How to figure out taxable income by Dec. 31 for Roth?

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peagreenboat
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How to figure out taxable income by Dec. 31 for Roth?

Post by peagreenboat » Sat Feb 23, 2019 6:28 pm

I am considering doing some Roth conversions over the next several years. Maybe this is a dumb question, but how do you figure out what your pre-conversion taxable income is going to be before the end of the calendar year so that you can Roth convert up to the top of your current tax bracket without going over into the next-higher tax bracket? Unlike the April 15 deadline to make Roth CONTRIBUTIONS credited to the previous tax year, you have to make Roth CONVERSIONS by Dec. 31 of the current tax year, but at the same time you don’t receive tax forms (1099s, etc.) until late January or February. Without those forms, how can you figure out how much you can convert to Roth and still stay in your existing tax bracket? Thanks for any guidance.

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FiveK
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Re: How to figure out taxable income by Dec. 31 for Roth?

Post by FiveK » Sat Feb 23, 2019 6:40 pm

Your brokerage accounts will show transactions during the year, particularly in December. Same thing for W-2 income: you get pay stubs with current and YTD values.

One thing you won't know until receiving your brokerage 1099-DIV is what fraction of the dividends were qualified. For a first approximation, you could use whatever the fraction was last year for the funds of interest.

Entering those numbers into your own spreadsheet, or some commercial software's "next year" version, should give you a good idea. If you miss by a little, then the lost opportunity or undesired extra tax will also be only a little.

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Re: How to figure out taxable income by Dec. 31 for Roth?

Post by indexfundfan » Sat Feb 23, 2019 6:43 pm

At best what you can get is an estimate of your income.
An early version of the tax software is usually available by mid December. Manually gather the dividend information from the brokerages' websites and enter into the tax software to get your income estimate.
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02nz
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Re: How to figure out taxable income by Dec. 31 for Roth?

Post by 02nz » Sat Feb 23, 2019 7:16 pm

Taxcaster is useful for this. https://turbotax.intuit.com/tax-tools/c ... taxcaster/

Later in the year it will be able to make estimates for 2019 taxes.

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peagreenboat
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Re: How to figure out taxable income by Dec. 31 for Roth?

Post by peagreenboat » Sat Feb 23, 2019 8:14 pm

Thank you, FiveK, indexfundfan, and 02nz for your very helpful replies.

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Re: How to figure out taxable income by Dec. 31 for Roth?

Post by livesoft » Sat Feb 23, 2019 8:30 pm

You practice figuring it out the year before and the year before that.

Some gotchas seen in the past:

1. Don't forget to add the foreign taxes paid by your mutual funds / ETFs to your income. It won't show up on your statements before the end of the year.

2. Don't forget to add distributions declared in December, but paid later in the first week of January.
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Re: How to figure out taxable income by Dec. 31 for Roth?

Post by Epsilon Delta » Sun Feb 24, 2019 12:09 am

Also, nothing particularly horrible happens if you over or under estimate by a few hundred or a few thousand. If your actual income is higher than estimated you convert a little bit in a higher tax bracket. If your income is lower than estimated you "waste" some of the lower bracket and may end up withdrawing at a higher rate later.

So do your best estimate, and perhaps figure a margin of error and whether you'd prefer to be high or low. If you are certain that some later withdrawals will be at the higher rate then you want to convert more, if you are certain you will never make withdrawals in the higher bracket then convert less.

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Re: How to figure out taxable income by Dec. 31 for Roth?

Post by retiredjg » Sun Feb 24, 2019 8:49 am

peagreenboat wrote:
Sat Feb 23, 2019 6:28 pm
I am considering doing some Roth conversions over the next several years. Maybe this is a dumb question, but how do you figure out what your pre-conversion taxable income is going to be before the end of the calendar year so that you can Roth convert up to the top of your current tax bracket without going over into the next-higher tax bracket? Unlike the April 15 deadline to make Roth CONTRIBUTIONS credited to the previous tax year, you have to make Roth CONVERSIONS by Dec. 31 of the current tax year, but at the same time you don’t receive tax forms (1099s, etc.) until late January or February. Without those forms, how can you figure out how much you can convert to Roth and still stay in your existing tax bracket? Thanks for any guidance.
I looked at some of your older posts. Apparently you are in the neighborhood of 68 or 69 and have been retired now for several years. So you should have a very good idea of what your income sources are.

