Last Minute Roth Conversion Question

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lawman3966
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Last Minute Roth Conversion Question

Post by lawman3966 » Sat Dec 28, 2019 8:41 pm

At the risk of being told to go figure this out myself, I'm still going to try and see if there's some consensus on the forum as to how I should proceed, while acknowledging that I waited until the eleventh hour to ask.

My numbers:
Age: 60 Single, No kids.
Tax-deferred: $500K
Roth: $150K
Taxable: $1020K

Income: $28.6K/year SSDI.
Medical Insurance: Medicare Advantage (in case it's relevant).

Taxable income for 2018: $9K (few changes to my income and investments since then).
Tax Exempt Interest: 0
Cap Gains: $8,515, including . . .
Cap Gains Distributions: $1,416
(cap gains distributions will likely recur. I don't have significant stock sales in 2019 though).
Ordinary Dividends: $10,506
Qualified Dividends: $8,760


Marginal tax brackets: 10% Federal; 0% state (zero-income-tax state).

My question: should I convert from TIRA to Roth by this coming 12/31? If so, how much?

I believe I've provided all the relevant information. However, if more is needed, please let me know.

(Edited to add marginal fed and state income tax rates, and detail about various components of taxable income).
Last edited by lawman3966 on Sun Dec 29, 2019 2:20 pm, edited 3 times in total.

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samsoes
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Re: Last Minute Roth Conversion Question

Post by samsoes » Sat Dec 28, 2019 8:44 pm

Depends. What's your marginal tax bracket (Federal and State)? Do you expect to be in a higher or lower tax bracket when you would otherwise take distribution of the tax-deferred IRA?
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HomeStretch
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Re: Last Minute Roth Conversion Question

Post by HomeStretch » Sat Dec 28, 2019 8:47 pm

Without a detailed analysis, consider converting up to at least the top of the 12% bracket.
Last edited by HomeStretch on Sat Dec 28, 2019 8:54 pm, edited 1 time in total.

murray1723
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Re: Last Minute Roth Conversion Question

Post by murray1723 » Sat Dec 28, 2019 8:48 pm

Do you have children? I believe the new SECURE act just passed that requires non-spouse inheritors to take 100% of the distributions within 10 years of inheritance should drive us to leave Roth's to our heirs instead of traditional IRAs. I'm in the same boat. I plan to convert $100k per year starting next year until it's emptied. I'm not doing it this year because I didn't plan it into my quarterly income tax payments, but I will for next year.

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lawman3966
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Re: Last Minute Roth Conversion Question

Post by lawman3966 » Sat Dec 28, 2019 9:01 pm

samsoes wrote:
Sat Dec 28, 2019 8:44 pm
Depends. What's your marginal tax bracket (Federal and State)? Do you expect to be in a higher or lower tax bracket when you would otherwise take distribution of the tax-deferred IRA?
I edited the top post to include marginal income tax rates. They are: 10% federal; and 0% state.
I don't expect my tax rates to change much in the next few years.

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lawman3966
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Re: Last Minute Roth Conversion Question

Post by lawman3966 » Sat Dec 28, 2019 9:06 pm

HomeStretch wrote:
Sat Dec 28, 2019 8:47 pm
Without a detailed analysis, consider converting up to at least the top of the 12% bracket.
Thank you. If I read this correctly, this would entail converting about $30K. Please correct this if I'm wrong.

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FiveK
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Re: Last Minute Roth Conversion Question

Post by FiveK » Sun Dec 29, 2019 7:17 am

lawman3966 wrote:
Sat Dec 28, 2019 8:41 pm
At the risk of being told to go figure this out myself, I'm still going to try and see if there's some consensus on the forum as to how I should proceed, while acknowledging that I waited until the eleventh hour to ask.

My numbers:
Age: 60 Single, No kids.
Tax-deferred: $500K
Roth: $150K
Taxable: $1020K

Income: $28.6K/year SSDI.
Medical Insurance: Medicare Advantage (in case it's relevant).

Taxable income for 2018: $9K (few changes to my income and investments since then).
Marginal tax brackets: 10% Federal; 0% state (zero-income-tax state).

My question: should I convert from TIRA to Roth by this coming 12/31? If so, how much?

I believe I've provided all the relevant information. However, if more is needed, please let me know.
Unfortunately "taxable income" is an ambiguous term. Assuming
$12.5K tax-exempt interest, and
$12.5K qualified dividends
in addition to $28.6K SSDI ($9K of which becomes taxable due to the other income), gives an AGI of $21.5K and a 2019 taxable income of $9.3K.

