering many of the key factors. I am facing many of the same questions and started a thread awhile ago to help think through my plan.

There were some important findings that help guide me through improving and executing the plan.

Key Learnings:
  • Start with a well defined understanding of your Roth Conversion Goals
  • A robust tool or model is essential for understanding the nuances of your Income, Expenses, Cash-Flow, Taxes, Asset Growth, Asset Location etc. there are a lot of moving parts that need to be considered.
  • Conversion planning needs to be an iterative process. Taxes, Asset Growth, Unexpected Death, Inflation, Health issues etc. can all change your plan. Suggest reviewing the plan at least annually to fine tune and align.
  • A simple line plot of the Cumulative Taxes Paid serves as a great way to compare various scenarios and to determine how closely Tax Equilibrium is achieved.
  • The Widow(er) Tax Penalty is real and you need to understand what if any impact this will have on your Retirement Plans.
  • When in doubt follow McQuarrie's Rule of Thumb for conservative Roth Conversions

viewtopic.php?t=354318



You might find it helpful…..
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WoodSpinner
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Re: roth conversions and IRMAA tier questions

Post by WoodSpinner »

Riprap wrote: Thu Nov 24, 2022 8:14 am I've been scratching my head on why folks place so much emphasis on avoiding the next IRMAA bracket. If a married couple jumps from the lowest bracket to the second lowest, the way I understnd it Part B and Part D increase by $937.20 per person or 1874.40 combined PER YEAR.

That's still a bargain!
I agree with you — it does seem like a bargain given that you have enough to worry about needing Roth Conversions in the first place.

WoodSpinner
smitcat
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Re: roth conversions and IRMAA tier questions

Post by smitcat »

WoodSpinner wrote: Thu Nov 24, 2022 10:59 am OP,

Planning Roth conversions is a probabilistic exercise and there is rarely a concrete right answer. That said, I think you are considering many of the key factors. I am facing many of the same questions and started a thread awhile ago to help think through my plan.

There were some important findings that help guide me through improving and executing the plan.

Key Learnings:
  • Start with a well defined understanding of your Roth Conversion Goals
  • A robust tool or model is essential for understanding the nuances of your Income, Expenses, Cash-Flow, Taxes, Asset Growth, Asset Location etc. there are a lot of moving parts that need to be considered.
  • Conversion planning needs to be an iterative process. Taxes, Asset Growth, Unexpected Death, Inflation, Health issues etc. can all change your plan. Suggest reviewing the plan at least annually to fine tune and align.
  • A simple line plot of the Cumulative Taxes Paid serves as a great way to compare various scenarios and to determine how closely Tax Equilibrium is achieved.
  • The Widow(er) Tax Penalty is real and you need to understand what if any impact this will have on your Retirement Plans.
  • When in doubt follow McQuarrie's Rule of Thumb for conservative Roth Conversions

viewtopic.php?t=354318



You might find it helpful…..

I agree - but I do not see 'total cumulative taxes paid' as a metric that can be utilized.
Exchme
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Re: roth conversions and IRMAA tier questions

Post by Exchme »

Echoing others, you need to set your goals first, before you worry about how close to get a particular IRMAA bracket. Some factors to think through-

Known health concerns that could lead to long term care (which could be tax deductible)
Known health or age differences that could lead one spouse to be in single tax brackets for a long time?
Desire to do QCDs or bequest the estate to charity?
Chance of moving to a location with different state tax rates?
Heirs' tax brackets that are different from yours?
Feelings on future tax rates (will TCJA expire on schedule)?
Subject to state or federal estate taxes?


You have a tax advisor, presumably you have discussed this, why aren't you listening to the professional? My guess is you are not converting nearly enough since you have $3M in tax deferred.

