Roth conversion

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Topic Author
indexonlyplease
Posts: 1491
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Location: Florida

Roth conversion

Post by indexonlyplease » Tue Mar 05, 2019 5:45 am

This year I would like to start converting my taxed deferred compensation (457 fund) to both our Roth IRA'a. I don't have much to fill up to the max 22% tax bracket after income from pension and part time work.

Question: does it matter if I pay the taxes with the monney in the 457 plan or cash I have saved? Can I ask them for more money and take the taxes out of the money I request?

What if any is the difference?
Does it make sense to go into the 24% tax bracket now also?
I will be 55 in April, wife 51 so I have many years to do this.
I will take SS at 70, no sure of wife.

Thanks,

lakpr
Posts: 784
Joined: Fri Mar 18, 2011 9:59 am

Re: Roth conversion

Post by lakpr » Tue Mar 05, 2019 8:05 am

No it does not matter whether the taxes come from the funds within the 457 plan or from outside sources. You can shelter more in the Roth IRAs if you are able to pay the taxes from the cash you saved (as the amount you can convert to Roth is upper-bounded by the amount in the 457 plan)

I would say yes it would make sense to go into the 24% bracket too, given that the tax rates are poised to revert to 15%/25% tax bracket in 2025, 6 more years from now. So the ability to convert at 24% is a limited time offer.

Are you in a state with no income tax? or at least in a state like IL, which doesn't tax Roth conversions? If you are flexible, you might want to consider moving to such a state for a period of 2 to 3 years, and during such residency convert the max amounts you can to Roth (geographic arbitrage)

Leave enough in your traditional 401k/IRA funds to cover the upper limit of lower tax brackets in your golden years, multiplied by 20. That would be $78.6k + $24.4k for 2019 = $103k, multiplied by 20 = $2.06 million. Or if you consider you want to be in 15% bracket after 2025, $75k + $13k standard deduction = $88k, multiplied by 20 = $1.76 million.

I am using the multiplier of 20 because the RMDs start at 4% of the outstanding balance, and increase gradually from there, the assumption is that the average RMD withdrawal would be approximately 5%.

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Eagle33
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Re: Roth conversion

Post by Eagle33 » Tue Mar 05, 2019 10:01 am

If you are 63 or older, remember to factor in IRMMA Medicare premium surcharges when calculating your conversion amount.
Rocket science is not “rocket science” to a rocket scientist, just as personal finance is not “rocket science” to a Boglehead.

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TheTimeLord
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Re: Roth conversion

Post by TheTimeLord » Tue Mar 05, 2019 10:15 am

Eagle33 wrote:
Tue Mar 05, 2019 10:01 am
If you are 63 or older, remember to factor in IRMMA Medicare premium surcharges when calculating your conversion amount.
Excuse my ignorance but why 63 instead of 65?
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]

lakpr
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Re: Roth conversion

Post by lakpr » Tue Mar 05, 2019 10:23 am

because IRMAA looks at the tax returns from the year when you are age 63.

Example: if you are 63 in 2017, you would have filed the tax return in 2018 when you are 64; and for the year 2019 when you are 65, IRMAA looks at the tax returns of 2018 to determine your Medicare surcharges.

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TheTimeLord
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Re: Roth conversion

Post by TheTimeLord » Tue Mar 05, 2019 10:30 am

lakpr wrote:
Tue Mar 05, 2019 10:23 am
because IRMAA looks at the tax returns from the year when you are age 63.
I found this, so your tax return at 63 only applies for a single year, correct?
The determination is made using the beneficiary’s most recent federal tax return—a two-year look back. For example, the IRMAA paid by your clients in 2019 would rely on 2017 tax returns.
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]

lakpr
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Re: Roth conversion

Post by lakpr » Tue Mar 05, 2019 10:32 am

TheTimeLord wrote:
Tue Mar 05, 2019 10:30 am
I found this, so your tax return at 63 only applies for a single year, correct?
The determination is made using the beneficiary’s most recent federal tax return—a two-year look back. For example, the IRMAA paid by your clients in 2019 would rely on 2017 tax returns.
Yes, my understanding is that the IRMAA surcharges are on a rolling-forward basis. So your tax returns when you are age 63 determine the IRMAA surcharges for age 65; tax returns for the year when you are age 64 determine the IRMAA surcharges for age 66, etc.

marcopolo
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Re: Roth conversion

Post by marcopolo » Tue Mar 05, 2019 10:36 am

indexonlyplease wrote:
Tue Mar 05, 2019 5:45 am
This year I would like to start converting my taxed deferred compensation (457 fund) to both our Roth IRA'a. I don't have much to fill up to the max 22% tax bracket after income from pension and part time work.

