Help me plan my Roth conversions

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Topic Author
prairieman
Posts: 362
Joined: Thu Mar 01, 2018 3:17 pm

Help me plan my Roth conversions

Post by prairieman »

We are in our early sixties. I am no expert in either taxes or investing but am a Boglehead by habit - simple low-cost portfolio, 60/40 equities/bonds all at Fidelity and Vanguard, mostly index funds.
We have about 60K in income from pension, early soc security, and RMD from an inherited IRA account. I took early soc security because I wanted to spread our tax burden out and because I have health issue that could shorten my life. Our investments provide capital gains and dividends that bring our income up to around 100-120K, which is what we live on in our area in the Midwest. We have no debt and so this is plenty.

So.... it occurs to me that our taxes could well rise over time if our IRA accounts grow and we need to take RMDs at 70. This, I want to use the remaining years in our sixties to convert part of our IRAs to Roth IRAs.

I don’t feel I know enough about this subject to select an amount to convert each year. What are the primary factors I need to consider? Is there a good website that provides advice on how much to convert each year?
“As long as the roots are not severed, all is well.” Chauncey Gardner
interwebopinion
Posts: 88
Joined: Thu Aug 13, 2020 6:21 pm

Re: Help me plan my Roth conversions

Post by interwebopinion »

There are two factors to consider:

* How much you can afford to pay in taxes on the conversion amounts per year given current cash flow
* How much savings this brings in taxes when withdrawing on the back end

Without more data, it's hard to tell if this would be a net benefit. You'll have to break out an excel spreadsheet and model it out. My gut feel is that given how close you are to RMD time, the net tax savings might not be enough to be worth it.
User avatar
TomatoTomahto
Posts: 11329
Joined: Mon Apr 11, 2011 1:48 pm

Re: Help me plan my Roth conversions

Post by TomatoTomahto »

You won’t have to take RMDs until 72, so that buys you 2 additional years of conversions :D
I get the FI part but not the RE part of FIRE.
aristotelian
Posts: 8270
Joined: Wed Jan 11, 2017 8:05 pm

Re: Help me plan my Roth conversions

Post by aristotelian »

What is your tax bracket and AGI? I would consider freezing SS to give you more room to do Roth conversions now but it's hard to say without more details.
retiredjg
Posts: 42258
Joined: Thu Jan 10, 2008 12:56 pm

Re: Help me plan my Roth conversions

Post by retiredjg »

The primary things to watch are:

1. IRMAA starting at age 63. Your AGI (adjusted gross income) at age 63 will determine what you pay for Medicare at 65. Your AGI at 64 determines what you pay for Medicare at 66. And so on. The point here is that this is a number you want to start watching the year in which one of you becomes 63.

Some people do not want to pay any extra for their Medicare coverage and will stay under those limits (the lowest being about $176k for a couple). If you are one of those people, you would want your income including the Roth conversion to be under this number.

Some people see their RMDs are going to be so large that larger conversions are needed to avoid that. They are willing to pay a higher premium for Medicare for some years in order to achieve that.


2. If you use the ACA for health insurance, you may lose subsidies if you make large conversions.


3. NIIT (net investment income tax) - if your Income goes over $250k for a couple, you'll have to pay 3.8% extra tax on investment income. I assume that includes Roth conversions although I've never looked at how this is calculated.

Those are the things that come to my mind - not a lot of info. Just enough to get you started on your own research.
Hockey10
Posts: 859
Joined: Wed Aug 24, 2016 12:20 pm
Location: Philadelphia suburbs

Re: Help me plan my Roth conversions

Post by Hockey10 »

cas
Posts: 962
Joined: Wed Apr 26, 2017 8:41 am

Re: Help me plan my Roth conversions

Post by cas »

Note that the usual progression of tax brackets isn't overly relevant to the OP. OP has a complicated marginal tax graph going on due to the interaction of ordinary income, the phase-in of social security taxation, and the phase-out of the 0% special tax bracket for long term capital gains and qualified dividends (LTCG/QD). (And the phase-in of the Net Investment Income Tax (NIIT) once a certain high level of Roth conversion income is added.)