If you are on SS, that part should be easy. If you have a pension, that should be easy. If you are taking money from an IRA or 401k type plan, you should be able to look up each withdrawal you have made during the year. If you have taxable investments, the expected dividends or capital gains distributions could be tricky. Is this your problem?

By late November or early December, you should be able to add those things up and make a reasonable guess about your income.

I'l like to suggest that "top of your current tax bracket" might not be an optimal target. It seems likely you are on Medicare. Are you familiar with the IRMAA limits? If you go over the IRMAA limits by even $1, your Medicare premiums go up two years later. If you are married, they go up for both of you.

In my case, the IRMAA limit is less than the top of my current tax bracket (by maybe $13k or so). So going to the top of my current tax bracket causes me to pay an extra $600 or so in Medicare Part B premiums 2 years later. For me, it is not worth it.

For this reason, I always leave a buffer of a couple thousand dollars below the IRMAA limit in case I forgot some income or made a mistake. Yes, I'm converting a little less than I could, but for me it's better than going a few dollars over.

One other thing....if I do my calculations and Roth conversion in early December and find out later that I suddenly need $3k or whatever, I just take that from Roth IRA so that it does not increase my taxable income for the year.

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Re: How to figure out taxable income by Dec. 31 for Roth?

Post by Earl Lemongrab » Sun Feb 24, 2019 5:26 pm

Which tax bracket? If it's the 12%, and you have significant stock fund holdings in taxable, be aware that the "real" tax bracket might be higher. That's because the 0% bracket for qualified dividends almost coincides with the 12% ordinary income bracket. So adding to the latter might bump Qdivs out of 0% into 15%, giving an effective bracket of 27%.

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Re: How to figure out taxable income by Dec. 31 for Roth?

Post by grabiner » Sun Feb 24, 2019 8:43 pm

FiveK wrote:
Sat Feb 23, 2019 6:40 pm
Your brokerage accounts will show transactions during the year, particularly in December. Same thing for W-2 income: you get pay stubs with current and YTD values.

One thing you won't know until receiving your brokerage 1099-DIV is what fraction of the dividends were qualified. For a first approximation, you could use whatever the fraction was last year for the funds of interest.
Similarly, if you have a foreign stock fund, you won't know how much was withheld for foreign tax. If 7% was withheld, you might have $9300 in dividends paid to your brokerage account, but $10,000 in taxable income.
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Re: How to figure out taxable income by Dec. 31 for Roth?

Post by grabiner » Sun Feb 24, 2019 8:45 pm

Earl Lemongrab wrote:
Sun Feb 24, 2019 5:26 pm
Which tax bracket? If it's the 12%, and you have significant stock fund holdings in taxable, be aware that the "real" tax bracket might be higher. That's because the 0% bracket for qualified dividends almost coincides with the 12% ordinary income bracket. So adding to the latter might bump Qdivs out of 0% into 15%, giving an effective bracket of 27%.
Therefore, in this situation, you want to limit your total taxable income to the top of the 12% bracket, not just your ordinary taxable income; you don't need to estimate the qualified dividends.

If you are converting to the top of the 22% or 24% tax bracket, your qualified dividends will be taxed at 15% in any case, so you can ignore them in determining the taxable amount.
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Re: How to figure out taxable income by Dec. 31 for Roth?

Post by JediMisty » Sun Feb 24, 2019 8:56 pm

livesoft wrote:
Sat Feb 23, 2019 8:30 pm
You practice figuring it out the year before and the year before that.

Some gotchas seen in the past:

1. Don't forget to add the foreign taxes paid by your mutual funds / ETFs to your income. It won't show up on your statements before the end of the year.

2. Don't forget to add distributions declared in December, but paid later in the first week of January.
#3 got me this year. How do I find dividends that are declared in December but paid in January? My tax statement showed more income for VBTLX than I downloaded in my Vanguard account. I checked it out and saw that while the monthly dividend is paid in January it counts for the previous year. 95%.if my bonds are in tax deferred, but I was close to the Roth income limit for contributions for 2018, so tried my best to determine all my dividends and capital gains

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Re: How to figure out taxable income by Dec. 31 for Roth?

