Roth conversion taxes

[JMK909er]

If I convert my Traditional IRA to a Roth I know I have to pay the tax on it. I am in a 12% tax bracket so does that mean that when I convert that I will owe 12% in taxes?
What about state tax? I live in Oklahoma.
Thanks, Joe

[Silk McCue]

You are only in the 12% bracket until you aren’t. Roth conversions increase your taxable income in addition to your SS, pension, taxable withdrawals etc. If you want to stay within the 12% bracket and not have additional dollars above that taxed at 22% you will need to closely estimate your taxes for the year before performing the conversion.

I searched the web and it appears that OK has an income tax. The Roth conversion will be subject to tax.

Cheers

[FiveK]

Maybe. Might be 12% or maybe 27% (see the chart in the Marginal tax rate - Bogleheads wiki for that situation) or maybe something else. Depends on your specific situation. Using one or more tax estimation tools may be useful.

Don't know details of OK taxes. For most (but not all) states, the converted amount is taxed the same as any other income.

[Running Bum]

Actually your marginal rate may be 27%, since conversions at 12% could push more qualified dividends and LTCGs into being taxed at 15%. I suggest plugging your numbers into https://www.irscalculators.com/tax-calculator . You'll also find that once you've pushed all of you Qdivs/LTCGs into being taxed you drop back to a 22% marginal tax rate.

If you are getting an ACA subsidy any conversions will reduce that subsidy. If you are 63 or older subsidies could also push you into a new IRMAA level. If you are collecting SS it could also affect how much SS is being taxed. The SS impact is also shown in the referenced tax calculator above, but ACA and IRMAA are not.

RMDs will also affect all of these except you'll no longer be on ACA.

This all means you need to try to estimate the total impact of conversions and future RMDs beyond just your tax bracket.

[JMK909er]

Thanks, it looks like a complex thing to figure out. I have 230k in the IRA, would it be better to convert a little at a time instead of all at once?
My wife and I are both retired so our income is less now than it was but I don't want it to push us into a higher tax bracket. Between both of our SS and my pension we will gross about 52k this year.

[niagara_guy]

On the main Bogleheads page there is a search box in the upper left corner, search for Roth conversion and you will get hits.

I use the prior year tax software (close enough) to model my taxes for the current year and try different Roth conversion amounts to determine how much to convert. Your tax software should show you how much tax you will pay to OK as well.

[Wiggums]

A Roth conversion is taxed as ordinary income. Like W2 income. It’s easy to look at last years return and estimate how much room you have. Also, the taxes revert at the end of 2025, so this maybe a good time. Yes, you will pay federal, state and local taxes, so a partial Roth conversion each year makes sense.

[niagara_guy]

Try this wiki:

https://www.bogleheads.org/wiki/Tax_estimation_tools

[Silk McCue]

Thanks, it looks like a complex thing to figure out. I have 230k in the IRA, would it be better to convert a little at a time instead of all at once?
My wife and I are both retired so our income is less now than it was but I don't want it to push us into a higher tax bracket. Between both of our SS and my pension we will gross about 52k this year.

If the $230k IRA represents all of your retirement savings and with your guaranteed income being $52k; I’m not certain that paying taxes to performing conversions is necessary or even beneficial to your long term retirement financial success. We would need to know more about your overall situation before I would recommend you convert anything.

Cheers

[JMK909er]

If the $230k IRA represents all of your retirement savings and with your guaranteed income being $52k; I’m not certain that paying taxes to performing conversions is necessary or even beneficial to your long term retirement financial success. We would need to know more about your overall situation before I would recommend you convert anything.

Thanks, My wife also has a IRA and a Roth from her career. So for example if I convert 50k does this count as income and boost my tax bracket for the year?

[HomeStretch]

There’s not enough information in your post to say whether you should do Roth conversions on an IRA balance of $230k. But what you have provided doesn’t make Roth conversions look necessary or compelling to me.

You need to run the Federal (and state, if applicable) tax scenarios using your/your spouse’s actual numbers. You might also look at each of your tax scenarios as a surviving spouse. Tax prep software can help with these scenarios.

Here’s a very quick rough example for Federal making assumptions that you/spouse are age 65, that your/spouse’s total tax deferred balance is $230k and ignoring that Federal rates are scheduled to revert in 2025, future returns, SS/pension increases, etc.:

A tax deferred balance of $230k will require a RMD at age 75 of ~$9k in today’s $ ignoring returns. That added to your SS and pension income of $52k makes your total income $61k.

