How much to rollover from IRA to Roth IRA

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StarsandStripes
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How much to rollover from IRA to Roth IRA

Post by StarsandStripes » Sun Jun 30, 2019 5:13 pm

After a couple of starts and stops I will be permanently retiring September 12, 2019. I have done OK using the Boglehead approach. We are both 63 years old. I am concerned about RMDS from my IRA's at 70, especially when only one of us is filing as single, hopefully that will be a long time in coming.

Currently we have a total portfolio of 4.5 million of which 2.5 million is in TIRAS, and 300k in Roth IRA accounts. The balance of 1.7 million is taxable. We receive about 40,000 dollars a year of dividends from the taxable investments which I have not calculated into spending. The taxable was a mistake that I made before learning about Vanguard and Bogleheads. The 40,000 dollars will be our only income after this year. We both plan to delay SS until 70. I have cash for 5 years of expenses, yes I know that is high but we sleep well at night knowing we can ride out a lot ups and downs. The portfolio is 60/40 and I consider my cash as a zero percent bond.

To the top of what bracket would ya'll suggest converting the TIRAS to Roth IRAS? I plan to pay the taxes out of my cash to allow the entire rollover to compound for a long time, hopefully. If our cash runs out we can take SS earlier than planed or use the rollover monies. Any suggestions about the medicare cliff? I do not see any way to avoid the Medicare cliff and reduce IRA values at the same time.

Thanks in advance!

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Re: How much to rollover from IRA to Roth IRA

Post by grabiner » Sun Jun 30, 2019 5:49 pm

Once you start taking SS, it will probably be about $50,000 in today's dollars, 85% taxable. Even small RMDs will put you in the 22% bracket unless you use them for Qualified Charitable Distributions, and your current RMDs are likely to put you in the 24% bracket. (If your regular income is in the 12% bracket but your qualified dividends and taxable gains put your total taxable income into the 22% bracket, this is even worse, as your marginal tax rate will be 27%.) And those 22% and 24% brackets are scheduled to become 25% and 28% in 2026 when you start taking them.

I would suggest converting up to an adjusted gross income (not taxable income) of $250K, which will put you in the middle of the 24% bracket. Beyond that point, the marginal tax rate becomes 27.8% because of the Net Investment Income tax, and it probably isn't worth paying 27.8% tax now to avoid 25% tax later. With that, and any capital gains from stock sales for living expenses, you should be able to get rid of about half of the traditional IRAs unless the stock market booms (and you probably won't mind if it does).
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lakpr
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Re: How much to rollover from IRA to Roth IRA

Post by lakpr » Sun Jun 30, 2019 5:57 pm

I suggest converting until the traditional (pre-tax) balances reach about $1.5 million. Do this conversion before December 31, 2025.

What is magical about this number? The top of the married filing jointly 12% bracket currently is $78950. Round it and call it $80k.

Tax rates are expected to revert to 2017 levels in 2026. If one of the spouses were to pass after that, the entire tIRA balance will be owned by the surviving spouse (assumption), what tax bracket would the RMD on the balance places the spouse in? I try not to exceed 25% bracket

The top of 25% tax bracket for a single is/will be$84500 odd, in 2017/2026.

Now, the RMDs start from 3.65% and go up. At age 78, the RMD is 5%. At age 84, the RMD is about 7%. The average RMD over 14 years is about 5%. The balance that sustains a 5% RMD for a single of $85k is $85k/5% = $1.7 million.

Have a little buffer, drop down to $1.5 million

This balance guarantees that if you are filing jointly your tax bracket will be 15% or less, and in case of a spouse passing, the surviving spouse does not pay more than 25% marginal rate, the next tax bracket
Last edited by lakpr on Sun Jun 30, 2019 7:32 pm, edited 1 time in total.

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Re: How much to rollover from IRA to Roth IRA

Post by Horsefly » Sun Jun 30, 2019 6:35 pm

We are in a fairly similar situation to the OP, with a fairly sizeable taxable account and - even if the OP doesn't recognize it yet - more than enough to live comfortably in retirement.

Something that you didn't mention is whether you have kids, or someone else you may leave some inheritance to. A traditional IRA or 401K already stinks as a way to leave $$ to your kids, and it will be worse if some variant of the SECURE act becomes law (I know we can't speculate, so I won't go further).

Roth IRAs are not taxable when you take $$ out, and the same is true for those who inherit the Roth after you pass. Besides the reasoning stated by others in this thread, this is a major motivation for us to convert a large portion of our traditional IRAs to Roth. We would then likely live out our years on just the RMDs, leaving the Roth's for our kids.