Question: does it matter if I pay the taxes with the monney in the 457 plan or cash I have saved? Can I ask them for more money and take the taxes out of the money I request?

What if any is the difference?
Does it make sense to go into the 24% tax bracket now also?
I will be 55 in April, wife 51 so I have many years to do this.
I will take SS at 70, no sure of wife.

Thanks,
I am not familiar with 457 plans, but are you sure you can take money from your plan and convert to BOTH OF YOUR Roths?
401k and Trad IRAs would not allow that, seems unlikely that a 457 would allow that, but i am not sure.

It works out better if you can pay the taxes due from outside funds. This allows more money to be sheltered from taxes going forward.
Once in a while you get shown the light, in the strangest of places if you look at it right.

neilpilot
Posts: 2249
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Location: Memphis area

Re: Roth conversion

Post by neilpilot » Tue Mar 05, 2019 10:55 am

lakpr wrote:
Tue Mar 05, 2019 10:23 am
because IRMAA looks at the tax returns from the year when you are age 63.

Example: if you are 63 in 2017, you would have filed the tax return in 2018 when you are 64; and for the year 2019 when you are 65, IRMAA looks at the tax returns of 2018 to determine your Medicare surcharges.
Correct, but there's one very important and likely exception.

If either you or your spouse expect a drop in income between when your 63 and 65, and that decrease is due to a Medicare "Life Changing Event" such as retirement or a work reduction, then you can file an appeal. That appeal is a simple document in which you provide a projected income when you are 65 that falls below the IRMAA surcharge amount. If your appeal is accepted (which is usually the case) the higher income at 63 and/or 64 will be ignored.

Search "IRMAA appeal" for more information.

marcopolo
Posts: 1807
Joined: Sat Dec 03, 2016 10:22 am

Re: Roth conversion

Post by marcopolo » Tue Mar 05, 2019 11:01 am

neilpilot wrote:
Tue Mar 05, 2019 10:55 am
lakpr wrote:
Tue Mar 05, 2019 10:23 am
because IRMAA looks at the tax returns from the year when you are age 63.

Example: if you are 63 in 2017, you would have filed the tax return in 2018 when you are 64; and for the year 2019 when you are 65, IRMAA looks at the tax returns of 2018 to determine your Medicare surcharges.
Correct, but there's one very important and likely exception.

If either you or your spouse expect a drop in income between when your 63 and 65, and that decrease is due to a Medicare "Life Changing Event" such as retirement or a work reduction, then you can file an appeal. That appeal is a simple document in which you provide a projected income when you are 65 that falls below the IRMAA surcharge amount. If your appeal is accepted (which is usually the case) the higher income at 63 and/or 64 will be ignored.

Search "IRMAA appeal" for more information.
I don't think stopping/reducing Roth Conversions counts as one of those exceptions.
Once in a while you get shown the light, in the strangest of places if you look at it right.

neilpilot
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Location: Memphis area

Re: Roth conversion

Post by neilpilot » Tue Mar 05, 2019 11:10 am

marcopolo wrote:
Tue Mar 05, 2019 11:01 am
neilpilot wrote:
Tue Mar 05, 2019 10:55 am
lakpr wrote:
Tue Mar 05, 2019 10:23 am
because IRMAA looks at the tax returns from the year when you are age 63.

Example: if you are 63 in 2017, you would have filed the tax return in 2018 when you are 64; and for the year 2019 when you are 65, IRMAA looks at the tax returns of 2018 to determine your Medicare surcharges.
Correct, but there's one very important and likely exception.