Post by Earl Lemongrab » Sun Feb 24, 2019 10:17 pm

grabiner wrote:
Sun Feb 24, 2019 8:45 pm
Earl Lemongrab wrote:
Sun Feb 24, 2019 5:26 pm
Which tax bracket? If it's the 12%, and you have significant stock fund holdings in taxable, be aware that the "real" tax bracket might be higher. That's because the 0% bracket for qualified dividends almost coincides with the 12% ordinary income bracket. So adding to the latter might bump Qdivs out of 0% into 15%, giving an effective bracket of 27%.
Therefore, in this situation, you want to limit your total taxable income to the top of the 12% bracket, not just your ordinary taxable income; you don't need to estimate the qualified dividends.
Correct, so keep that in mind for capital gains as well.

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peagreenboat
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Re: How to figure out taxable income by Dec. 31 for Roth?

Post by peagreenboat » Mon Feb 25, 2019 2:11 pm

Thank you, everyone, for all of this information! It seems that everything related to Roth conversions is incredibly complex. Why can't they have made the Roth conversion deadline April 15, like the Roth contribution deadline? That simple thing would make a big difference in the ease (or NOT) with which conversions can be most efficiently done. All these hoops to jump through -- Annoying! Thanks again to everyone who commented on my question.

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Re: How to figure out taxable income by Dec. 31 for Roth?

Post by The Wizard » Mon Feb 25, 2019 2:52 pm

peagreenboat wrote:
Sat Feb 23, 2019 6:28 pm
I am considering doing some Roth conversions over the next several years. Maybe this is a dumb question, but how do you figure out what your pre-conversion taxable income is going to be before the end of the calendar year so that you can Roth convert up to the top of your current tax bracket without going over into the next-higher tax bracket?
First of all, the "converting to top of tax bracket" thing is a poor concept to embrace.
What you need to embrace is your projected AGI and Taxable Income projections for your early 70s, when both SS and RMDs are coming in.

For instance, let's say you're in your mid to late 60s (as I am) and project your age 71 Taxable Income to be $110,000, filing Single.
(Double everything for MFJ.)
That puts you in the 24% marginal bracket for 2019, for taxable income from around $84k to $160k.

Now let's say your estimated Taxable Income in early December this year comes to $81,000. That gives you a whopping $3000 of Roth conversion headroom to top of 22% bracket, which is very little.
At age 67, you should be Roth converting enough to get your Taxable Income up to at least $105,000.

Conversely, let's say your Taxable Income estimate for this year was $86,000, putting you just into the 24% marginal bracket. So do you Roth convert $73,000, putting you up close to the top of the 24% bracket?
Heck no!
You still convert enough to get up close to that $110k age 71 projected Taxable Income bogey...
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Re: How to figure out taxable income by Dec. 31 for Roth?

Post by RetiredCSProf » Mon Feb 25, 2019 10:49 pm

retiredjg wrote:
Sun Feb 24, 2019 8:49 am
I'l like to suggest that "top of your current tax bracket" might not be an optimal target. It seems likely you are on Medicare. Are you familiar with the IRMAA limits? If you go over the IRMAA limits by even $1, your Medicare premiums go up two years later. If you are married, they go up for both of you.

In my case, the IRMAA limit is less than the top of my current tax bracket (by maybe $13k or so). So going to the top of my current tax bracket causes me to pay an extra $600 or so in Medicare Part B premiums 2 years later. For me, it is not worth it.

For this reason, I always leave a buffer of a couple thousand dollars below the IRMAA limit in case I forgot some income or made a mistake. Yes, I'm converting a little less than I could, but for me it's better than going a few dollars over.
+1

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Re: How to figure out taxable income by Dec. 31 for Roth?

Post by celia » Tue Feb 26, 2019 2:51 am

What we’re saying is instead of trying to fill to the top of your current tax bracket, take the long range view and estimate what your age 71 and age 72 taxes would be while taking SS and RMDs.

It doesn’t make financial sense to stay in the 12% tax bracket until you turn 71, then be in the 24% tax bracket (or whatever your post-age-70 bracket is) for the rest of your life. Many find that leveling their taxable income throughout their remaining years is better than having a few years of a low tax bracket followed by many years of a high bracket. And for those who are married, once you or your spouse dies, the survivor will have to file as Single where the room in each tax bracket is half of what it is for MFJ.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

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Re: How to figure out taxable income by Dec. 31 for Roth?