Given the above amounts, your marginal rates for $0 to $32.5K of traditional to Roth conversions are
Image

That may or may not affect your conversion decision. First place to start is "how close to reality are the assumptions used?"

lakpr
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Re: Last Minute Roth Conversion Question

Post by lakpr » Sun Dec 29, 2019 8:43 am

Given that tax rates are poised to rise in 2026, I would suggest converting up to the top of 12% bracket every year. Yes, 30k per year.

Wild Willie
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Re: Last Minute Roth Conversion Question

Post by Wild Willie » Sun Dec 29, 2019 9:57 am

Since I read about the SECURE act, I have toyed with the idea of converting to save my kids from having to pay higher taxes than I would have to pay if I start converting now. I will probably not do so for the following reasons:

1) Medicare premiums will rise because my AGI will surpass the threshold

2) RMD's already force me up to the 12% bracket

3) I don't trust certain peeps, if they get into power, to leave the Roth rules alone

cas
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Re: Last Minute Roth Conversion Question

Post by cas » Sun Dec 29, 2019 10:59 am

HomeStretch wrote:
Sat Dec 28, 2019 8:47 pm
Without a detailed analysis, consider converting up to at least the top of the 12% bracket.
lakpr wrote:
Sun Dec 29, 2019 8:43 am
Given that tax rates are poised to rise in 2026, I would suggest converting up to the top of 12% bracket every year. Yes, 30k per year.
Advising someone who is on Social Security to convert "to the top of the 12% bracket" may cause them to pay much more in taxes than they were expecting. (More - possibly much more - than a 12% marginal rate.)

When someone is already on social security, especially with 28.6K in social security income, the "Social Security tax hump" usually consumes the vast majority or all of the nominal 12% bracket. The concept of "the 12% bracket" becomes mostly theoretical for them and of limited practical use in their real tax-paying world.

See FiveK's graph above for what actual marginal rates are likely to look like in the nominal "12% bracket" for someone on Social Security. (The actual shape and width of the SS tax hump is highly dependent on an individual's income profile, however. That is why FiveK said "First place to start is 'How close to reality are the assumptions used?'")

Sorry if this post comes across as harsh to posters who kindly responded quickly and genuinely tried to help. It is just that every time someone on SS writes in to ask about Roth conversion, there tends to be an immediate rush of posts saying "convert at least to the top of the 12% bracket!" And I'm worried that that is an attractive, fast, easy answer that will lead these types of advice-seekers-with-SS-income to do something that is inadvisable. Meanwhile, it takes time and effort for people like FiveK to extract the necessary additional income profile information and properly computer-model the actual situation. So those posts tend to come later, if at all.

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lawman3966
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Re: Last Minute Roth Conversion Question

Post by lawman3966 » Sun Dec 29, 2019 2:23 pm

FiveK wrote:
Sun Dec 29, 2019 7:17 am
lawman3966 wrote:
Sat Dec 28, 2019 8:41 pm
At the risk of being told to go figure this out myself, I'm still going to try and see if there's some consensus on the forum as to how I should proceed, while acknowledging that I waited until the eleventh hour to ask.

My numbers:
Age: 60 Single, No kids.
Tax-deferred: $500K
Roth: $150K
Taxable: $1020K

Income: $28.6K/year SSDI.
Medical Insurance: Medicare Advantage (in case it's relevant).

Taxable income for 2018: $9K (few changes to my income and investments since then).
Marginal tax brackets: 10% Federal; 0% state (zero-income-tax state).

My question: should I convert from TIRA to Roth by this coming 12/31? If so, how much?

I believe I've provided all the relevant information. However, if more is needed, please let me know.
Unfortunately "taxable income" is an ambiguous term. Assuming
$12.5K tax-exempt interest, and
$12.5K qualified dividends
in addition to $28.6K SSDI ($9K of which becomes taxable due to the other income), gives an AGI of $21.5K and a 2019 taxable income of $9.3K.

Given the above amounts, your marginal rates for $0 to $32.5K of traditional to Roth conversions are
Image

That may or may not affect your conversion decision. First place to start is "how close to reality are the assumptions used?"
I have edited the top post to add the information you recite as important above. I repeat it below:
Taxable income for 2018: $9K (few changes to my income and investments since then).
Tax Exempt Interest: 0
Cap Gains: $8,515, including . . .
Cap Gains Distributions: $1,416
(cap gains distributions will likely recur. I don't have significant stock sales in 2019 though).
Ordinary Dividends: $10,506
Qualified Dividends: $8,760.