If you don't want to take your tax professional's advice and want to model it out yourself, then get a good year by year model and test various assumptions to see what makes sense. I use Pralana Gold (paid spreadsheet) as it has a very good tax package with IRMAA, NIIT, SS taxation, LTCG taxes, AMT, ACA premium credit estimates. It has huge flexibility on handling different types of accounts, various withdrawal strategies and includes historical simulations, Monte Carlo. A nice part of that is you can choose a historical staring year and let the program show you how your strategy would have fared. You can specify an overall asset allocation and tell it which account to hold the most stocks vs. bonds and it will handle that too. You also can specify the final tax rate to apply to the residual tax deferred balance so you can do accurate comparisons on the after tax estate value.
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Re: roth conversions and IRMAA tier questions

Post by drzzzzz »

How much to convert to a Roth is an interesting question since much of it depends on what you would do with the traditional IRA if you didn't convert. We converted a lot two years back and because of that we are both paying double or more of our baseline medicare monthly cost (so not sure the extra thousands made much sense in our situation) since we are currently QCD all of our required minimum withdrawals. We had previously decided to leave to charity, so our plans are just to leave the remaining traditional IRA balances as donations and are not planning to convert much if any more dollars from our IRAs.
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WoodSpinner
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Re: roth conversions and IRMAA tier questions

Post by WoodSpinner »

smitcat wrote: Thu Nov 24, 2022 11:14 am
WoodSpinner wrote: Thu Nov 24, 2022 10:59 am OP,

Planning Roth conversions is a probabilistic exercise and there is rarely a concrete right answer. That said, I think you are considering many of the key factors. I am facing many of the same questions and started a thread awhile ago to help think through my plan.

There were some important findings that help guide me through improving and executing the plan.

Key Learnings:
  • Start with a well defined understanding of your Roth Conversion Goals
  • A robust tool or model is essential for understanding the nuances of your Income, Expenses, Cash-Flow, Taxes, Asset Growth, Asset Location etc. there are a lot of moving parts that need to be considered.
  • Conversion planning needs to be an iterative process. Taxes, Asset Growth, Unexpected Death, Inflation, Health issues etc. can all change your plan. Suggest reviewing the plan at least annually to fine tune and align.
  • A simple line plot of the Cumulative Taxes Paid serves as a great way to compare various scenarios and to determine how closely Tax Equilibrium is achieved.
  • The Widow(er) Tax Penalty is real and you need to understand what if any impact this will have on your Retirement Plans.
  • When in doubt follow McQuarrie's Rule of Thumb for conservative Roth Conversions

viewtopic.php?t=354318



You might find it helpful…..

I agree - but I do not see 'total cumulative taxes paid' as a metric that can be utilized.
Why not? It’s certainly an estimate but a reasonable approach if you have a forward looking tax model.

A simpler approach would be to try and balance AGI across the years.

Do you have another suggestion? This is an area where lots of folks struggle and I would love to have better advice.

WoodSpinner
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FiveK
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Re: roth conversions and IRMAA tier questions

Post by FiveK »

WoodSpinner wrote: Thu Nov 24, 2022 8:46 pm
smitcat wrote: Thu Nov 24, 2022 11:14 am I agree - but I do not see 'total cumulative taxes paid' as a metric that can be utilized.
Why not? It’s certainly an estimate but a reasonable approach if you have a forward looking tax model.
...
Do you have another suggestion? This is an area where lots of folks struggle and I would love to have better advice.
Perhaps "money available after paying taxes"?

E.g., assume
- $50K available to convert now, with
- taxes paid from the conversion at 22% marginal rate, and
- invested in the same funds whether in traditional or Roth, and
- the funds double in value between now and a future time, and
- a conversion at that future time would incur a 15% marginal rate.

Convert now: $11K taxes paid ($50K * 22%), and ($50K - $11k) * 2 = $78K is available at that future time
Convert later: $15K taxes paid (2 * $50K * 15%), and (2 * $50K - $15K) = $85K is available at that future time

Seems better to pay more in tax ($15K vs. $11K) to have more available to spend ($85K vs. $78K).
smitcat
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Re: roth conversions and IRMAA tier questions

Post by smitcat »

WoodSpinner wrote: Thu Nov 24, 2022 8:46 pm
smitcat wrote: Thu Nov 24, 2022 11:14 am
WoodSpinner wrote: Thu Nov 24, 2022 10:59 am OP,

Planning Roth conversions is a probabilistic exercise and there is rarely a concrete right answer. That said, I think you are considering many of the key factors. I am facing many of the same questions and started a thread awhile ago to help think through my plan.