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Re: How much to rollover from IRA to Roth IRA

Post by grabiner » Sun Jun 30, 2019 7:13 pm

lakpr wrote:
Sun Jun 30, 2019 5:57 pm
I suggest converting until the traditional (pre-tax) balances reach about $1.5 million. Do this conversion before December 31, 2025.

What is magical about this number? The top of the married filing jointly 12% bracket currently is $78950. Round it and call it $80k.
There are two errors in this computation. The RMD is not the sole source of taxable income; dividends from the taxable account, and 85% of Social Security, are also taxable. Working the other way, you need to add the standard deduction to the taxable income to get the gross income; it is currently $27,000 for a married couple over 65. If the 2018 tax cuts expire in 2026, the standard deduction will go down but the personal exemptions will come back.

(While qualified dividends and long-term gains are not taxed at your tax bracket, having them cross the top of the 12% tax bracket increases your marginal tax rate to 27%. Every $1 of other income is itself taxed at 12%, and pushes $1 of qualified dividends from the 0% to the 15% tax rate.)

This is the basis for my estimate that it is not practical to get out of the 22%/25% tax bracket.
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lakpr
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Re: How much to rollover from IRA to Roth IRA

Post by lakpr » Sun Jun 30, 2019 7:32 pm

grabiner wrote:
Sun Jun 30, 2019 7:13 pm
There are two errors in this computation. The RMD is not the sole source of taxable income; dividends from the taxable account, and 85% of Social Security, are also taxable. Working the other way, you need to add the standard deduction to the taxable income to get the gross income; it is currently $27,000 for a married couple over 65. If the 2018 tax cuts expire in 2026, the standard deduction will go down but the personal exemptions will come back.

(While qualified dividends and long-term gains are not taxed at your tax bracket, having them cross the top of the 12% tax bracket increases your marginal tax rate to 27%. Every $1 of other income is itself taxed at 12%, and pushes $1 of qualified dividends from the 0% to the 15% tax rate.)

This is the basis for my estimate that it is not practical to get out of the 22%/25% tax bracket.
grabiner,

True. I was just making back of the envelope calculations in a very rough sense. Deliberately ignored the standard deduction for a couple, as well as the taxable dividends, with the assumption that they nearly cancel out each other. The SS is not considered since they both reach the age of 70 only in 2026, and the OP indicated to wait until then. Since the tax on traditional to Roth conversions will be paid from taxable account, I have also added a 25% odd reduction in the taxable account (inclusive of any state taxes), which means the $40k dividends accruing now will probably decrease as well.

If more accurate projections are required, I would refer the OP to iORP tool. As it is, my post requires the OP to convert $1 million over 7 years to Roth, that is a steep $160k annual conversions from the tIRA. Plus $40k dividends put them in the 22% tax bracket.

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Re: How much to rollover from IRA to Roth IRA

Post by infotrader » Sun Jun 30, 2019 9:46 pm

lakpr wrote:
Sun Jun 30, 2019 7:32 pm
grabiner wrote:
Sun Jun 30, 2019 7:13 pm
There are two errors in this computation. The RMD is not the sole source of taxable income; dividends from the taxable account, and 85% of Social Security, are also taxable. Working the other way, you need to add the standard deduction to the taxable income to get the gross income; it is currently $27,000 for a married couple over 65. If the 2018 tax cuts expire in 2026, the standard deduction will go down but the personal exemptions will come back.

(While qualified dividends and long-term gains are not taxed at your tax bracket, having them cross the top of the 12% tax bracket increases your marginal tax rate to 27%. Every $1 of other income is itself taxed at 12%, and pushes $1 of qualified dividends from the 0% to the 15% tax rate.)

This is the basis for my estimate that it is not practical to get out of the 22%/25% tax bracket.
grabiner,

True. I was just making back of the envelope calculations in a very rough sense. Deliberately ignored the standard deduction for a couple, as well as the taxable dividends, with the assumption that they nearly cancel out each other. The SS is not considered since they both reach the age of 70 only in 2026, and the OP indicated to wait until then. Since the tax on traditional to Roth conversions will be paid from taxable account, I have also added a 25% odd reduction in the taxable account (inclusive of any state taxes), which means the $40k dividends accruing now will probably decrease as well.

If more accurate projections are required, I would refer the OP to iORP tool. As it is, my post requires the OP to convert $1 million over 7 years to Roth, that is a steep $160k annual conversions from the tIRA. Plus $40k dividends put them in the 22% tax bracket.
Do you mean 24% tax bracket? Since 22% starts at $78,950 for MFJ, right?