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FiveK
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Re: Last Minute Roth Conversion Question

Post by FiveK » Sun Dec 29, 2019 5:36 pm

lawman3966 wrote:
Sun Dec 29, 2019 2:23 pm
I have edited the top post to add the information you recite as important above. I repeat it below:
Taxable income for 2018: $9K (few changes to my income and investments since then).
Tax Exempt Interest: 0
Cap Gains: $8,515, including . . .
Cap Gains Distributions: $1,416
(cap gains distributions will likely recur. I don't have significant stock sales in 2019 though).
Ordinary Dividends: $10,506
Qualified Dividends: $8,760.
Do you itemize deductions? Just trying to confirm the $9K "taxable income" number. Assuming qualified dividends are a subset of ordinary dividends, and SSDI gross was $28,600, I get $5126 of the SSDI was taxable and a total taxable income on line 10 of 2018 form 1040 = $13,563.

If your itemized deductions were ~$16,600 that would have give the $9K.

I'm happy to generate another chart, but you could also eliminate the middleman by downloading the personal finance toolbox spreadsheet into Excel if interested.

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dodecahedron
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Re: Last Minute Roth Conversion Question

Post by dodecahedron » Sun Dec 29, 2019 5:43 pm

cas wrote:
Sun Dec 29, 2019 10:59 am
HomeStretch wrote:
Sat Dec 28, 2019 8:47 pm
Without a detailed analysis, consider converting up to at least the top of the 12% bracket.
lakpr wrote:
Sun Dec 29, 2019 8:43 am
Given that tax rates are poised to rise in 2026, I would suggest converting up to the top of 12% bracket every year. Yes, 30k per year.
Advising someone who is on Social Security to convert "to the top of the 12% bracket" may cause them to pay much more in taxes than they were expecting. (More - possibly much more - than a 12% marginal rate.)

When someone is already on social security, especially with 28.6K in social security income, the "Social Security tax hump" usually consumes the vast majority or all of the nominal 12% bracket. The concept of "the 12% bracket" becomes mostly theoretical for them and of limited practical use in their real tax-paying world.

See FiveK's graph above for what actual marginal rates are likely to look like in the nominal "12% bracket" for someone on Social Security. (The actual shape and width of the SS tax hump is highly dependent on an individual's income profile, however. That is why FiveK said "First place to start is 'How close to reality are the assumptions used?'")

Sorry if this post comes across as harsh to posters who kindly responded quickly and genuinely tried to help. It is just that every time someone on SS writes in to ask about Roth conversion, there tends to be an immediate rush of posts saying "convert at least to the top of the 12% bracket!" And I'm worried that that is an attractive, fast, easy answer that will lead these types of advice-seekers-with-SS-income to do something that is inadvisable. Meanwhile, it takes time and effort for people like FiveK to extract the necessary additional income profile information and properly computer-model the actual situation. So those posts tend to come later, if at all.
Amen and well-said! Well-intended but clueless advice about doing anything based on a bracket-focused rule of thumb can do a great deal of financial damage in situations like the OP's.

Too many people on this forum blithely assume that bracket rates are necessarily the same as effective marginal rates. That can *sometimes* be true, but for anyone with SS income and/or LTCG and qualified dividend income and/or on phase-out ranges for various types of credits, that can be far from true.

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lawman3966
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Re: Last Minute Roth Conversion Question

Post by lawman3966 » Sun Dec 29, 2019 7:27 pm

FiveK wrote:
Sun Dec 29, 2019 5:36 pm
lawman3966 wrote:
Sun Dec 29, 2019 2:23 pm
I have edited the top post to add the information you recite as important above. I repeat it below:
Taxable income for 2018: $9K (few changes to my income and investments since then).
Tax Exempt Interest: 0
Cap Gains: $8,515, including . . .
Cap Gains Distributions: $1,416
(cap gains distributions will likely recur. I don't have significant stock sales in 2019 though).
Ordinary Dividends: $10,506
Qualified Dividends: $8,760.
Do you itemize deductions? Just trying to confirm the $9K "taxable income" number. Assuming qualified dividends are a subset of ordinary dividends, and SSDI gross was $28,600, I get $5126 of the SSDI was taxable and a total taxable income on line 10 of 2018 form 1040 = $13,563.