There were some important findings that help guide me through improving and executing the plan.

Key Learnings:
  • Start with a well defined understanding of your Roth Conversion Goals
  • A robust tool or model is essential for understanding the nuances of your Income, Expenses, Cash-Flow, Taxes, Asset Growth, Asset Location etc. there are a lot of moving parts that need to be considered.
  • Conversion planning needs to be an iterative process. Taxes, Asset Growth, Unexpected Death, Inflation, Health issues etc. can all change your plan. Suggest reviewing the plan at least annually to fine tune and align.
  • A simple line plot of the Cumulative Taxes Paid serves as a great way to compare various scenarios and to determine how closely Tax Equilibrium is achieved.
  • The Widow(er) Tax Penalty is real and you need to understand what if any impact this will have on your Retirement Plans.
  • When in doubt follow McQuarrie's Rule of Thumb for conservative Roth Conversions

viewtopic.php?t=354318



You might find it helpful…..

I agree - but I do not see 'total cumulative taxes paid' as a metric that can be utilized.
Why not? It’s certainly an estimate but a reasonable approach if you have a forward looking tax model.

A simpler approach would be to try and balance AGI across the years.

Do you have another suggestion? This is an area where lots of folks struggle and I would love to have better advice.

WoodSpinner
We have been using 'spendable' funds after taxes for our key metric when using RPM, Pralana, and other calculators. After running many different scenarios thru each calculator, you get a feel for how each of the variables affect the decisions which you have control over.
It is not that important how much taxes we pay in the larger picture.
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WoodSpinner
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Re: roth conversions and IRMAA tier questions

Post by WoodSpinner »

FiveK wrote: Thu Nov 24, 2022 10:48 pm
WoodSpinner wrote: Thu Nov 24, 2022 8:46 pm
smitcat wrote: Thu Nov 24, 2022 11:14 am I agree - but I do not see 'total cumulative taxes paid' as a metric that can be utilized.
Why not? It’s certainly an estimate but a reasonable approach if you have a forward looking tax model.
...
Do you have another suggestion? This is an area where lots of folks struggle and I would love to have better advice.
Perhaps "money available after paying taxes"?

E.g., assume
- $50K available to convert now, with
- taxes paid from the conversion at 22% marginal rate, and
- invested in the same funds whether in traditional or Roth, and
- the funds double in value between now and a future time, and
- a conversion at that future time would incur a 15% marginal rate.

Convert now: $11K taxes paid ($50K * 22%), and ($50K - $11k) * 2 = $78K is available at that future time
Convert later: $15K taxes paid (2 * $50K * 15%), and (2 * $50K - $15K) = $85K is available at that future time

Seems better to pay more in tax ($15K vs. $11K) to have more available to spend ($85K vs. $78K).
FiveK,

I have looked at After-Tax wealth as a metric as well and have no issue with using that. I calculate this as well but don’t find it as effective when discussing our plans with my spouse and family. This is especially true when highlighting significant downshifts in After-Tax wealth when there is large Effective Marginal bracket changes (Death of a spouse, Inheritance, RMDs, Income spikes etc.).

It’s as reasonable a metric as any other given the uncertainties involved.

