Roth conversion

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is50xenough
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Roth conversion

Post by is50xenough » Fri Jan 11, 2019 1:00 pm

For those who are in early retirement and with significant tax deferred savings, are you doing "mega" Roth conversions, meaning not at the level of zero taxes or even the lowest tax bracket. This would likely be folks in 50s and 60s. Love to hear your thought process on both sides---doing or not doing. Thanks all

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David Jay
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Re: Roth conversion

Post by David Jay » Fri Jan 11, 2019 1:08 pm

This is widely discussed here on BH so there is lots of information out there.

Here is the Wiki on the subject: https://www.bogleheads.org/wiki/Roth_IRA_conversion

May I also suggest this Bogleheads search (click on link), you will find dozens of threads on this topic: https://www.google.com/search?sitesearc ... +before+SS
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DSInvestor
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Re: Roth conversion

Post by DSInvestor » Fri Jan 11, 2019 1:13 pm

An increase in income could cause disqualification for a ACA health insurance premium tax credit or trigger medicare IRMAA (Income related monthly adjustment amount).

The ACA premium tax credit could be substantial (>10-20K depending on age). When I ran numbers on the KFF calculator, a couple age 64 in my area with 65K income (395% of poverty level) may get a premium tax credit of 22K. Increase income to 66K (404% of poverty level) and premium tax credit drops to ZERO.

Kaiser family foundation calculator: https://www.kff.org/interactive/subsidy-calculator/
Last edited by DSInvestor on Sat Jan 12, 2019 1:19 am, edited 1 time in total.
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Dottie57
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Re: Roth conversion

Post by Dottie57 » Fri Jan 11, 2019 3:01 pm

No. My employer didn’t allow post tax contributions. So no way to do so.

Golf maniac
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Re: Roth conversion

Post by Golf maniac » Fri Jan 11, 2019 5:13 pm

I am 59 and retired 3 years. I will begin Roth conversions this year. All money is in tax deferred so it will take me 5 to 6 years of large conversions to get the majority over to Roth. I am a Fed retiree so I am not planning to take Medicare Part B as current health coverage for Part B items are covered (so don’t have to worry about high premiums from higher income). The main reason I am doing the conversions is I believe taxes will never be lower. The current tax rates expire in 2025 and I want as much in Roth as possible in current tax rates.

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Re: Roth conversion

Post by Good Listener » Fri Jan 11, 2019 6:33 pm

See PM.

krafty81
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Re: Roth conversion

Post by krafty81 » Fri Jan 11, 2019 8:27 pm

Seems like some confusion on "Mega - Roth". Lots of discussion on this site. I am 59. This year I will max out my 401K in about six months (25,000), then do post tax contributions to my 401K to get up to 55K. In Dec, I will make my one allowed tx to my Roth IRA of the 30K I put in there the last six months. I will owe income tax on my gains from that six months.

relaxtothemax
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Re: Roth conversion

Post by relaxtothemax » Fri Jan 11, 2019 8:45 pm

My 2 cents.
I'm seriously considering doing 150k conversions for the next 6 years.
I know it will put us up there as far as tax costs and medicare go but in 6 years it will happen anyway.
I have plenty of cash to pay the taxes and if the stock market drops then I'm definitely doing it.
If the stock market continues to rally I may pause and rethink.
I don't want to fund a Roth IRA with top priced equities.

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FIREchief
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Re: Roth conversion

Post by FIREchief » Fri Jan 11, 2019 8:49 pm

is50xenough wrote:
Fri Jan 11, 2019 1:00 pm
For those who are in early retirement and with significant tax deferred savings, are you doing "mega" Roth conversions, meaning not at the level of zero taxes or even the lowest tax bracket.
Yes.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

sandramjet
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Re: Roth conversion

Post by sandramjet » Fri Jan 11, 2019 8:57 pm

I was planning on doing this but if I do, it would push me over the limit for getting the AOTC benefits... I can't justify the impact of giving up that credit.

The Wizard
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Re: Roth conversion

Post by The Wizard » Fri Jan 11, 2019 9:26 pm

At age 68, basically six years into retirement and filing Single, I've been doing moderate Roth conversions of $30k to $35k the past few years, not "mega".

I'm in the 24% marginal bracket this year, formerly the 28% bracket, so this level of Roth conversion simply brings my AGI up to about where it will be in 2020 with zero Roth conversions from then on...
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DrGoogle2017
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Re: Roth conversion

Post by DrGoogle2017 » Fri Jan 11, 2019 11:13 pm

I’ve been doing mega Roth conversion, I plan to do 11 more mega years until I’m 70.

marcopolo
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Re: Roth conversion

Post by marcopolo » Sat Jan 12, 2019 12:05 am

DSInvestor wrote:
Fri Jan 11, 2019 1:13 pm
An increase in income could cause disqualification for a ACA health insurance premium tax credit or trigger medicare IRMAA (Income related monthly adjustment amount).