Post by Namashkar » Tue Feb 26, 2019 2:12 pm

celia wrote:
Tue Feb 26, 2019 2:51 am
What we’re saying is instead of trying to fill to the top of your current tax bracket, take the long range view and estimate what your age 71 and age 72 taxes would be while taking SS and RMDs.

It doesn’t make financial sense to stay in the 12% tax bracket until you turn 71, then be in the 24% tax bracket (or whatever your post-age-70 bracket is) for the rest of your life. Many find that leveling their taxable income throughout their remaining years is better than having a few years of a low tax bracket followed by many years of a high bracket. And for those who are married, once you or your spouse dies, the survivor will have to file as Single where the room in each tax bracket is half of what it is for MFJ.
Absolutely. The long term planning is very critical for married couples.

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Re: How to figure out taxable income by Dec. 31 for Roth?

Post by classicjazzfan » Wed Feb 27, 2019 11:09 pm

The Wizard wrote:
Mon Feb 25, 2019 2:52 pm

First of all, the "converting to top of tax bracket" thing is a poor concept to embrace.
What you need to embrace is your projected AGI and Taxable Income projections for your early 70s, when both SS and RMDs are coming in.
Wizard:

Could you please explain the rationale for this strategy? Is it to pay “extra taxes” on Roth conversions larger than one might otherwise make between say ages 65 and 70, even if it means going into a higher tax bracket, in order to have a smaller balance remaining in tax-deferred accounts once SS and RMDs begin and thus save on income taxes thereafter? In other words, is your point that if one did not follow your recommended strategy and converted only enough to stay within the 12% bracket so as not to pay extra taxes “unnecessarily,” one would risk having a larger tax-deferred balance after age 70 and thus even higher income taxes than would have been incurred by following your strategy? Thank you.

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Re: How to figure out taxable income by Dec. 31 for Roth?

Post by classicjazzfan » Wed Feb 27, 2019 11:10 pm

celia wrote:
Tue Feb 26, 2019 2:51 am
What we’re saying is instead of trying to fill to the top of your current tax bracket, take the long range view and estimate what your age 71 and age 72 taxes would be while taking SS and RMDs. . . . Many find that leveling their taxable income throughout their remaining years is better than having a few years of a low tax bracket followed by many years of a high bracket. . . . .
Celia:

I’d like to ask you the same questions that I asked Wizard about a post he made further up in this thread that was similar to yours:

Could you please explain the rationale for this strategy? Is it to pay “extra taxes” on Roth conversions larger than one might otherwise make between say ages 65 and 70, even if it means going into a higher tax bracket, in order to have a smaller balance remaining in tax-deferred accounts once SS and RMDs begin and thus save on income taxes thereafter? In other words, is your point that if one did not follow your recommended strategy and converted only enough to stay within the 12% bracket so as not to pay extra taxes “unnecessarily,” one would risk having a larger tax-deferred balance after age 70 and thus even higher income taxes than would have been incurred by following your strategy? Thank you.

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Re: How to figure out taxable income by Dec. 31 for Roth?

Post by 123 » Wed Feb 27, 2019 11:32 pm

Once in awhile I've had a discrepancy between the income earned for the year on our December statement and the 1099 issued by the brokerage. In the most recent incident the brokerage statement did not include interest income that was earned on a treasury bill (with a subsequent January maturity) that had been sold in December (settlement before 12/31). So usually the ytd income totals on brokerage are reliable but I guess there may be valid reasons why it takes so long to get some 1099's.
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Re: How to figure out taxable income by Dec. 31 for Roth?

Post by sawdust60 » Thu Feb 28, 2019 3:45 am

classicjazzfan wrote:
Wed Feb 27, 2019 11:10 pm
...
Could you please explain the rationale for this strategy? Is it to pay “extra taxes” on Roth conversions larger than one might otherwise make between say ages 65 and 70, even if it means going into a higher tax bracket...
You pay tax now or pay tax later. Your analysis will show if it makes sense to do Roth conversions at 22% or higher rates. This is not a one-size, rule-of-thumb. Look at your projected income.