There is enough non-SS income that the social security taxation is probably already all the way phased in (to the max 85% of social security amount). So that part of the complication is probably already water under the bridge that doesn't need to be considered.

But there may be a fairly significant LTCG/QD "lump in the python" that may cause unexpectedly high marginal tax rates at certain levels of Roth conversion.

OP? Does that 60K in "pension, early soc security, and RMD" that you mention include your whole SS amount or just the 85% (max) that is taxable? Or ... It is a bit more of a personal question (and I don't like asking those), but it would probably be useful to know how much the whole SS income amount for the year is.

And how much of the "capital gains and dividends" is long term capital gains and qualified dividends?

And will either or both of you be 63 years old or older by the end of the year? If so, IRMAA (Medicare premium surcharges) become a consideration.
Topic Author
prairieman
Posts: 362
Joined: Thu Mar 01, 2018 3:17 pm

Re: Help me plan my Roth conversions

Post by prairieman »

We have been in the 22% tax bracket and currently have room before we get to the 24% tax bracket. I hadn’t really studied the 35% tax bracket but don’t think we would get there when RMDs begin kicking in... assuming brackets stay approximately the same.

I don’t know what the IRRMA Cliff is - or how much it costs per year when we reach Medicare age.

I really don’t know what to think anymore. Are Roth conversions only worth it if you’re in the 12% range and think you’ll get to the 22% range with RMDs or maybe if you think you could get moved from 24% into the 35% range? Neither is likely for us. I would like to stay in the 22% range though and avoid 24%, but won’t manage it when my wife claims her SS and when RMDs click in - unless we work on transferring IRA money into Roth.

Overall, we do not know what will happen moving forward, but I like the idea of evening out our income through time in case taxes increase in whatever tax bracket we move into.
“As long as the roots are not severed, all is well.” Chauncey Gardner
retiredjg
Posts: 42258
Joined: Thu Jan 10, 2008 12:56 pm

Re: Help me plan my Roth conversions

Post by retiredjg »

In that case, converting up to near the top of the 22% bracket for now and up to the IRMAA limit (just under the 22% bracket) in and after the years that one of you reaches 63 is a model to look at.

Going into the first IRMAA tier costs about $700 per person per year in higher Medicare costs. Higher IRMAA tiers cost more.

If you have a huge tax-deferred account, it could be worth it to go that far (or farther). If not, it is a limit to watch - it is a cliff, not a phase in. You don't want to stumble into it by a few dollars accidentally.

https://www.medicare.gov/your-medicare- ... rt-b-costs
cas
Posts: 962
Joined: Wed Apr 26, 2017 8:41 am

Re: Help me plan my Roth conversions

Post by cas »

retiredjg wrote: Thu Nov 19, 2020 6:26 pm In that case, converting up to near the top of the 22% bracket for now and up to the IRMAA limit (just under the 22% bracket) in and after the years that one of you reaches 63 is a model to look at.
It is true that OP's 120K(ish) AGI puts him/her in the "22% bracket" if you just want to look at total AGI.

But (short version), 22% isn't the rate that OP would be paying on a Roth conversion. I'm pretty sure he would be paying a 27% tax rate for the first several tens of thousands of dollars of Roth conversion, then the tax rate would drop to 22% for a small range of additional Roth conversions, then the first IRMAA threshold would be reached (which may or may not be a consideration).

Long version:
OP seems to have somewhere around a 50%/50% mix between "pension, early soc security, and RMD" and "capital gains and dividends." I'll assume that a significant amount (multiple tens of thousands of dollars) of those "capital gains and dividends" are long term capital gains and qualified dividends that qualify for the special LTCG/QD tax rates. The ""pension, early soc security, and RMD" are taxed at ordinary income tax rates. (And I'll assume that 85% of the SS has already become taxable.)

Due to the 2 different tax bracket systems applied to the ordinary income vs the LTCG/QD, OP's *marginal* tax rate is different than his "tax bracket".

