Newly retired Roth Conversion help

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simplesimon
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Joined: Mon Feb 25, 2008 8:53 pm
Location: Boston, MA

Newly retired Roth Conversion help

Post by simplesimon » Wed May 20, 2020 7:37 am

Hi, for the following newly retired couple that I'm helping, I got tripped up with social security taxation and what might be optimal for Roth conversions going forward and am looking for some guidance.

Age: He's 69 and she's 64, living in CA
His pension: $22k/yr
Her pension: $23k/yr
His social security: $4k in 2020 (spousal benefits), $22k in 2021 (half spousal, half full benefits at age 70), $36k/yr thereafter
Her social security: $9k in 2020 (starting in June), $18k/yr thereafter
His Trad IRA: $300k
Her Trad IRA: $300k
His Roth IRA: $400k
Her Roth IRA: $130k
Taxable: $500k

To stay in the ~12% tax bracket, it looks like they could convert ~$60k in 2020 and $10k in subsequent years. Does that seem right? Based on this information, does it make sense to continue to convert in the 22% bracket? What other factors need to be considered?

Thanks in advance!

Pops1860
Posts: 123
Joined: Thu Mar 14, 2013 4:05 pm

Re: Newly retired Roth Conversion help

Post by Pops1860 » Wed May 20, 2020 7:50 am

No specific answer to your question, but a reminder to keep Medicare IRMMA (premium increases) breakpoints in mind, as well as tax brackets, in your analysis. Obviously, this only applies for situations where individual is on Medicare.

For us, we converted to the lowest IRMMA breakpoint, not a tax bracket breakpoint, when we did our conversions. But that was our decision. Others use tax brackets. Just keep both in mind.
The power of accurate observation is often called cynicism by those who do not have it. ~George Bernard Shaw

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dwickenh
Posts: 1961
Joined: Sun Jan 04, 2015 9:45 pm
Location: Illinois

Re: Newly retired Roth Conversion help

Post by dwickenh » Wed May 20, 2020 8:03 am

I think their account diversity already has them in a good place. They will have the ability to access capital gains in the taxable account at 0 tax rate if they keep the conversions inside the 12% tax brkt. I don't think there is anything wrong with adding to the Roths through conversions, but I would not go into the 22% brkt to accomplish the conversion. I agree that they may want to check the brkts for IRMMA and find a sweet spot for conversions.
I feel they would be fine if they did absolutely nothing due to the amounts already in taxable and Roths. I am envious of their current position as my Roth accounts make up only about 10% of my total.
The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.” | — Warren Buffett

earlyout
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Joined: Tue Feb 20, 2007 5:24 pm

Re: Newly retired Roth Conversion help

Post by earlyout » Wed May 20, 2020 8:29 am

Don't forget to include the dividends and capital gain from the taxable account when you decide how much to convert. Conversions can no longer be reversed so you want to say on the safe side, particularly with the IRMAA cliff.

SS Rambo
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Joined: Wed Jan 29, 2020 10:55 am

Re: Newly retired Roth Conversion help

Post by SS Rambo » Wed May 20, 2020 1:10 pm

Never hurts to test out the tax brackets in some free online software. Will be based off last year’s brackets, not this years, but use it to estimate max conversion amounts and then round down a bit to be safe. Like stated, stay in the 12% bracket since that is clearly an option, and keep IRMAA cutoffs in mind. If taxable account never going to be used, let it grow and get step up in basis upon passing.

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FiveK
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Re: Newly retired Roth Conversion help

Post by FiveK » Wed May 20, 2020 8:02 pm

simplesimon wrote:
Wed May 20, 2020 7:37 am
Hi, for the following newly retired couple that I'm helping, I got tripped up with social security taxation and what might be optimal for Roth conversions going forward and am looking for some guidance.

Age: He's 69 and she's 64, living in CA
His pension: $22k/yr
Her pension: $23k/yr
His social security: $4k in 2020 (spousal benefits), $22k in 2021 (half spousal, half full benefits at age 70), $36k/yr thereafter
Her social security: $9k in 2020 (starting in June), $18k/yr thereafter
His Trad IRA: $300k
Her Trad IRA: $300k
His Roth IRA: $400k
Her Roth IRA: $130k
Taxable: $500k

To stay in the ~12% tax bracket, it looks like they could convert ~$60k in 2020 and $10k in subsequent years. Does that seem right? Based on this information, does it make sense to continue to convert in the 22% bracket? What other factors need to be considered?
Assuming $10K/yr in qualified dividends from the taxable account, it's ~$40K for 2020, ~$17K for 2021, and the days of 12% marginal rates are behind them starting in 2022. You can confirm using the personal finance toolbox Excel spreadsheet if you have even basic spreadsheet knowledge.

Off the top of my head, converting in the 22% bracket makes sense in case
- one of them passes away and the survivor is subject to single filing rates
- they wish to provides heirs with the maximum spendable inheritance and the heirs' marginal rate will be 22% or more

Likewise, not converting makes sense in case
- they expect large, itemizable, medical deductions that will decrease taxable income significantly in future years
- they intend to leave the tIRAs to charity, in which case the charity does not have to pay any tax.

Pops1860
Posts: 123
Joined: Thu Mar 14, 2013 4:05 pm

Re: Newly retired Roth Conversion help

Post by Pops1860 » Fri May 22, 2020 3:33 pm

Actually, one more thing to look into.

Check out if your state has age-related (senior) tax breaks.

If these breaks are phased out with increasing income, you may be paying additional state tax (as you convert) that could influence your conversion target. You may not realize this is happening unless you look specifically for it.

In our case, Virginia, the following applies:

If you or your spouse were born on or before Jan. 1, 1955, you may qualify to claim an age deduction of up to $12,000 each. The age deduction you may claim will depend upon your birth date, filing status, and income. If you were born:

On or between Jan. 2, 1939, and Jan. 1, 1955: Your age deduction is based on your income. A taxpayer's income, for purposes of determining an income-based age deduction, is the taxpayer's adjusted federal adjusted gross income or AFAGI. A taxpayer's AFAGI is the taxpayer's federal adjusted gross income, modified for any fixed-date conformity adjustments, and reduced by any taxable Social Security and Tier 1 Railroad Benefits. This deduction shall be reduced by $1 for every $1 that the taxpayer's adjusted federal adjusted gross income exceeds $50,000 for single taxpayers or $75,000 for married taxpayers.


Just check this out for your state and include it as appropriate in your analysis. Note that, in our state, the "Adjusted" AFAGI includes subtracting Social Security, so this "$75,000 limit for married taxpayers" is actually a pretty high limit.
The power of accurate observation is often called cynicism by those who do not have it. ~George Bernard Shaw

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