Roth conversions to 32%, 35% tax bracket?

[FIREnow]

In previous meetings with my Fidelity representative, she recommended Roth conversions up to 24% tax bracket. I have 2.7M in tax deferred, and now the representative suggests Roth conversions up to 32% or even 35%. What are your thoughts on this?

In simulations, RMD for below average market conditions starts at $165K for age 75. For average conditions, RMD starts at $291K.

Also, I pay quarterly estimated taxes. Can I make the Roth conversion in any quarter?

I am single, age 56, and retired last year with a pension of $39K. I live in California with a tax rate of 9.3%.

[retiredjg]

Ugg. I see their point.

Even if you have no income other than the pension and convert to the top of the 32% bracket, that's only about $218k in conversion this year (assuming your expenses are not more than that). You will not put a big dent in 2.7 million at that rate each year, but that may keep your 2.7 million from growing a lot.

If you can keep the $2.7 million from growing a lot, your first RMDs will only be about $97k which I would not consider "burdensome".

If you have that large a tax-deferred account, it seems likely you also have money in a taxable account...producing taxable income as well.

Another option is to not convert any or not convert a lot and start the maximum QCDs (qualified charitable contributions) when you hit age 70.5. The limit is $105k this year and will be higher when you reach that age.

Some of this decision depends on what will happen to your money when you die. If you have heirs your choice may be different from if you have no heirs.

Yes, you can do the Roth conversion in any quarter, but do keep up the estimated taxes. At your age, you cannot pay your taxes by withholding without paying a penalty for early withdrawal.

[Carl53]

Ugg. I see their point.

Even if you have no income other than the pension and convert to the top of the 32% bracket, that's only about $218k in conversion this year (assuming your expenses are not more than that). You will not put a big dent in 2.7 million at that rate each year, but that may keep your 2.7 million from growing a lot.

If you can keep the $2.7 million from growing a lot, your first RMDs will only be about $97k which I would not consider "burdensome".

If you have that large a tax-deferred account, it seems likely you also have money in a taxable account...producing taxable income as well.

Another option is to not convert any or not convert a lot and start the maximum QCDs (qualified charitable contributions) when you hit age 70.5. The limit is $105k this year and will be higher when you reach that age.

Some of this decision depends on what will happen to your money when you die. If you have heirs your choice may be different from if you have no heirs.

Yes, you can do the Roth conversion in any quarter, but do keep up the estimated taxes. At your age, you cannot pay your taxes by withholding without paying a penalty for early withdrawal.

+1
Two additional considerations, any possibility of marriage and MFJ, and how big a ding are your state taxes? If you do the former get a prenup. Also consider that age 65 IRMAA will start with your age 63 income levels.

[rockstar]

Ugg. I see their point.

Even if you have no income other than the pension and convert to the top of the 32% bracket, that's only about $218k in conversion this year (assuming your expenses are not more than that). You will not put a big dent in 2.7 million at that rate each year, but that may keep your 2.7 million from growing a lot.

If you can keep the $2.7 million from growing a lot, your first RMDs will only be about $97k which I would not consider "burdensome".

If you have that large a tax-deferred account, it seems likely you also have money in a taxable account...producing taxable income as well.

Another option is to not convert any or not convert a lot and start the maximum QCDs (qualified charitable contributions) when you hit age 70.5. The limit is $105k this year and will be higher when you reach that age.

Some of this decision depends on what will happen to your money when you die. If you have heirs your choice may be different from if you have no heirs.

Yes, you can do the Roth conversion in any quarter, but do keep up the estimated taxes. At your age, you cannot pay your taxes by withholding without paying a penalty for early withdrawal.

+1
Two additional considerations, any possibility of marriage and MFJ, and how big a ding are your state taxes? If you do the former get a prenup. Also consider that age 65 IRMAA will start with your age 63 income levels.

Spouse death plus RMDs can make this really ugly.

[Stinky]

Personally, I’m allergic to Roth conversions into the 32% bracket. Too much tax for me. A bridge too far. I’ll take my chances in taxes when I start RMDs in a few years.

But I am doing Roth conversions to the top of the 24% bracket. That feels comfortable to me.