Not enough information has been provided yet, but my best guess is that a new dollar of Roth conversion income would have a 27% marginal tax rate, because it, itself, would be in the 12% bracket for ordinary income, but would also push a dollar of the LTDG/QD income from the 0% special LTCG/QD tax bracket into the 15% special LTCG/QD tax bracket.

Not enough information has been provided yet, but my best guess is that the 27% marginal "shadow tax bracket" still has tens of thousands of dollars of Roth conversions to go before all the LTCG/QD income has been pushed out of the 0% special LTCG/QD tax bracket into the 15% special LTCG/QD tax bracket.

Once that happens, *then* OP's marginal rate truely would be 22%. But I'm not sure that that "22% marginal bracket" is very wide before IRMAA kicks in.

Unfortunately, I don't have Excel, so I can't produce one of FiveK's graphs of what I'm talking about.
Last edited by cas on Thu Nov 19, 2020 8:09 pm, edited 1 time in total.
cas
Posts: 962
Joined: Wed Apr 26, 2017 8:41 am

Re: Help me plan my Roth conversions

Post by cas »

I just remembered a new tax visualization tool that people have been complimenting on the forums recently.

Here is the graph with $60,000 "wage income" (stand in for how the pension, 85% SS, and RMD is taxed) and $60,000 long term capital gain income (stand in for LTCG and qualified dividend income).
Total tax = $6109

Here is the graph with $70K "wage income" (the 60K "pension, 85% SS, and RMD" plus $10K Roth conversion) and $60K LTCG/QD.
Total tax = $8809

Aside from looking at the graphics and seeing how the $10K Roth conversion changes both the 12% and the CG15% stripes, note that

(Total Tax $8809 - Total Tax $6109)/$10K Roth conversion income = 2700/10K = .27 i.e. a 27% marginal tax rate on that $10K Roth conversion.
cas
Posts: 962
Joined: Wed Apr 26, 2017 8:41 am

Re: Help me plan my Roth conversions

Post by cas »

And here's another graph with $106K "wage income" (the $60 pension/SS/RMD + $46K Roth conversion) + $60K LTCG/QD.

See how only just now, after 46K of Roth conversions, has the 22% bracket "stripe" appeared for ordinary income, plus the CG0% "stripe" has completely disappeared (i.e. no more LTCG/QD left to be pushed from the 0% rate to the 15% rate)?

Except at this point, AGI is $166K which doesn't leave much of that 22% "stripe" that can be filled with additional Roth conversion before the first IRMAA threshold.

(I'm not implying that the first IRMAA a threshold is necessarily a show stopper. Just too lazy to look up where the 24% bracket was going to kick in.)
User avatar
JDCarpenter
Posts: 1482
Joined: Tue Sep 09, 2014 2:42 pm

Re: Help me plan my Roth conversions

Post by JDCarpenter »

Another factor that hasn't been mentioned is that, unless you and spouse die in the same tax year, the survivor will face RMDs at single taxpayer rates as s/he ages. That is one of the factors that has us choosing to fill up the present 24% bracket with conversions--even in years where we otherwise would have had no tax liability.

BUT: 1) no pensions for us (although two very high social security PIAs under present rules); 2) extremely disproportionate and large (>4 million) tax deferred accounts at retirement in late 50s. As always, YMMV.
Edit Signature
User avatar
Bogle7
Posts: 728
Joined: Fri May 11, 2018 9:33 am

Roth conversions are person specific

Post by Bogle7 »

We are only doing Roth conversions because we have a daughter and 2 grandkids.
We are only doing Roth conversions because of the 10-year rule.
tibbitts
Posts: 12277
Joined: Tue Feb 27, 2007 6:50 pm

Re: Help me plan my Roth conversions

Post by tibbitts »

I would say planning only goes so far, because so much is based on volatile in your traditional (besides other considerations like IRMAA, your guess as to future tax rates, etc.) If you get a break via a large market drop on a volatile traditional, you might want to discard your plans and just convert down to whatever balance you want to be left with. If the value of the converted shares drops by 40%, that can dwarf an increase of 10% in tax rates on the conversion.
User avatar
FiveK
Posts: 10559
Joined: Sun Mar 16, 2014 2:43 pm

