Does IRA to ROTH Still Make Sense AND How Much to Convert

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patrickscott
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Does IRA to ROTH Still Make Sense AND How Much to Convert

Post by patrickscott »

Greetings,
Thank you in advance for your always amazing insight and willingness to help.

Question 1: Should I keep on converting IRA's to ROTH up to the MAGI limit?
Question 2: Should I convert IRA's to ROTH in excess of the MAGI limit and by how much?

Current situation:
I am retired, aged 76, as far as I know in good health.
My wife, aged 55, in good health, resigned in March 2022 and will not be going back to work.
Our I Bonds balance: $494,600, most maturing in 2029 & 2030. (The amounts they are paying now on those OLD I-Bonds are amazing!) We will start cashing in some I Bonds two-three years before they mature to lower our future substantial taxes.
My VTSAX IRA balance: $480,000.
My VTSAX Roth balance $410,000.
My VFIAX, VTSAX and VBIAX mutual fund (not in ROTH or IRA) about $860,000 (which will be inherited).
My IRA RMD: $21,000 (taken in February 2022).
April 2022 my IRA to ROTH Conversion: $70,000.
Estimated Ordinary Dividends: $11,000
My current gov pension & (very small) Social Security: $45,000.
Spouse 2022 wages: $6,000, no future pension, only estimated Social Security of $14,000 a year.
Spouse's IRA: $156,000
Spouse's Roth: $194,000.
Estimated 2022 total income (before deductions, etc.) $153,000.
We live very comfortably on about $40,000. We do not have any bills, except for utilities and property taxes.
Over the past few years, we have been converting substantial amounts of IRA's to ROTH.
We have never exceeded the MAGI.
My main concern is to lower my wife's, as a widow, future taxes.
I have no idea if it makes sense to convert more IRA's, possibly another $20,000, or if it makes sense to go over the MAGI limit and pay the additional taxes and increased Medicare premium.

Any suggestions, insight, are most welcome. THANKS!
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FiveK
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Re: Does IRA to ROTH Still Make Sense AND How Much to Convert

Post by FiveK »

Are either of you comfortable enough with Excel to try any of the ones mentioned in the Using a spreadsheet section of the Roth IRA conversion wiki?
Exchme
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Re: Does IRA to ROTH Still Make Sense AND How Much to Convert

Post by Exchme »

You didn't tell us if you need to limit income in the next few years for your wife to get ACA premium credits, that may be as advantageous as Roth Conversions.

After you pass, I think your wife will be in the 22% bracket and still in the base IRMAA tier, so it's not a big benefit to do conversions in the 22% bracket now in order to avoid taxes in the 22% bracket in the future (you still get a small gain by paying taxes on the conversion out of taxable, reducing future tax drag, but it's not too exciting). I don't think jumping to the next IRMAA tier makes sense, that effectively ups the tax rate on the last converted $ by another couple percent. If you do not need ACA, then a "no regret" plan seems to me to convert to the top of the 0% Long Term Capital Gains point, which was a MAGI of $109,250 in 2022. That would give you some small conversions going forward, say $20K/yr, and those conversions would be taxed at 12%, so would be clear winners. If you do need ACA for your wife, then your effective tax rate on conversions is higher as your premium credit is reduced, so the benefit of conversions would be much smaller.
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patrickscott
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Re: Does IRA to ROTH Still Make Sense AND How Much to Convert

Post by patrickscott »

Exchme wrote: Thu Sep 22, 2022 11:59 pm You didn't tell us if you need to limit income in the next few years for your wife to get ACA premium credits, that may be as advantageous as Roth Conversions.

After you pass, I think your wife will be in the 22% bracket and still in the base IRMAA tier, so it's not a big benefit to do conversions in the 22% bracket now in order to avoid taxes in the 22% bracket in the future (you still get a small gain by paying taxes on the conversion out of taxable, reducing future tax drag, but it's not too exciting). I don't think jumping to the next IRMAA tier makes sense, that effectively ups the tax rate on the last converted $ by another couple percent. If you do not need ACA, then a "no regret" plan seems to me to convert to the top of the 0% Long Term Capital Gains point, which was a MAGI of $109,250 in 2022. That would give you some small conversions going forward, say $20K/yr, and those conversions would be taxed at 12%, so would be clear winners. If you do need ACA for your wife, then your effective tax rate on conversions is higher as your premium credit is reduced, so the benefit of conversions would be much smaller.
Thanks for your detailed reply.
My wife is on my (government job) medical insurance and thus, bases on the little I understand about ACA, she would not be eligible for ACA. Thanks for your advice.

For 2022, we will convert up to close the 2022 MAGI. We are still thinking about what to do in 2023, 2024, 2025, 2026 (tax rates possibly 3% higher), on.

I had not thought of my wife doing the conversions. Now that you mention it, since my wife, as a widow, could easily be in the 22% (or even 12%) tax bracket, it may make sense to let her do IRA to ROTH conversions up to the single individual 22% tax bracket ($41,775).

Thanks!
Have a great day.
Last edited by patrickscott on Sat Sep 24, 2022 6:23 am, edited 2 times in total.
Topic Author
patrickscott
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Re: Does IRA to ROTH Still Make Sense AND How Much to Convert

Post by patrickscott »

FiveK wrote: Thu Sep 22, 2022 9:51 pm Are either of you comfortable enough with Excel to try any of the ones mentioned in the Using a spreadsheet section of the Roth IRA conversion wiki?
Thanks. I'll give it a try... although I have not used Excel in about 25 years.