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Re: How much to rollover from IRA to Roth IRA

Post by lakpr » Sun Jun 30, 2019 10:12 pm

infotrader,

22% tax bracket for MFJ extends up to $168k taxable income, plus $27k standard deduction = $195k income.

160 + 40 = $200k, but hoping that they will have about $5k in other pretax expenses to get down to 22% bracket. If not, the Roth conversion will be only upto $155k than $160k per year

infotrader
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Re: How much to rollover from IRA to Roth IRA

Post by infotrader » Sun Jun 30, 2019 10:36 pm

lakpr wrote:
Sun Jun 30, 2019 10:12 pm
infotrader,

22% tax bracket for MFJ extends up to $168k taxable income, plus $27k standard deduction = $195k income.

160 + 40 = $200k, but hoping that they will have about $5k in other pretax expenses to get down to 22% bracket. If not, the Roth conversion will be only upto $155k than $160k per year
Thanks! I thought I missed something here.

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StarsandStripes
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Re: How much to rollover from IRA to Roth IRA

Post by StarsandStripes » Mon Jul 01, 2019 6:25 am

This discussion has given me a better understanding of our situation. It looks like we will be converting to the top of the 22 percent bracket at least.

One thing that is often over looked is that even as conversions are done the remaining balance of the tIRA is still compounding tax free. If you start with 2,500,000 dollars and 150,000 is converted that leaves a balance of 2,350,000. Assume a 3 percent return and your dealing with 2,420,500 dollars the following year. Not much of a decrease.

I know this is a good problem to have. I struggle with the values as I started out with a great wife, a good education, and nothing else. To arrive at this point in life is a huge milestone that I do not want to mess up.

We do plan to leave our children an inheritance. A Roth Ira seems like a good start. If we have any tIRAS left we will let our children know about inherited IRAs and how to use them.

Thanks everyone for the advice.

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Re: How much to rollover from IRA to Roth IRA

Post by Chip » Mon Jul 01, 2019 8:28 am

StarsandStripes wrote:
Mon Jul 01, 2019 6:25 am
This discussion has given me a better understanding of our situation. It looks like we will be converting to the top of the 22 percent bracket at least.
Don't forget that since you are age 63 Roth conversions that result in an AGI > 170k will result in higher Medicare premiums (IRMAA). There is a two year lookback so that's why age 63 is important. I view those increased premiums as an additional "tax" cost when looking at Roth conversion strategies.

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Re: How much to rollover from IRA to Roth IRA

Post by kaneohe » Mon Jul 01, 2019 9:21 am

lakpr wrote:
Sun Jun 30, 2019 10:12 pm
infotrader,

22% tax bracket for MFJ extends up to $168k taxable income, plus $27k standard deduction = $195k income.

160 + 40 = $200k, but hoping that they will have about $5k in other pretax expenses to get down to 22% bracket. If not, the Roth conversion will be only upto $155k than $160k per year
std deduction is 24+ K? Also if part of the 40K dividends is QDIV and the QDIV subtracted out from the taxable income when calculating the tax on ordinary income, additional conversion could be done within the 22% bracket for ordinary income?

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Re: How much to rollover from IRA to Roth IRA

Post by lakpr » Mon Jul 01, 2019 9:47 am

Kaneohe,

The standard deduction is higher for folks over 65; $1300 extra each for that spouse who is older than 65. $24,600 + $2600 = $27,200. The OP and his wife are 63 now.

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Re: How much to rollover from IRA to Roth IRA

Post by kaneohe » Mon Jul 01, 2019 10:34 am

lakpr wrote:
Mon Jul 01, 2019 9:47 am
Kaneohe,

The standard deduction is higher for folks over 65; $1300 extra each for that spouse who is older than 65. $24,600 + $2600 = $27,200. The OP and his wife are 63 now.
I guess I was thinking of the immediate future.......this yr and next.

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Re: How much to rollover from IRA to Roth IRA

Post by #Cruncher » Mon Jul 01, 2019 7:01 pm

StarsandStripes wrote:
Sun Jun 30, 2019 5:13 pm
We receive about 40,000 dollars a year of dividends from the taxable investments ... The 40,000 dollars will be our only income after this year.
How Roth conversions would be marginally taxed depends on how much of the dividends are qualified and therefore subject to favorable tax treatment. For example, here it is if $30,000 of the dividends were qualified. It assumes 2019 tax brackets for a joint return with a deduction of $27,000.