Personal opinion.

[WhiteMaxima]

I will target 12% (15% after 2026) for Roth conversion.

[tibbitts]

I will target 12% (15% after 2026) for Roth conversion.

But that's not helpful, or even an option, for the OP. The only likely way the OP might ever be paying taxes at 12% - especially post-SS/RMD - would be by doing conversions now at 37%. Or I suppose if the tax code changes and the income tax becomes something else.

[tibbitts]

In previous meetings with my Fidelity representative, she recommended Roth conversions up to 24% tax bracket. I have 2.7M in tax deferred, and now the representative suggests Roth conversions up to 32% or even 35%. What are your thoughts on this?

In simulations, RMD for below average market conditions starts at $165K for age 75. For average conditions, RMD starts at $291K.

Also, I pay quarterly estimated taxes. Can I make the Roth conversion in any quarter?

I am single, age 56, and retired last year with a pension of $39K. I live in California with a tax rate of 9.3%.

I don't think 35% conversions are an outrageous idea but based just on what you said it's hard to evaluate, especially given the number of years you have to SS/RMD.

I assume the rep came up with this using some software so you should ask her to show you comparisons for limiting conversions at various levels vs. 32%/35%, and explain the reasoning. You don't say but we don't know what other deferred income you have besides this and your pension and (effectively) SS. For example I/EE bonds are, or can be, a kind of deferred income. And so are unrealized cap gains in your taxable account.

[02nz]

In previous meetings with my Fidelity representative, she recommended Roth conversions up to 24% tax bracket. I have 2.7M in tax deferred, and now the representative suggests Roth conversions up to 32% or even 35%. What are your thoughts on this?

In simulations, RMD for below average market conditions starts at $165K for age 75. For average conditions, RMD starts at $291K.

Did she say if those figures are in nominal or real dollars? If nominal, keep in mind that tax brackets are indexed for inflation. The top of the 24% (28% if it reverts to pre-TCJA rates) bracket is, in 2024, almost $210K for a 65+ single filer 65. So I don't see a clear case for converting now in the 32% bracket and above. My advice: Convert up to the top of the 24% bracket while TCJA rates are in effect, and then re-evaluate.

[FiveK]

But I am doing Roth conversions to the top of the 24% bracket. That feels comfortable to me.

+1

FIREnow, from what you have presented that seems a good place to start for you also. What do you think and why?

[FIREnow]

But I am doing Roth conversions to the top of the 24% bracket. That feels comfortable to me.

+1

FIREnow, from what you have presented that seems a good place to start for you also. What do you think and why?

I think the top of the 24% bracket is a good place to start for a variety of reasons. Thank you for this suggestion.
1. I only have $100K in a HYSA and $250K in taxable brokerage accounts to pay taxes.
2. And why pay the same amount of taxes now versus later (although the Fidelity representative thinks tax rates will go up)?
3. Also, I accumulated this wealth being in the 12% tax bracket while working and to go up to 32% or 35% now would demonstrate to me that I messed up somehow and didn't think this tax issue through.

[FIREnow]

I assume the rep came up with this using some software so you should ask her to show you comparisons for limiting conversions at various levels vs. 32%/35%, and explain the reasoning. You don't say but we don't know what other deferred income you have besides this and your pension and (effectively) SS. For example I/EE bonds are, or can be, a kind of deferred income. And so are unrealized cap gains in your taxable account.

The rep didn't use any software. She thought that the 24% tax bracket would hardly make a dent in the Roth conversions. For 2024, I would be converting $150K from the 24% cap of $206,550 ($191,950 plus standard deduction of $14,600) for example.

[FIREnow]

Did she say if those figures are in nominal or real dollars?

In nominal

[Affable at 50]

But I am doing Roth conversions to the top of the 24% bracket. That feels comfortable to me.

+1

FIREnow, from what you have presented that seems a good place to start for you also. What do you think and why?

I think the top of the 24% bracket is a good place to start for a variety of reasons. Thank you for this suggestion.
1. I only have $100K in a HYSA and $250K in taxable brokerage accounts to pay taxes.
2. And why pay the same amount of taxes now versus later (although the Fidelity representative thinks tax rates will go up)?
3. Also, I accumulated this wealth being in the 12% tax bracket while working and to go up to 32% or 35% now would demonstrate to me that I messed up somehow and didn't think this tax issue through.