Thanks again. Have a great day.
VanGar+Goyle
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Re: Does IRA to ROTH Still Make Sense AND How Much to Convert

Post by VanGar+Goyle »

patrickscott wrote: Thu Sep 22, 2022 12:39 pm Question 1: Should I keep on converting IRA's to ROTH up to the MAGI limit?
Question 2: Should I convert IRA's to ROTH in excess of the MAGI limit and by how much?
Exactly which MAGI limit are you concerned about?

[ Reply of Sep 23 was the 2022 first Medicare IRMAA Married Filing Jointly limit for income from the 2020 tax year ]
Last edited by VanGar+Goyle on Sun Sep 25, 2022 1:09 am, edited 2 times in total.
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retiredjg
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Re: Does IRA to ROTH Still Make Sense AND How Much to Convert

Post by retiredjg »

I think continuing the conversions you have been doing - up to just below the IRMAA trigger - may be reasonable because of your wife's age.

The RMD you have now is not a significant problem because your IRA is not overly large. But, for example, if you were to die this year, that $480k IRA could grow a lot in the 17 years before she would need to take RMDs from it, especially since it is invested entirely in stocks.

However, it is not clear to me what her potential income would be as a widow. Would any part of your pension continue? Would her survivor SS income be higher than her own SS? Also, not sure yet if/how this fits in...could she continue with your health insurance?

If her only income as a widow would be her $14k in SS and if here expenses were still in the $40k range, it is possible she might be in a very low tax bracket - like today's 12% tax bracket. If that is expected to be the case, converting extra at 22% now does not make as much sense to me.

Is there a desire to leave heirs Roth IRA instead of traditional IRA? That would argue for continuing the Roth conversions at 22%.


One thing more to consider - your Roth conversions are making more of your SS taxable and also making the $11k in dividend income completely taxable. Some of that $11k (the qualified dividends) would be tax free if you were not doing Roth conversions.

There could be some benefit in moving all your bonds into HIs IRA, slowing down its growth. This would also result in more stocks in taxable (possibly more tax free dividends if you were not doing Roth conversions).

Bottom line....What you "should" be doing is not at all clear to me.

1. After this year, without Roth conversions, you would be in the 12% bracket with tax free dividends for a long time.

2. Or you could do a couple of large conversions in 2023 and 2024, in the 22% bracket, and whittle that IRA down to almost nothing...putting yourself into a very low tax bracket forever.
chemocean
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Re: Does IRA to ROTH Still Make Sense AND How Much to Convert

Post by chemocean »

patrickscott wrote: Thu Sep 22, 2022 12:39 pm Greetings,
Thank you in advance for your always amazing insight and willingness to help.

Question 1: Should I keep on converting IRA's to ROTH up to the MAGI limit?
Question 2: Should I convert IRA's to ROTH in excess of the MAGI limit and by how much?

Current situation:
My VTSAX IRA balance: $480,000.

My VFIAX, VTSAX and VBIAX mutual fund (not in ROTH or IRA) about $860,000 (which will be inherited).

Spouse's IRA: $156,000
I understand that your primary concern about the present $636,000 is that your RMDs will drive the marginal tax rate of your surviving spouse higher.
My understanding is that upon your death, your younger wife can assume your IRA as her own and her RMD will be determined by the schedule when she turns 72, which will be much less than the RMD for your last year.

It is likely that SOMEONE will pay taxes on your and your wife's IRA 10 years after the death of the surviving spouse, unless you are charitable inclined or your heir can claim one of the exceptions to the SECURE act.
IF you are charitably inclined, you can use your RMD to make your annual charitable contributions tax-free now.

You indicate that your taxable accounts will be inherited.
Will the IRAs also be inherited? If so, the beneficiaries will need to pay taxes on the inherited IRA within 10 years, unless the heir is a charity.
Roth conversions more beneficial to the heirs than Traditional IRA, because the inherited Roth can grow tax free for 10 years after the passing of the surviving spouse.
If the traditional IRAs will go to a charity as a bequest upon your death, why pay taxes on a Roth conversion since the charity will not have to pay taxes.
Last edited by chemocean on Fri Sep 23, 2022 1:00 pm, edited 1 time in total.
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retiredjg
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Re: Does IRA to ROTH Still Make Sense AND How Much to Convert

Post by retiredjg »

chemocean wrote: Fri Sep 23, 2022 9:29 am My understanding is that upon your death, your younger wife can assume your RMD as her own and the RMD will be determined by the schedule when she turns 72, which will be much less than the RMD for your last year.
Does the surviving spouse assume the RMD? I know the surviving spouse usually assumes the IRA, but I didn't think they have to continue the RMDs.
Topic Author
patrickscott
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Re: Does IRA to ROTH Still Make Sense AND How Much to Convert

Post by patrickscott »

VanGar+Goyle wrote: Fri Sep 23, 2022 7:21 am
patrickscott wrote: Thu Sep 22, 2022 12:39 pm Question 1: Should I keep on converting IRA's to ROTH up to the MAGI limit?
Question 2: Should I convert IRA's to ROTH in excess of the MAGI limit and by how much?
Exactly which MAGI limit are you concerned about?

I am trying to figure out if exceeding "Married couples with a MAGI above $182,000 up to $228,000" makes sense. :moneybag
Topic Author
patrickscott
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Re: Does IRA to ROTH Still Make Sense AND How Much to Convert

Post by patrickscott »

retiredjg wrote: Fri Sep 23, 2022 8:42 am I think continuing the conversions you have been doing - up to just below the IRMAA trigger - may be reasonable because of your wife's age.

