Roth conversions: Maxing out a tax bracket

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Topic Author
RWB63
Posts: 17
Joined: Mon Dec 18, 2023 4:53 pm

Roth conversions: Maxing out a tax bracket

Hi all,

I've seen some conflicting information on this and was hoping you all can shed some light... I'm looking to max out the 24% tax bracket with Roth conversions, and trying to better understand the mechanics of doing this. My question is simply this: In calculating the amount to convert, do I look at my TOTAL TAXABLE INCOME before the Roth conversion, and then convert the amount that will bring my total taxable income to the top of the tax bracket? Or instead, do I convert the amount that will bring my total ORDINARY income to the top of the tax bracket?

It seems that the latter makes sense since tax on just my ordinary income (after deductions) is calculated through the tax brackets, and this seems to be corroborated when I crunch the numbers. (If I were to look at TOTAL income--much of which is capital gains--it seems that I would not be filling up the tax bracket.) However, I have not seen any information that says to take this approach.

Thanks and look forward to your thoughts!
jebmke
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Location: Delmarva Peninsula

Re: Roth conversions: Maxing out a tax bracket

focus on the marginal tax rate you are willing to incur. Sometimes that is not the statutory (bracket) rate. Best way is to prepare a pro-forma tax return without the conversion and then experiment with adding amounts as a conversion.
When you discover that you are riding a dead horse, the best strategy is to dismount.
Wiggums
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Joined: Thu Jan 31, 2019 7:02 am

Re: Roth conversions: Maxing out a tax bracket

We take most recent tax return and modify the income for a quick approximation.
"I started with nothing and I still have most of it left."
Running Bum
Posts: 393
Joined: Sun Feb 10, 2013 1:00 pm

Re: Roth conversions: Maxing out a tax bracket

To directly answer your question, you're looking at ORDINARY income to make out 24%. I agree with the other posts though, you should verify through a mock tax return that your marginal cost of conversion isn't higher due to IRMAA, ACA subsidy, NIIT, phase out of itemized deductions, etc which may apply to you.
Topic Author
RWB63
Posts: 17
Joined: Mon Dec 18, 2023 4:53 pm

Re: Roth conversions: Maxing out a tax bracket

Thanks for the quick replies, as well as the reminder that there are other important moving parts to consider, as I attempt to optimize the conversion amount. Thanks, too, for the confirmation that--other factors aside--I should look at ORDINARY (not total) income as I seek to fill a tax bracket.
smitcat
Posts: 13947
Joined: Mon Nov 07, 2016 9:51 am

Re: Roth conversions: Maxing out a tax bracket

RWB63 wrote: Wed Jul 31, 2024 12:28 pm Thanks for the quick replies, as well as the reminder that there are other important moving parts to consider, as I attempt to optimize the conversion amount. Thanks, too, for the confirmation that--other factors aside--I should look at ORDINARY (not total) income as I seek to fill a tax bracket.
Please note that if you will be affected by IRMAA to include that as well as anything else that would be a cost of conversions.
That is why good folks are guiding you to use current tax software to avoid the results of converting to the 'top' of a tax bracket rather than the 'top' of an IRMAA bracket.
bsteiner
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Joined: Sat Oct 20, 2012 9:39 pm
Location: NYC/NJ/FL

Re: Roth conversions: Maxing out a tax bracket

There are some deductions and credits that depend on income that you might want to consider if you wanted to convert up to the top of a specified bracket.
Topic Author
RWB63
Posts: 17
Joined: Mon Dec 18, 2023 4:53 pm

Re: Roth conversions: Maxing out a tax bracket

smitcat wrote: Wed Jul 31, 2024 1:38 pm Please note that if you will be affected by IRMAA to include that as well as anything else that would be a cost of conversions.
That is why good folks are guiding you to use current tax software to avoid the results of converting to the 'top' of a tax bracket rather than the 'top' of an IRMAA bracket.
Got it. Thanks for calling this out!
Riprap
Posts: 824
Joined: Thu Jan 29, 2009 1:08 pm

Re: Roth conversions: Maxing out a tax bracket

Different categories of income are "stacked" depending on tax categorization with ordinary income always being on top of the stack.