If it’s true that you accumulated this wealth while in the 12% bracket, that’s sad. It’s also an error you can’t undo so don’t dwell on it.

You have a multi-million dollar account that will be taxed during your lifetime or will be paid by the IRA beneficiaries.

If you plan to move from CA at some point there could be opportunities to save more on conversions later.

I believe it may make sense to convert up to the top of the 24% tax bracket. Once you exceed $200k in MAGI, your investment income will be hit with NIIT of 3.8%.

Since your taxable accounts are limited, you may need to eventually pay the taxes from your IRA as you withdraw to spend or convert to Roth,

[Exchme]

This is an example where putting bonds in tax deferred and stocks in taxable and Roth can help.
With your bonds in tax deferred (remembering to tax adjust so that $1 in tax deferred is only worth $0.59-0.68 after state and federal taxes, a large and rising share of your t-IRA will be bonds. Doing that makes sticking to Roth Conversions at 24% pretty reasonable.

[tibbitts]

I assume the rep came up with this using some software so you should ask her to show you comparisons for limiting conversions at various levels vs. 32%/35%, and explain the reasoning. You don't say but we don't know what other deferred income you have besides this and your pension and (effectively) SS. For example I/EE bonds are, or can be, a kind of deferred income. And so are unrealized cap gains in your taxable account.

The rep didn't use any software. She thought that the 24% tax bracket would hardly make a dent in the Roth conversions. For 2024, I would be converting $150K from the 24% cap of $206,550 ($191,950 plus standard deduction of $14,600) for example.

Although I often believe Bogleheads put too much faith in the precision of software projections, there is zero possibility I'd recommend large conversions to someone without at least some numbers to back it up. At least she needs to say what her assumptions are beyond "doesn't make a dent", and discuss the impacts on IRMAA and RMDs when you get to that stage.

A lot depends on return assumptions and your allocation and how it will change as you do conversions. If you're targeting 100% fixed income in deferred you can eventually use numbers like 1.5% or 2% for growth, because real growth is (almost) all that matters. Unfortunately NIIT and SS taxation (and anything not indexed) exist to make us always say "almost." But if you're a member of the why-not-100%-equity crowd and assume Dave Ramsey returns (what is that in real terms - 10%?), that might lead you to make those conversions past 24%. What assumptions are you making on your own and are you at least projecting out RMDs (the primary issue) to see what they might be like under different real return assumptions?

Anyone who is unable to convert at zero to maybe 12% isn't going to target zero for a conversion goal, so what is your goal for when you hit different ages (IRMAA, SS, RMD)? Will you be donating any part of the deferred money, and if so when?

Incidentally you probably want to look at 2024 dollars for simplicity, or ... either use real or nominal for all your numbers; don't attempt to mix-and-match.

I'm not saying the rep is wrong, and especially if you believe you'll experience a "bad" sequence of returns (that would be a good one for most people) and are equity-heavy in deferred, then there is a case where you might want to take some big swings up front (so maybe into 35%, as she says.)

[Wiggums]

We are doing Roth conversions to the top of the 24% bracket. We started with 2/3rds in tax deferred. I’m of the opinion that any conversion is helpful because of the portfolio growth. I’d have a hard time converting in the 32% bracket as a general statement. When we convert, the traditional IRA end of year balance never drops as much as we would like because of the portfolio growth. We have a DAF and will take advantage of QCDs.

[kd2008]

Don't let tax tail wag. Nothing wrong in paying taxes on RMDs as they happen. You may even do QCDs. You have accumulated well. You are 56, and may spend some of it by the time you reach 75. If you must, do a set amount every year. Don't worry about optimizing, or getting to the top of tax bracket etc. Numerically it may sound great but you may also get regrets if tax brackets fall in future.

Think more about the marginal utility of wealth that is subjected to Roth conversion - it is most likely zero or close to it. Don't spend time on things that don't matter in the end.