The RMD you have now is not a significant problem because your IRA is not overly large. But, for example, if you were to die this year, that $480k IRA could grow a lot in the 17 years before she would need to take RMDs from it, especially since it is invested entirely in stocks.

However, it is not clear to me what her potential income would be as a widow. Would any part of your pension continue? Would her survivor SS income be higher than her own SS? Also, not sure yet if/how this fits in...could she continue with your health insurance?

If her only income as a widow would be her $14k in SS and if here expenses were still in the $40k range, it is possible she might be in a very low tax bracket - like today's 12% tax bracket. If that is expected to be the case, converting extra at 22% now does not make as much sense to me.

Is there a desire to leave heirs Roth IRA instead of traditional IRA? That would argue for continuing the Roth conversions at 22%.


One thing more to consider - your Roth conversions are making more of your SS taxable and also making the $11k in dividend income completely taxable. Some of that $11k (the qualified dividends) would be tax free if you were not doing Roth conversions.

There could be some benefit in moving all your bonds into HIs IRA, slowing down its growth. This would also result in more stocks in taxable (possibly more tax free dividends if you were not doing Roth conversions).

Bottom line....What you "should" be doing is not at all clear to me.

1. After this year, without Roth conversions, you would be in the 12% bracket with tax free dividends for a long time.

2. Or you could do a couple of large conversions in 2023 and 2024, in the 22% bracket, and whittle that IRA down to almost nothing...putting yourself into a very low tax bracket forever.
Thank you for your thorough and detailed reply and additional questions.

At the time of my death:
1) My government pension will stop.
2) My SS, (due to very little Social Security covered work AND Windfall Offset Provision), is very low, about $99 (after Medicare deduction) a month. My SS taxes are minimal.
3) My widow will have a small monthly recurring income of about $1,000 (not including her SS), and whatever she needs from inherited stocks & I Bonds, IRA's and Roth's. (My widow will inherit my IRA's and ROTH's).
4) Her estimated expenditures as a widow: $30,000 to $35,000.
5) My widow will continue receiving my government BCBS medical insurance.
6) We are joint owners of the I BONDS (under my SSN). I cannot transfer them to her. We will cash them in about 7 or 8 years and will have substantial tax bills.

Thanks again for your assistance.
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retiredjg
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Re: Does IRA to ROTH Still Make Sense AND How Much to Convert

Post by retiredjg »

Thanks for the response. I still have no idea what you should do. Clearly, her income as a widow will be in a very low bracket until RMDs start for her. Then agreed...the tax bracket could go up to more than the 22% you are paying these days.

However, since the conversions are making your (something less than) $11k in dividends taxable, you are not converting all of it at the 22% rate. Some is being converted at a higher rate than that (27%).

It is possible you have already converted enough to keep her RMDs reasonable. It is possible that one or two more years would be fine. Maybe even better.

One thing that actually is clear to me is that you should not trigger IRMAA costs for this. At least, there is no financial reason to do that. I suppose there could be a peace of mind reason for some people.

Or if you do, convert the entire thing (yours, not hers) in one year, pay IRMAA for only one year, and be done with it. I would not go that route myself, but some might.
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Lee_WSP
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Re: Does IRA to ROTH Still Make Sense AND How Much to Convert

Post by Lee_WSP »

Unless you have estate planning purposes in mind, I don’t see a compelling argument to go either way. Personally, I prefer Roth, but not at the expense of a higher income tax rate.
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LilyFleur
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Re: Does IRA to ROTH Still Make Sense AND How Much to Convert

Post by LilyFleur »

patrickscott wrote: Fri Sep 23, 2022 12:54 pm
retiredjg wrote: Fri Sep 23, 2022 8:42 am I think continuing the conversions you have been doing - up to just below the IRMAA trigger - may be reasonable because of your wife's age.

The RMD you have now is not a significant problem because your IRA is not overly large. But, for example, if you were to die this year, that $480k IRA could grow a lot in the 17 years before she would need to take RMDs from it, especially since it is invested entirely in stocks.

However, it is not clear to me what her potential income would be as a widow. Would any part of your pension continue? Would her survivor SS income be higher than her own SS? Also, not sure yet if/how this fits in...could she continue with your health insurance?

If her only income as a widow would be her $14k in SS and if here expenses were still in the $40k range, it is possible she might be in a very low tax bracket - like today's 12% tax bracket. If that is expected to be the case, converting extra at 22% now does not make as much sense to me.

Is there a desire to leave heirs Roth IRA instead of traditional IRA? That would argue for continuing the Roth conversions at 22%.


One thing more to consider - your Roth conversions are making more of your SS taxable and also making the $11k in dividend income completely taxable. Some of that $11k (the qualified dividends) would be tax free if you were not doing Roth conversions.

There could be some benefit in moving all your bonds into HIs IRA, slowing down its growth. This would also result in more stocks in taxable (possibly more tax free dividends if you were not doing Roth conversions).

Bottom line....What you "should" be doing is not at all clear to me.

1. After this year, without Roth conversions, you would be in the 12% bracket with tax free dividends for a long time.

2. Or you could do a couple of large conversions in 2023 and 2024, in the 22% bracket, and whittle that IRA down to almost nothing...putting yourself into a very low tax bracket forever.
Thank you for your thorough and detailed reply and additional questions.