Your adjusted gross income (AGI) for tax purposes will be less than $61k as SS benefits are included in AGI at 0%-85%, depending on your income.

If filing as married/joint, the 2023 standard deduction is $30.7k.

Taxable Income is something less than $30k ($61k - $30.7k - whatever SS isn’t taxed). This puts you in the lower part of the 12% tax bracket.

The RMD income of $9k if you don’t convert doesn’t increase your Federal marginal tax rate above 12%. As others have mentioned, depending on the % of SS that is included in AGI, the RMD $ could increase the % of SS $ taxed but there’s not enough info in your post to say.

As a couple, the additional $9k in RMD income does not push you into higher Medicare premiums (IRMAA tier 1) or above the net investment income tax threshold of $250k.

[JMK909er]

Thanks for all the great info. It looks to me like I should just leave this Roth conversion alone for now and maybe revisit at a later time.

[FiveK]

I have 230k in the IRA, would it be better to convert a little at a time instead of all at once?

Yes!

When you do revisit, see the Roth IRA conversion wiki and perhaps this annotated chart to give you some idea of what to look for. Good luck!

[steadyosmosis]

If I convert my Traditional IRA to a Roth I know I have to pay the tax on it. I am in a 12% tax bracket so does that mean that when I convert that I will owe 12% in taxes?
What about state tax? I live in Oklahoma.
Thanks, Joe

Depends on how much you convert annually.
I convert whatever amount each year brings me to the top of my 12% bracket.
I am unwilling at this time to pay Uncle Sam more than 12-cents for each dollar I convert.
I also have to pay state taxes (not in Oklahoma).

[Silk McCue]

If I convert my Traditional IRA to a Roth I know I have to pay the tax on it. I am in a 12% tax bracket so does that mean that when I convert that I will owe 12% in taxes?
What about state tax? I live in Oklahoma.
Thanks, Joe

Depends on how much you convert annually.
I convert whatever amount each year brings me to the top of my 12% bracket.
I am unwilling at this time to pay Uncle Sam more than 12-cents for each dollar I convert.
I also have to pay state taxes (not in Oklahoma).

Good points.

To add on:
OP and spouse are both currently on Social Security. As a result each dollar converted In the 12% bracket will result in 22.2% Federal tax on each extra dollar converted. Add in Oklahoma state income tax and I think it’s a hard pass based on their overall finances as I see them presented so far.

If the op were to post using the Asking Portfolio Questions format they could get much more reliable advice.

Cheers

[Exchme]

We know of $52K in SS benefits. Once the sum of (AGI+ tax exempt interest + 1/2 of SS benefits) exceed $30,000, then Roth Conversions will not only be taxed at their rate, they will also force a steep phase in tax on SS benefits. So if there are no other sources of income besides SS, the max Roth Conversion before the marginal tax rate becomes unreasonable is $6,000. Most folks have a few $ in interest, capital gains, dividends, etc., so the real number OP could profitably convert is even less.

[HomeStretch]

We know of $52K in SS benefits. …

The 52k includes pension income too per OP.

… Between both of our SS and my pension we will gross about 52k this year.

[JMK909er]

We know of $52K in SS benefits. …

The 52k includes pension income too per OP.

… Between both of our SS and my pension we will gross about 52k this year.

Yes that is correct

[celia]

We encourage people to convert during their early retirement years since they often are in a lower tax bracket. BUT, if they DON’T convert, their tax-deferred balance will continue to grow. (Yours could easily be $500K when RMDs start.) Then when RMDs start, they will pay even more in taxes than they would had they converted in early reirement.

There’s nothing magic about staying in the 12% bracket now since you will eventually be in a higher bracket either while you convert now or take RMDs later. So, it doesn’t make sense to have several years of low taxes now followed by higher-than-necessary taxes when RMDs start. But you basically get to decide if you want to pay the taxes now or later. Remember, that when you were contributing to tax-deferred, you were agreeing to pay the taxes later. You are getting closer to the “later”.

If nothing else, consider that tax brackets are scheduled to revert to 2017 levels in 2026. We are currently in historically low tax brackets that won’t stay that way forever.

I suggest playing around with some tax software to try out various scenarios of income before you make a final decision.

[HomeStretch]

We know of $52K in SS benefits. …

The 52k includes pension income too per OP.

… Between both of our SS and my pension we will gross about 52k this year.