The ACA premium tax credit could be substantial (>10-20K depending on age). When I ran numbers on the KFF calculator, a couple age 65 in my area with 48K income (395% of poverty level) may get a premium tax credit of 24K. Increase income to 49K (404% of poverty level) and premium tax credit drops to ZERO.

Kaiser family foundation calculator: https://www.kff.org/interactive/subsidy-calculator/
I think your numbers are wrong. The FPL for a couple is $16,460. So, $48k would only be about 300% FPL. The cliff at 400% of FPL is around $65k, NOT $48k, for a couple.
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DSInvestor
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Re: Roth conversion

Post by DSInvestor » Sat Jan 12, 2019 1:19 am

marcopolo wrote:
Sat Jan 12, 2019 12:05 am
DSInvestor wrote:
Fri Jan 11, 2019 1:13 pm
An increase in income could cause disqualification for a ACA health insurance premium tax credit or trigger medicare IRMAA (Income related monthly adjustment amount).

The ACA premium tax credit could be substantial (>10-20K depending on age). When I ran numbers on the KFF calculator, a couple age 65 in my area with 48K income (395% of poverty level) may get a premium tax credit of 24K. Increase income to 49K (404% of poverty level) and premium tax credit drops to ZERO.

Kaiser family foundation calculator: https://www.kff.org/interactive/subsidy-calculator/
I think your numbers are wrong. The FPL for a couple is $16,460. So, $48k would only be about 300% FPL. The cliff at 400% of FPL is around $65k, NOT $48k, for a couple.
Thanks. I corrected my post above.
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FiveK
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Re: Roth conversion

Post by FiveK » Sat Jan 12, 2019 3:21 am

is50xenough wrote:
Fri Jan 11, 2019 1:00 pm
are you doing "mega" Roth conversions, meaning not at the level of zero taxes or even the lowest tax bracket.
Yes, using a spreadsheet with logic copied from the personal finance toolbox spreadsheet. This accounts for the various IRMAA and ACA cliffs noted previously, plus various other marginal rate effects such as SS benefit taxation, etc. Could probably use that spreadsheet as is, and in practice do compare results between it and the personal one.

The Wizard
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Re: Roth conversion

Post by The Wizard » Sat Jan 12, 2019 5:56 am

Well, if one is doing "mega" Roth conversions (whatever that means), then I would expect one's AGI to be well over $85,000 per person and well into higher Medicare IRMAA tiers at age 65 and above.
Am I correct?
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retiredjg
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Re: Roth conversion

Post by retiredjg » Sat Jan 12, 2019 7:24 am

The Wizard wrote:
Sat Jan 12, 2019 5:56 am
Well, if one is doing "mega" Roth conversions (whatever that means), then I would expect one's AGI to be well over $85,000 per person and well into higher Medicare IRMAA tiers at age 65 and above.
Am I correct?
Yes, almost. It's MAGI over $85k for a single person at age 63 and beyond that will push the person into a higher IRMAA tier at ages 65 and beyond.

In this case the MAGI = AGI plus tax-exempt interest (like from muni bonds). Obviously, if the AGI is over the limit, the MAGI would be over the limit as well so what you said is true but not the whole story.

retiredjg
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Re: Roth conversion

Post by retiredjg » Sat Jan 12, 2019 7:42 am

is50xenough wrote:
Fri Jan 11, 2019 1:00 pm
For those who are in early retirement and with significant tax deferred savings, are you doing "mega" Roth conversions...
is50xenough, if you are confused about some of the answers you are seeing, that is because the term "mega....Roth" is used to describe something else. :happy

The Wizard
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Re: Roth conversion

Post by The Wizard » Sat Jan 12, 2019 7:51 am

retiredjg wrote:
Sat Jan 12, 2019 7:42 am
is50xenough wrote:
Fri Jan 11, 2019 1:00 pm
For those who are in early retirement and with significant tax deferred savings, are you doing "mega" Roth conversions...
is50xenough, if you are confused about some of the answers you are seeing, that is because the term "mega....Roth" is used to describe something else. :happy
I agree.
Would have been better simply to ask if people are doing "large" Roth conversions, though even that is subject to interpretation...
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livesoft
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Re: Roth conversion

Post by livesoft » Sat Jan 12, 2019 8:08 am

We are only converting up to the amount that our qualified dividends are still taxed at 0%. At least in 2017, if we converted higher, then the dividends would have an effective tax rate of 30%.