At the time of my death:
1) My government pension will stop.
2) My SS, (due to very little Social Security covered work AND Windfall Offset Provision), is very low, about $99 (after Medicare deduction) a month. My SS taxes are minimal.
3) My widow will have a small monthly recurring income of about $1,000 (not including her SS), and whatever she needs from inherited stocks & I Bonds, IRA's and Roth's. (My widow will inherit my IRA's and ROTH's).
4) Her estimated expenditures as a widow: $30,000 to $35,000.
5) My widow will continue receiving my government BCBS medical insurance.
6) We are joint owners of the I BONDS (under my SSN). I cannot transfer them to her. We will cash them in about 7 or 8 years and will have substantial tax bills.

Thanks again for your assistance.
I am highlighting this for the consideration of Bogleheads who are investing heavily in I Bonds at the moment. It's a factor in tax and financial planning, and you are wise to consider it.
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patrickscott
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Re: Does IRA to ROTH Still Make Sense AND How Much to Convert

Post by patrickscott »

retiredjg wrote: Fri Sep 23, 2022 1:22 pm
However, since the conversions are making your (something less than) $11k in dividends taxable, you are not converting all of it at the 22% rate. Some is being converted at a higher rate than that (27%).

It is possible you have already converted enough to keep her RMDs reasonable. It is possible that one or two more years would be fine. Maybe even better.

One thing that actually is clear to me is that you should not trigger IRMAA costs for this. At least, there is no financial reason to do that. I suppose there could be a peace of mind reason for some people.
Thanks for the additional insight.

1) I do not understand, "However, since the conversions are making your (something less than) $11k in dividends taxable, you are not converting all of it at the 22% rate. Some is being converted at a higher rate than that (27%). "

2) It is clear to us that we should not trigger the IRMAA costs.

Thanks again.
Last edited by patrickscott on Sat Sep 24, 2022 7:08 am, edited 1 time in total.
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patrickscott
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Re: Does IRA to ROTH Still Make Sense AND How Much to Convert

Post by patrickscott »

Lee_WSP wrote: Fri Sep 23, 2022 1:23 pm Unless you have estate planning purposes in mind, I don’t see a compelling argument to go either way. Personally, I prefer Roth, but not at the expense of a higher income tax rate.
Thanks for your insight.
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patrickscott
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Re: Does IRA to ROTH Still Make Sense AND How Much to Convert

Post by patrickscott »

LilyFleur wrote: Fri Sep 23, 2022 1:29 pm
patrickscott wrote: Fri Sep 23, 2022 12:54 pm
retiredjg wrote: Fri Sep 23, 2022 8:42 am
6) We are joint owners of the I BONDS (under my SSN). I cannot transfer them to her. We will cash them in about 7 or 8 years and will have substantial tax bills.

Thanks again for your assistance.
I am highlighting this for the consideration of Bogleheads who are investing heavily in I Bonds at the moment. It's a factor in tax and financial planning, and you are wise to consider it.
Thanks for your comments. We were going to gradually start cashing in some I BONDS, but since our 'old' I BONDS (most of them purchased in 2000-2005) are now earning from 10.23%-13.39%, we are going to start cashing them in when the rate drops back down again. (Back in 01/01/2000, they were earning from 2.51%-5.66%)

Have a great day.
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retiredjg
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Re: Does IRA to ROTH Still Make Sense AND How Much to Convert

Post by retiredjg »

patrickscott wrote: Sat Sep 24, 2022 6:49 am 1) I do not understand, "However, since the conversions are making your (something less than) $11k in dividends taxable, you are not converting all of it at the 22% rate. Some is being converted at a higher rate than that (27%). "
Ordinary income is taxed by one set of rates (10%, 12%, 22%, 24%, 32% etc). Long term capital gains and qualified dividends are taxed at different rates (0%, 15%, and 20%).

As long as your total income is under $83,350, all long term capital gains and qualified dividends are taxed at 0%. LTCG and QDs above that limit are taxed at 15%.

When it comes to taxation, your ordinary income sits underneath LTCG/QDs in a stack. The ordinary income includes salary, SS, pension, short term capital gains and Roth conversions. Each dollar that is converted to Roth adds $1 to ordinary income which is taxed at 12%. In addition, each dollar that is converted to Roth "pushes" $1 of LTCG/QD from the 0% rate into the 15% rate.

So each dollar of Roth conversion is taxed at 27% as long as your LTCD and QD "straddle" that $83,350 limit. Once ordinary income reaches $83,350, all LTCG/QD are above the line. At that point, LTCG/QDs are taxed at 15%.

Your income this year, without the conversions, appears to be about $83k. Assuming that is correct, with no conversions, all of your LTCG and QD would have been taxed at 0%. However, since you have done the $70k Roth conversion, all of your LTCG/QD have been pushed from below the limit to above the limit making part of that conversion taxed at 27%. Once you are past that, ordinary income drops back down to normal.

I hope that makes sense. We don't know what part of your ordinary dividends are qualified dividends, but I suspect a good portion are qualified.
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retiredjg
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Re: Does IRA to ROTH Still Make Sense AND How Much to Convert

Post by retiredjg »

PS. I'm not trying to say you should not do Roth conversions. I'm just pointing out that that not all of your Roth conversion is being done at 12% or 22% as you may have thought. Some dollars are being converted at 27%.
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tadamsmar
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Re: Does IRA to ROTH Still Make Sense AND How Much to Convert

Post by tadamsmar »

LilyFleur wrote: Fri Sep 23, 2022 1:29 pm
patrickscott wrote: Fri Sep 23, 2022 12:54 pm
retiredjg wrote: Fri Sep 23, 2022 8:42 am
6) We are joint owners of the I BONDS (under my SSN). I cannot transfer them to her. We will cash them in about 7 or 8 years and will have substantial tax bills.