If you're already taking SS, you might find that any conversion incurs additional tax at 22% and higher when it causes more SS to become taxable.
Marginal tax rates are no longer 10%, 12%, 22%. Up to 85% of SS income becomes taxable, based on non-SS income. With SS, marginal rates for non-SS income can often be 15%, 18.5%, 22.2%, 40.7%.

If your only income is SS, none would be taxable, and you would convert perhaps 20k, to fill up the 0% bracket where AGI = Deductions. But you quickly get into the range where each $1 of non-SS income causes $0.85 of SS to become taxable. 10% x 1.85 = 18.5%; 12% x 1.85 = 22.2%

Some prior posts include tables/graphs similar to wiki on Taxation of Social Security Benefits:
MFJ, 62k SS -- large amount of SS shows 9k at 40.7% 'the hump'
MFJ graphs, multiple SS amounts -- lower amount of SS can provide significant 12% range
Single, age 60, 900k IRA, 39k SS -- with links to i-orp report and IRMAA
Considerations for Roth at 22% and 24%

Also understand the potential for your SS + pension + RMD + other income + tax exempt interest income to result in IRMAA penalty. Sometimes Roth conversions can help in avoiding IRMAA or the 40.7% hump.

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Re: How to figure out taxable income by Dec. 31 for Roth?

Post by classicjazzfan » Thu Feb 28, 2019 5:59 pm

sawdust60 wrote:
Thu Feb 28, 2019 3:45 am
classicjazzfan wrote:
Wed Feb 27, 2019 11:10 pm
...
Could you please explain the rationale for this strategy? Is it to pay “extra taxes” on Roth conversions larger than one might otherwise make between say ages 65 and 70, even if it means going into a higher tax bracket...
You pay tax now or pay tax later. Your analysis will show if it makes sense to do Roth conversions at 22% or higher rates. This is not a one-size, rule-of-thumb. Look at your projected income.

If you're already taking SS, you might find that any conversion incurs additional tax at 22% and higher when it causes more SS to become taxable.
Marginal tax rates are no longer 10%, 12%, 22%. Up to 85% of SS income becomes taxable, based on non-SS income. With SS, marginal rates for non-SS income can often be 15%, 18.5%, 22.2%, 40.7%.

If your only income is SS, none would be taxable, and you would convert perhaps 20k, to fill up the 0% bracket where AGI = Deductions. But you quickly get into the range where each $1 of non-SS income causes $0.85 of SS to become taxable. 10% x 1.85 = 18.5%; 12% x 1.85 = 22.2%

Some prior posts include tables/graphs similar to wiki on Taxation of Social Security Benefits:
MFJ, 62k SS -- large amount of SS shows 9k at 40.7% 'the hump'
MFJ graphs, multiple SS amounts -- lower amount of SS can provide significant 12% range
Single, age 60, 900k IRA, 39k SS -- with links to i-orp report and IRMAA
Considerations for Roth at 22% and 24%

Also understand the potential for your SS + pension + RMD + other income + tax exempt interest income to result in IRMAA penalty. Sometimes Roth conversions can help in avoiding IRMAA or the 40.7% hump.
sawdust60:

Thank you for your reply and the links to your informative past posts. I had read them previously but will now give them greater scrutiny since they show well that there are many moving parts to be considered.

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Re: How to figure out taxable income by Dec. 31 for Roth?

Post by celia » Sat Mar 02, 2019 5:23 am

classicjazzfan wrote:
Wed Feb 27, 2019 11:10 pm
Could you please explain the rationale for this strategy? Is it to pay “extra taxes” on Roth conversions larger than one might otherwise make between say ages 65 and 70, even if it means going into a higher tax bracket, in order to have a smaller balance remaining in tax-deferred accounts once SS and RMDs begin and thus save on income taxes thereafter? In other words, is your point that if one did not follow your recommended strategy and converted only enough to stay within the 12% bracket so as not to pay extra taxes “unnecessarily,” one would risk having a larger tax-deferred balance after age 70 and thus even higher income taxes than would have been incurred by following your strategy? Thank you.
I’m not recommending a strategy. I’m recommending you do an analysis by projecting your future income and taxes. Some people will be fine converting smaller amounts in early retirement whereas others with larger TIRAs will be shocked at their taxes when they are 71. At that point, it’s almost impossible to change anything since they MUST take RMDs that are larger than they expected. In fact, the TIRA (and yearly RMDs) will keep growing until the RMDs are larger than the annual growth of the account. This usually happens in your 80s.