Code: Select all

----- Roth Conversion ----    ------ Federal Tax -----    Marg
       Range        Extent          Range       Extent    Rate
-----------------   ------    ---------------   ------    -----
      0 -  17,000   17,000         0 -      0        0     0.0%
 17,000 -  36,400   19,400         0 -  1,940    1,940    10.0%
 36,400 -  65,750   29,350     1,940 -  5,462    3,522    12.0%
 65,750 -  95,750   30,000     5,462 - 13,562    8,100    27.0%
 95,750 -  95,950      200    13,562 - 13,586       24    12.0%
 95,950 - 185,400   89,450    13,586 - 33,265   19,679    22.0%
185,400 - 210,000   24,600    33,265 - 39,169    5,904    24.0%
210,000 - 250,000   40,000    39,169 - 50,289   11,120    27.8%
250,000 - 338,450   88,450    50,289 - 71,517   21,228    24.0%
338,450 -                     71,517 -                    32.0%
With these assumptions you definitely should convert at least $65,750 since the marginal tax rate would be only 12%. It's less clear how much more, if any, you should convert.

Follow these steps if you want to run this calculation with other amounts of qualified & not qualified dividends or a different deduction.
  • Select All, Copy, and Paste [ * ] the following at cell A1 of a blank Excel sheet.

    Code: Select all

    ord bracket 5	321450	0.32
    ord bracket 4	168400	0.24
    ord bracket 3	78950	0.22
    ord bracket 2	19400	0.12
    ord bracke 1	0	0.1
    QDIV bracket 2	78750	0.15
    QDIV bracket 1		0
    NIIT floor	250000	0.038
    Deduction	27000
    Qualified dividends	30000
    Other dividends	10000
    Roth conversions	0	=$B9-$B11	=$B9-$B11+$B4	=$B9-$B10-$B11+$B6	=$B9-$B11+$B6	=$B9-$B11+$B3	=$B9-$B11+$B2	=$B8-$B10-$B11	=$B8	=$B9-$B11+$B1
    Adjusted Gross Income	=$B10+$B11+B12
    Taxable Income	=MAX(0,B13-$B9)
    QDIV taxable	=MIN($B10,B14)
    Ord taxable	=B14-B15
    Taxable - ord 5	=MAX(0,B$16-$B1)
    Taxable - ord 4	=MAX(0,B$16-$B2)-SUM(B$17:B17)
    Taxable - ord 3	=MAX(0,B$16-$B3)-SUM(B$17:B18)
    Taxable - ord 2	=MAX(0,B$16-$B4)-SUM(B$17:B19)
    Taxable - ord 1	=MAX(0,B$16-$B5)-SUM(B$17:B20)
    Taxable - QDIV 2	=MAX(0,MIN(B$15,B$14-$B6))
    Taxable - QDIV 1	=MAX(0,MIN(B$15,B$14-$B7))-B22
    Taxable - NIIT	=MAX(0,MIN($B10+$B11,B13-$B8))
    Tax - ord 5	=$C1*B17
    Tax - ord 4	=$C2*B18
    Tax - ord 3	=$C3*B19
    Tax - ord 2	=$C4*B20
    Tax - ord 1	=$C5*B21
    Tax - QDIV 2	=$C6*B22
    Tax - QDIV 1	=$C7*B23
    Tax - NIIT	=$C8*B24
    Total tax	=SUM(B25:B32)
    
    Additional conversion		=C12-B12
    Increased tax		=C33-B33
    Marginal rate		=C36/C35
  • Format for readability.
  • Copy cells B13:B33 right to column K.
  • Copy cells C35:C37 right to column K.
  • Revise assumptions in cells B9:B11 as needed.
* If you have trouble pasting, try "Paste Special" and "Text".

elainet7
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Re: How much to rollover from IRA to Roth IRA

Post by elainet7 » Tue Aug 06, 2019 8:07 am

james lange writes much about this and told me to convert up to the 24% bracket
as a fla resident distribution of 300k results in 18% effective tax rate plus increased medicare premium
we will never see rates this low in our lifetime

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FiveK
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Re: How much to rollover from IRA to Roth IRA

Post by FiveK » Tue Aug 06, 2019 11:01 am

elainet7 wrote:
Tue Aug 06, 2019 8:07 am
james lange writes much about this and told me to convert up to the 24% bracket
as a fla resident distribution of 300k results in 18% effective tax rate plus increased medicare premium
we will never see rates this low in our lifetime
You'll pay ~14% for the first ~$169K (staying $1K under the $170K IRMAA tier).

The marginal rate (including IRMAA spikes) on the amount from $169K to $300K will be ~29%.

Your call on whether paying 29% on that $131K will be a good choice.

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Re: How much to rollover from IRA to Roth IRA

Post by WoodSpinner » Tue Aug 06, 2019 11:23 am

OP,

First, congrats! You have plenty of funds for retirement and I hope you both have a ball!

