Is a Roth conversion a good idea if you are in the 15% tax bracket?

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Woodshark
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Is a Roth conversion a good idea if you are in the 15% tax bracket?

Post by Woodshark » Sat Sep 30, 2017 10:43 am

I know Roth conversions and conversion ladders are can be a good idea if you are a high income earner and expect to be in a lower tax bracket upon retirement. I just don’t know about those firmly in the 15% tax bracket and who are already in early retirement. It’s a question I’ve been trying to find a good answer to.
For example, I’m 57, my wife is 54. We are able to retire a bit early and we get by nicely with the income from a pension and our investments. As our needs are modest, I think we will remain in the 15% tax bracket for the majority of our retirement years. There may be some creep into next tax bracket up sometime in the future, but I don’t see it happening with any frequency, if at all.

Since there is no tax on capital gains while in the 15% bracket, I’ve traded funds up to 15% limit to take advantage of this and reset the basis on some of our taxable investments. This is a tax free action and I’m happy to be able to do it. BUT, as I understand it, a Roth conversion is treated as ordinary income and is taxed as such. So any Roth conversion done will create a taxable event on the amount converted.

So does it make any sense to do a Roth conversion if one is already in the 15% bracket and plan to remain so for the foreseeable future, or am I missing something?

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Re: Is a Roth conversion a good idea if you are in the 15% tax bracket?

Post by mhalley » Sat Sep 30, 2017 10:58 am

There are several other reasons to convert. The most common is to decrease RMDs that could put you into a higher tax bracket after you turn 70 and in addition to higher taxes could increase your medicare premiums. Another is if you have IRA money you would like to go to heirs, they benefit more from a roth ira than a traditional ira. You can play around with some numbers at i-orp to see if it would make sense for some conversions. At 57, you could potentially have 40 years for money to compound.
https://www.i-orp.com/gamma/extended.html

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Re: Is a Roth conversion a good idea if you are in the 15% tax bracket?

Post by retiredjg » Sat Sep 30, 2017 11:22 am

Woodshark wrote:
Sat Sep 30, 2017 10:43 am
I know Roth conversions and conversion ladders are can be a good idea if you are a high income earner and expect to be in a lower tax bracket upon retirement.
You may have misunderstood. It is only a good idea for high income earners who convert AFTER they retire and are in a lower tax bracket. That's when they get the benefit.

I just don’t know about those firmly in the 15% tax bracket and who are already in early retirement.
It could easily be a good idea, especially if you just convert up to the top of the 15% bracket. To me this is sort of a no-brainer. Do you know how much space you have left in that bracket?


Since there is no tax on capital gains while in the 15% bracket, I’ve traded funds up to 15% limit to take advantage of this and reset the basis on some of our taxable investments. This is a tax free action and I’m happy to be able to do it.
This is a good idea as well. Maybe you could continue to do this every 3rd year or something.

So does it make any sense to do a Roth conversion if one is already in the 15% bracket and plan to remain so for the foreseeable future, or am I missing something?
The reason you should consider Roth conversions is that if your IRA is large enough, the RMDs might push you into a higher bracket later on. And since you are a couple, when one is gone, the other will almost certainly be in the 25% bracket, not the 15% bracket, even if income does not go up.


Things that you need to consider are
  • -Does the pension have survivor benefits? If so, how much?

    -Will you have SS in the future?

    -How big is the IRA now and how big do you expect your beginning RMD's to be? If the RMDs will be similar to what you are taking out now, no big deal. But if the RMDs will push you into a higher bracket, better to get some of that IRA into Roth now if you can.
Here's kind of a worst possible scenario. You make not conversions for the next 10 or 12 years, the IRA grows faster than you are using it, SS starts at age 70 and one of you dies at about that time. The survivor could have pension income, SS, a big RMD, and be in a higher bracket just by the fact of being single.

In this worst scenario, the survivor could be pushed into the 28% bracket and will certainly be wishing conversions had been done at 15% many years before. This may not reflect your situation at all. It's just an example of how things could go.

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Re: Is a Roth conversion a good idea if you are in the 15% tax bracket?