If either you or your spouse expect a drop in income between when your 63 and 65, and that decrease is due to a Medicare "Life Changing Event" such as retirement or a work reduction, then you can file an appeal. That appeal is a simple document in which you provide a projected income when you are 65 that falls below the IRMAA surcharge amount. If your appeal is accepted (which is usually the case) the higher income at 63 and/or 64 will be ignored.

Search "IRMAA appeal" for more information.
I don't think stopping/reducing Roth Conversions counts as one of those exceptions.
...and I never said or implied that a conversion was an exception.

OP & spouse are in their 50s, so IRMAA isn't yet a factor. However, Eagle33 warned that if you are 63 you need to be careful about keeping your income under IRMAA surcharge limits. I simply indicate that it's common for someone to retire in their 60s, and retirement can easily negate the impact of a high income at 63 and/or 64.

There are many threads here, including this one, where a 63 y/o planning to retire at 65 might otherwise be influenced to reduce their amount of conversion in fear of IRMAA needlessly.

marcopolo
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Joined: Sat Dec 03, 2016 10:22 am

Re: Roth conversion

Post by marcopolo » Tue Mar 05, 2019 11:11 am

neilpilot wrote:
Tue Mar 05, 2019 11:10 am
marcopolo wrote:
Tue Mar 05, 2019 11:01 am
neilpilot wrote:
Tue Mar 05, 2019 10:55 am
lakpr wrote:
Tue Mar 05, 2019 10:23 am
because IRMAA looks at the tax returns from the year when you are age 63.

Example: if you are 63 in 2017, you would have filed the tax return in 2018 when you are 64; and for the year 2019 when you are 65, IRMAA looks at the tax returns of 2018 to determine your Medicare surcharges.
Correct, but there's one very important and likely exception.

If either you or your spouse expect a drop in income between when your 63 and 65, and that decrease is due to a Medicare "Life Changing Event" such as retirement or a work reduction, then you can file an appeal. That appeal is a simple document in which you provide a projected income when you are 65 that falls below the IRMAA surcharge amount. If your appeal is accepted (which is usually the case) the higher income at 63 and/or 64 will be ignored.

Search "IRMAA appeal" for more information.
I don't think stopping/reducing Roth Conversions counts as one of those exceptions.
...and I never said or implied that a conversion was an exception.

OP & spouse are in their 50s, so IRMAA isn't yet a factor. However, Eagle33 warned that if you are 63 you need to be careful about keeping your income under IRMAA surcharge limits. I simply indicate that it's common for someone to retire in their 60s, and retirement can easily negate the impact of a high income at 63 and/or 64.

There are many threads here, including this one, where a 63 y/o planning to retire at 65 might otherwise be influenced to reduce their amount of conversion in fear of IRMAA needlessly.
Perhaps I was confused by the thread title.

Many people contemplating conversions in their early 60s have already retired, they would be wise to at least consider keeping their conversions u see IRMAA limits.
Once in a while you get shown the light, in the strangest of places if you look at it right.

ByThePond
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Re: Roth conversion

Post by ByThePond » Tue Mar 05, 2019 12:26 pm

OP, with regard to your question of whether to Roth convert into your 24% bracket, you can get a good handle on it by using the Retiree Portfolio Model (RPM) https://www.bogleheads.org/wiki/Retiree_Portfolio_Model in the wiki.
I had much the same question and found a counterintuitive solution that projects to save quite a bundle over the course of my retirement.
The RPM has a learning curve and takes a fair bit of setting up, but the info generated in invaluable, IMO. There's a section that lets you input various conversion amounts and times and shows the impact on taxes and overall balance. Just fiddle with your conversion input data to find the sweet spot.

sawdust60
Posts: 164
Joined: Tue Jul 17, 2018 12:06 pm

Re: Roth conversion

Post by sawdust60 » Wed Mar 06, 2019 4:38 pm

lakpr wrote:
Tue Mar 05, 2019 8:05 am
No it does not matter whether the taxes come from the funds within the 457 plan or from outside sources. You can shelter more in the Roth IRAs if you are able to pay the taxes from the cash you saved (as the amount you can convert to Roth is upper-bounded by the amount in the 457 plan)

I would say yes it would make sense to go into the 24% bracket too, given that the tax rates are poised to revert to 15%/25% tax bracket in 2025, 6 more years from now. So the ability to convert at 24% is a limited time offer.