Thanks again for your assistance.
I am highlighting this for the consideration of Bogleheads who are investing heavily in I Bonds at the moment. It's a factor in tax and financial planning, and you are wise to consider it.
Since the I-Bonds are jointly owned, won't she just be the owning survivor if he dies? What's the issue that you are highlighting?

Edit: Are you highlighting the fact that you have to pay the taxes when the I-Bond matures?
Last edited by tadamsmar on Sat Sep 24, 2022 9:22 am, edited 1 time in total.
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tadamsmar
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Re: Does IRA to ROTH Still Make Sense AND How Much to Convert

Post by tadamsmar »

I am trying to think of scenarios where you might regret converting too much.

One scenario is if you have large medical bills that give you a large tax deduction so you can, in effect, draw down trad IRAs tax free. Can happen for qualified nursing home or nursing care expenses.

Not sure of all the scenarios where converting is a loser.
Last edited by tadamsmar on Sat Sep 24, 2022 9:15 am, edited 4 times in total.
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tadamsmar
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Re: Does IRA to ROTH Still Make Sense AND How Much to Convert

Post by tadamsmar »

Where are you getting the money to pay the conversion taxes?
Carl53
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Re: Does IRA to ROTH Still Make Sense AND How Much to Convert

Post by Carl53 »

Keep in mind the $182k IRMAA limit for 2022 is based upon your 2020 tax return. Was your income in 2020 close to that level. If so be sure to add back in any tax free earnings. If you were to go to maybe $195k or possibly $200k you may still escape IRMAA in 2024 due to inflation. Unfortunately you won't know for sure until its too late but $195k ought to be safe as inflation adjustments for 2022 in the 2023 tax brackets/limits should be higher than that and next year's inflation will add to it prior to 2024.

I don't see how you could have so much in Ibonds unless you purchased some in 2003 when you could put 30k each into them or possibly inherited some. I don't know if back then you could have supplemented regular purchases with tax refunds or trusts but even then it seems quite a stretch to have that impressive total. $10k in purchases for both of you in May 1999 and December 2000 would be worth $144+k today.
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retiredjg
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Re: Does IRA to ROTH Still Make Sense AND How Much to Convert

Post by retiredjg »

I understand that the I Bond limits were not enforced back then. People routinely reported buying more than the limit for a number of years.
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patrickscott
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Re: Does IRA to ROTH Still Make Sense AND How Much to Convert

Post by patrickscott »

retiredjg wrote: Sat Sep 24, 2022 8:25 am
patrickscott wrote: Sat Sep 24, 2022 6:49 am 1) I do not understand, "However, since the conversions are making your (something less than) $11k in dividends taxable, you are not converting all of it at the 22% rate. Some is being converted at a higher rate than that (27%). "
Ordinary income is taxed by one set of rates (10%, 12%, 22%, 24%, 32% etc). Long term capital gains and qualified dividends are taxed at different rates (0%, 15%, and 20%).

As long as your total income is under $83,350, all long term capital gains and qualified dividends are taxed at 0%. LTCG and QDs above that limit are taxed at 15%.

When it comes to taxation, your ordinary income sits underneath LTCG/QDs in a stack. The ordinary income includes salary, SS, pension, short term capital gains and Roth conversions. Each dollar that is converted to Roth adds $1 to ordinary income which is taxed at 12%. In addition, each dollar that is converted to Roth "pushes" $1 of LTCG/QD from the 0% rate into the 15% rate.

So each dollar of Roth conversion is taxed at 27% as long as your LTCD and QD "straddle" that $83,350 limit. Once ordinary income reaches $83,350, all LTCG/QD are above the line. At that point, LTCG/QDs are taxed at 15%.

Your income this year, without the conversions, appears to be about $83k. Assuming that is correct, with no conversions, all of your LTCG and QD would have been taxed at 0%. However, since you have done the $70k Roth conversion, all of your LTCG/QD have been pushed from below the limit to above the limit making part of that conversion taxed at 27%. Once you are past that, ordinary income drops back down to normal.

I hope that makes sense. We don't know what part of your ordinary dividends are qualified dividends, but I suspect a good portion are qualified.
Thank you for your detailed explanation. I will have to make a test tax return to see what my actual taxation rate is. Thanks again for being so detailed.
RCL
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Re: Does IRA to ROTH Still Make Sense AND How Much to Convert

Post by RCL »

patrickscott wrote: Sat Sep 24, 2022 1:40 pm
retiredjg wrote: Sat Sep 24, 2022 8:25 am
patrickscott wrote: Sat Sep 24, 2022 6:49 am 1) I do not understand, "However, since the conversions are making your (something less than) $11k in dividends taxable, you are not converting all of it at the 22% rate. Some is being converted at a higher rate than that (27%). "
Ordinary income is taxed by one set of rates (10%, 12%, 22%, 24%, 32% etc). Long term capital gains and qualified dividends are taxed at different rates (0%, 15%, and 20%).

As long as your total income is under $83,350, all long term capital gains and qualified dividends are taxed at 0%. LTCG and QDs above that limit are taxed at 15%.