Yes that is correct

OP:
The gist of Exchme’s comment is accurate, it just changes the $6k amount calculated. Perhaps you’d like to provide the breakdown of the $52k between pension and SS.

Also keep in mind:
(1) if you have high tax deductible healthcare/LTC costs that allow you to itemize in the future or plan to leave $ to a qualified charity, don’t convert and pay taxes unnecessarily on that portion of your/spouse’s tax deferred balances.
(2) tax rates are scheduled to revert in 2026, so the 12% bracket becomes 15%. Small Roth conversions at 12% may make sense at least between 2023-2025 if it doesn’t cause SS taxation that gives you a 27% rate on the conversion while in the 12% bracket.

[JMK909er]

I am open to giving more detailed information. How extensive and what information is needed?

[Silk McCue]

I am open to giving more detailed information. How extensive and what information is needed?

The following would be helpful.
- Your ages.
- Your combined or separate gross annual social security benefits (not just the amount going into your checking account)
- The gross amount of the annual pension referenced.
- A list of your accounts, who owns them and their current rough balances (IRA, Roth, Taxable)

Approximate current annual spending including Fed and State taxes.

Cheers

[annebert]

I don't see that anyone else has mentioned this. Social Security benefits are not taxed by Oklahoma. Up to $10,000 of federally-taxed income from private, federal government, and designated Oklahoma state and local government retirement plans is exempt. So how much of your income is taxed will depend on what portion of your retirement income is SS and what is pension.

[twh]

I urge the OP to get a copy of Turbotax and even if you didn't do your own taxes, put it all into a return and then play with the conversions. You'll see exactly where you land.

[JMK909er]

My SS is $25,884/yr. It will go down in May by $172/mo when my medicare kicks in.
Wife's SS is $15,840/yr. Her medicare is still a couple years out.
My fed gov pension is not finalized yet after retiring 8 months ago but I estimate it will be about $12,000/yr (had to split with former ex from divorce)

Retirement accounts:
I have 230k in an IRA
I have 10k in a Roth

Wife has 55k in an IRA
Wife has 42k in a Roth
Wife has 51k in a work retirement account that she put into after tax and was matched by her employer and it makes exactly 6% per year guaranteed.

We don't tap into our retirement accounts. At least not until the economy picks up. (OK is very cheap cost of living)
Retirement accounts are invested in Vanguard 60/40 in VTI 42%, VXUS 18%, BND 28% and BNDX 12%

Hope this helps.

[HomeStretch]

Your combined income is $32,862 (= $12,000 pension + 50% of gross SS benefits) which makes 50% of your/spouse’s SS benefits subject to tax. For combined income > $44,000, 85% of SS is included in your adjusted gross income (AGI). So you have about $11k space ($44k - $33k) @ 50%.

This means you can convert up to $11k while staying at a 12% Federal tax rate + state tax, if any. It’s worth considering for 2023 (and 2024-5) before the tax rate increases to 15% in 2026.

I think it’s worth doing some level of Roth conversions as your future RMDs will probably push you into the 85% SS taxation level.

I just did the calcs quickly by hand so check my #s.

[w5000]

Although they may be in the 12% tax bracket, not sure if their marginal rate is actually higher? I didn't run their numbers, but I have for my mom -- although she is in the 12% tax bracket, every $1 of additional income pushes $0.85 more of her SS to be taxed, so her marginal rate is actually 12% + 0.85 * 12% = 22.2%. You may find that you can push through that 22.2% tax rate, until the maximum of 85% of your SS is being taxed, and then your marginal rate may drop back down to 12%.

[JMK909er]

Your combined income is $32,862 (= $12,000 pension + 50% of gross SS benefits) which makes 50% of your/spouse’s SS benefits subject to tax. For combined income > $44,000, 85% of SS is included in your adjusted gross income (AGI). So you have about $11k space ($44k - $33k) @ 50%.

This means you can convert up to $11k while staying at a 12% Federal tax rate + state tax, if any. It’s worth considering for 2023 (and 2024-5) before the tax rate increases to 15% in 2026.

I think it’s worth doing some level of Roth conversions as your future RMDs will probably push you into the 85% SS taxation level.

I just did the calcs quickly by hand so check my #s.

Thank you so much, this is good information that is way over my head! What do some of the other posters think? Do you concur with this? Just looking for more assurance before I proceed with anything. THANKS!