Are you in a state with no income tax? or at least in a state like IL, which doesn't tax Roth conversions? If you are flexible, you might want to consider moving to such a state for a period of 2 to 3 years, and during such residency convert the max amounts you can to Roth (geographic arbitrage)

Leave enough in your traditional 401k/IRA funds to cover the upper limit of lower tax brackets in your golden years, multiplied by 20. That would be $78.6k + $24.4k for 2019 = $103k, multiplied by 20 = $2.06 million. Or if you consider you want to be in 15% bracket after 2025, $75k + $13k standard deduction = $88k, multiplied by 20 = $1.76 million.

I am using the multiplier of 20 because the RMDs start at 4% of the outstanding balance, and increase gradually from there, the assumption is that the average RMD withdrawal would be approximately 5%.
$2 million in tax deferred could result in many years of IRMAA penalty. Model your future income stream. Don't forget about your other sources of income. Marginal tax rates for pension, and other non-SS income are different once you begin SS. refer to prior post link to wiki and other examples/discussion

Topic Author
indexonlyplease
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Location: Florida

Re: Roth conversion

Post by indexonlyplease » Wed Mar 06, 2019 4:54 pm

Thank you for all the responses.

I am waiting to finish my taxes to see how much I can convert for 2019. Since wife and I are still working part time I assume we would have to wait until the end of each year to see what is left in the 22% bracket before going into the 24%s bracket.

I will play with the numbers.

Topic Author
indexonlyplease
Posts: 1491
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Location: Florida

Re: Roth conversion

Post by indexonlyplease » Thu Mar 07, 2019 7:22 am

lakpr wrote:
Tue Mar 05, 2019 8:05 am
No it does not matter whether the taxes come from the funds within the 457 plan or from outside sources. You can shelter more in the Roth IRAs if you are able to pay the taxes from the cash you saved (as the amount you can convert to Roth is upper-bounded by the amount in the 457 plan) So having them withhold the tax is the same until you are at the end of the conversation. Years away.

I would say yes it would make sense to go into the 24% bracket too, given that the tax rates are poised to revert to 15%/25% tax bracket in 2025, 6 more years from now. So the ability to convert at 24% is a limited time offer. This is a concern of mine. Yes I think I will have to go into the 24% bracket.

Are you in a state with no income tax? or at least in a state like IL, which doesn't tax Roth conversions? If you are flexible, you might want to consider moving to such a state for a period of 2 to 3 years, and during such residency convert the max amounts you can to Roth (geographic arbitrage) Live in Florida no state tax.

Leave enough in your traditional 401k/IRA funds to cover the upper limit of lower tax brackets in your golden years, multiplied by 20. That would be $78.6k + $24.4k for 2019 = $103k, multiplied by 20 = $2.06 million. Or if you consider you want to be in 15% bracket after 2025, $75k + $13k standard deduction = $88k, multiplied by 20 = $1.76 million. I am thinking of moving all stock funds (2 funds) to Vanguard then leaving the fixed money in the 457 plan. The fixed money is in a stable value fund that pays 3.25%. My AA is 50/50

I am using the multiplier of 20 because the RMDs start at 4% of the outstanding balance, and increase gradually from there, the assumption is that the average RMD withdrawal would be approximately 5%.
Can you explain the 2 paragraphs better. Why keep money in 457 for latter years. My pension will always keep me in the 22% bracket. How will this effect me.
Also, many state about the medicare insurance I will pay extra, so I guess it would be better to stop conversion 2 years before 65. What income decideds this extra money.

Thank You,

Topic Author
indexonlyplease
Posts: 1491
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Location: Florida

Re: Roth conversion

Post by indexonlyplease » Thu Mar 07, 2019 7:26 am

marcopolo wrote:
Tue Mar 05, 2019 10:36 am
indexonlyplease wrote:
Tue Mar 05, 2019 5:45 am
This year I would like to start converting my taxed deferred compensation (457 fund) to both our Roth IRA'a. I don't have much to fill up to the max 22% tax bracket after income from pension and part time work.