Post by David Jay » Sat Sep 30, 2017 11:50 am

retiredjg wrote:
Sat Sep 30, 2017 11:22 am
So does it make any sense to do a Roth conversion if one is already in the 15% bracket and plan to remain so for the foreseeable future, or am I missing something?
The reason you should consider Roth conversions is that if your IRA is large enough, the RMDs might push you into a higher bracket later on. And since you are a couple, when one is gone, the other will almost certainly be in the 25% bracket, not the 15% bracket, even if income does not go up.
This ^^^

Your RMD percentage is based on life expectancy, so the percentage goes up every year. The RMD percentage of your tax-deferred accounts (401K, tIRA, 403B) is 7.1% at age 85, 9.3% at age 90 and so on.
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Re: Is a Roth conversion a good idea if you are in the 15% tax bracket?

Post by Doc » Sat Sep 30, 2017 11:56 am

Woodshark wrote:
Sat Sep 30, 2017 10:43 am
I just don’t know about those firmly in the 15% tax bracket and who are already in early retirement. It’s a question I’ve been trying to find a good answer to.
For example, I’m 57, my wife is 54.
Under current law you will probably not be in the 15% marginal tax rate when you start taking social security because up to 85% of you SS becomes taxable for each dollar of other income you have - like RMD's. So in the 15% bracket you marginal rate may be 27.75% not 15%. And you qual divs and LTCG marginal rate tax will be 8.5% not zero.

Speculating on future changes in the tax code is not an allowed topic on this board. Even posting a link is a no no. You will have to Google that yourself.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

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Re: Is a Roth conversion a good idea if you are in the 15% tax bracket?

Post by Peter Foley » Sat Sep 30, 2017 12:39 pm

Two long term posters whose opinions I respect beat me to the punch.

Like retiredjg, I consider conversion to the top of the 15% bracket a no brainer for most early retirees. Part of the reason is Doc's point, once you start receiving SS Benefits marginal tax rates can increase significantly.

Tax gain harvesting, as you have been doing, is another smart move for those in the 15% bracket.

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Re: Is a Roth conversion a good idea if you are in the 15% tax bracket?

Post by delamer » Sat Sep 30, 2017 2:27 pm

Lots of good reasons to convert noted above.

Another way to look at the conversion issue -- is there any downside to converting? The only one that I can think of is a change in income tax rates that would lower your marginal tax rate.

Woodshark
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Re: Is a Roth conversion a good idea if you are in the 15% tax bracket?

Post by Woodshark » Sat Sep 30, 2017 3:40 pm

retiredjg wrote:
Sat Sep 30, 2017 11:22 am
Woodshark wrote:
Sat Sep 30, 2017 10:43 am
I know Roth conversions and conversion ladders are can be a good idea if you are a high income earner and expect to be in a lower tax bracket upon retirement.
You may have misunderstood. It is only a good idea for high income earners who convert AFTER they retire and are in a lower tax bracket. That's when they get the benefit.
That is what I meant to say. Thank you for clarifying it for other readers.

So does it make any sense to do a Roth conversion if one is already in the 15% bracket and plan to remain so for the foreseeable future, or am I missing something?
The reason you should consider Roth conversions is that if your IRA is large enough, the RMDs might push you into a higher bracket later on. And since you are a couple, when one is gone, the other will almost certainly be in the 25% bracket, not the 15% bracket, even if income does not go up.
Thank you, good point. I had not considered what would happen if one of us is gone.

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Re: Is a Roth conversion a good idea if you are in the 15% tax bracket?

Post by Dead Man Walking » Sat Sep 30, 2017 3:55 pm

delamer wrote:
Sat Sep 30, 2017 2:27 pm
Lots of good reasons to convert noted above.

Another way to look at the conversion issue -- is there any downside to converting? The only one that I can think of is a change in income tax rates that would lower your marginal tax rate.
When I retired 17 years ago, I started making conversions annually under the assumption that tax rates would have to rise because the national debt was increasing astronomically. My assumption may have been wrong. The tax code revisions now being discussed may lower my tax rate. However, my heirs may benefit from my conversions; consequently, I would agree that there isn't much of a downside to conversions.

DMW

Woodshark
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Re: Is a Roth conversion a good idea if you are in the 15% tax bracket?

Post by Woodshark » Sat Sep 30, 2017 3:57 pm

Peter Foley wrote:
Sat Sep 30, 2017 12:39 pm

Like retiredjg, I consider conversion to the top of the 15% bracket a no brainer for most early retirees. Part of the reason is Doc's point, once you start receiving SS Benefits marginal tax rates can increase significantly.