[smitcat]

I assume the rep came up with this using some software so you should ask her to show you comparisons for limiting conversions at various levels vs. 32%/35%, and explain the reasoning. You don't say but we don't know what other deferred income you have besides this and your pension and (effectively) SS. For example I/EE bonds are, or can be, a kind of deferred income. And so are unrealized cap gains in your taxable account.

The rep didn't use any software. She thought that the 24% tax bracket would hardly make a dent in the Roth conversions. For 2024, I would be converting $150K from the 24% cap of $206,550 ($191,950 plus standard deduction of $14,600) for example.

Did you tell the rep what the future funds were to be used for in your plan?
- do you intend to spend most all of them in your lifetime?
- do you intend to give to charity?
- are you planning for your heir(s)?

[bikechuck]

Personally, I’m allergic to Roth conversions into the 32% bracket. Too much tax for me. A bridge too far. I’ll take my chances in taxes when I start RMDs in a few years.

But I am doing Roth conversions to the top of the 24% bracket. That feels comfortable to me.

Personal opinion.

Interesting, my wife and I have been converting to a level just below the first IRMAA tier. From time to time I wonder if we should do more.

2025 is my last year before starting RMDs and 2026 is my wife's last year before RMDs... perhaps we should convert to the top of the 24% bracket and accept the IRMAA penalty for two years only.

I don't know how beneficial it would be though as we have very little in taxable so we need to pay taxes with IRA withdrawals.

[bikechuck]

We are doing Roth conversions to the top of the 24% bracket. We started with 2/3rds in tax deferred. I’m of the opinion that any conversion is helpful because of the portfolio growth. I’d have a hard time converting in the 32% bracket as a general statement. When we convert, the traditional IRA end of year balance never drops as much as we would like because of the portfolio growth. We have a DAF and will take advantage of QCDs.

Do your conversations subject you to IRMAA?

[retired@50]

... I live in California with a tax rate of 9.3%.

Any chance the state of residence will change?

That could save 9.3% on any Roth conversions.

Regards,

[Prokofiev]

I am not interested in converting at 32% or 35%. Yes, tax rates could be higher in several years (2026) and even higher
later. But people have been saying that for the past 40+ years and rates have only declined during that time.

I would think of it this way. Roth conversions are pre-paying taxes today in the hope of saving taxes at some future date.
Without knowing future tax rates, the ROR for my TIRA and future legislation I cannot be sure that conversions will be
profitable. At 0%, certainly. At 10%,12%,15% probably. At 22%,24%,25%, possibly especially if I am very well off. But once I
covert, those taxes are never coming back. I have lost the ability to spend that money should I need it. Health expenses,
long-term care, poor stock returns and personal "mistakes" could lead to a situation where I might regret paying those taxes
early. I might need that money.

A painful example. During Oct 2007, I was retired and living a fantasy life. I had left my job at age 47. Fat portfolio. A
paid-off condo. Small but very nice and perfectly located. I was traveling the world, with an apartment in Spain. Yet despite
my extravagant lifestyle, my net worth was increasing every year. Inflation averaged 2.4%, my portfolio 9.6% and I was spending
about 3%/year. How much would I have in 18 months? Well, possibly about the same or a little less. Most likely 5-10% more. And
with a little luck, 15-30% more. But the real answer was less than half. Not just my equities down 50%. Or my portfolio down
50%. But my net worth less than 50%. My condo value dropped 45%. My art and antiques were worth 60-80% less.
Total market (VTI) = -51%. US Value = -54% Total Intl (VEU) = -58% Emerging (VWO) = -62% Reit (VNQ) = -65%. And since I was sure
that a rebound was close, I continually rebalanced from bonds to stocks and watched my new purchases drop. Even my corporate
bonds, lost some money. I went from a bullet-proof retirement to suddenly looking for a job in 2009. I never got that job. Finding
employment at 55+ is tough.