If your itemized deductions were ~$16,600 that would have give the $9K.

I'm happy to generate another chart, but you could also eliminate the middleman by downloading the personal finance toolbox spreadsheet into Excel if interested.
I did not itemize deductions for 2018. I'm not sure how to reconcile your calculations with my return. I do recall using the IRS's online calculation tool/forms to complete my return. So I hope/assume that it's right.

Possible sources of error:
In the top post, I, perhaps unwisely, cited my SSDI income going forward, which for 2020 is 28560. It was less for 2018, about 27,400. The online system found that none of my SSDI income was taxable. My tax return copy shows a total income of 21.2K and a taxable income of 9.2K.

I had to pay back a premium tax credit for about 10 months' worth of ACA coverage, though I don't know if this would incur the discrepancy you mention.

Anyway, I appreciate the input provided thus far. If it's best that I take the reins from here, that's fine.

A more general, non-mathematical question: even though my situation (i.e. SSDI income, cap gains, and dividends) doesn't provide the same level of incentive to do conversions between now and the start of RMDs as would exist in the absence of such income, isn't there still some advantage to evening out the income between the pre-RMD period and the subsequent RMD receiving period?

Thanks again.

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FiveK
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Re: Last Minute Roth Conversion Question

Post by FiveK » Mon Dec 30, 2019 5:37 am

lawman3966 wrote:
Sun Dec 29, 2019 7:27 pm
In the top post, I, perhaps unwisely, cited my SSDI income going forward, which for 2020 is 28560. It was less for 2018, about 27,400. The online system found that none of my SSDI income was taxable. My tax return copy shows a total income of 21.2K and a taxable income of 9.2K.
Perhaps you could look at the 2018 return to see the values that add up to 21.2K?

With non-qualified dividends = $1746, qualified dividends = $8760, and LTCG = $8515, your non-SSDI income is $19,021.
Taking $27,400 SSDI, the taxable portion would be $3,861 (at least, if SSDI is treated the same as SS) for an AGI of $22,882.
I had to pay back a premium tax credit for about 10 months' worth of ACA coverage, though I don't know if this would incur the discrepancy you mention.
That would affect the tax calculation (and if you have ACA coverage for 2019, that could also affect your marginal tax rate for tIRA withdrawals), but not your AGI or taxable income.
Anyway, I appreciate the input provided thus far. If it's best that I take the reins from here, that's fine.
Are you able to use the spreadsheet that was used to generate the chart? If so, that probably is best. If not, I'm willing to take another look.
A more general, non-mathematical question: even though my situation (i.e. SSDI income, cap gains, and dividends) doesn't provide the same level of incentive to do conversions between now and the start of RMDs as would exist in the absence of such income, isn't there still some advantage to evening out the income between the pre-RMD period and the subsequent RMD receiving period?
Unfortunately the only way to evaluate that question is mathematically. ;)

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lawman3966
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Re: Last Minute Roth Conversion Question

Post by lawman3966 » Mon Dec 30, 2019 7:35 am

FiveK wrote:
Mon Dec 30, 2019 5:37 am
lawman3966 wrote:
Sun Dec 29, 2019 7:27 pm
In the top post, I, perhaps unwisely, cited my SSDI income going forward, which for 2020 is 28560. It was less for 2018, about 27,400. The online system found that none of my SSDI income was taxable. My tax return copy shows a total income of 21.2K and a taxable income of 9.2K.
Perhaps you could look at the 2018 return to see the values that add up to 21.2K?
The trick may reside in the fact that cap gains are reported separately, on Schedule 1, and appear not to be included in the calculation of how much of the SSDI income is taxable. Interest and dividends total to about $12.7K (which is not separately called out). Line 5a shows SSDI income of 27.4K and line 5b says that the taxable amount of the SSDI income is 0.

The cap gains amount of $8515 is imported into line 6 and brings Total income to $21.2K. There were no adjustments to income, and so the AGI on line 7 is also $21.2K. Subtraction of the $12K standard deduction on line 8 brings taxable income to $9.2K.
. . .