Tax gain harvesting, as you have been doing, is another smart move for those in the 15% bracket.
Upon reading the advice given so far (for which I am greatly appreciative), it brings up another question, or I guess I could rephrase my initial question. In the long term, which would be the better choice.

a. Use the tax free space within the 15% tax bracket to do tax gain harvesting at a zero tax rate.

b. Do Roth conversions and pay the 15% tax?

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Re: Is a Roth conversion a good idea if you are in the 15% tax bracket?

Post by aristotelian » Sat Sep 30, 2017 4:07 pm

There was a thread on this recently. Difference between 0 and 15 % capital gains is more than 15 and 25% marginal tax. But there are advantages to getting money out of traditional and into Roth for tax free growth and flexible withdrawals. Reasonable minds will differ.

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Re: Is a Roth conversion a good idea if you are in the 15% tax bracket?

Post by Peter Foley » Sat Sep 30, 2017 4:09 pm

Woodshark wrote:
Upon reading the advice given so far (for which I am greatly appreciative), it brings up another question, or I guess I could rephrase my initial question. In the long term, which would be the better choice.

a. Use the tax free space within the 15% tax bracket to do tax gain harvesting at a zero tax rate.

b. Do Roth conversions and pay the 15% tax?
It is hard to make a general recommendation for the choices you propose. The answer would depend both on the size of one's portfolio and the ratio of taxable assets to tax deferred assets. Very generally speaking, the higher the ration of tax deferred to taxable the more inclined I would be to do Roth conversions because RMD's might push one into a higher tax bracket. Also if you have so much in taxable that you will likely leave a good portion of it to your heirs, there would be little reason to do tax gain harvesting and Roth conversion again would likely be more beneficial.

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Re: Is a Roth conversion a good idea if you are in the 15% tax bracket?

Post by retiredjg » Sat Sep 30, 2017 4:11 pm

This has been asked before and I do not remember if there is a consensus. You might be able to do a search for previous threads if you can figure out the right words.

My gut feeling, which may not be right, is to do the Roth conversions if you have a large IRA. This will reduce your RMDs. It is something you have control over.

If you don't tax gain harvest and end up using that money for living expenses, the most you will pay at a later date is 15% (the long term cap gain rate). But if you are forced to take money from IRA for your RMDs, that is taxed at higher rates - your ordinary tax rate which historically has always (almost always) been higher than the LTCG rate.

I freely admit this question is very complex and my gut feeling could be very wrong in some or all circumstances. It is a fascinating question though and I'm not sure the answer is entirely financial. Some of it may be emotional.

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Re: Is a Roth conversion a good idea if you are in the 15% tax bracket?

Post by celia » Sat Sep 30, 2017 4:13 pm

Woodshark wrote:
Sat Sep 30, 2017 10:43 am
So does it make any sense to do a Roth conversion if one is already in the 15% bracket and plan to remain so for the foreseeable future, or am I missing something?
It seems you have not yet considered what Social Security and RMDs will both do to your taxes. Why don't you find out now by doing a dummy tax return for the year you are 71 using current tax software. Of course, it will not be accurate, but you will be able to see what is waiting for you down the road while you still have time to change things before then.

Don't forget to bump up the value of your tax-deferred accounts to estimated future values. Your first RMD in the year you turn 70.5 will be for 3.65% of the tax-deferred account values.

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Re: Is a Roth conversion a good idea if you are in the 15% tax bracket?

Post by Watty » Sat Sep 30, 2017 4:24 pm

The answer is "it depends" .

And you need to look at your taxes three ways, as a couple and as if either of you survives the other. When a survivor starts filing single tax returns they can get up to the 25% tax bracket pretty quickly.

As someone else mentioned doing a dummy tax return, including your state taxes is a good way to see what the tax impact might be.

One thing that is preventing me from doing Roth conversions before I start Medicare is that I need to manage my income so that I will still get a subsidy for ACA health insurance so consider if that might be a factor for you.

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Re: Is a Roth conversion a good idea if you are in the 15% tax bracket?

Post by wrongfunds » Sat Sep 30, 2017 5:12 pm

Here's kind of a worst possible scenario. You make not conversions for the next 10 or 12 years, the IRA grows faster than you are using it, SS starts at age 70 and one of you dies at about that time. The survivor could have pension income, SS, a big RMD, and be in a higher bracket just by the fact of being single.

In this worst scenario, the survivor could be pushed into the 28% bracket and will certainly be wishing conversions had been done at 15% many years before. This may not reflect your situation at all. It's just an example of how things could go.
Please tell me why this is NOT a "first wold problem" if it came to that? I am seriously asking why the possible "worst" case scenario equates to having "too much" money.