My point is that "stuff" happens. Next time that 18-month disaster could be a 10-year lost decade. I might need those pre-paid taxes
for daily living expenses, health care and/or nursing home. If not, I will remain wealthy, and I won't mind paying that extra tax at 73,
75 or 80. Chances are you will die rich and the TIRA money will be inherited by someone in a much lower tax bracket. Or you will give it
all away to charity in which case QCDs from a TIRA is really the best option. Wait until 70 to receive SS and you will have 8 extra years to
convert more and avoid IRMAA surcharges. And you could wisely move to Texas before conversion and save 10%. Move back to Cali several years
later if you must. You probably won't . . .

That is not to say that I didn't do any conversions. I have managed to move $1.5M to Roth over the past 23 years, but at tax rates of 15%
22% and 24%. Almost certainly, I now see that I should have done more. But that is hindsight. The 2009 rebound might never have
happened. I could have been in trouble. I don't regret not converting more. Higher RMDs are the price we pay for being wealthy.

[celia]

(This is my major comment)

In previous meetings with my Fidelity representative, she recommended Roth conversions up to 24% tax bracket. I have 2.7M in tax deferred, and now the representative suggests Roth conversions up to 32% or even 35%. What are your thoughts on this?

I agree with her. Following are my estimates that are likely similar to hers.

In simulations, RMD for below average market conditions starts at $165K for age 75. For average conditions, RMD starts at $291K.

I am single, age 56, and retired last year with a pension of $39K. I live in California with a tax rate of 9.3%.

At age 56, your RMDs won't start for 19 years.

Are you aware of the Rule of 72? Using this concept and if you don't withdraw anything from the tax-deferred account, if the average growth over those years is (choose one):

2%, then it will take 36 years for your IRA to double, so let's say it grows only 50% during those 19 years. The balance then of $4M will start with an RMD of $162K.

5%, then it will take 14.4 yrs to double. But the remaining 4.6 years will add to that. The balance could be $6M with an RMD starting at $237K.

8%, then it will take 9 years to double and double again in the following 9 years. The balance will be $10.8M with an RMD starting at $432K.

10%, then it will take only 7.2 years to double, another 7.2 years to double again, and the remaining 4.6 years will half-way double by age 75. The balance would be $12M with an RMD starting at $486K.

It looks like the advisor probably had something withdrawn yearly from the IRA for living expenses which slowed down the growth. But as long as the yearly withdrawals are less than the yearly growth, the IRA will continue to grow.

I think the top of the 24% bracket is a good place to start for a variety of reasons. Thank you for this suggestion.

Don't do something just because someone else does it. Your portfolio and situation likely isn't like theirs.

1. I only have $100K in a HYSA and $250K in taxable brokerage accounts to pay taxes.

Then you'll likely have to pay taxes (and some living expenses) from IRA withdrawals. The good thing is that will help bring down the value of the account. The bad thing is that you have to pay taxes on the withdrawals besides on the amounts that are converted (which count as withdrawals too).

Don't do your conversions then withdraw from the Roth because there will be penalties if you are under 59.5 or if the Roth is less than 5 years old.

2. And why pay the same amount of taxes now versus later (although the Fidelity representative thinks tax rates will go up)?

We are currently in the lowest tax brackets that have been seen in our lifetime. We can't speculate what they will be in the future on this forum but we do know that our current tax brackets are set to expire at the end of 2025, then revert to 2017 levels, unless Congress comes up with something else before then.

Dollar-wise, you will pay more taxes as the account (and withdrawals) increase. Percentage-wise, it is best to pay the taxes when your tax rate is lowest. But those years seem over now and you can't convert very much in the 12% tax bracket anyways.
2024 Tax Brackets

3. Also, I accumulated this wealth being in the 12% tax bracket while working and to go up to 32% or 35% now would demonstrate to me that I messed up somehow and didn't think this tax issue through.

That could be. You likely also had many years of good growth in your investments by choosing the funds/ ETFs that you (or your advisor) did.

My suggestion for both of you is to convert to the top of the 32% tax bracket for this year and next, starting with the stock funds that have grown the fastest percentage-wise. Get that continued growth to grow in Roths instead to maximize future tax-free growth. If the markets drop by 20% or more, your shares will be worth less, so you can convert even more shares for the same tax bill then. I would then even go into the 35% tax bracket!