There have been many threads and lots of head scratching on the question of just how much to convert. There is a wealth of knowledge in the forum threads to mine....

This is a particularly good one, unfortunately the spreadsheet model Celia built in her post doesn’t currently display.

Here are a few thoughts to keep in mind.

- Decision is very dependent on you personal situation — one size will NOT fit all.

- My experience is that none of the free modeling tools (e.g. i-orp, firecalc, RPM etc.) have enough logic built in to do a good job of answering the question of How much to convert. Typically they are lacking in the details of Federal and State tax calculations.

- Psychologically it is challenging to shift from a lifetime of Saving and deferring taxes to a plan which voluntarily increases your tax burden in the short term.

- There are a great many uncertainties to deal with (tax law, life expectancy, market return, health, bequests etc.).

- To answer this question for us, I built my own model (similar to Celia’s) and used it to help understand the various trade offs and strategies. In the end I came up with this approach.
  1. Convert enough each year to smooth out my Adjusted Gross Income (AGI) to a target level that matches my expected Average AGI from 70-80 (roughly my first 10 years of RMDS). Comparing Marginal tax rates during these periods can be useful as well — I use them as a sanity check but not a driver given the uncertainties involved.
  • Update the model every year (it’s part of my yearly rebalancing and financial housekeeping) with the latest information on the portfolio, tax rates, and any other changes. Typically I will establish a new conversion target in early January which then becomes part of my tax planning.
.
  • Establish a Dollar Cost Conversion strategy to spread out the Conversions over the year. During significant market dips, convert a bit more (I am always converting in-kind, so a market dip allows me to convert more shares).

  • In December do a final conversion if needed to true up to your target.
  • Decide how you are going to pay the Taxman and follow through! We have been paying Estimated taxes quarterly and targeting a safe harbor to avoid any penalties.
Good luck, hope some of this is helpful.

WoodSpinner

elainet7
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Re: How much to rollover from IRA to Roth IRA

Post by elainet7 » Tue Aug 06, 2019 2:43 pm

Lange's new book discusses roth conversions as well as his first RETIRE SECURE

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FiveK
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Re: How much to rollover from IRA to Roth IRA

Post by FiveK » Tue Aug 06, 2019 3:05 pm

elainet7 wrote:
Tue Aug 06, 2019 2:43 pm
Lange's new book discusses roth conversions as well as his first RETIRE SECURE
From a quick scan of the early pages preview available on Amazon, his analysis corresponds to the wiki section about converting a traditional IRA to a Roth IRA, paying the tax with cash on hand.

Nothing magic or secret, but apparently accurate (as long as he is using marginal, not effective, rates for comparison) and a little hyperbole might help book sales. ;)

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Re: How much to rollover from IRA to Roth IRA

Post by elainet7 » Tue Aug 06, 2019 4:26 pm

no brainer to convert with these low tax rates doing at least 50k/yr

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Re: How much to rollover from IRA to Roth IRA

Post by elainet7 » Tue Aug 06, 2019 4:27 pm

how do I contact the board administrator

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FiveK
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Re: How much to rollover from IRA to Roth IRA

Post by FiveK » Tue Aug 06, 2019 4:50 pm

elainet7 wrote:
Tue Aug 06, 2019 4:27 pm
how do I contact the board administrator
See Bogleheads.org - The team.

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Re: How much to rollover from IRA to Roth IRA

Post by celia » Tue Aug 06, 2019 4:52 pm

StarsandStripes wrote:
Mon Jul 01, 2019 6:25 am
This discussion has given me a better understanding of our situation. It looks like we will be converting to the top of the 22 percent bracket at least.
I would convert to at least the top of the 24% tax bracket since that is not much more than 22%.
One thing that is often over looked is that even as conversions are done the remaining balance of the tIRA is still compounding tax free.
No. The tIRA is tax-deferred. All it's future growth will be taxed when it is withdrawn.
Assume a 3 percent return and your dealing with 2,420,500 dollars the following year. Not much of a decrease.
You're right in that the tIRA will continue to grow as long as the annual growth rate is more than the percentage withdrawn for the year.