What I like about looking at Cumulative taxes paid as a metric:
  • Effective Marginal Tax Rates or IRMAA brackets are useful markers for a conversion target.
  • I have the expected Tax calculations already available as part of my analysis.
  • Finding a Tax Equilibrium is a reasonable goal for Conversion Planning
  • Plotting cumulative taxes paid highlights the impact of future RMDs and SS.
  • It’s easy to highlight the Breakeven Point for doing Roth Conversions vs. other alternatives.
WoodSpinner
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WoodSpinner
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Re: roth conversions and IRMAA tier questions

Post by WoodSpinner »

smitcat wrote: Fri Nov 25, 2022 8:37 am
WoodSpinner wrote: Thu Nov 24, 2022 8:46 pm
smitcat wrote: Thu Nov 24, 2022 11:14 am
WoodSpinner wrote: Thu Nov 24, 2022 10:59 am OP,

Planning Roth conversions is a probabilistic exercise and there is rarely a concrete right answer. That said, I think you are considering many of the key factors. I am facing many of the same questions and started a thread awhile ago to help think through my plan.

There were some important findings that help guide me through improving and executing the plan.

Key Learnings:
  • Start with a well defined understanding of your Roth Conversion Goals
  • A robust tool or model is essential for understanding the nuances of your Income, Expenses, Cash-Flow, Taxes, Asset Growth, Asset Location etc. there are a lot of moving parts that need to be considered.
  • Conversion planning needs to be an iterative process. Taxes, Asset Growth, Unexpected Death, Inflation, Health issues etc. can all change your plan. Suggest reviewing the plan at least annually to fine tune and align.
  • A simple line plot of the Cumulative Taxes Paid serves as a great way to compare various scenarios and to determine how closely Tax Equilibrium is achieved.
  • The Widow(er) Tax Penalty is real and you need to understand what if any impact this will have on your Retirement Plans.
  • When in doubt follow McQuarrie's Rule of Thumb for conservative Roth Conversions

viewtopic.php?t=354318



You might find it helpful…..

I agree - but I do not see 'total cumulative taxes paid' as a metric that can be utilized.
Why not? It’s certainly an estimate but a reasonable approach if you have a forward looking tax model.

A simpler approach would be to try and balance AGI across the years.

Do you have another suggestion? This is an area where lots of folks struggle and I would love to have better advice.

WoodSpinner
We have been using 'spendable' funds after taxes for our key metric when using RPM, Pralana, and other calculators. After running many different scenarios thru each calculator, you get a feel for how each of the variables affect the decisions which you have control over.
It is not that important how much taxes we pay in the larger picture.
See my reply to FiveK above ….
smitcat
Posts: 9883
Joined: Mon Nov 07, 2016 10:51 am

Re: roth conversions and IRMAA tier questions

Post by smitcat »

WoodSpinner wrote: Fri Nov 25, 2022 12:00 pm
FiveK wrote: Thu Nov 24, 2022 10:48 pm
WoodSpinner wrote: Thu Nov 24, 2022 8:46 pm
smitcat wrote: Thu Nov 24, 2022 11:14 am I agree - but I do not see 'total cumulative taxes paid' as a metric that can be utilized.
Why not? It’s certainly an estimate but a reasonable approach if you have a forward looking tax model.
...
Do you have another suggestion? This is an area where lots of folks struggle and I would love to have better advice.
Perhaps "money available after paying taxes"?

E.g., assume
- $50K available to convert now, with
- taxes paid from the conversion at 22% marginal rate, and
- invested in the same funds whether in traditional or Roth, and
- the funds double in value between now and a future time, and
- a conversion at that future time would incur a 15% marginal rate.

Convert now: $11K taxes paid ($50K * 22%), and ($50K - $11k) * 2 = $78K is available at that future time
Convert later: $15K taxes paid (2 * $50K * 15%), and (2 * $50K - $15K) = $85K is available at that future time

Seems better to pay more in tax ($15K vs. $11K) to have more available to spend ($85K vs. $78K).
FiveK,

I have looked at After-Tax wealth as a metric as well and have no issue with using that. I calculate this as well but don’t find it as effective when discussing our plans with my spouse and family. This is especially true when highlighting significant downshifts in After-Tax wealth when there is large Effective Marginal bracket changes (Death of a spouse, Inheritance, RMDs, Income spikes etc.).

It’s as reasonable a metric as any other given the uncertainties involved.