Re: Help me plan my Roth conversions

Post by FiveK »

prairieman wrote: Thu Nov 19, 2020 3:09 pm Is there a good website that provides advice on how much to convert each year?
You might look at the Roth IRA conversion wiki and generate a marginal rate chart for your specific situation using the tool mentioned there. That might give you some insight into your question.
retiredjg
Posts: 42258
Joined: Thu Jan 10, 2008 12:56 pm

Re: Help me plan my Roth conversions

Post by retiredjg »

prairieman wrote: Thu Nov 19, 2020 3:09 pm We have about 60K in income from pension, early soc security, and RMD from an inherited IRA account.... Our investments provide capital gains and dividends that bring our income up to around 100-120K...
Prairieman, I agree with cas. You may not just be in the 22% tax bracket. It depends on where your income is coming from.

The $60k from pension, SS, and RMD are all "ordinary income". That part is pretty clear.

The other income could be coming from a taxable account or a tax-deferred account or a Roth account or some combination of these three. Incomes from these 3 types of accounts are all taxed differently. So the exact source(s) of this other $60 - $80k needs to be specified for this exercise to make any sense.
Topic Author
prairieman
Posts: 362
Joined: Thu Mar 01, 2018 3:17 pm

Re: Help me plan my Roth conversions

Post by prairieman »

retiredjg wrote: Fri Nov 20, 2020 8:20 am
prairieman wrote: Thu Nov 19, 2020 3:09 pm We have about 60K in income from pension, early soc security, and RMD from an inherited IRA account.... Our investments provide capital gains and dividends that bring our income up to around 100-120K...
Prairieman, I agree with cas. You may not just be in the 22% tax bracket. It depends on where your income is coming from.

The $60k from pension, SS, and RMD are all "ordinary income". That part is pretty clear.

The other income could be coming from a taxable account or a tax-deferred account or a Roth account or some combination of these three. Incomes from these 3 types of accounts are all taxed differently. So the exact source(s) of this other $60 - $80k needs to be specified for this exercise to make any sense.
Thanks all. For calculation sake, assume half of the other 40-60 K is LTCG and half is dividends, both from taxable accounts.
I do not understand at all how 22% tax rate changes to 27%.
“As long as the roots are not severed, all is well.” Chauncey Gardner
cas
Posts: 962
Joined: Wed Apr 26, 2017 8:41 am

Re: Help me plan my Roth conversions

Post by cas »

prairieman wrote: Fri Nov 20, 2020 9:59 am assume half of the other 40-60 K is LTCG and half is dividends, both from taxable accounts.
And (approximately) how much of the dividends are qualified dividends? (Line 3a on your 2019 IRS Form 1040)

Qualified dividends are taxed differently than non-qualified dividends.
retiredjg
Posts: 42258
Joined: Thu Jan 10, 2008 12:56 pm

Re: Help me plan my Roth conversions

Post by retiredjg »

prairieman wrote: Fri Nov 20, 2020 9:59 am I do not understand at all how 22% tax rate changes to 27%.
I'll give it a try.

Imagine your income is $110k, $60k of ordinary income (pension, SS, etc) and $50k of long term capital gains. They are sitting in a stack with the ordinary income on bottom and the LTCG on top.

Your total AGI is $110k and you would think that puts you into the 22% tax bracket. But it does not work exactly like that because long term cap gains (and qualified dividends) are taxed on a different scale from ordinary income.

The first $24,800 (starting from the bottom of the stack and moving upward) is not taxed at all because that represents your deductions (I'm using standard deduction for the example). Continuing to move up the stack, some of your ordinary income is taxed at 10% and some at 12%. However, you do not have enough ordinary income for any of it to be taxed at 22%. The marginal rate (tax on the next dollar) for your ordinary income is 12%.

Now we continue going up the stack taxing your LTCG. The first part of it is taxed at 0%. However when you reach the point on the stack that represents $80k taxable income, the rest of your capital gains are taxed at 15%.