For me, "worst" case scenario is having to eat the so called "dog food" or running out of retirement money. From reading BH over the years, I have been conditioned to make sure that is the case to avoid at all costs.

I suppose I put more value on NOT paying taxes right now than having to pay *extra taxes* later. I rationalize that by saying to myself "I will be paying "extra taxes* because I will be making "extra money". I have resigned to the fact that the more I make, the more I will be paying in taxes. I am ok with that paradigm.

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Re: Is a Roth conversion a good idea if you are in the 15% tax bracket?

Post by David Jay » Sat Sep 30, 2017 5:26 pm

wrongfunds wrote:
Sat Sep 30, 2017 5:12 pm
Please tell me why this is NOT a "first wold problem" if it came to that?
It certainly is a "nice" problem to have huge RMDs. But why not manage it for optimal results? Especially if you want to leave a legacy to charity or family.
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Re: Is a Roth conversion a good idea if you are in the 15% tax bracket?

Post by retiredjg » Sat Sep 30, 2017 5:50 pm

wrongfunds wrote:
Sat Sep 30, 2017 5:12 pm
Please tell me why this is NOT a "first wold problem" if it came to that? I am seriously asking why the possible "worst" case scenario equates to having "too much" money.
It would be a first world problem. All of this poster's "issues" are probably first world problems. That does not make them evil, just worse for the poster.

I'm just saying that the scenario I presented is worse than another choice the original poster might choose. It was an extreme example, to show what could happen and how measures taken now could ameliorate some of it.

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Re: Is a Roth conversion a good idea if you are in the 15% tax bracket?

Post by Wakefield1 » Sun Oct 01, 2017 12:23 am

If I were in the 15% bracket Roth conversion would be a very good idea.(At least up to the top of that bracket)

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Re: Is a Roth conversion a good idea if you are in the 15% tax bracket?

Post by Woodshark » Sun Oct 01, 2017 8:52 am

Once again thank you for the thoughtful responses. As others have mentioned, I don’t think there is a clear cut answer as everyone’s situation is different. Take the free tax harvest gain now or go ahead and take the 15% tax hit so as to not pay an unknown tax on it in the future.

There certainly is no easy formula but several posts did make me think about things I had not considered. Such as what percentage of our retirement accounts in a Roth. Only 14%. That surprised me. (This is something I should have known). What will it do to the tax rate of a surviving spouse, and did I want to leave any tax free assets to our heirs after we are gone. (still working on these)

I agree we are fortunate and that this is a first world problem, but if we didn’t ask these types of questions, early an often, I doubt that many of us here would be in the situation to ponder these kind of first world questions.

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Re: Is a Roth conversion a good idea if you are in the 15% tax bracket?

Post by Cheyenne » Sun Oct 01, 2017 9:59 am

If I were in the 15% bracket Roth conversion would be a very good idea.(At least up to the top of that bracket)
Would it still be a wise move if distributions were needed to pay the 15% tax?

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Re: Is a Roth conversion a good idea if you are in the 15% tax bracket?

Post by JW-Retired » Sun Oct 01, 2017 10:00 am

Peter Foley wrote:
Sat Sep 30, 2017 12:39 pm
Like retiredjg, I consider conversion to the top of the 15% bracket a no brainer for most early retirees. Part of the reason is Doc's point, once you start receiving SS Benefits marginal tax rates can increase significantly.
Woodshark,
Would you mind explaining something?

You seem to be oblivious to several poster's mentioning that for certain income ranges the 15% & 25% marginal tax rate on other-than-SS-income can effectively almost double once you are receiving Social Security. Is this just because you and wife will not receive any SS? Or is it that, like many folks we encounter, it seems so weird you doubt it could possibly be true?

If the latter, suggest you investigate it some more. It can have a huge impact to Roth conversion decisions.
JW
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Re: Is a Roth conversion a good idea if you are in the 15% tax bracket?

Post by Doc » Sun Oct 01, 2017 10:14 am

Addressing Woodshark,
JW-Retired wrote:
Sun Oct 01, 2017 10:00 am
You [Woodshark] seem to be oblivious to several poster's mentioning that for certain income ranges the 15% & 25% marginal tax rate on other-than-SS-income can effectively almost double once you are receiving Social Security. Is this just because you and wife will not receive any SS? Or is it that, like many folks we encounter, it seems so weird you doubt it could possibly be true?
The other wrinkle that makes this decision so complicated is the option to delay SS and do your ROTH conversions prior to that time.