What I like about looking at Cumulative taxes paid as a metric:
  • Effective Marginal Tax Rates or IRMAA brackets are useful markers for a conversion target.
  • I have the expected Tax calculations already available as part of my analysis.
  • Finding a Tax Equilibrium is a reasonable goal for Conversion Planning
  • Plotting cumulative taxes paid highlights the impact of future RMDs and SS.
  • It’s easy to highlight the Breakeven Point for doing Roth Conversions vs. other alternatives.
WoodSpinner
"I have looked at After-Tax wealth as a metric as well and have no issue with using that. I calculate this as well but don’t find it as effective when discussing our plans with my spouse and family. This is especially true when highlighting significant downshifts in After-Tax wealth when there is large Effective Marginal bracket changes (Death of a spouse, Inheritance, RMDs, Income spikes etc.)."
Do you run calculators such as Pralana and load these in? Do you vary these inputs and see what the results are?

Effective Marginal Tax Rates or IRMAA brackets are useful markers for a conversion target.
Lowest taxes will be seen with no conversions.

I have the expected Tax calculations already available as part of my analysis.
Tax software is a good check on calculators/spreadsheets, but we do get tax numbers on each calculator which are usable for current year taxes but not a metric for review of long-term choices.

Finding a Tax Equilibrium is a reasonable goal for Conversion Planning
A good goal except with spousal passing, inheritances and income spikes.

Plotting cumulative taxes paid highlights the impact of future RMDs and SS.
Plotting 'spendable' income highlights the potential problems with future SS and RMD's.

It’s easy to highlight the Breakeven Point for doing Roth Conversions vs. other alternatives.
Same with spendable income.
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WoodSpinner
Posts: 2792
Joined: Mon Feb 27, 2017 1:15 pm

Re: roth conversions and IRMAA tier questions

Post by WoodSpinner »

Smitcat wrote:I have looked at After-Tax wealth as a metric as well and have no issue with using that. I calculate this as well but don’t find it as effective when discussing our plans with my spouse and family. This is especially true when highlighting significant downshifts in After-Tax wealth when there is large Effective Marginal bracket changes (Death of a spouse, Inheritance, RMDs, Income spikes etc.).
Do you run calculators such as Pralana and load these in? Do you vary these inputs and see what the results are?


I have my own spreadsheet that integrates all of this planning. I can vary my inputs and take a snapshot of the results which I then use for comparison. I suspect you can do something like this with Pralana but I already had my model built when Pralana became available.

The tax calculations are correct (my tax situation is not complex) for the current year but use assumptions for inflation rates and the Tax code for future years (since none of these inputs are known).

I am using this spreadsheet to plan conversions over a long period of time (ages 58-70) and am very interested in the cumulative impact over time. I review yearly, lock in my current years conversion target and then project out future years. Rinse and repeat as needed.

Effective Marginal Tax Rates or IRMAA brackets are useful markers for a conversion target.
Lowest taxes will be seen with no conversions.


This is true for the current years taxes. Once you project outwards you can see the impact on future years taxes. Plus you can look at the breakeven age for paying the taxes now vs. later. This can become important if you have decided what you are optimizing for (the couple together, surviving spouse, inheritance).

I have the expected Tax calculations already available as part of my analysis.

Tax software is a good check on calculators/spreadsheets, but we do get tax numbers on each calculator which are usable for current year taxes but not a metric for review of long-term choices.


I agree that the current years taxes are well known. That said, you still need to do some reasonable projections on tax rates in the future to plan Roth Conversions. There may be some rare cases (e.g. death bed conversions) where this is not needed.

Finding a Tax Equilibrium is a reasonable goal for Conversion Planning
A good goal except with spousal passing, inheritances and income spikes.


As mentioned above, one key step for Roth Conversion planning is to decide who you are optimizing for. This will drive different results since the Tax and legislative impacts differ greatly. For instance my conversion plan would be vastly different if I was optimizing for the surviving spouse vs. my daughter’s inheritance.

Plotting cumulative taxes paid highlights the impact of future RMDs and SS.
Plotting 'spendable' income highlights the potential problems with future SS and RMD's.