You also need to be aware of the IRMAA rules once Medicare kicks in. I'm not not sure if IRMAA still applies if you don't use Medicare. Just consider the Medicare surcharges as another tax. www.ssa.gov/pubs/EN-05-10536.pdf
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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FiveK
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Re: How much to rollover from IRA to Roth IRA

Post by FiveK » Tue Aug 06, 2019 5:10 pm

celia wrote:
Tue Aug 06, 2019 4:52 pm
StarsandStripes wrote:
Mon Jul 01, 2019 6:25 am
This discussion has given me a better understanding of our situation. It looks like we will be converting to the top of the 22 percent bracket at least.
I would convert to at least the top of the 24% tax bracket since that is not much more than 22%.
Unfortunately, the marginal rate (curve labeled "Cumulative") on tIRA withdrawal amounts above $130K (due to the $40K QD), when we consider the Medicare surcharges as another tax, is 26% at lowest, and there only for a narrow withdrawal amount:

Image

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WoodSpinner
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Re: How much to rollover from IRA to Roth IRA

Post by WoodSpinner » Tue Aug 06, 2019 7:53 pm

FiveK wrote:
Tue Aug 06, 2019 5:10 pm
celia wrote:
Tue Aug 06, 2019 4:52 pm
StarsandStripes wrote:
Mon Jul 01, 2019 6:25 am
This discussion has given me a better understanding of our situation. It looks like we will be converting to the top of the 22 percent bracket at least.
I would convert to at least the top of the 24% tax bracket since that is not much more than 22%.
Unfortunately, the marginal rate (curve labeled "Cumulative") on tIRA withdrawal amounts above $130K (due to the $40K QD), when we consider the Medicare surcharges as another tax, is 26% at lowest, and there only for a narrow withdrawal amount:

Image
True, but the Marginal tax rate for the RMDs is likely to be significantly higher (including similar Medicare Surcharges). Many of us will just have to pony up the extra IRMA premium — there won’t be much choice about it.

Agree with Celia, I would be targeting well into the 24% bracket — which aligns with my plan to smooth out AGI described above.

WoodSpinner

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FiveK
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Re: How much to rollover from IRA to Roth IRA

Post by FiveK » Tue Aug 06, 2019 8:30 pm

WoodSpinner wrote:
Tue Aug 06, 2019 7:53 pm
True, but the Marginal tax rate for the RMDs is likely to be significantly higher (including similar Medicare Surcharges). Many of us will just have to pony up the extra IRMA premium — there won’t be much choice about it.

Agree with Celia, I would be targeting well into the 24% bracket — which aligns with my plan to smooth out AGI described above.

WoodSpinner
Assuming $40K QD and $50K SS, here's the tIRA withdrawal marginal rates, assuming 2019 taxes, for a 70 year old couple.
Image

Somewhere around 25% for a $100K RMD, so paying 30% now wouldn't be great. Of course, if one spouse passes away, single rates would be higher.

In any case, a low single digit percentage difference is probably the most any reasonable choice would matter.

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Re: How much to rollover from IRA to Roth IRA

Post by grabiner » Tue Aug 06, 2019 8:36 pm

elainet7 wrote:
Tue Aug 06, 2019 8:07 am
james lange writes much about this and told me to convert up to the 24% bracket
as a fla resident distribution of 300k results in 18% effective tax rate plus increased medicare premium
we will never see rates this low in our lifetime
The effective (average) tax rate isn't relevant, because you make the decision for every dollar. If you convert up to the top of the 22% bracket, then you pay 24% tax on every additional dollar you convert. This may be a good or bad deal, but it should be evaluated at the 24% marginal rate rather than the average rate on the whole conversion.
Wiki David Grabiner

Rajsx
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Re: How much to rollover from IRA to Roth IRA

Post by Rajsx » Tue Aug 06, 2019 8:45 pm

A very helpful thread to follow, as I am in a similar boat as the OP
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FiveK
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Re: How much to rollover from IRA to Roth IRA

Post by FiveK » Tue Aug 06, 2019 9:25 pm

grabiner wrote:
Tue Aug 06, 2019 8:36 pm
elainet7 wrote:
Tue Aug 06, 2019 8:07 am
james lange writes much about this and told me to convert up to the 24% bracket
as a fla resident distribution of 300k results in 18% effective tax rate plus increased medicare premium
we will never see rates this low in our lifetime
The effective (average) tax rate isn't relevant, because you make the decision for every dollar. If you convert up to the top of the 22% bracket, then you pay 24% tax on every additional dollar you convert. This may be a good or bad deal, but it should be evaluated at the 24% marginal rate rather than the average rate on the whole conversion.
+1 on "effective (average) tax rate isn't relevant."

If both of the MFJ couple are below age 63, the nominal 22% and 24% brackets are all that matter.

The marginal rate (including IRMAA spikes) on the amount from $169K to $300K will be ~29%.