Even if you have 99% long term capital gains and/or qualified dividends, ordinary income (Roth conversions) will be stacked on top. You then have to see what bracket you're in once all the income is stacked AND you've adjusted for standard or itemized deductions, whichever applies.

Check out this video:

FiveK
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Joined: Sun Mar 16, 2014 2:43 pm

Re: Roth conversions: Maxing out a tax bracket

RWB63 wrote: Wed Jul 31, 2024 12:28 pm Thanks for the quick replies, as well as the reminder that there are other important moving parts to consider, as I attempt to optimize the conversion amount.
If you can use Excel, you can generate your own version of this annotated chart.
retiredjg
Posts: 55132
Joined: Thu Jan 10, 2008 11:56 am

Re: Roth conversions: Maxing out a tax bracket

Riprap wrote: Wed Jul 31, 2024 2:42 pm Different categories of income are "stacked" depending on tax categorization with ordinary income always being on top of the stack.

Even if you have 99% long term capital gains and/or qualified dividends, ordinary income (Roth conversions) will be stacked on top. You then have to see what bracket you're in once all the income is stacked AND you've adjusted for standard or itemized deductions, whichever applies.

Check out this video:

This is actually backwards.

Ordinary income is on the bottom and long term cap gains and qualified dividends sit on top. LTCG and QDs are not part of your "tax bracket" (which usually refers to ordinary income only). They are taxed on a different tax scale (which you could also call "brackets" if you want).

I didn't watch the video (too long) but if you want to tell us where in the video that information came from, people could look at it.
Riprap
Posts: 824
Joined: Thu Jan 29, 2009 1:08 pm

Re: Roth conversions: Maxing out a tax bracket

retiredjg wrote: Wed Jul 31, 2024 4:12 pm
Riprap wrote: Wed Jul 31, 2024 2:42 pm Different categories of income are "stacked" depending on tax categorization with ordinary income always being on top of the stack.

Even if you have 99% long term capital gains and/or qualified dividends, ordinary income (Roth conversions) will be stacked on top. You then have to see what bracket you're in once all the income is stacked AND you've adjusted for standard or itemized deductions, whichever applies.

Check out this video:

This is actually backwards.

Ordinary income is on the bottom and long term cap gains and qualified dividends sit on top. LTCG and QDs are not part of your "tax bracket" (which usually refers to ordinary income only). They are taxed on a different tax scale (which you could also call "brackets" if you want).

I didn't watch the video (too long) but if you want to tell us where in the video that information came from, people could look at it.
You're right, I misstated.
Dufus
Posts: 234
Joined: Mon Sep 25, 2023 8:35 pm

Re: Roth conversions: Maxing out a tax bracket

I talked to Jason at Planvision today about Taxes and Conversions and he was VERY helpful. Planvision isn't for everyone, but for me it's a solid value for what I pay. (~\$100/year after \$300 first year)

I had previously done some modeling with New Retirement while on trial, but the results didn't make sense. I had also watched the Number Crunching Nerds series on YouTube, which I thought was one of the best explanations of conversion strategies I had seen. You just have to watch it at least 1.5 times normal speed.

Jason looked at my returns and my amounts in deferred and came back with a couple of good suggestions and a good list of suggestions that I didn't even ask about.
captaindorky
Posts: 78
Joined: Tue Jan 31, 2017 9:04 pm

Re: Roth conversions: Maxing out a tax bracket

Jason and PlanVision are a great resource. I use them as well.