I appreciate the input provided thus far. If it's best that I take the reins from here, that's fine.[/quote]
FiveK wrote:
Mon Dec 30, 2019 5:37 am
Are you able to use the spreadsheet that was used to generate the chart? If so, that probably is best. If not, I'm willing to take another look.
I have not been able to download the app yet. (my SSDI arises from CFS which limits my time and energy). However, I will try to take a look at it later today. Many thanks for your efforts on this matter.

cas
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Re: Last Minute Roth Conversion Question

Post by cas » Mon Dec 30, 2019 8:06 am

lawman3966 wrote:
Mon Dec 30, 2019 7:35 am
The trick may reside in the fact that cap gains are reported separately, on Schedule 1, and appear not to be included in the calculation of how much of the SSDI income is taxable.
Alan S. (frequent Boglehead's poster and CPA) once wrote in this forum something that made me laugh and stuck with me. (paraphrasing - google isn't turning up the exact quote for me):

"The IRS has realized that they went a few exits too far in their search for a postcard-sized Form 1040 in 2018. They are now backtracking for 2019." ***

That whole "Put stuff from Schedule 1 onto an easily missed, unnumbered blank space on Line 6 of Form 1040" thingy is definitely one of the "exits too far" in my opinion. That *had* to have led to vast numbers of errors.

However, capital gains should definitely be included in the calculation of how much SS is taxable. See Instructions for 2018 Form 1040 -> Social Security Benefits Worksheet—Lines 5a and 5b

Line 3 says (bold added by me)
3. Combine the amounts from Form 1040, lines 1, 2b, 3b, 4b, and Schedule 1, line 22
Schedule 1, line 22 picks up the capital gain income.

*** I just looked and, yep, on the draft 2019 Form 1040 capital gains are back on the main Form 1040 on a numbered line all their own. (like 2017 and previous).

MnD
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Re: Last Minute Roth Conversion Question

Post by MnD » Mon Dec 30, 2019 10:13 am

dodecahedron wrote:
Sun Dec 29, 2019 5:43 pm
cas wrote:
Sun Dec 29, 2019 10:59 am
HomeStretch wrote:
Sat Dec 28, 2019 8:47 pm
Without a detailed analysis, consider converting up to at least the top of the 12% bracket.
lakpr wrote:
Sun Dec 29, 2019 8:43 am
Given that tax rates are poised to rise in 2026, I would suggest converting up to the top of 12% bracket every year. Yes, 30k per year.
Advising someone who is on Social Security to convert "to the top of the 12% bracket" may cause them to pay much more in taxes than they were expecting. (More - possibly much more - than a 12% marginal rate.)

When someone is already on social security, especially with 28.6K in social security income, the "Social Security tax hump" usually consumes the vast majority or all of the nominal 12% bracket. The concept of "the 12% bracket" becomes mostly theoretical for them and of limited practical use in their real tax-paying world.

See FiveK's graph above for what actual marginal rates are likely to look like in the nominal "12% bracket" for someone on Social Security. (The actual shape and width of the SS tax hump is highly dependent on an individual's income profile, however. That is why FiveK said "First place to start is 'How close to reality are the assumptions used?'")

Sorry if this post comes across as harsh to posters who kindly responded quickly and genuinely tried to help. It is just that every time someone on SS writes in to ask about Roth conversion, there tends to be an immediate rush of posts saying "convert at least to the top of the 12% bracket!" And I'm worried that that is an attractive, fast, easy answer that will lead these types of advice-seekers-with-SS-income to do something that is inadvisable. Meanwhile, it takes time and effort for people like FiveK to extract the necessary additional income profile information and properly computer-model the actual situation. So those posts tend to come later, if at all.
Amen and well-said! Well-intended but clueless advice about doing anything based on a bracket-focused rule of thumb can do a great deal of financial damage in situations like the OP's.

Too many people on this forum blithely assume that bracket rates are necessarily the same as effective marginal rates. That can *sometimes* be true, but for anyone with SS income and/or LTCG and qualified dividend income and/or on phase-out ranges for various types of credits, that can be far from true.
I agree with all of the above given the "rush to Roth" panic gripping this board and the subsequent poor decisions arising from it. I might add that I spent the holidays with a person who was formerly a senior staffer on the House Ways and Means committee followed by decades as a K street lawyer-lobbyist specializing in federal taxation. She opined that for those in the lower and middle tax brackets, the odds of marginal brackets increasing in 2026 are very remote and in fact, considerable support for a modest simplification and decline from 12 and 22% to 10% and 20% and expansion of the EITC are being discussed. Any tax increases arising from the expiration of the current brackets will be all about the wealthy and in particular the extremely wealthy.

The above is of course subject to uncertainty but assuming a reversion to higher tax brackets across the board in 2026 as justification to pay more taxes at marginal or higher brackets now is an extremely poor base case assumption given political realities.
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