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Re: How much to rollover from IRA to Roth IRA

Post by WoodSpinner » Tue Aug 06, 2019 10:36 pm

FiveK wrote:
Tue Aug 06, 2019 8:30 pm
WoodSpinner wrote:
Tue Aug 06, 2019 7:53 pm
True, but the Marginal tax rate for the RMDs is likely to be significantly higher (including similar Medicare Surcharges). Many of us will just have to pony up the extra IRMA premium — there won’t be much choice about it.

Agree with Celia, I would be targeting well into the 24% bracket — which aligns with my plan to smooth out AGI described above.

WoodSpinner
Assuming $40K QD and $50K SS, here's the tIRA withdrawal marginal rates, assuming 2019 taxes, for a 70 year old couple.
Image

Somewhere around 25% for a $100K RMD, so paying 30% now wouldn't be great. Of course, if one spouse passes away, single rates would be higher.

In any case, a low single digit percentage difference is probably the most any reasonable choice would matter.
Plus RMDs increase.... assuming a 4% return, they start out at about $91,000 but head up to $123,000 by 80. See link .

In addition tax brackets are scheduled to go back up by 2025.

Modeling the anticipated AGI will be really useful. I would be surprised if there wasn’t additional income to account for (e.g. LTCG, Interest etc.). After all it is a sizable portfolio!

Of course you could tilt the calculations by donating most of the RMDs via Qualified Charitable deductions. That would shift the recommendation towards not converting. As indicated previously, a great deal depends on your personal circumstances.

WoodSpinner

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Re: How much to rollover from IRA to Roth IRA

Post by BarbK » Thu Aug 08, 2019 6:33 pm

I remember that Small Law thread; It would be great if he came back and updated with what he ended up doing.

We've been converting to the top of the 15 (now 12) % bracket since 2015 forgoing any ACA subsidies. A lot of our income was Muni $ so our tax bracket was super low and we were able to convert about $75-$80K per year.

Staying in the 15/12% tax brackets hasn't made a dent in the TIRA balances or future RMDs.

Since reading this thread, I did the estimates for up to the $170K (IRMA) and the next level (214K). So after the 12% bracket you lose your qualified dividends so that extra $40K of Roth Conversions (in our case) has a 24% tax associated with it.

Then for the next level of IRMA, that $44K of Roth Conversions is taxed at 22% but additional IRMA kicks in.

Our ages are 62 (him) and 66 (me) with a December birthday so I don't know if the additional IRMA for 1 person may just be for a month that first year.

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Re: How much to rollover from IRA to Roth IRA

Post by FiveK » Thu Aug 08, 2019 7:00 pm

BarbK wrote:
Thu Aug 08, 2019 6:33 pm
Our ages are 62 (him) and 66 (me) with a December birthday so I don't know if the additional IRMA for 1 person may just be for a month that first year.
Your 2019 tax return, filed in 2020, will be used for your all 12 months of your 2021 Medicare premiums.

If he will turn 63 between now and the end of 2019, his 2021 Medicare premiums (when he turns 65 and presumably starts) will apply for only the months he pays.

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Re: How much to rollover from IRA to Roth IRA

Post by BarbK » Fri Aug 09, 2019 9:34 am

FiveK wrote:
Thu Aug 08, 2019 7:00 pm
BarbK wrote:
Thu Aug 08, 2019 6:33 pm
Our ages are 62 (him) and 66 (me) with a December birthday so I don't know if the additional IRMA for 1 person may just be for a month that first year.
Your 2019 tax return, filed in 2020, will be used for your all 12 months of your 2021 Medicare premiums.

If he will turn 63 between now and the end of 2019, his 2021 Medicare premiums (when he turns 65 and presumably starts) will apply for only the months he pays.
Thank you - that's good to know.

There is some much bang for the buck in the 12%, but much less so in the higher tax brackets with losing the zero tax on qualified dividends.

I went back and re-read that entire thread that Woodspinner linked. Definitely worth the read and can skim right over the recharacterization posts.

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Re: How much to rollover from IRA to Roth IRA

Post by BarbK » Tue Aug 13, 2019 8:15 am

#Cruncher wrote:
Mon Jul 01, 2019 7:01 pm
StarsandStripes wrote:
Sun Jun 30, 2019 5:13 pm
We receive about 40,000 dollars a year of dividends from the taxable investments ... The 40,000 dollars will be our only income after this year.
How Roth conversions would be marginally taxed depends on how much of the dividends are qualified and therefore subject to favorable tax treatment. For example, here it is if $30,000 of the dividends were qualified. It assumes 2019 tax brackets for a joint return with a deduction of $27,000.