This is a very individual question and the only way anyone can get to a "good" conclusion for themselves is do a lot of what if's with a good tax preparation program. And then you still have to guess because the tax laws could always change.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

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Re: Is a Roth conversion a good idea if you are in the 15% tax bracket?

Post by bsteiner » Sun Oct 01, 2017 7:59 pm

Doc wrote:
Sat Sep 30, 2017 11:56 am
...
Speculating on future changes in the tax code is not an allowed topic on this board. ...
I heard Cathy Hughes from the Treasury Department speak on Friday. She's been the estate and gift tax attorney advisor in the Office of Tax Policy since 2002. Before that, she was at a major law firm and was chair of the estate and gift tax committee of the American Bar Association's tax section.

She said there's no way to predict what if anything Congress may enact in the way of tax legislation.

She said the same thing when I heard her speak a few years ago.

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Re: Is a Roth conversion a good idea if you are in the 15% tax bracket?

Post by Doc » Sun Oct 01, 2017 8:52 pm

@bsteiner

No comment allowed. :annoyed
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Re: Is a Roth conversion a good idea if you are in the 15% tax bracket?

Post by jmk » Mon Oct 02, 2017 2:08 pm

Doc wrote:
Sat Sep 30, 2017 11:56 am
Under current law you will probably not be in the 15% marginal tax rate when you start taking social security because up to 85% of you SS becomes taxable for each dollar of other income you have - like RMD's. So in the 15% bracket you marginal rate may be 27.75% not 15%. And you qual divs and LTCG marginal rate tax will be 8.5% not zero.
I'm 53 but am going to be in a similar position at 59 when I retire (waiting for SS but getting small state pension at 61). Do any of the retirement calculators like ORP model future RMDs / SS/ Pensions/ taxes/conversions? In my spreadsheet all I've done is use the RMD % formula for my IRA bucket assuming estimated returns--but I'd like to be more accurate than this.

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Re: Is a Roth conversion a good idea if you are in the 15% tax bracket?

Post by jalbert » Mon Oct 02, 2017 3:11 pm

Roth conversions are income for the purpose of calculating ACA tax credits. Current marginal tax rate is higher than tax bracket if you get insurance from an ACA exchange and qualify for an ACA tax credit.
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Re: Is a Roth conversion a good idea if you are in the 15% tax bracket?

Post by Doc » Mon Oct 02, 2017 3:36 pm

jmk wrote:
Mon Oct 02, 2017 2:08 pm
Doc wrote:
Sat Sep 30, 2017 11:56 am
Under current law you will probably not be in the 15% marginal tax rate when you start taking social security because up to 85% of you SS becomes taxable for each dollar of other income you have - like RMD's. So in the 15% bracket you marginal rate may be 27.75% not 15%. And you qual divs and LTCG marginal rate tax will be 8.5% not zero.
I'm 53 but am going to be in a similar position at 59 when I retire (waiting for SS but getting small state pension at 61). Do any of the retirement calculators like ORP model future RMDs / SS/ Pensions/ taxes/conversions? In my spreadsheet all I've done is use the RMD % formula for my IRA bucket assuming estimated returns--but I'd like to be more accurate than this.
Any future value model has to be taken as not much better than a wild ass guess. Just a small difference in the assumed return can make a huge difference when that "error" is compounded for 10 or 20 years. Once upon a time I evaluated proposals for a large industrial firm. We didn't calculate the Internal Rate of Return or Return on Investment. Instead we were give a "hurdle rate" that was dictated by the board of directors. And we only used a ten year time frame. We calculated on the IRR or ROI on the investment but rather the net present value based on discounting the cash flow estimates by the given hurdle rate. That way those cash flows out near the end were discounted to such a large extent that any "error" was greatly diminished. The hurdle rate was 10% after tax. That made any cash flows more than five years out almost insignificant.

Private investors don't like this approach. We've become ingrained on thinking that such and such CD rate is 2% or TBM is now 3% when it used to be 5%. No matter how good your guess as to return rates or future tax rates the compounding is going to make the result meaningless. Better just do your estimates on where you are today. You should know what your pension & SS would be if you were 65 next week based on today's wages. And you know what your RMD would be also be based on the IRA balance today. Decide on that basis if you would do a ROTH conversion this December. Next year do the calculation again based on the newer data. You are making your ROTH conversion decision every year. The is no need to say "what if" you would do ten years from now.