We are many years from RMD and SS, so there is time to do more. Plus our jet setting lifestyle hacks allow us to live without much in the way of taxes anyways. I suspect that at RMD time, we will be doing mostly QCDs instead of RMDs.
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PatrickA5
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Re: Roth conversion

Post by PatrickA5 » Sat Jan 12, 2019 9:53 am

We converted up to $160K last year - which would be the point where our American Opportunity Credit for DS's college would start to phase out. So, we stopped there. We're 60 now, and plan on doing some bigger conversions for the next 2 or 3 years and then some smaller conversion to the top of the 12% bracket annually after that time. You don't want to convert everything, but having a good mix of tax deferred, tax free, and taxable accounts will give you a lot of options come RMD/SS time.

DrGoogle2017
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Re: Roth conversion

Post by DrGoogle2017 » Sat Jan 12, 2019 4:35 pm

retiredjg wrote:
Sat Jan 12, 2019 7:24 am
The Wizard wrote:
Sat Jan 12, 2019 5:56 am
Well, if one is doing "mega" Roth conversions (whatever that means), then I would expect one's AGI to be well over $85,000 per person and well into higher Medicare IRMAA tiers at age 65 and above.
Am I correct?
Yes, almost. It's MAGI over $85k for a single person at age 63 and beyond that will push the person into a higher IRMAA tier at ages 65 and beyond.

In this case the MAGI = AGI plus tax-exempt interest (like from muni bonds). Obviously, if the AGI is over the limit, the MAGI would be over the limit as well so what you said is true but not the whole story.
$170k for a couple, I make sure I don’t go over it for IRMAA purpose. I know it’s painful for a lot of folks to pay anymore tax then necessary, so not everybody will do it. Plus I don’t have to worry about ACA. But for the people relying on ACA subsidy, they will have to pay more on tax later if their account is large enough.
Last edited by DrGoogle2017 on Sat Jan 12, 2019 5:14 pm, edited 2 times in total.

DrGoogle2017
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Re: Roth conversion

Post by DrGoogle2017 » Sat Jan 12, 2019 4:53 pm

krafty81 wrote:
Fri Jan 11, 2019 8:27 pm
Seems like some confusion on "Mega - Roth". Lots of discussion on this site. I am 59. This year I will max out my 401K in about six months (25,000), then do post tax contributions to my 401K to get up to 55K. In Dec, I will make my one allowed tx to my Roth IRA of the 30K I put in there the last six months. I will owe income tax on my gains from that six months.
I googled and there is no such thing as Mega Roth, but rather Mega Backdoor Roth. So that’s why I wasn’t confused by OP.

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Leif
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Re: Roth conversion

Post by Leif » Sat Jan 12, 2019 5:26 pm

I've started the "mega" (as the OP defined it) conversions. I've estimated my retirement income and calculated my conversion amount for each year to keep me within my tax bracket. I do the conversions quarterly to match my estimated tax payments.

I will be converting equities that I want to keep in a tax preferred account, such as REITs. All my conversions will be equities.

I've decided to accelerate my conversion if the market turns bear. Even with these "mega" conversions I'll still have some substantial RMDs coming. I guess I over saved in my tIRA/401K accounts.

lstone19
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Re: Roth conversion

Post by lstone19 » Sun Jan 13, 2019 11:04 am

We are doing Roth conversions to the top of 24% both last year and this year (our last pre-IRMAA year (almost - my wife turns 65 in Dec 2021)). I'm mostly retired, my wife is still working).

Why? We think we are unlikely to see lower income tax rates in the future (both due to income and where we think rates may go), in our current state (unlikely to stay there in full retirement) all retirement income (anything on a 1099-R) is exempt from state income tax, and if we don't, between pensions, SS, and RMDs (when we get there), we'll be well into SS taxability as potentially IRMAA. Getting a few hundred thousand converted relieves that pressure.

And right now, we have no "penalties" by doing so - income is already too high for health care subsidies and no children in school.

But in 2020, I'll start working to keep MAGI below IRMAA limits. And by having a reasonably sized Roth balance, we can manipulate income as needed (pull from Roth if we don't want anymore taxable income that year).

There's no guarantee this is the best strategy but as we don't know the future, it seems reasonable to us right now.

ByThePond
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Re: Roth conversion

Post by ByThePond » Sun Jan 13, 2019 5:29 pm

Yes. Just started this year with a $30k conversion. The goal is to completely empty out the remainder of my tax deferred acct by age 70, during the time that DW's RMDs begin. Like many here, we had a lot of our portfolio in tax deferred accts. ACA and IRMAA are not issues.
I also purchased a large SPIA out of my tax deferred acct in aid of this and to build an income floor.
I have found Retiree Portfolio Model very useful in identifying the sweet spot for how much and when to convert. (Thank you BigFoot48.)