Question: does it matter if I pay the taxes with the monney in the 457 plan or cash I have saved? Can I ask them for more money and take the taxes out of the money I request?

What if any is the difference?
Does it make sense to go into the 24% tax bracket now also?
I will be 55 in April, wife 51 so I have many years to do this.
I will take SS at 70, no sure of wife.

Thanks,
I am not familiar with 457 plans, but are you sure you can take money from your plan and convert to BOTH OF YOUR Roths?
401k and Trad IRAs would not allow that, seems unlikely that a 457 would allow that, but i am not sure.

It works out better if you can pay the taxes due from outside funds. This allows more money to be sheltered from taxes going forward.
Yes, it does as but taxes must be paid and it counts as income for the year.

lakpr
Posts: 784
Joined: Fri Mar 18, 2011 9:59 am

Re: Roth conversion

Post by lakpr » Thu Mar 07, 2019 7:59 am

indexonlyplease wrote:
Thu Mar 07, 2019 7:22 am
Can you explain the 2 paragraphs better. Why keep money in 457 for latter years. My pension will always keep me in the 22% bracket. How will this effect me.
Also, many state about the medicare insurance I will pay extra, so I guess it would be better to stop conversion 2 years before 65. What income decideds this extra money.

Thank You,
If you are going to be in 22% bracket because of your pension, ignore my calculations above. I was trying to say, keep enough in the tax advantaged plan so that when you withdraw, the RMD withdrawals would fill out up to the top of 10% and 12% brackets. No more than that. The top of 12% bracket for MFJ is $78k taxable income, so multiply that by 20. The idea is contributions escape 22% taxes but withdrawals incur only 12%.

marcopolo
Posts: 1807
Joined: Sat Dec 03, 2016 10:22 am

Re: Roth conversion

Post by marcopolo » Thu Mar 07, 2019 11:21 am

indexonlyplease wrote:
Thu Mar 07, 2019 7:26 am
marcopolo wrote:
Tue Mar 05, 2019 10:36 am
indexonlyplease wrote:
Tue Mar 05, 2019 5:45 am
This year I would like to start converting my taxed deferred compensation (457 fund) to both our Roth IRA'a. I don't have much to fill up to the max 22% tax bracket after income from pension and part time work.

Question: does it matter if I pay the taxes with the monney in the 457 plan or cash I have saved? Can I ask them for more money and take the taxes out of the money I request?

What if any is the difference?
Does it make sense to go into the 24% tax bracket now also?
I will be 55 in April, wife 51 so I have many years to do this.
I will take SS at 70, no sure of wife.

Thanks,
I am not familiar with 457 plans, but are you sure you can take money from your plan and convert to BOTH OF YOUR Roths?
401k and Trad IRAs would not allow that, seems unlikely that a 457 would allow that, but i am not sure.

It works out better if you can pay the taxes due from outside funds. This allows more money to be sheltered from taxes going forward.
Yes, it does as but taxes must be paid and it counts as income for the year.
Sure, I get the taxes due part. That is how a rollover from YOUR 457/403/401k to YOUR Roth IRA would work.
I am surprised you can take distributions from YOUR 457 plan and rollover to your SPOUSE's Roth IRA. Certainly can't do that with any other type of retirement plans that i am aware of. But, like i said, i am not familiar with 457 plans.
Once in a while you get shown the light, in the strangest of places if you look at it right.

cherijoh
Posts: 5351
Joined: Tue Feb 20, 2007 4:49 pm
Location: Charlotte NC

Re: Roth conversion

Post by cherijoh » Thu Mar 07, 2019 11:27 am

TheTimeLord wrote:
Tue Mar 05, 2019 10:30 am
lakpr wrote:
Tue Mar 05, 2019 10:23 am
because IRMAA looks at the tax returns from the year when you are age 63.
I found this, so your tax return at 63 only applies for a single year, correct?
The determination is made using the beneficiary’s most recent federal tax return—a two-year look back. For example, the IRMAA paid by your clients in 2019 would rely on 2017 tax returns.
When you are 66, they'll look back at your tax return for age 64, etc. The IRMAA determination is made every year so it is one of the limiting factors in the size of the Roth Conversion.