[grabiner]

My SS is $25,884/yr. It will go down in May by $172/mo when my medicare kicks in.
Wife's SS is $15,840/yr. Her medicare is still a couple years out.
My fed gov pension is not finalized yet after retiring 8 months ago but I estimate it will be about $12,000/yr (had to split with former ex from divorce)

Your combined income is $32,862 (= $12,000 pension + 50% of gross SS benefits) which makes 50% of your/spouse’s SS benefits subject to tax. For combined income > $44,000, 85% of SS is included in your adjusted gross income (AGI). So you have about $11k space ($44k - $33k) @ 50%.

This formula is incorrect; see Taxation of Social Security benefits on the wiki.

With $41,724 of SS, half of that is $20,862, so you can have $11,138 of other income before the phase-in of SS starts. Thus, once you start your federal pension, you will already be in the range in which every $1 of extra income makes 50 cents of SS taxable. You can have $23.138 of other income before you reach the range in which every $1 of extra income makes 85 cents of SS taxable, which will make your marginal tax rate 18.5% in the 10% bracket, or 22.2% in the 12% bracket.

However, your SS is low enough that you can max out on SS taxation with a lot of room left in the 12% bracket. An optimal amount to convert each year would probably be enough so that your non-SS income, plus 85% of your SS, minus the standard deduction, is the top of the 12% tax bracket. This allows you to take more from the IRA and pay 12% tax, reducing future RMDs which may be taxed at 18.5% or 22.2%.

(One exception: if you intend to donate your RMDs to charity, then they won't increase your taxes.)

[Silk McCue]

Using an often utilized tax tool for 2022 I find that you can convert $9900 to Roth and pay $0 in Federal taxes. Certainly not suggesting you wouldn’t want to do more but taxes will rise quickly from there. Taking the conversion up by $1000 would result in taxable income of $1481 and Fed tax of $148.

https://www.mortgagecalculator.org/calc ... ulator.php

Cheers

[JMK909er]

One more thing I just thought of...I am collecting an interim amount of my pension already which is $753/mo minus $75 in fed tax = $678/mo for now. (probably not enough tax taken out)

The fed gov only gives you a part of what they think your full pension will be until it is finalized (I have been waiting 8 months so far) When it is finalized I will get backpay based on what my full pension will be (I think will be about $1000/mo). So I have no way of knowing what that amount will be. It could throw everything off!

I am expecting it to be finalized soon so I guess I should wait until it happens and I know how much it will be.

[JMK909er]

I should have also mentioned that I retired May 31, 2022 so back pay will be from then.

[Katietsu]

Using an often utilized tax tool for 2022 I find that you can convert $9900 to Roth and pay $0 in Federal taxes. Certainly not suggesting you wouldn’t want to do more but taxes will rise quickly from there. Taking the conversion up by $1000 would result in taxable income of $1481 and Fed tax of $148.

https://www.mortgagecalculator.org/calc ... ulator.php

Cheers

I used a different tool and found the same answer.

[Exchme]

Using an often utilized tax tool for 2022 I find that you can convert $9900 to Roth and pay $0 in Federal taxes. Certainly not suggesting you wouldn’t want to do more but taxes will rise quickly from there. Taking the conversion up by $1000 would result in taxable income of $1481 and Fed tax of $148.

https://www.mortgagecalculator.org/calc ... ulator.php

Cheers

I used a different tool and found the same answer.

Quick clarification here, your comment and OP's comment that he is getting 7 months of back pay on the pension seem to have "crossed in the mail", so reduce the tax free Roth Conversion number by that much. Also, upthread OP indicated he is going on medicare this year, so the standard deduction is $1900 higher than you might have assumed. Adjusting for those and using the 2023 standard deduction, my hand calculation gets a bit over $4000 as allowable Roth space without paying taxes. He could do another ~$12K at an effective 15% marginal bracket, which may or may not be worth bothering with.

[Silk McCue]

One more thing I just thought of...I am collecting an interim amount of my pension already which is $753/mo minus $75 in fed tax = $678/mo for now. (probably not enough tax taken out)

The fed gov only gives you a part of what they think your full pension will be until it is finalized (I have been waiting 8 months so far) When it is finalized I will get backpay based on what my full pension will be (I think will be about $1000/mo). So I have no way of knowing what that amount will be. It could throw everything off!

I am expecting it to be finalized soon so I guess I should wait until it happens and I know how much it will be.

Thanks for the info. Once these numbers are locked down for 2023 you will be able to make an informed decision regarding how much Roth you want to convert this year and we can help you with that.