Imagine sliding an extra dollar into the ordinary income block of this stack. That $1 will be taxed at 12%. But it also pushes $1 of LTCG from the 0% rate into the 15% rate. So adding $1 of ordinary income causes you to be taxed $0.27. This is a 27% marginal rate.

Does that make sense?
Topic Author
prairieman
Posts: 362
Joined: Thu Mar 01, 2018 3:17 pm

Re: Help me plan my Roth conversions

Post by prairieman »

retiredjg wrote: Fri Nov 20, 2020 12:09 pm
prairieman wrote: Fri Nov 20, 2020 9:59 am I do not understand at all how 22% tax rate changes to 27%.
I'll give it a try.

Imagine your income is $110k, $60k of ordinary income (pension, SS, etc) and $50k of long term capital gains. They are sitting in a stack with the ordinary income on bottom and the LTCG on top.

Your total AGI is $110k and you would think that puts you into the 22% tax bracket. But it does not work exactly like that because long term cap gains (and qualified dividends) are taxed on a different scale from ordinary income.

The first $24,800 (starting from the bottom of the stack and moving upward) is not taxed at all because that represents your deductions (I'm using standard deduction for the example). Continuing to move up the stack, some of your ordinary income is taxed at 10% and some at 12%. However, you do not have enough ordinary income for any of it to be taxed at 22%. The marginal rate (tax on the next dollar) for your ordinary income is 12%.

Now we continue going up the stack taxing your LTCG. The first part of it is taxed at 0%. However when you reach the point on the stack that represents $80k taxable income, the rest of your capital gains are taxed at 15%.

Imagine sliding an extra dollar into the ordinary income block of this stack. That $1 will be taxed at 12%. But it also pushes $1 of LTCG from the 0% rate into the 15% rate. So adding $1 of ordinary income causes you to be taxed $0.27. This is a 27% marginal rate.

Does that make sense?
Yes! Thank you so much. This is very counterintuitive. Now that I understand this, I will look at my last several years of taxes closer to sort this out using exact figures which I don’t really like sharing.
“As long as the roots are not severed, all is well.” Chauncey Gardner
User avatar
FiveK
Posts: 10559
Joined: Sun Mar 16, 2014 2:43 pm

Re: Help me plan my Roth conversions

Post by FiveK »

prairieman wrote: Fri Nov 20, 2020 1:47 pm This is very counterintuitive. Now that I understand this, I will look at my last several years of taxes closer to sort this out using exact figures which I don’t really like sharing.
Given that understanding, perhaps the chart in the Roth IRA conversion wiki and charts in this post will make more sense. And yes, you generating your own chart(s) with your exact figures is definitely best.
FrankLUSMC
Posts: 228
Joined: Tue Nov 28, 2017 1:43 pm

Re: Roth conversions are person specific

Post by FrankLUSMC »

Bogle7 wrote: Thu Nov 19, 2020 10:13 pm We are only doing Roth conversions because we have a daughter and 2 grandkids.
We are only doing Roth conversions because of the 10-year rule.
This, plus the single earner tax bracket at the death of one partner is anther reason we are doing Roth conversions.
Topic Author
prairieman
Posts: 362
Joined: Thu Mar 01, 2018 3:17 pm

Re: Roth conversions are person specific

Post by prairieman »

FrankLUSMC wrote: Sat Nov 21, 2020 9:27 am
Bogle7 wrote: Thu Nov 19, 2020 10:13 pm We are only doing Roth conversions because we have a daughter and 2 grandkids.
We are only doing Roth conversions because of the 10-year rule.
This, plus the single earner tax bracket at the death of one partner is anther reason we are doing Roth conversions.
This is an interesting slant. If one spouse passes much before the other, the remaining spouse could easily be moved up into a new tax bracket.
“As long as the roots are not severed, all is well.” Chauncey Gardner
retiredjg
Posts: 42258
Joined: Thu Jan 10, 2008 12:56 pm

Re: Help me plan my Roth conversions

Post by retiredjg »

With your income and apparent assets, I'd consider it unlikely for the survivor in your marriage to be in a bracket lower than 22% now (25% starting in 2026). Before RMDs start. Depending on how large the RMDs might be, it could go higher.