I have found this website to be very informative in understanding the brackets and taxes.

https://engaging-data.com/tax-brackets/
tibbitts
Posts: 25156
Joined: Tue Feb 27, 2007 5:50 pm

Re: Roth conversions: Maxing out a tax bracket

Dufus wrote: Wed Jul 31, 2024 5:00 pm I talked to Jason at Planvision today about Taxes and Conversions and he was VERY helpful. Planvision isn't for everyone, but for me it's a solid value for what I pay. (~\$100/year after \$300 first year)

I had previously done some modeling with New Retirement while on trial, but the results didn't make sense. I had also watched the Number Crunching Nerds series on YouTube, which I thought was one of the best explanations of conversion strategies I had seen. You just have to watch it at least 1.5 times normal speed.

Jason looked at my returns and my amounts in deferred and came back with a couple of good suggestions and a good list of suggestions that I didn't even ask about.
Dufus
Posts: 234
Joined: Mon Sep 25, 2023 8:35 pm

Re: Roth conversions: Maxing out a tax bracket

captaindorky wrote: Wed Jul 31, 2024 5:46 pm Jason and PlanVision are a great resource. I use them as well.

I have found this website to be very informative in understanding the brackets and taxes.

https://engaging-data.com/tax-brackets/
Thanks Captain, I had forgotten about that site. It made me make note to doublecheck my tax estimates, it came out lower than my estimates.
Dufus
Posts: 234
Joined: Mon Sep 25, 2023 8:35 pm

Re: Roth conversions: Maxing out a tax bracket

tibbitts wrote: Wed Jul 31, 2024 6:15 pm
Dufus wrote: Wed Jul 31, 2024 5:00 pm I talked to Jason at Planvision today about Taxes and Conversions and he was VERY helpful. Planvision isn't for everyone, but for me it's a solid value for what I pay. (~\$100/year after \$300 first year)

I had previously done some modeling with New Retirement while on trial, but the results didn't make sense. I had also watched the Number Crunching Nerds series on YouTube, which I thought was one of the best explanations of conversion strategies I had seen. You just have to watch it at least 1.5 times normal speed.

Jason looked at my returns and my amounts in deferred and came back with a couple of good suggestions and a good list of suggestions that I didn't even ask about.
The purpose of the Zoom meeting was Taxes and Roth Conversion Strategies and I thought he would just stick to that scope, but he went ahead and mentioned and made points about: Inherited IRAs, Charitable Giving, Asset Allocation, and other items which he may do with every customer. So, he gave me more than I was asking for. Most of the things he suggested I was already aware of/planning to do, but I had let some asset allocation/placement slip especially in some inherited IRAs.

This was my first year with them and I don't see how they are making money with the fees they charge.
tibbitts
Posts: 25156
Joined: Tue Feb 27, 2007 5:50 pm

Re: Roth conversions: Maxing out a tax bracket

Dufus wrote: Wed Jul 31, 2024 7:01 pm
tibbitts wrote: Wed Jul 31, 2024 6:15 pm
Dufus wrote: Wed Jul 31, 2024 5:00 pm I talked to Jason at Planvision today about Taxes and Conversions and he was VERY helpful. Planvision isn't for everyone, but for me it's a solid value for what I pay. (~\$100/year after \$300 first year)

I had previously done some modeling with New Retirement while on trial, but the results didn't make sense. I had also watched the Number Crunching Nerds series on YouTube, which I thought was one of the best explanations of conversion strategies I had seen. You just have to watch it at least 1.5 times normal speed.

Jason looked at my returns and my amounts in deferred and came back with a couple of good suggestions and a good list of suggestions that I didn't even ask about.
The purpose of the Zoom meeting was Taxes and Roth Conversion Strategies and I thought he would just stick to that scope, but he went ahead and mentioned and made points about: Inherited IRAs, Charitable Giving, Asset Allocation, and other items which he may do with every customer. So, he gave me more than I was asking for. Most of the things he suggested I was already aware of/planning to do, but I had let some asset allocation/placement slip especially in some inherited IRAs.