That's just my two cents which if discounted at 10% a year doesn't amount to much. :D
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Re: Is a Roth conversion a good idea if you are in the 15% tax bracket?

Post by IowaFarmBoy » Mon Oct 02, 2017 4:41 pm

Another thing to consider is that at some point in the future you or your spouse is likely to be widowed and the survivor will be be filling as single and your tax bracket could change.

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Re: Is a Roth conversion a good idea if you are in the 15% tax bracket?

Post by Longrunner » Mon Oct 02, 2017 6:13 pm

Upon reading the advice given so far (for which I am greatly appreciative), it brings up another question, or I guess I could rephrase my initial question. In the long term, which would be the better choice.

a. Use the tax free space within the 15% tax bracket to do tax gain harvesting at a zero tax rate.

b. Do Roth conversions and pay the 15% tax?
I initiated a thread recently to get clear on what is meant by the top of the 15% tax bracket. David Grabiner's advice was spot-on: 'look at the marginal rate.' Selling Taxable to Top of Bracket: What does it mean?

I am 66 and mostly retired (occasional consulting contract). I receive some but not full SS benefits (Divorced Spousal Benefits being taken until 70). Although I am in the 0% tax bracket now, I can't avoid the 25% bracket once SS and RMDs kick-in at 70/70.5. Although I prefer to pay no Federal Taxes :beer it's not the best move longer term for me. Makes sense to me to pay a 15% marginal rate now rather than 25% on the same money later on.

I also have a choice of harvesting gains or Roth Conversions. If I was certain that I would never get above a 15% marginal tax rate I would do Roth conversions up to 10% using the logic above (10% tax now vs. 15% later).

My situation is a little different than yours however. It works best for me to gain harvest this year but how I will proceed is the same way as if I undertook Roth Conversions. I sell from my taxable accounts up to the dollar when my Federal Marginal Rate moves beyond 15%.

I am gain harvesting to pay off mortgage debt. I don't think I am going to make much of a dent in my RMDs through Roth Conversions over the next 4 years. I have decided to gain harvest to reduce my mortgage debt and housing costs

To figure out how much LTCG for me to take this year, I updated last year's tax returns in Turbo Tax and then vary Captial Gains to figure out when I reach the top of my 15% marginal rate.

Best, LR

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Re: Is a Roth conversion a good idea if you are in the 15% tax bracket?

Post by jmk » Mon Oct 02, 2017 6:46 pm

Doc wrote:
Mon Oct 02, 2017 3:36 pm
You should know what your pension & SS would be if you were 65 next week based on today's wages. And you know what your RMD would be also be based on the IRA balance today. Decide on that basis if you would do a ROTH conversion this December. Next year do the calculation again based on the newer data. You are making your ROTH conversion decision every year. The is no need to say "what if" you would do ten years from now.
That's a good point. The main reason I want to have an estimate now is to decide between Roth and tIRA, which is dependent on tax rates then. If I'm going to end up 25% instead of 15% then it's Roth all the way; otherwise I can avail myself of IRA in addition to traditional 403b. My apologies if I'm highjacking the original poster's question: I'm in same boat as he but have my own twist. The other rub is that I'm not even sure about SS since I might cut back to part time from ages 55-59.

jmk

Wakefield1
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Re: Is a Roth conversion a good idea if you are in the 15% tax bracket?

Post by Wakefield1 » Mon Oct 02, 2017 6:56 pm

Cheyenne wrote:
Sun Oct 01, 2017 9:59 am
If I were in the 15% bracket Roth conversion would be a very good idea.(At least up to the top of that bracket)
Would it still be a wise move if distributions were needed to pay the 15% tax?
I should have said that I am assuming that other funds from Taxable investments or ongoing income or a checkbook with some xs are used to pay the (estimated tax-don't forget the State!!). The Roth conversion might not be as desirable if proceeds from the "traditional" IRA are used to pay the tax. Someone on the Forum might know how to do the math for a particular set of numbers for a conversion using funds from the IRA to pay the tax. That reduces the total amount you have in all your IRA(s) and Roth IRA(s)combined which you might not want to do. If I convert $10,000. from my IRA to my Roth IRA this year it will cost me about $3075. A couple of checks sent with Estimated Tax tickets to IRS and VA. Dept. of Taxation. (There may be some other ways of paying the tax than the Estimated Tax payments that I use at the time I make the conversion) used by other members of the Forum. (Note: Converting a small amount per year but doing it during each of several years might help to keep you within your present tax bracket "marginal rate".) :happy
-I might ask anyone here: Could there be a problem of possibly a withdrawal from IRA used to pay the tax on IRA conversion being charged a penalty if the person is less than 59 and 1/2 years old? - (I don't believe that penalty is charged on the actual amount converted)

retiredjg
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Re: Is a Roth conversion a good idea if you are in the 15% tax bracket?