This is a reason to consider conversions now even though some will be taxed at 27%.
Topic Author
prairieman
Posts: 362
Joined: Thu Mar 01, 2018 3:17 pm

Re: Help me plan my Roth conversions

Post by prairieman »

retiredjg wrote: Sat Nov 21, 2020 1:57 pm With your income and apparent assets, I'd consider it unlikely for the survivor in your marriage to be in a bracket lower than 22% now (25% starting in 2026). Before RMDs start. Depending on how large the RMDs might be, it could go higher.

This is a reason to consider conversions now even though some will be taxed at 27%.
Yes, and it turns out the size of the 27% window shrunk this year ( future years) due to me taking early SS payments - which I won’t freeze (owing to health considerations). We paused the RMD from the inherited IRA this year but sold some funds that we no longer wanted to hold. The devil will be in the details, some of which I won’t know until near year’s end.

The websites and discussion provided by cas and FiveK have been excellent help and, while I had been wavering on whether to do this at all, I think I will - remaining cognizant of IRRMA, the 27% window, the tax consequences of either myself or my spouse passing away, and 2026 tax brackets.

This site is amazing.
“As long as the roots are not severed, all is well.” Chauncey Gardner
User avatar
Peter Foley
Posts: 5156
Joined: Fri Nov 23, 2007 10:34 am
Location: Lake Wobegon

Re: Help me plan my Roth conversions

Post by Peter Foley »

I did not see some useful information posted so I will try to fill the gap.

Check out Numbers Unlimited from www.FinancialPlanInc.com Page one has useful information regarding tax brackets, much of which is based on your taxable income.

Page 2 has Medicare information (among other things). The IRMMA threshold that has been mentioned is Medicare Part B. This is based on Modified Adjusted Gross income. The base amount for MFJ is $144.60/month per person if your MAGI is less than $174,000 in 2020. If you go one dollar over that, the cost per person increases to $202.40/person/month. As mentioned, there is a two year look back.

Depending on your exact ages, I not sure skipping the RMD on the inherited account this year is a good move.
User avatar
FiveK
Posts: 10559
Joined: Sun Mar 16, 2014 2:43 pm

Re: Help me plan my Roth conversions

Post by FiveK »

Peter Foley wrote: Sat Nov 21, 2020 2:56 pm I did not see some useful information posted so I will try to fill the gap.
Not shown directly, but the linked pages in this post suggest how one can evaluate all the various brackets, tiers, etc., that affect most people making this decision.
cas
Posts: 962
Joined: Wed Apr 26, 2017 8:41 am

Re: Help me plan my Roth conversions

Post by cas »

prairieman wrote: Sat Nov 21, 2020 2:36 pm The websites and discussion provided by cas and FiveK have been excellent help and, while I had been wavering on whether to do this at all, I think I will - remaining cognizant of IRRMA, the 27% window, the tax consequences of either myself or my spouse passing away, and 2026 tax brackets.
Note that the Tax Bracket Visualization tool that I used above does *not* show the effect of Net Investment Income Tax (NIIT) that starts phasing in once your AGI reaches $250,000 (for MFJ).

So keep an eye on NIIT if you are considering making large Roth conversions that would push your AGI up above $250,000, e.g. similar to what is discussed in the second thread that FiveK that linked.

Another tool that is often recommended on this forums for these sorts of things is this tax estimation tool. (Ignore the fact that the URL says "mortgagecalculator". It is a Form 1040 calculator.)