This was my first year with them and I don't see how they are making money with the fees they charge.
Thanks; hopefully some of the forum members contemplating using Planvision will benefit from the information.
heyyou
Posts: 4548
Joined: Tue Feb 20, 2007 3:58 pm

Re: Roth conversions: Maxing out a tax bracket

Do try to convert as much as you can tolerate, considering the additional current taxes.
Having been there a decade ago, I am now so pleased with the growth in my RIRA, that I wish that I had converted even more. What is left in your tIRA is a tax liability in your RMD years. I considered Roth conversions as extra taxes back then, but those conversions are long term stock fund investments that are tax free from next year into the distant future. Now in my RMD years, I am paying progressively more taxes on my remaining tIRA holdings.

With bond funds stored in your tIRA, and stock funds in your RIRA, it is wise to boost your RIRA assets now since you still have many years of retirement left to pay for.
teen persuasion
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Joined: Sun Oct 25, 2015 1:43 pm

Re: Roth conversions: Maxing out a tax bracket

Dufus wrote: Wed Jul 31, 2024 6:43 pm
captaindorky wrote: Wed Jul 31, 2024 5:46 pm Jason and PlanVision are a great resource. I use them as well.

I have found this website to be very informative in understanding the brackets and taxes.

https://engaging-data.com/tax-brackets/
Thanks Captain, I had forgotten about that site. It made me make note to doublecheck my tax estimates, it came out lower than my estimates.
I just tried it - it's super simplified, only includes wage income and LTCG income, nothing else. It would be entirely misleading in my situation, where it ignores large refundable credits.
Stinky
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Location: Sweet Home Alabama

Re: Roth conversions: Maxing out a tax bracket

RWB63 wrote: Wed Jul 31, 2024 11:35 am I'm looking to max out the 24% tax bracket with Roth conversions…..
In my view, you’re wise to do this.

I’m doing exactly the same thing…..
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
smitcat
Posts: 13947
Joined: Mon Nov 07, 2016 9:51 am

Re: Roth conversions: Maxing out a tax bracket

Stinky wrote: Thu Aug 01, 2024 9:08 am
RWB63 wrote: Wed Jul 31, 2024 11:35 am I'm looking to max out the 24% tax bracket with Roth conversions…..
In my view, you’re wise to do this.

I’m doing exactly the same thing…..
I am guessing you are paying attention to IRMAA or are unaffected.
Topic Author
RWB63
Posts: 17
Joined: Mon Dec 18, 2023 4:53 pm

Re: Roth conversions: Maxing out a tax bracket

THANK YOU, everyone, for the great information, reminders, and resources... This was super-helpful!!
Stinky
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Location: Sweet Home Alabama

Re: Roth conversions: Maxing out a tax bracket

smitcat wrote: Thu Aug 01, 2024 9:21 am
Stinky wrote: Thu Aug 01, 2024 9:08 am
RWB63 wrote: Wed Jul 31, 2024 11:35 am I'm looking to max out the 24% tax bracket with Roth conversions…..
In my view, you’re wise to do this.

I’m doing exactly the same thing…..
I am guessing you are paying attention to IRMAA or are unaffected.
Yes, IRMAA is definitely on my mind.

Unfortunately.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
smitcat
Posts: 13947
Joined: Mon Nov 07, 2016 9:51 am

Re: Roth conversions: Maxing out a tax bracket

Stinky wrote: Thu Aug 01, 2024 9:26 am
smitcat wrote: Thu Aug 01, 2024 9:21 am
Stinky wrote: Thu Aug 01, 2024 9:08 am
RWB63 wrote: Wed Jul 31, 2024 11:35 am I'm looking to max out the 24% tax bracket with Roth conversions…..
In my view, you’re wise to do this.

I’m doing exactly the same thing…..
I am guessing you are paying attention to IRMAA or are unaffected.
Yes, IRMAA is definitely on my mind.

Unfortunately.
Very good, excellent, I agree.