When it comes to taxation, your ordinary income sits underneath LTCG/QDs in a stack. The ordinary income includes salary, SS, pension, short term capital gains and Roth conversions. Each dollar that is converted to Roth adds $1 to ordinary income which is taxed at 12%. In addition, each dollar that is converted to Roth "pushes" $1 of LTCG/QD from the 0% rate into the 15% rate.

So each dollar of Roth conversion is taxed at 27% as long as your LTCD and QD "straddle" that $83,350 limit. Once ordinary income reaches $83,350, all LTCG/QD are above the line. At that point, LTCG/QDs are taxed at 15%.

Your income this year, without the conversions, appears to be about $83k. Assuming that is correct, with no conversions, all of your LTCG and QD would have been taxed at 0%. However, since you have done the $70k Roth conversion, all of your LTCG/QD have been pushed from below the limit to above the limit making part of that conversion taxed at 27%. Once you are past that, ordinary income drops back down to normal.

I hope that makes sense. We don't know what part of your ordinary dividends are qualified dividends, but I suspect a good portion are qualified.
Thank you for your detailed explanation. I will have to make a test tax return to see what my actual taxation rate is. Thanks again for being so detailed.
Aren't the long term capital gains and the qualified dividends rate determined by Taxable income and not Total income? If that's not the case, I'm in trouble :(
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patrickscott
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Re: Does IRA to ROTH Still Make Sense AND How Much to Convert

Post by patrickscott »

Carl53 wrote: Sat Sep 24, 2022 10:07 am Keep in mind the $182k IRMAA limit for 2022 is based upon your 2020 tax return. Was your income in 2020 close to that level. If so be sure to add back in any tax free earnings. If you were to go to maybe $195k or possibly $200k you may still escape IRMAA in 2024 due to inflation. Unfortunately you won't know for sure until its too late but $195k ought to be safe as inflation adjustments for 2022 in the 2023 tax brackets/limits should be higher than that and next year's inflation will add to it prior to 2024.

I don't see how you could have so much in Ibonds unless you purchased some in 2003 when you could put 30k each into them or possibly inherited some. I don't know if back then you could have supplemented regular purchases with tax refunds or trusts but even then it seems quite a stretch to have that impressive total. $10k in purchases for both of you in May 1999 and December 2000 would be worth $144+k today.
Thanks for your comments and suggestions concerning IRMAA.

In 2020 my AGI was about $145,000 so IRMAA should not be a problem.

We started buying I Bond when they were strongly recommended by Mel Lindauer on Bogleheads. Thanks Mel! :sharebeer
Back in 2000, 2001, 2002, we bought as many I BONDS as we could afford. The purchase limit was higher back then and the fixed rate was much higher.

Also, back in 2000, 2001 and 2002, I was able to convince my father to invest substantially in I BONDS -- which (as you guessed correctly) I inherited (as a joint owner) :D about 6 years ago.

Our total investment (including inherited I BONDS) since 2000 is $163,181.00, most of them purchased in 2000, 2001, 2002 and 2003.

Have a great day.
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patrickscott
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Re: Does IRA to ROTH Still Make Sense AND How Much to Convert

Post by patrickscott »

tadamsmar wrote: Sat Sep 24, 2022 9:11 am Where are you getting the money to pay the conversion taxes?
Fortunately, we have sufficient cash on hand to pay for our conversion taxes.
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Re: Does IRA to ROTH Still Make Sense AND How Much to Convert

Post by patrickscott »

retiredjg wrote: Sat Sep 24, 2022 8:31 am PS. I'm not trying to say you should not do Roth conversions. I'm just pointing out that that not all of your Roth conversion is being done at 12% or 22% as you may have thought. Some dollars are being converted at 27%.
Thanks again.
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Re: Does IRA to ROTH Still Make Sense AND How Much to Convert

Post by patrickscott »

retiredjg wrote: Sat Sep 24, 2022 10:49 am I understand that the I Bond limits were not enforced back then. People routinely reported buying more than the limit for a number of years.
That's what we did. We purchase a lot of I BONDS.
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Re: Does IRA to ROTH Still Make Sense AND How Much to Convert

Post by retiredjg »

RCL wrote: Sat Sep 24, 2022 2:40 pm
patrickscott wrote: Sat Sep 24, 2022 1:40 pm
retiredjg wrote: Sat Sep 24, 2022 8:25 am
patrickscott wrote: Sat Sep 24, 2022 6:49 am 1) I do not understand, "However, since the conversions are making your (something less than) $11k in dividends taxable, you are not converting all of it at the 22% rate. Some is being converted at a higher rate than that (27%). "
Ordinary income is taxed by one set of rates (10%, 12%, 22%, 24%, 32% etc). Long term capital gains and qualified dividends are taxed at different rates (0%, 15%, and 20%).

As long as your total income is under $83,350, all long term capital gains and qualified dividends are taxed at 0%. LTCG and QDs above that limit are taxed at 15%.

When it comes to taxation, your ordinary income sits underneath LTCG/QDs in a stack. The ordinary income includes salary, SS, pension, short term capital gains and Roth conversions. Each dollar that is converted to Roth adds $1 to ordinary income which is taxed at 12%. In addition, each dollar that is converted to Roth "pushes" $1 of LTCG/QD from the 0% rate into the 15% rate.

So each dollar of Roth conversion is taxed at 27% as long as your LTCD and QD "straddle" that $83,350 limit. Once ordinary income reaches $83,350, all LTCG/QD are above the line. At that point, LTCG/QDs are taxed at 15%.