I like this tool because it is a reasonable balance between fast, concise, and thorough. For example, it immediately calculates whether any particular change you make in your income entries will
- cause you to owe any NIIT (last item under the "Total Tax After Credits" section)
- change the amount of your social security income that is taxable (third from last item under the "Income" section)
RetiredAL
Posts: 1069
Joined: Tue Jun 06, 2017 12:09 am
Location: SF Bay Area

Re: Help me plan my Roth conversions

Post by RetiredAL »

prairieman wrote: Sat Nov 21, 2020 2:36 pm
Yes, and it turns out the size of the 27% window shrunk this year ( future years) due to me taking early SS payments - which I won’t freeze (owing to health considerations). We paused the RMD from the inherited IRA this year but sold some funds that we no longer wanted to hold. The devil will be in the details, some of which I won’t know until near year’s end.

The websites and discussion provided by cas and FiveK have been excellent help and, while I had been wavering on whether to do this at all, I think I will - remaining cognizant of IRRMA, the 27% window, the tax consequences of either myself or my spouse passing away, and 2026 tax brackets.

This site is amazing.
Your health statement alone is a good enough reason to convert somewhat aggressively.

Don't be afraid of the significantly crossing an IRRMA step to get the conversions done and out of the way. It's only bad if you barely cross into an IRRMA step year after year.
Topic Author
prairieman
Posts: 362
Joined: Thu Mar 01, 2018 3:17 pm

Re: Help me plan my Roth conversions

Post by prairieman »

RetiredAL wrote: Sat Nov 21, 2020 5:10 pm
prairieman wrote: Sat Nov 21, 2020 2:36 pm
Yes, and it turns out the size of the 27% window shrunk this year ( future years) due to me taking early SS payments - which I won’t freeze (owing to health considerations). We paused the RMD from the inherited IRA this year but sold some funds that we no longer wanted to hold. The devil will be in the details, some of which I won’t know until near year’s end.

The websites and discussion provided by cas and FiveK have been excellent help and, while I had been wavering on whether to do this at all, I think I will - remaining cognizant of IRRMA, the 27% window, the tax consequences of either myself or my spouse passing away, and 2026 tax brackets.

This site is amazing.
Your health statement alone is a good enough reason to convert somewhat aggressively.

Don't be afraid of the significantly crossing an IRRMA step to get the conversions done and out of the way. It's only bad if you barely cross into an IRRMA step year after year.
Yes, $700 doesn’t seem like a lot to worry about. Also if we truly do go back to 2017 tax brackets in 2026, and RMDs and wife’s SS kick in as I “kick the bucket” (which I hope not to do), she’d be paying at a much higher tax rate than now. It’s making more sense to me now than it did initially. I’m glad I asked the question on this forum and suspect it could help others decide, too.
“As long as the roots are not severed, all is well.” Chauncey Gardner
User avatar
celia
Posts: 11540
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

Re: Help me plan my Roth conversions

Post by celia »

prairieman wrote: Thu Nov 19, 2020 3:09 pm I took early soc security because I wanted to spread our tax burden out and because I have health issue that could shorten my life.
Many of us find that it is best to spread out our tax burden from retirement until our final years instead of having a few years of low taxes in our 60s followed by the remaining years being in a higher tax bracket, due to RMDs. But that doesn't mean your income sources need to be consistent during that time. Have you considered that if you suspended SS until you are 70 that not only would your age 70 benefits be 8% larger for each year you wait from Full Retirement Age to age 70, but that they will also be higher for your spouse, should you die before her (this assumes you have the higher earnings). In addition, even if you should die a year after re-starting SS, the "lost money" could be less than the increased taxes you might have to pay before age 70 since each dollar of SS makes another dollar of income be taxed until 85% of your SS is taxed. You would have to do the calcs both ways to see which is better for you.

I recommend using a spreadsheet like the one in my post found here and fill it out twice, once for continuing SS as you are currently doing and once for restarting it at age 70. Also note that this spreadsheet has two years of IRMAA fees which is not as bad as many people make it seem. I just see it as a form of delayed taxes for the 2 years previous. After setting up your expected incomes for each year, calculate how much room is left for Roth conversions before you hit a change of tax bracket, the IRMAA cliff, or the NIIT. Then use tax software to estimate the tax due each year. Don't worry about inflation and just use the latest software for all the years.

Also, take some time to read the text above and below that chart to get the most from it.
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.
Post Reply