I would not change your withholding as I fully expect that you will owe zero in Fed Taxes if you do not perform a Roth conversion as I already modeled for you using 2022 tax year software. The 2023 brackets are broader than 2022 and standard deductions are higher.

Cheers

[JMK909er]

You guys are so smart! Thanks to all of you answering my post. I am so impressed with all the knowledge of all the details concerning this.
I have been in contact with the people processing my retirement and I am expecting my retirement to be finalized soon. Maybe in the next couple of weeks.
When I get this retirement information I will come back to this thread with the info. Thanks to all of you, I am so grateful!

-Joe

[celia]

My SS is $25,884/yr. It will go down in May by $172/mo when my medicare kicks in..

Let me throw another idea out there that you may or may not like. If you have been on SS for less than a year, you can suspend or undo it and start it up again at age 70. The benefits here are that your monthly benefit will grow 8% a year from Full Retirement Age (67?) until age 70. So that is another 24% of SS you can get (even more than that since you’re getting an amount less than FRA benefit since you started before FRA).

This will be guaranteed for the rest of your life and for your wife, should she outlive you.

This will give you more room in your tax brackets to do Roth conversion or IRA withdrawals. You can withdraw from the IRA for the rest of your living expenses first, then convert to the top of the 12% tax bracket.

Of course, this needs a complete re-do of your tax calculations.

[FiveK]

Once these numbers are locked down for 2023 you will be able to make an informed decision regarding how much Roth you want to convert this year and we can help you with that.

+1

Assuming $12K pension, $41724 SS benefit, no other income of any kind, filing MFJ with one filer age 65+ and the other <65, an $11k Roth conversion would incur no federal tax and ~$95 OK tax (if the personal finance toolbox is correct).

Above $11K, the marginal rates on Roth conversions (federal+state) look like this:


Based on that, converting $11K (or whatever makes the total non-SS income ~$23K) seems a "go do". Converting more would take some thought.

[JMK909er]

My SS is $25,884/yr. It will go down in May by $172/mo when my medicare kicks in..

Let me throw another idea out there that you may or may not like. If you have been on SS for less than a year, you can suspend or undo it and start it up again at age 70. The benefits here are that your monthly benefit will grow 8% a year from Full Retirement Age (67?) until age 70. So that is another 24% of SS you can get (even more than that since you’re getting an amount less than FRA benefit since you started before FRA).

This will be guaranteed for the rest of your life and for your wife, should she outlive you.

This will give you more room in your tax brackets to do Roth conversion or IRA withdrawals. You can withdraw from the IRA for the rest of your living expenses first, then convert to the top of the 12% tax bracket.

Of course, this needs a complete re-do of your tax calculations.

No, we're going to keep drawing both our SS because with this and my pension we don't need to tap into our retirement accounts except for when we want to go on a vacation or something. That way our accounts can continue to grow and I think the market will get better down the road.

[GMCZ71]

Don't forget about your taxable account, any interest income?

Also I didn't see anyone mention drawing a little from Trad to put in a taxable account. Or Split 50/50 convert to Roth and withdraw to taxable.

[Silk McCue]

Don't forget about your taxable account, any interest income?

Also I didn't see anyone mention drawing a little from Trad to put in a taxable account. Or Split 50/50 convert to Roth and withdraw to taxable.

Why would anyone recommend not putting it all in Roth since no taxes are due on funds withdrawn and they have ready access to those funds just like a Taxable account for which taxes on gains would be due.

Cheers

[GMCZ71]

Don't forget about your taxable account, any interest income?

Also I didn't see anyone mention drawing a little from Trad to put in a taxable account. Or Split 50/50 convert to Roth and withdraw to taxable.

Why would anyone recommend not putting it all in Roth since no taxes are due on funds withdrawn and they have ready access to those funds just like a Taxable account for which taxes on gains would be due.

Cheers

From memory op has room up to $80k of total income where long term cap gain is 0 tax. I could be wrong

[Silk McCue]

Don't forget about your taxable account, any interest income?

Also I didn't see anyone mention drawing a little from Trad to put in a taxable account. Or Split 50/50 convert to Roth and withdraw to taxable.

Why would anyone recommend not putting it all in Roth since no taxes are due on funds withdrawn and they have ready access to those funds just like a Taxable account for which taxes on gains would be due.

Cheers

From memory op has room up to $80k of total income where long term cap gain is 0 tax. I could be wrong

What about interest/dividends? There is no risk, no downside to holding these funds in Roth.

Cheers

[GMCZ71]

Very true Silk. I was just giving another option.