Your income this year, without the conversions, appears to be about $83k. Assuming that is correct, with no conversions, all of your LTCG and QD would have been taxed at 0%. However, since you have done the $70k Roth conversion, all of your LTCG/QD have been pushed from below the limit to above the limit making part of that conversion taxed at 27%. Once you are past that, ordinary income drops back down to normal.

I hope that makes sense. We don't know what part of your ordinary dividends are qualified dividends, but I suspect a good portion are qualified.
Thank you for your detailed explanation. I will have to make a test tax return to see what my actual taxation rate is. Thanks again for being so detailed.
Aren't the long term capital gains and the qualified dividends rate determined by Taxable income and not Total income? If that's not the case, I'm in trouble :(
You are correct, thank you.

I used the term "total income" to mean both ordinary income and LT gains/QDs. Poor wording on my part. I should have said "total taxable income" and specified line 15 on the tax return.
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Re: Does IRA to ROTH Still Make Sense AND How Much to Convert

Post by tadamsmar »

retiredjg wrote: Sat Sep 24, 2022 8:25 am
patrickscott wrote: Sat Sep 24, 2022 6:49 am 1) I do not understand, "However, since the conversions are making your (something less than) $11k in dividends taxable, you are not converting all of it at the 22% rate. Some is being converted at a higher rate than that (27%). "
Ordinary income is taxed by one set of rates (10%, 12%, 22%, 24%, 32% etc). Long term capital gains and qualified dividends are taxed at different rates (0%, 15%, and 20%).

As long as your total income is under $83,350, all long term capital gains and qualified dividends are taxed at 0%. LTCG and QDs above that limit are taxed at 15%.

When it comes to taxation, your ordinary income sits underneath LTCG/QDs in a stack. The ordinary income includes salary, SS, pension, short term capital gains and Roth conversions. Each dollar that is converted to Roth adds $1 to ordinary income which is taxed at 12%. In addition, each dollar that is converted to Roth "pushes" $1 of LTCG/QD from the 0% rate into the 15% rate.

So each dollar of Roth conversion is taxed at 27% as long as your LTCD and QD "straddle" that $83,350 limit. Once ordinary income reaches $83,350, all LTCG/QD are above the line. At that point, LTCG/QDs are taxed at 15%.

Your income this year, without the conversions, appears to be about $83k. Assuming that is correct, with no conversions, all of your LTCG and QD would have been taxed at 0%. However, since you have done the $70k Roth conversion, all of your LTCG/QD have been pushed from below the limit to above the limit making part of that conversion taxed at 27%. Once you are past that, ordinary income drops back down to normal.

I hope that makes sense. We don't know what part of your ordinary dividends are qualified dividends, but I suspect a good portion are qualified.
Isn't your formula wrong for ordinary income? You left out the RMDs.

But I guess your estimate for his pre-conversion income is correct based on 153,000 - 70,000 = 83,000 (But what does the OP mean by "total income", that's not IRS terminology AFAIK).
Last edited by tadamsmar on Sun Sep 25, 2022 6:00 am, edited 1 time in total.
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Re: Does IRA to ROTH Still Make Sense AND How Much to Convert

Post by tadamsmar »

patrickscott wrote: Fri Sep 23, 2022 11:39 am
VanGar+Goyle wrote: Fri Sep 23, 2022 7:21 am
patrickscott wrote: Thu Sep 22, 2022 12:39 pm Question 1: Should I keep on converting IRA's to ROTH up to the MAGI limit?
Question 2: Should I convert IRA's to ROTH in excess of the MAGI limit and by how much?
Exactly which MAGI limit are you concerned about?

I am trying to figure out if exceeding "Married couples with a MAGI above $182,000 up to $228,000" makes sense. :moneybag
I think your math or understanding is incorrect. 182,000 is a taxable income limit, not an MAGI limit. In the OP, you quote 153,000 as your total income. What does total income mean? Taxable income? MAGI?

If you want to stay in the 22% tax bracket the you want a taxable income of less than <182,000. Your standard deduction is 25,900+1,400 = 27,300.

So, you want to keep you MAGI below 182,000 + 27,300 = 209,300, unless you have Medicare Part B which sets the IRMAA limit to 202,000 according to these estimates: https://thefinancebuff.com/medicare-irm ... ckets.html

I think that is the right math, others can check it. My situation is kind of like yours so I am also trying to get the math right for myself.

Anyway, not sure how you arrived at the $70,000 Roth conversion in the OP. I don't see where you clearly state what your MAGI would be if you did not do a conversion.

PS: If the 153,000 "total income" figure is your MAGI before your Roth conversions then that puts a $70,000 Roth conversion in the ballpark, I think.

PS2: 153,000 appears to be your MAGI after the $70,000 conversion. That puts your taxable income around 126,000 which is in the middle of tax bracket, not near any tax bracket limit.

PS3: Now I think you are getting the 182,000 from the 2022 IRMAA limit on MAGI. So I guess that means you have Medicare Part B, you have not confirmed?

Anyway the 182,000 2022 limit is based on your 2020 MAGI. If you indeed have Part B, then you should be using the limit that is based on your 2022 MAGI. That is the 2024 limit which can only be estimated. You need a low-ball estimate of that since you don't want to exceed it. I think 202,000 is good low-ball estimate based on this:

https://thefinancebuff.com/medicare-irm ... ckets.html
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Re: Does IRA to ROTH Still Make Sense AND How Much to Convert

Post by retiredjg »

tadamsmar wrote: Sun Sep 25, 2022 5:06 am Isn't your formula wrong for ordinary income? You left out the RMDs.
Agreed, RMDs are ordinary income. My list was not meant to include all sources of ordinary income. I was just giving examples of ordinary income.