Post by retiredjg » Tue Oct 03, 2017 7:21 am

Wakefield1 wrote:
Mon Oct 02, 2017 6:56 pm
-I might ask anyone here: Could there be a problem of possibly a withdrawal from IRA used to pay the tax on IRA conversion being charged a penalty if the person is less than 59 and 1/2 years old? - (I don't believe that penalty is charged on the actual amount converted)
Yes. If money from the IRA is used to pay the tax before age 59.5, that is considered an early withdrawal and the amount paid in tax is subject to the 10% penalty (as well as ordinary taxes). I would not use IRA money to pay the taxes before age 59.5.

After age 59.5, if you take money out of savings or another account to pay the taxes you end up with more in the Roth IRA.

However, if instead you use IRA money to pay the taxes, that's OK too because you are just taking "your money" and giving Uncle Sam "his money" that you are just holding in your IRA. The benefit for doing that is it also reduces the amount subject to RMDs when that time comes.

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Re: Is a Roth conversion a good idea if you are in the 15% tax bracket?

Post by Woodshark » Tue Oct 03, 2017 8:18 am

JW-Retired wrote:
Sun Oct 01, 2017 10:00 am

Woodshark,
Would you mind explaining something?

You seem to be oblivious to several poster's mentioning that for certain income ranges the 15% & 25% marginal tax rate on other-than-SS-income can effectively almost double once you are receiving Social Security. Is this just because you and wife will not receive any SS? Or is it that, like many folks we encounter, it seems so weird you doubt it could possibly be true?

If the latter, suggest you investigate it some more. It can have a huge impact to Roth conversion decisions.
JW
Not oblivious to SS at all. It's just not going to be as large as an influence on our retirement as it is to others. My wife's career was in public school. She has her retirement accounts but was in one of the systems that opted out of Social Security and therefore will receive $0. Due to my choice of career, my SS will be less than most. I have no doubt that I will receive it. But in my case, it will not be an influential amount.
aristotelian wrote:
Sat Sep 30, 2017 4:07 pm
There was a thread on this recently. Difference between 0 and 15 % capital gains is more than 15 and 25% marginal tax. But there are advantages to getting money out of traditional and into Roth for tax free growth and flexible withdrawals. Reasonable minds will differ.
Agreed.

Roth conversions within the 15% bracket are great. But so is tax gain harvesting. If you TGH, you get an immediate relief of 15%. If you do a Roth conversion you pay 15% now, in the hopes that you don't pay 25-28% in the future. Many years later, if or when you do end up in a larger 25-28% tax bracket, you've MIGHT have saved your future self that 10-13% difference by paying early. But most people forget about state taxes. When you do that roth conversion, depending on where you live, you might have to pay state taxes on that amount also. Add 5-9% state tax on top of the 15% federal tax and the rate you might be paying now is getting much closer to the feared 25-28% in the future.

I originally posed the question to see if there was a obvious answer but found out that this is a complex decision. How old are you? How much do you have in retirement? When do you plan on retiring? What age are you taking Social Security? Do you get Social Security? What state tax rate do you currently have? What state do you plan on living in in the future and what is their tax rate? The list goes on.

There is no clear cut answer. Fortunately it does not have to be all or nothing. As others have said, you can plan on looking at it on a yearly basis. Tax gain harvesting in some years and doing Roth conversions in others.

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Re: Is a Roth conversion a good idea if you are in the 15% tax bracket?

Post by Cheyenne » Tue Oct 03, 2017 8:35 am

After age 59.5 ... if ... you use IRA money to pay the taxes, that's OK too because you are just taking "your money" and giving Uncle Sam "his money" that you are just holding in your IRA. The benefit for doing that is it also reduces the amount subject to RMDs when that time comes.
Thanks for answering my question.