I have done both as part of a number of planning exercises. My experience is that it’s easier for people to understand taxes paid vs. after-tax wealth. They both offer good insights into the overall plan.

It’s easy to highlight the Breakeven Point for doing Roth Conversions vs. other alternatives.
Same with spendable income.


I haven’t done this yet but will build a chart to see how well this works. Currently displaying the alternatives in a bar chart.
smitcat
Posts: 9883
Joined: Mon Nov 07, 2016 10:51 am

Re: roth conversions and IRMAA tier questions

Post by smitcat »

WoodSpinner wrote: Fri Nov 25, 2022 1:08 pm
Smitcat wrote:I have looked at After-Tax wealth as a metric as well and have no issue with using that. I calculate this as well but don’t find it as effective when discussing our plans with my spouse and family. This is especially true when highlighting significant downshifts in After-Tax wealth when there is large Effective Marginal bracket changes (Death of a spouse, Inheritance, RMDs, Income spikes etc.).
Do you run calculators such as Pralana and load these in? Do you vary these inputs and see what the results are?


I have my own spreadsheet that integrates all of this planning. I can vary my inputs and take a snapshot of the results which I then use for comparison. I suspect you can do something like this with Pralana but I already had my model built when Pralana became available.

The tax calculations are correct (my tax situation is not complex) for the current year but use assumptions for inflation rates and the Tax code for future years (since none of these inputs are known).

I am using this spreadsheet to plan conversions over a long period of time (ages 58-70) and am very interested in the cumulative impact over time. I review yearly, lock in my current years conversion target and then project out future years. Rinse and repeat as needed.

Effective Marginal Tax Rates or IRMAA brackets are useful markers for a conversion target.
Lowest taxes will be seen with no conversions.


This is true for the current years taxes. Once you project outwards you can see the impact on future years taxes. Plus you can look at the breakeven age for paying the taxes now vs. later. This can become important if you have decided what you are optimizing for (the couple together, surviving spouse, inheritance).

I have the expected Tax calculations already available as part of my analysis.

Tax software is a good check on calculators/spreadsheets, but we do get tax numbers on each calculator which are usable for current year taxes but not a metric for review of long-term choices.


I agree that the current years taxes are well known. That said, you still need to do some reasonable projections on tax rates in the future to plan Roth Conversions. There may be some rare cases (e.g. death bed conversions) where this is not needed.

Finding a Tax Equilibrium is a reasonable goal for Conversion Planning
A good goal except with spousal passing, inheritances and income spikes.


As mentioned above, one key step for Roth Conversion planning is to decide who you are optimizing for. This will drive different results since the Tax and legislative impacts differ greatly. For instance my conversion plan would be vastly different if I was optimizing for the surviving spouse vs. my daughter’s inheritance.

Plotting cumulative taxes paid highlights the impact of future RMDs and SS.
Plotting 'spendable' income highlights the potential problems with future SS and RMD's.


I have done both as part of a number of planning exercises. My experience is that it’s easier for people to understand taxes paid vs. after-tax wealth. They both offer good insights into the overall plan.

It’s easy to highlight the Breakeven Point for doing Roth Conversions vs. other alternatives.
Same with spendable income.


I haven’t done this yet but will build a chart to see how well this works. Currently displaying the alternatives in a bar chart.
We use both RPM and Pralana and they each have the ability to swap out various inputs at any time - Pralana this year (update) is more capable then in the past.
On these we can see any combination of taxes and spendable funds - we used to look at the taxes much more but lately that is an indirect metric for us.
Since we can and have run many scenarios and charted the results some patterns become apparent - so we choose which one(s) more likely as our best plan(s). This would include optimizing things like Roth conversions for both a spouse and then an heir.

We are optimizing for spendable income and heirs with an eye on taxes only for the ability to optimize spending.
We used to have our own spreadsheets which grew larger and larger over time - until we were introduced to RPM maybe 10 years back and Pralana a few years back.
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