Code: Select all

----- Roth Conversion ----    ------ Federal Tax -----    Marg
       Range        Extent          Range       Extent    Rate
-----------------   ------    ---------------   ------    -----
      0 -  17,000   17,000         0 -      0        0     0.0%
 17,000 -  36,400   19,400         0 -  1,940    1,940    10.0%
 36,400 -  65,750   29,350     1,940 -  5,462    3,522    12.0%
 65,750 -  95,750   30,000     5,462 - 13,562    8,100    27.0%
 95,750 -  95,950      200    13,562 - 13,586       24    12.0%
 95,950 - 185,400   89,450    13,586 - 33,265   19,679    22.0%
185,400 - 210,000   24,600    33,265 - 39,169    5,904    24.0%
210,000 - 250,000   40,000    39,169 - 50,289   11,120    27.8%
250,000 - 338,450   88,450    50,289 - 71,517   21,228    24.0%
338,450 -                     71,517 -                    32.0%
With these assumptions you definitely should convert at least $65,750 since the marginal tax rate would be only 12%. It's less clear how much more, if any, you should convert.

Follow these steps if you want to run this calculation with other amounts of qualified & not qualified dividends or a different deduction.
  • Select All, Copy, and Paste [ * ] the following at cell A1 of a blank Excel sheet.

    Code: Select all

    ord bracket 5	321450	0.32
    ord bracket 4	168400	0.24
    ord bracket 3	78950	0.22
    ord bracket 2	19400	0.12
    ord bracke 1	0	0.1
    QDIV bracket 2	78750	0.15
    QDIV bracket 1		0
    NIIT floor	250000	0.038
    Deduction	27000
    Qualified dividends	30000
    Other dividends	10000
    Roth conversions	0	=$B9-$B11	=$B9-$B11+$B4	=$B9-$B10-$B11+$B6	=$B9-$B11+$B6	=$B9-$B11+$B3	=$B9-$B11+$B2	=$B8-$B10-$B11	=$B8	=$B9-$B11+$B1
    Adjusted Gross Income	=$B10+$B11+B12
    Taxable Income	=MAX(0,B13-$B9)
    QDIV taxable	=MIN($B10,B14)
    Ord taxable	=B14-B15
    Taxable - ord 5	=MAX(0,B$16-$B1)
    Taxable - ord 4	=MAX(0,B$16-$B2)-SUM(B$17:B17)
    Taxable - ord 3	=MAX(0,B$16-$B3)-SUM(B$17:B18)
    Taxable - ord 2	=MAX(0,B$16-$B4)-SUM(B$17:B19)
    Taxable - ord 1	=MAX(0,B$16-$B5)-SUM(B$17:B20)
    Taxable - QDIV 2	=MAX(0,MIN(B$15,B$14-$B6))
    Taxable - QDIV 1	=MAX(0,MIN(B$15,B$14-$B7))-B22
    Taxable - NIIT	=MAX(0,MIN($B10+$B11,B13-$B8))
    Tax - ord 5	=$C1*B17
    Tax - ord 4	=$C2*B18
    Tax - ord 3	=$C3*B19
    Tax - ord 2	=$C4*B20
    Tax - ord 1	=$C5*B21
    Tax - QDIV 2	=$C6*B22
    Tax - QDIV 1	=$C7*B23
    Tax - NIIT	=$C8*B24
    Total tax	=SUM(B25:B32)
    
    Additional conversion		=C12-B12
    Increased tax		=C33-B33
    Marginal rate		=C36/C35
  • Format for readability.
  • Copy cells B13:B33 right to column K.
  • Copy cells C35:C37 right to column K.
  • Revise assumptions in cells B9:B11 as needed.
* If you have trouble pasting, try "Paste Special" and "Text".
Thank you for posting your spreadsheet. I pasted into Google Sheets and have been working with it with our information. It also agreed with what I was calculating for tax under the different levels of Roth conversion (unlike the online tax calculators). I like your format a lot.

I changed column H to be up to the 170K IRMA limit, Marginal rate 24%
I changed column I to be up to the 214K IRMA Limit - Marginal rate with IRMA 24.9%
I changed column J to be up to the 267 IRMA limit. - Marginal rate with IRMA 29.35%

Now the hard part, seeing how much impact the different conversions make on future RMDS. I've been doing the max of the 15,12 brackets for 5 years now.

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Re: How much to rollover from IRA to Roth IRA

Post by togb » Tue Aug 13, 2019 9:27 pm

lakpr wrote:
Sun Jun 30, 2019 5:57 pm
I suggest converting until the traditional (pre-tax) balances reach about $1.5 million. Do this conversion before December 31, 2025.
This just made my day. That's the target I set for my tIRA balance at age 70-- for the same reasons-- it "right sizes" my RMD. Seeing that target explained so well, makes me feel I'm on the right track, so thank you!

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