Topic Author
indexonlyplease
Posts: 1491
Joined: Thu Apr 30, 2015 12:30 pm
Location: Florida

Re: Roth conversion

Post by indexonlyplease » Sun Mar 10, 2019 8:13 am

marcopolo wrote:
Thu Mar 07, 2019 11:21 am
indexonlyplease wrote:
Thu Mar 07, 2019 7:26 am
marcopolo wrote:
Tue Mar 05, 2019 10:36 am
indexonlyplease wrote:
Tue Mar 05, 2019 5:45 am
This year I would like to start converting my taxed deferred compensation (457 fund) to both our Roth IRA'a. I don't have much to fill up to the max 22% tax bracket after income from pension and part time work.

Question: does it matter if I pay the taxes with the monney in the 457 plan or cash I have saved? Can I ask them for more money and take the taxes out of the money I request?

What if any is the difference?
Does it make sense to go into the 24% tax bracket now also?
I will be 55 in April, wife 51 so I have many years to do this.
I will take SS at 70, no sure of wife.

Thanks,
I am not familiar with 457 plans, but are you sure you can take money from your plan and convert to BOTH OF YOUR Roths?
401k and Trad IRAs would not allow that, seems unlikely that a 457 would allow that, but i am not sure.

It works out better if you can pay the taxes due from outside funds. This allows more money to be sheltered from taxes going forward.
Yes, it does as but taxes must be paid and it counts as income for the year.
Sure, I get the taxes due part. That is how a rollover from YOUR 457/403/401k to YOUR Roth IRA would work.
I am surprised you can take distributions from YOUR 457 plan and rollover to your SPOUSE's Roth IRA. Certainly can't do that with any other type of retirement plans that i am aware of. But, like i said, i am not familiar with 457 plans.
I miss understod you. Yes, I can only roll into my Roth IRA not my wife's.

Topic Author
indexonlyplease
Posts: 1491
Joined: Thu Apr 30, 2015 12:30 pm
Location: Florida

Re: Roth conversion

Post by indexonlyplease » Sun Mar 10, 2019 8:23 am

neilpilot wrote:
Tue Mar 05, 2019 10:55 am
lakpr wrote:
Tue Mar 05, 2019 10:23 am
because IRMAA looks at the tax returns from the year when you are age 63.

Example: if you are 63 in 2017, you would have filed the tax return in 2018 when you are 64; and for the year 2019 when you are 65, IRMAA looks at the tax returns of 2018 to determine your Medicare surcharges.
Correct, but there's one very important and likely exception.

If either you or your spouse expect a drop in income between when your 63 and 65, and that decrease is due to a Medicare "Life Changing Event" such as retirement or a work reduction, then you can file an appeal. That appeal is a simple document in which you provide a projected income when you are 65 that falls below the IRMAA surcharge amount. If your appeal is accepted (which is usually the case) the higher income at 63 and/or 64 will be ignored.

Search "IRMAA appeal" for more information.
This is a good point. Looks like married filling jointly no IRMMA tax under 170k. I am 10 years away but I will have to check if Roth conversions count. I may have to stop for a couple of years. I could easily be converting to age 70 if I don't go into the 24% bracket. Like someone said we have 6 years until we know if we would convert back to 25% or worse.

Topic Author
indexonlyplease
Posts: 1491
Joined: Thu Apr 30, 2015 12:30 pm
Location: Florida

Re: Roth conversion

Post by indexonlyplease » Sun Mar 10, 2019 8:25 am

cherijoh wrote:
Thu Mar 07, 2019 11:27 am
TheTimeLord wrote:
Tue Mar 05, 2019 10:30 am
lakpr wrote:
Tue Mar 05, 2019 10:23 am
because IRMAA looks at the tax returns from the year when you are age 63.
I found this, so your tax return at 63 only applies for a single year, correct?
The determination is made using the beneficiary’s most recent federal tax return—a two-year look back. For example, the IRMAA paid by your clients in 2019 would rely on 2017 tax returns.
When you are 66, they'll look back at your tax return for age 64, etc. The IRMAA determination is made every year so it is one of the limiting factors in the size of the Roth Conversion.
So, they look every year. Then it does not matter if you stop and then start Roth conversions?