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is50xenough
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Re: Roth conversion

Post by is50xenough » Mon Jan 14, 2019 4:21 pm

retiredjg wrote:
Sat Jan 12, 2019 7:42 am
is50xenough wrote:
Fri Jan 11, 2019 1:00 pm
For those who are in early retirement and with significant tax deferred savings, are you doing "mega" Roth conversions...
is50xenough, if you are confused about some of the answers you are seeing, that is because the term "mega....Roth" is used to describe something else. :happy
You are correct, I should have used the phrase "large" instead of "mega" since mega does refer to a very specific circumstance. Seemed like most answers still make sense but correction appreciated!

boglefannyc
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Re: Roth conversion

Post by boglefannyc » Mon Jan 14, 2019 6:46 pm

is50xenough wrote:
Fri Jan 11, 2019 1:00 pm
For those who are in early retirement and with significant tax deferred savings, are you doing "mega" Roth conversions, meaning not at the level of zero taxes or even the lowest tax bracket. This would likely be folks in 50s and 60s. Love to hear your thought process on both sides---doing or not doing. Thanks all
I am age 58 and for 2019 I estimate to be about $9k below the 12% bracket. I'm thinking to tax gain harvest one of my two remaining individual stocks to simplify. In the future I do not plan to Roth convert above the 12% bracket since we will likely be in the 22% bracket when RMD's begin. The factors I'm considering are:

1. I am trying to delay social security till 70 and will have many years to convert but not enough in taxable funds to live on and pay the taxes
2. We are planning to move to a no tax state soon
3. Our current marginal rates are 12% federal and 8.26% state
3. If we do not move, our state has a $20k exemption for retirement income starting at age 59 1/2
4. If the market does poorly this year, I may prefer to tax loss harvest and Roth convert the $9k

SGM
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Re: Roth conversion

Post by SGM » Mon Jan 14, 2019 7:11 pm

We converted from age 62 to 67 while working part time and later completely retired. I delayed my SS until 70. DW took her spousal benefit when I was 67 but very late in the year. We chose to convert all of our 401ks and traditional IRAs. I considered keeping some tIRAs for charitable donations, but DW did not want any RMDs. We use large capital gain stocks for charitable donations instead.



DW has extreme longevity in her family and that was a consideration both for delaying my SS until 70 and for making conversions. Single are taxed at a higher rate for the same amount of income.

GAAP
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Re: Roth conversion

Post by GAAP » Tue Jan 15, 2019 2:44 pm

Yes, for a number of reasons.
  • I'm subject to a Washington Estate tax, that would tax my heirs on funds owed to the IRS.
  • I have enough other income sources that will make Medicare premium concerns a moot point.
  • I and my wife both have a family history of longevity.
  • Unless amended, the current tax brackets will expire in a few years.
  • I'm delaying defined benefit sources, including SS, to maximize the final value received -- leaving more room to do conversions.
  • I have a child with ongoing major medical issues who could likely use a lifetime tax-free income stream.
  • Decreasing the amount of future taxes provides room for the retirement spending smile, should it occur.
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nguy44
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Re: Roth conversion

Post by nguy44 » Tue Jan 15, 2019 3:09 pm

I am still taking the time to figure this out for my situation. I do plan to do some conversion, as if I leave my tax deferred accounts as is I will face large RMDs in 2028, when I turn 70.5. Coupled with my pension, SS, and earnings for my taxable accounts, it likely would push us up a tax bracket (of course who knows what tax brackets will be like in 2028 :happy ). In any case, I need to figure this out, perhaps do an initial conversion with some of the tax deferred money this year.

Good Listener
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Re: Roth conversion

Post by Good Listener » Thu Jan 17, 2019 5:12 pm

nguy44 wrote:
Tue Jan 15, 2019 3:09 pm
I am still taking the time to figure this out for my situation. I do plan to do some conversion, as if I leave my tax deferred accounts as is I will face large RMDs in 2028, when I turn 70.5. Coupled with my pension, SS, and earnings for my taxable accounts, it likely would push us up a tax bracket (of course who knows what tax brackets will be like in 2028 :happy ). In any case, I need to figure this out, perhaps do an initial conversion with some of the tax deferred money this year.
I know :( the brackets will be higher in 2028, possibly much much higher. The rhetoric I am hearing is scary doni am getting all converted ASAP.

azianbob
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Re: Roth conversion

Post by azianbob » Thu Jan 17, 2019 7:39 pm

So if I am understanding correctly, for health insurance, if I retire early (before 65), I should try to keep my AGI under $65,000 until I am 65 so I can still get the ACA credit, and then once I turn 65, keep my AGI under $170,000 so I pay the lowest Medicare premium possible?