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cinghiale
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Re: Is a Roth conversion a good idea if you are in the 15% tax bracket?

Post by cinghiale » Tue Oct 03, 2017 9:06 am

Good topic. Insightful posts. Thanks, all, for the contributions thus far.

I was wondering about the wisdom of the group concerning Roth conversions when there’s a substantial nest egg and there are no legacy concerns, i.e., for a couple with no children. In such a case, there would be a good chance that a couple would never need Roth funds, given the assumption that there was sufficient income until RMDs kick in and then substantial income from the RMDs. Might it be better to tap into IRA funds each year, calculating the amount liquidated and withdrawn to stay within— just within— the 15% tax bracket? That would lower the total amount in tax deferred in the same way that Roth conversions do, and would make the funds available for present-day use.

This assumes that some parent, sibling, friend, or relative who inherits the Roth account would need to take withdrawals immediately upon inheriting it. And that defeats the purpose of having made the conversions and paid the taxes throughout the years.

Thoughts?
-- Cinghiale | | "We don't see things as they are; we see them as we are." Anais Nin | | | "Sometimes the first duty of intelligent men is the restatement of the obvious." George Orwell

Uniballer
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Re: Is a Roth conversion a good idea if you are in the 15% tax bracket?

Post by Uniballer » Tue Oct 03, 2017 9:14 am

IMO Roth money is simply more valuable than taxable: no capital gains on growth. Ever. And it costs the same to convert tIRA money to Roth as it does to put it in taxable. There's just that pesky 5 year waiting period.

Granted, if you knew that you would need the money right away then putting it in taxable might make more sense, but otherwise, no.

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Re: Is a Roth conversion a good idea if you are in the 15% tax bracket?

Post by JW-Retired » Tue Oct 03, 2017 10:04 am

Woodshark wrote:
Tue Oct 03, 2017 8:18 am
Not oblivious to SS at all. It's just not going to be as large as an influence on our retirement as it is to others. My wife's career was in public school. She has her retirement accounts but was in one of the systems that opted out of Social Security and therefore will receive $0. Due to my choice of career, my SS will be less than most. I have no doubt that I will receive it. But in my case, it will not be an influential amount.
Your post question was "Is Roth conversion a good idea......"

In or around the 15% or lowish 25% bracket means whatever this "not influential" amount of SS might be, if you are taking SS it probably will cause some significant portion of the Roth conversions to be effectively taxed 1.5X to 1.85X higher than your nominal bracket rate. IMO, that's not a good idea. So it's usually the best approach to get your Roth conversions all done before you take any SS benefits.
JW
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Re: Is a Roth conversion a good idea if you are in the 15% tax bracket?

Post by Chip » Wed Oct 04, 2017 7:00 am

Woodshark wrote:
Tue Oct 03, 2017 8:18 am
Roth conversions within the 15% bracket are great. But so is tax gain harvesting. If you TGH, you get an immediate relief of 15%. If you do a Roth conversion you pay 15% now, in the hopes that you don't pay 25-28% in the future. Many years later, if or when you do end up in a larger 25-28% tax bracket, you've MIGHT have saved your future self that 10-13% difference by paying early. But most people forget about state taxes.
I don't agree that you get "immediate relief of 15%" by TGH. If you don't sell you pay no tax on those unrealized gains. And if you TGH you will pay state income tax on the gains in most states, usually at ordinary income rates.
When you do that roth conversion, depending on where you live, you might have to pay state taxes on that amount also. Add 5-9% state tax on top of the 15% federal tax and the rate you might be paying now is getting much closer to the feared 25-28% in the future.
Yes, but the future tax rate will also include state taxes, so 25% PLUS the 5-9% state taxes you mentioned.

I'm not against TGH, but I think preferring it to Roth conversions makes the most sense when you are relatively certain you're going to have to sell those assets in a few years, AND that you will likely not be in the 15% bracket at that time. Another good reason to TGH is to clean up/simplify a portfolio at low tax cost.

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Re: Is a Roth conversion a good idea if you are in the 15% tax bracket?

Post by Doc » Wed Oct 04, 2017 8:00 am

Woodshark wrote:
Tue Oct 03, 2017 8:18 am
Roth conversions within the 15% bracket are great. But so is tax gain harvesting.
Depending on your individual situation it is sometimes possible to save on taxes if you can "blast through" the SS phaseout range and reduce your LTCG rate back to zero. This may allow tax loss harvesting in later years.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

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