Although the tax rate seems high, don't forget that we have a progressive tax system. Look at the tax brackets and you will see how much of your money is taxed at 10%, how much at 12%, etc. You aren't paying 32% or 35% on all your withdrawals, but just some of it. And when you look at the tax bracket table, use your "Taxable Income" (a line on your tax return) when you look at the tax brackets.

After next year, we all have to see what happens with tax law changes, if any.

[MnD]

In previous meetings with my Fidelity representative, she recommended Roth conversions up to 24% tax bracket. I have 2.7M in tax deferred, and now the representative suggests Roth conversions up to 32% or even 35%. What are your thoughts on this?

In simulations, RMD for below average market conditions starts at $165K for age 75. For average conditions, RMD starts at $291K.

Also, I pay quarterly estimated taxes. Can I make the Roth conversion in any quarter?

I am single, age 56, and retired last year with a pension of $39K. I live in California with a tax rate of 9.3%.

Start taking an age 80 (5% of portfolio balance) RMD every year starting now up till age 80 and have fun! That's only $174K a year (135K + 39K) pre-tax including your pension. That 5% drag should eliminate any real growth in the portfolio in an average sequence of returns.

Tax brackets are indexed for inflation so you are probably looking at nothing exciting tax-wise for the next 24 years.
Depending on COLA your pension income is not going to grow in real terms or it will decline in real terms every year. Your only other income bump would be SS at age 70 and in an below average sequence of returns and/or a non-cola pension all that might do is backfill the decline in income from portfolio at 5% and/or loss of pension purchasing power.

After age 80 your RMD's would gradually creep above 5% of portfolio balance but you might be dead or in a nursing home with the odds of that increasing every year. So maybe you would use a huge chunk on tax deductible medical-required long term care or if dead dying and still single, leave the tax deferred to charity.

Ask your typical 56 year olds on the street if they would like to retire now with $175K of taxable income.
You are in a fabulous position to have a blast in the go-go years of retirement.
That income after taxes in a high cost high tax state is not exactly lifestyles of the rich and famous.
Can you think of better things to do with a nice income than pay a huge amount of taxes prematurely on Roth conversions?

[LadyGeek]

kt2062 has a question which I've moved into a new thread. See: [In the 32% tax bracket - Should I do a Roth conversion?]

FYI - This thread was bumped from July 2024.

(Thanks to the member who reported the post and provided a link to that thread.)

[AlmstRtrd]

In previous meetings with my Fidelity representative, she recommended Roth conversions up to 24% tax bracket. I have 2.7M in tax deferred, and now the representative suggests Roth conversions up to 32% or even 35%. What are your thoughts on this?

In simulations, RMD for below average market conditions starts at $165K for age 75. For average conditions, RMD starts at $291K.

Also, I pay quarterly estimated taxes. Can I make the Roth conversion in any quarter?

I am single, age 56, and retired last year with a pension of $39K. I live in California with a tax rate of 9.3%.

Maybe it's just me but it seems that people are answering your RMD question without looking at your entire portfolio. In another of your posts in this thread, you also wrote:

"I only have $100K in a HYSA and $250K in taxable brokerage accounts to pay taxes."

Do you also have an existing Roth account? If so, what is the current balance?

The basic issue as I see it is that you don't have enough money outside of your tax-deferred accounts to both live on and pay taxes on large conversions, at least not for more than a couple of years. Is the following your overall picture?

$2.7M in tax-deferred
$250K in taxable
$100K in HYSA
39K annually from your pension

Assuming that is more or less correct, it seems that Substantially Equal Periodic Payments (https://www.investopedia.com/terms/s/sepp.asp) until you are 59.5 years old could be a good choice. After that maybe max out the 24% bracket until RMDs kick in around 2043. And don't forget to include a rough dollar amount of SS payments in your calculations.

If you DO have an existing Roth account, I would hold a high percentage of stocks there and a lower percentage of stocks (more bonds) in your tax-deferred account. This would help to "restrain" the growth of your tax-deferred account while still having some exposure to stocks (which you need because your retirement is potentially very long).

Anyway, it seems that people trying to answer your original question about tax brackets just don't have enough information about your overall portfolio to begin with. But it's always possible that I missed a pertinent post (it wouldn't be the first time!).