cherijoh
Posts: 5351
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Location: Charlotte NC

Re: Roth conversion

Post by cherijoh » Sun Mar 10, 2019 8:40 am

indexonlyplease wrote:
Sun Mar 10, 2019 8:25 am
cherijoh wrote:
Thu Mar 07, 2019 11:27 am
TheTimeLord wrote:
Tue Mar 05, 2019 10:30 am
lakpr wrote:
Tue Mar 05, 2019 10:23 am
because IRMAA looks at the tax returns from the year when you are age 63.
I found this, so your tax return at 63 only applies for a single year, correct?
The determination is made using the beneficiary’s most recent federal tax return—a two-year look back. For example, the IRMAA paid by your clients in 2019 would rely on 2017 tax returns.
When you are 66, they'll look back at your tax return for age 64, etc. The IRMAA determination is made every year so it is one of the limiting factors in the size of the Roth Conversion.
So, they look every year. Then it does not matter if you stop and then start Roth conversions?
You have to decide which is better for you - more Roth conversions or getting hit with IRMAA. The good news/bad news is that you make this decision every year. If you do more Roth conversions early it might save you from higher IRMA tiers when it comes time for RMDs from your traditional retirement accounts.

From an online article I found:
The government determines whether you qualify for IRMAA by finding your modified adjusted gross income (MAGI). Your monthly IRMAA payment for each year is determined by your MAGI from two years prior. Your MAGI is your adjusted gross income (AGI) with certain costs added back to it. Your AGI is a commonly used income figure to determine your income bracket for tax purposes. AGI includes your total income for a year with certain deductions subtracted. Your MAGI adjusts by adding some deductions back, and so it might, in some cases, be higher than your AGI. Most people’s MAGI is identical to or slightly higher than their AGI. Deductions added back to your MAGI can include:

Topic Author
indexonlyplease
Posts: 1491
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Location: Florida

Re: Roth conversion

Post by indexonlyplease » Sun Mar 10, 2019 9:00 am

All good responses.

Thanks

Topic Author
indexonlyplease
Posts: 1491
Joined: Thu Apr 30, 2015 12:30 pm
Location: Florida

Re: Roth conversion

Post by indexonlyplease » Sun Mar 10, 2019 1:05 pm

lakpr wrote:
Tue Mar 05, 2019 8:05 am
No it does not matter whether the taxes come from the funds within the 457 plan or from outside sources. You can shelter more in the Roth IRAs if you are able to pay the taxes from the cash you saved (as the amount you can convert to Roth is upper-bounded by the amount in the 457 plan)

I would say yes it would make sense to go into the 24% bracket too, given that the tax rates are poised to revert to 15%/25% tax bracket in 2025, 6 more years from now. So the ability to convert at 24% is a limited time offer.

Are you in a state with no income tax? or at least in a state like IL, which doesn't tax Roth conversions? If you are flexible, you might want to consider moving to such a state for a period of 2 to 3 years, and during such residency convert the max amounts you can to Roth (geographic arbitrage)

Leave enough in your traditional 401k/IRA funds to cover the upper limit of lower tax brackets in your golden years, multiplied by 20. That would be $78.6k + $24.4k for 2019 = $103k, multiplied by 20 = $2.06 million. Or if you consider you want to be in 15% bracket after 2025, $75k + $13k standard deduction = $88k, multiplied by 20 = $1.76 million.

I am using the multiplier of 20 because the RMDs start at 4% of the outstanding balance, and increase gradually from there, the assumption is that the average RMD withdrawal would be approximately 5%.
Follow up question on paying taxes from savings. I can see I owe a lot more in taxes than I have in savings. So, I assume I could start paying taxes with savings but then would run out of money fast. I would think this would be the case for most people??

neilpilot
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Location: Memphis area

Re: Roth conversion

Post by neilpilot » Sun Mar 10, 2019 2:22 pm

indexonlyplease wrote:
Sun Mar 10, 2019 1:05 pm

Follow up question on paying taxes from savings. I can see I owe a lot more in taxes than I have in savings. So, I assume I could start paying taxes with savings but then would run out of money fast. I would think this would be the case for most people??
No....most people's savings exceed their tax liability :twisted:

