Lazareth wrote: ↑
Tue Jul 09, 2019 11:46 am
[*]Tax efficient retirement income management can done without IRA to Roth IRA conversions.
[*]Both methods give much the same disposable income for any given model; i.e. there is no particular economic advantage to doing conversions.
[/list]Conversions move tax payments up to the front of the retirement plan while the non conversion method spreads the tax-deferred withdrawals and thus income taxes across retirement. In most cases, conversions will pay less total taxes than non-conversions, an irrelevant consideration since the goal is to maximize disposable income.
In light of this, that “there is no particular economic advantage” I ask this group for reason they choose to convert, to pay more taxes now, rather than smooth out the taxes over the draw down period?
I do not understand the full context of this particular statement, but it is a highly individual matter, depending on many circumstances.
I can say that about $30K in carefully titrated Roth conversions do make sense for me, this year, at age 65, for a variety of reasons. Roth conversions will not make sense in 2020 (or possibly a very small amount, a few thousand, at most.)
I am mindful of many things in saying that (taxable SS, keeping my qualified divs taxed at 0%, Medicare IRMAA, senior citizen property tax reduction income limits, charitable giving plans and deduction lumping and the 30% limit on annual deductions for FMV of appreciated securities, my solar credit carryforward, the way my state treats IRA income, foreign tax credit, etc.) I am sure that i-ORP can´t possibly take into account everything that *I* do
My current marginal tax bracket has room for almost 30K in Roth conversions in 2019 without leaving the effective 12% marginal tax bracket. I do have to be mindful of lots of things, but I am pretty confident it will work this year.
Towards the end of this year, I will reach the point at which it makes sense to file for my widow´s SS benefits. (Note that widow´s benefits do not increase after FRA, so no point to waiting any longer.) So in 2020 I will be facing a very different situation--more than just a few thousand in Roth conversions could push me into the infamous SS ¨tax hump/torpedo¨ zone. My effective marginal tax rate will go very quickly from 10% to 49% in 2020.
After that who knows? I am taking it one year at a time.
My late husband and I did a significant amount of opportunistic Roth conversions before his death. (Our self-employment income had peaks and valleys that made this make sense for us.) As a result of those Roth conversions and his decision to invest relatively aggressively in the Roths during his life time, I wound up with almost equal amounts of Roth and tax deferred in my retirement accounts when he died six years ago. In the year of his death, I did more Roth conversions (it was my last year at MFJ rates and I also made signficant deduction lumping charitable donations to DAFs that year, intending to use them in his memory.) The next five years, I had an ACA exchange plan covering myself and my young adult daughter and it did not make sense to do Roth conversions. This year, 2019, seems to be another good opportunity. Next year likely won´t be--but who knows? Something unexpected could happen. (Tax law changes can´t be discussed here, but the possibility of sudden windfall taxable income also has to be taken into account, very large medical expenses, etc.)
One year at a time.
And I highly recommend the NBER´s TaxSimulator model
for making projections free online. It is not perfect but pretty darn good for my purposes. It will deal with state as well as federal tax projections. I also plan to buy HR Block tax software on the Black Friday sale in late November to do fine tuning at that point.