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FiveK
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Re: Roth conversion

Post by FiveK » Thu Jan 17, 2019 7:42 pm

azianbob wrote:
Thu Jan 17, 2019 7:39 pm
So if I am understanding correctly, for health insurance, if I retire early (before 65), I should try to keep my AGI under $65,000 until I am 65 so I can still get the ACA credit, and then once I turn 65, keep my AGI under $170,000 so I pay the lowest Medicare premium possible?
The spreadsheet you downloaded in TIRA Roth Conversion and Backdoor Roth IRA in the same year possible? - Bogleheads.org will include both ACA and IRMAA effects in its marginal rate chart. Then it's up to you to decide how the results affect your decisions.

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celia
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Re: Roth conversion

Post by celia » Thu Jan 17, 2019 10:57 pm

is50xenough wrote:
Fri Jan 11, 2019 1:00 pm
For those who are in early retirement and with significant tax deferred savings, are you doing "mega" Roth conversions, meaning not at the level of zero taxes or even the lowest tax bracket. This would likely be folks in 50s and 60s. Love to hear your thought process on both sides---doing or not doing. Thanks all
That’s what we did and it worked out well for us. It also simplified our life a bit so we don’t have to worry about RMDs as our memory goes… DH is now doing QCDs on the Inherited IRAs so we can clear them out too.
DSInvestor wrote:
Fri Jan 11, 2019 1:13 pm
An increase in income could cause disqualification for a ACA health insurance premium tax credit or trigger medicare IRMAA (Income related monthly adjustment amount).
Yes, you are correct that a Roth conversion will appear as if you have an increase in income on your tax return. But so will an RMD after you are 70.5. After 70.5, it is difficult to change your tax situation (brackets), unless you turn off some of your income streams. How many years will you benefit being on the ACA vs. how many years will you be taking RMDs (maybe even with IRMAA surcharges)?

And as you get older, it will only get worse as your tax-deferred account will usually continue to grow as well as the percent you need to withdraw each year. The RMDs usually peak in one’s 80s when the amount withdrawn each year is greater than the amount of growth in the account. And if one spouse dies, the surviving spouse will have to continue taking the same RMDs (assuming the couple was similar in age) while filing as Single. The tax bracket for Singles is half as large as it is for MFJs, so the percent going to taxes after the death of the first spouse will most likely be in an even higher tax bracket.

The Wizard wrote:
Sat Jan 12, 2019 5:56 am
Well, if one is doing "mega" Roth conversions (whatever that means), then I would expect one's AGI to be well over $85,000 per person and well into higher Medicare IRMAA tiers at age 65 and above.
Am I correct?
For clarification, if you do a large enough Roth conversion to push your MAGI over $85K (Single) or $170K (Married) after the year you turn 63, then YES, you will be impacted by IRMAA surcharges when on Medicare after 65. The surcharges start out small (about $50/mo/person) but can get quite large, depending on what tier your MAGI was in two years previously.
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: Roth conversion

Post by neilpilot » Thu Jan 17, 2019 11:17 pm

celia wrote:
Thu Jan 17, 2019 10:57 pm

For clarification, if you do a large enough Roth conversion to push your MAGI over $85K (Single) or $170K (Married) after the year you turn 63, then YES, you will be impacted by IRMAA surcharges when on Medicare after 65. The surcharges start out small (about $50/mo/person) but can get quite large, depending on what tier your MAGI was in two years previously.
Medicare Premiums: Rules For Higher-Income Beneficiaries.
Not necessarily. Even though you exceed MAGI the year you turn 63 (or 64), it’s easy to file a successful IRMAA appeal if you expect your income will drop below MAGI the year you will turn 65 due to retirement or another SS life changing event. Look at SSA-44.

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FiveK
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Re: Roth conversion

Post by FiveK » Thu Jan 17, 2019 11:26 pm

neilpilot wrote:
Thu Jan 17, 2019 11:17 pm
Not necessarily. Even though you exceed MAGI the year you turn 63 (or 64), it’s easy to file a successful IRMAA appeal if you expect your income will drop below MAGI the year you will turn 65 due to retirement or another SS life changing event. Look at SSA-44.
Correct.

Although, "stopped doing Roth conversions," "didn't realize any capital gains," and similar voluntary MAGI reductions, are not accepted grounds for an IRMAA appeal.

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