Topic Author
indexonlyplease
Posts: 1491
Joined: Thu Apr 30, 2015 12:30 pm
Location: Florida

Re: Roth conversion

Post by indexonlyplease » Sun Mar 10, 2019 5:20 pm

neilpilot wrote:
Sun Mar 10, 2019 2:22 pm
indexonlyplease wrote:
Sun Mar 10, 2019 1:05 pm

Follow up question on paying taxes from savings. I can see I owe a lot more in taxes than I have in savings. So, I assume I could start paying taxes with savings but then would run out of money fast. I would think this would be the case for most people??
No....most people's savings exceed their tax liability :twisted:
What I mean is having enough savings after tax money to pay for the taxes on the conversion to the Roth IRA.

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sergeant
Posts: 1074
Joined: Tue Dec 04, 2007 11:13 pm

Re: Roth conversion

Post by sergeant » Sun Mar 10, 2019 7:00 pm

indexonlyplease wrote:
Sun Mar 10, 2019 5:20 pm
neilpilot wrote:
Sun Mar 10, 2019 2:22 pm
indexonlyplease wrote:
Sun Mar 10, 2019 1:05 pm

Follow up question on paying taxes from savings. I can see I owe a lot more in taxes than I have in savings. So, I assume I could start paying taxes with savings but then would run out of money fast. I would think this would be the case for most people??
No....most people's savings exceed their tax liability :twisted:
What I mean is having enough savings after tax money to pay for the taxes on the conversion to the Roth IRA.
Most here do have more than enough in after tax money to pay the tax on our conversions. Paying the tax from a taxable account allows us to enjoy the full benefit of the conversion. Usually to convert to Roth from a 457 account you have to rollover the 457 to a traditional IRA and then do the rollover. There is a lot of info in the wiki.
Lincoln 3 EOW!

Topic Author
indexonlyplease
Posts: 1491
Joined: Thu Apr 30, 2015 12:30 pm
Location: Florida

Re: Roth conversion

Post by indexonlyplease » Fri Mar 15, 2019 7:26 am

sergeant wrote:
Sun Mar 10, 2019 7:00 pm
indexonlyplease wrote:
Sun Mar 10, 2019 5:20 pm
neilpilot wrote:
Sun Mar 10, 2019 2:22 pm
indexonlyplease wrote:
Sun Mar 10, 2019 1:05 pm

Follow up question on paying taxes from savings. I can see I owe a lot more in taxes than I have in savings. So, I assume I could start paying taxes with savings but then would run out of money fast. I would think this would be the case for most people??
No....most people's savings exceed their tax liability :twisted:
What I mean is having enough savings after tax money to pay for the taxes on the conversion to the Roth IRA.
Most here do have more than enough in after tax money to pay the tax on our conversions. Paying the tax from a taxable account allows us to enjoy the full benefit of the conversion. Usually to convert to Roth from a 457 account you have to rollover the 457 to a traditional IRA and then do the rollover. There is a lot of info in the wiki.
Did not know about the rollover. I will read wiki
Thanks

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CAsage
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Re: Roth conversion

Post by CAsage » Fri Mar 15, 2019 9:11 pm

I must be the odd duck that doesn't wish to part with any after-tax funds to pay taxes. I am driving my IRA down as fast as I can, prior to IRMAA and SS and RMD.... so the next several years, I am doing Roth conversions and IRA withdrawals for Tax withholding in December to cover 99% of my federal and state taxes - out of my IRA, and yes I know the it might be better not to. Carefully calculated to the top dollar of the 24% bracket. You gotta pay taxes on it one way or the other, and none of us really know... but I don't think my top tax bracket will ever be lower.
And don't let the IRMAA tail wag the dog - I'm going to max out my Roth Conversions at 63 and 64 anyway; it will drive my effective marginal tax rate from 24% to 28%, which is still better than 32%. Something to reevaluate each year, see what you think.
Salvia Clevelandii "Winifred Gilman" my favorite. YMMV; not a professional advisor.

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