But I guess your estimate for his pre-conversion income is correct based on 153,000 - 70,000 = 83,000 (But what does the OP mean by "total income", that's not IRS terminology AFAIK).
I don't know for sure what our original poster means by "total income". Again, I was trying to explain the 27% marginal tax rate. No matter what the poster means by "total income", the example is the same, although the numbers may work out differently.

Your post does bring up a good point. Tax rates are determined by "taxable income", after all deductions. IRMAA is determined by the MAGI for IRMAA - which is before some deductions and includes tax-exempt bond income (which is not included in taxable income). These are things that people do stumble over.
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Re: Does IRA to ROTH Still Make Sense AND How Much to Convert

Post by retiredjg »

tadamsmar wrote: Sun Sep 25, 2022 5:32 am
patrickscott wrote: Fri Sep 23, 2022 11:39 am
VanGar+Goyle wrote: Fri Sep 23, 2022 7:21 am
patrickscott wrote: Thu Sep 22, 2022 12:39 pm Question 1: Should I keep on converting IRA's to ROTH up to the MAGI limit?
Question 2: Should I convert IRA's to ROTH in excess of the MAGI limit and by how much?
Exactly which MAGI limit are you concerned about?

I am trying to figure out if exceeding "Married couples with a MAGI above $182,000 up to $228,000" makes sense. :moneybag
I think your math or understanding is incorrect. 182,000 is a taxable income limit, not an MAGI limit. In the OP, you quote 153,000 as your total income. What does total income mean? Taxable income? MAGI?
I think the $182,000 up to $228,000 is a reference to 2022 IRMAA limits. IRMAA is calculated from MAGI limits, not taxable income. And the IRMAA MAGI includes tax-exempt income (such as from tax-exempt bonds).

Obviously, if this is going to be looked at further, more specific information is needed from patrickscott.
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Re: Does IRA to ROTH Still Make Sense AND How Much to Convert

Post by patrickscott »

tadamsmar wrote: Sun Sep 25, 2022 5:32 am
patrickscott wrote: Fri Sep 23, 2022 11:39 am
VanGar+Goyle wrote: Fri Sep 23, 2022 7:21 am
patrickscott wrote: Thu Sep 22, 2022 12:39 pm Question 1: Should I keep on converting IRA's to ROTH up to the MAGI limit?
Question 2: Should I convert IRA's to ROTH in excess of the MAGI limit and by how much?
Exactly which MAGI limit are you concerned about?

I am trying to figure out if exceeding "Married couples with a MAGI above $182,000 up to $228,000" makes sense. :moneybag
I think your math or understanding is incorrect. 182,000 is a taxable income limit, not an MAGI limit. In the OP, you quote 153,000 as your total income. What does total income mean? Taxable income? MAGI?

I apologize for the confusion related to the term 'total income.' :(

On the tax estimating software I use, https://www.mortgagecalculator.org/calc ... ulator.php, on one line it states, "Total income $153,718," and further down it states, "Adjusted gross income (AGI) $153,118."

Instead of using the term total income, I should have used Adjusted gross income (AGI) $153,118. :oops:

Thanks again to all that have posted.
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Re: Does IRA to ROTH Still Make Sense AND How Much to Convert

Post by retiredjg »

Thanks for the clarification.

Just in case you don't realize this, the modified gross adjusted income (MAGI) for IRMAA is increased by any tax-exempt interest (such as from tax-exempt bonds) that is not included in your AGI.

So your MAGI for IRMAA may be $153,118 or it may be higher if you have tax-exempt income.
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Re: Does IRA to ROTH Still Make Sense AND How Much to Convert

Post by FiveK »

patrickscott wrote: Sun Sep 25, 2022 9:03 am On the tax estimating software I use, https://www.mortgagecalculator.org/calc ... ulator.php, on one line it states, "Total income $153,718," and further down it states, "Adjusted gross income (AGI) $153,118."
If the mortgagecalculator tool works best for you among various Tax estimation tools, you might want to use the Dinkytown version instead, because that is kept more current.
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patrickscott
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Re: Does IRA to ROTH Still Make Sense AND How Much to Convert

Post by patrickscott »

FiveK wrote: Sun Sep 25, 2022 1:59 pm
patrickscott wrote: Sun Sep 25, 2022 9:03 am On the tax estimating software I use, https://www.mortgagecalculator.org/calc ... ulator.php, on one line it states, "Total income $153,718," and further down it states, "Adjusted gross income (AGI) $153,118."
If the mortgagecalculator tool works best for you among various Tax estimation tools, you might want to use the Dinkytown version instead, because that is kept more current.
Thanks, I'll take a look at that.
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patrickscott
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Re: Does IRA to ROTH Still Make Sense AND How Much to Convert

Post by patrickscott »

retiredjg wrote: Sun Sep 25, 2022 9:19 am Thanks for the clarification.

Just in case you don't realize this, the modified gross adjusted income (MAGI) for IRMAA is increased by any tax-exempt interest (such as from tax-exempt bonds) that is not included in your AGI.

So your MAGI for IRMAA may be $153,118 or it may be higher if you have tax-exempt income.
Thanks for the additional information. I do not have any tax-exempt interest/income.
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