But your above reasoning will apply to those who have large TIRAs and didn’t plan ahead. See this post showing how your cumulative taxes could be less by doing large conversions before RMD age.

Another important reason why married couples should convert early is that after one of them dies, the survivor will still have to take the total RMDs as if both were living, but will have to file as Single. The space in each tax bracket for Singles is half of what MFJ gets. So the tax bracket for the survivor is likely to jump up to another level.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

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Re: How to figure out taxable income by Dec. 31 for Roth?

Post by classicjazzfan » Sat Mar 02, 2019 1:25 pm

celia wrote:
Sat Mar 02, 2019 5:23 am
classicjazzfan wrote:
Wed Feb 27, 2019 11:10 pm
Could you please explain the rationale for this strategy? Is it to pay “extra taxes” on Roth conversions larger than one might otherwise make between say ages 65 and 70, even if it means going into a higher tax bracket, in order to have a smaller balance remaining in tax-deferred accounts once SS and RMDs begin and thus save on income taxes thereafter? In other words, is your point that if one did not follow your recommended strategy and converted only enough to stay within the 12% bracket so as not to pay extra taxes “unnecessarily,” one would risk having a larger tax-deferred balance after age 70 and thus even higher income taxes than would have been incurred by following your strategy? Thank you.
I’m not recommending a strategy. I’m recommending you do an analysis by projecting your future income and taxes. Some people will be fine converting smaller amounts in early retirement whereas others with larger TIRAs will be shocked at their taxes when they are 71. At that point, it’s almost impossible to change anything since they MUST take RMDs that are larger than they expected. In fact, the TIRA (and yearly RMDs) will keep growing until the RMDs are larger than the annual growth of the account. This usually happens in your 80s.

But your above reasoning will apply to those who have large TIRAs and didn’t plan ahead. See this post showing how your cumulative taxes could be less by doing large conversions before RMD age.

Another important reason why married couples should convert early is that after one of them dies, the survivor will still have to take the total RMDs as if both were living, but will have to file as Single. The space in each tax bracket for Singles is half of what MFJ gets. So the tax bracket for the survivor is likely to jump up to another level.
Celia:

Your lucid explanation of this matter reaffirms what I already know and have been planning for, and I appreciate your confirmation that I'm fully on the right track. I just wanted to be sure that there wasn't some other factor that I've overlooked. Thank you.

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Re: How to figure out taxable income by Dec. 31 for Roth?

Post by celia » Sat Mar 02, 2019 2:32 pm

classicjazzfan wrote:
Sat Mar 02, 2019 1:25 pm
Your lucid explanation of this matter reaffirms what I already know and have been planning for, and I appreciate your confirmation that I'm fully on the right track. I just wanted to be sure that there wasn't some other factor that I've overlooked. Thank you.
Also note that you need to be aware of the Medicare Premiums: Rules For Higher-Income Beneficiaries.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

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Re: How to figure out taxable income by Dec. 31 for Roth?

Post by classicjazzfan » Sat Mar 02, 2019 5:38 pm

celia wrote:
Sat Mar 02, 2019 2:32 pm
classicjazzfan wrote:
Sat Mar 02, 2019 1:25 pm
Your lucid explanation of this matter reaffirms what I already know and have been planning for, and I appreciate your confirmation that I'm fully on the right track. I just wanted to be sure that there wasn't some other factor that I've overlooked. Thank you.
Also note that you need to be aware of the Medicare Premiums: Rules For Higher-Income Beneficiaries.
Celia:

Thank you for the SSA document. I'm well aware of the pitfalls of IRMAA. As a couple, my wife and I are likely to avoid them; but whichever one of us survives the other may not be so fortunate, which further underscores the importance of the kind of advance planning regarding Roth conversions and taxes that you have explained so well in your various posts. The time that you (and other members of our Bogleheads family) have taken to share your knowledge with those of us still learning is greatly appreciated.

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