Roth conversion-How fast

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renovator20
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Roth conversion-How fast

Post by renovator20 »

Good afternoon,

I'm looking for feedback to negative side of doing large roth conversions from my IRA.
age 65 married,filling joint. No debt.
Will delay SS until 70y/o maybe.....
I would like to get my IRA below 1M by age 70.
I can do my conversions up to the top of the 24% tax bracket but stay below IRRMA cap of $326K. If I do this, it will get my IRA to a level we can spend down by age 90. We would still have a large Roth at that time plus a large after tax savings.
Does anyone see any major problems with this. It cleans up legacy taxes in the current tax rates.

Thanks for any ideas.
Renovator20
jebmke
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Re: Roth conversion-How fast

Post by jebmke »

Don’t forget NIIT, if applicable. always check your calculations with tax software. Your bracket rate isn’t alway your marginal tax rate.
When you discover that you are riding a dead horse, the best strategy is to dismount.
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renovator20
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Re: Roth conversion-How fast

Post by renovator20 »

I did not know about NIIT. 3.8% tax added over $250K?3. What individuals are subject to the Net Investment Income Tax?

Individuals will owe the tax if they have Net Investment Income and also have modified adjusted gross income over the following thresholds:

Filing Status


Threshold Amount
Married filing jointly

$250,000
Married filing separately

$125,000
Single

$200,000
Head of household (with qualifying person)

$200,000
Qualifying widow(er) with dependent child

$250,000

Taxpayers should be aware that these threshold amounts are not indexed for inflation.
Thank you
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FiveK
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Re: Roth conversion-How fast

Post by FiveK »

renovator20 wrote: Sun Sep 13, 2020 2:32 pm I did not know about NIIT. 3.8% tax added over $250K?3. What individuals are subject to the Net Investment Income Tax?
Those with investment income (interest, dividends, capital gains, etc.).

The tax is only on the investment income, not all income.
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FiveK
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Re: Roth conversion-How fast

Post by FiveK »

renovator20 wrote: Sun Sep 13, 2020 2:18 pm Good afternoon,

I'm looking for feedback to negative side of doing large roth conversions from my IRA.
,,,
Thanks for any ideas.
Renovator20
Perhaps the quickest way (if you have Excel) is to put your non-conversion income into the personal finance toolbox and have it generate your marginal tax rate as a function of your conversion amount for you.

See Roth IRA conversion - Using a spreadsheet for an example.
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celia
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Re: Roth conversion-How fast

Post by celia »

renovator20 wrote: Sun Sep 13, 2020 2:18 pm I'm looking for feedback to negative side of doing large roth conversions from my IRA.
If I understand the question, you seem to want to know the downside of large Roth conversions:
* Taxes will be owed
* You could be pushed up to another tax bracket (or two)
* You might trigger the IRMAA surcharge for higher Medicare/ drug plan premiums
* Some SS that might not have been taxed, then becomes taxed
* The markets might drop right after you convert and you may regret missing the opportunity to then convert more shares for the same tax hit.

However, the benefits of doing Roth conversions for someone with over $1M in tax-deferred can easily outweigh these disadvantages.

If you are looking for ideas on how to figure out how much to convert, start reading from here until you get to the end of the page. Notice how I put different growth rates on taxable, tax-deferred, and Roth accounts that I was tracking at the bottom of the spreadsheet. Also notice that my example shows 2 years of making an impact on future RMDs, 2 years of "treading water", and 2 years of "falling behind".
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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renovator20
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Re: Roth conversion-How fast

Post by renovator20 »

If I understand the question, you seem to want to know the downside of large Roth conversions:
* Taxes will be owed
* You could be pushed up to another tax bracket (or two)
* You might trigger the IRMAA surcharge for higher Medicare/ drug plan premiums
* Some SS that might not have been taxed, then becomes taxed
* The markets might drop right after you convert and you may regret missing the opportunity to then convert more shares for the same tax hit.

However, the benefits of doing Roth conversions for someone with over $1M in tax-deferred can easily outweigh these disadvantages.

I understand the statements above. I would be doing transfers from pre taxIRA (vanguard mutual funds) to roth, and also to my after tax account for income.
My plan was to go the the top of the 24% tax rate but below the IRRMA MAGI $326K for 5 yrs.
I still do not understand NIIT relationship with pre tax transfer over $250K of 3.8%
These numbers are much larger than I have ever had experience with. We have been savers and I need a clear strategy to move the pretax assets in a prudent plan. I may be a little over my head and have to find a CPA this year.

Thanks for any input. This group is the best!
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WoodSpinner
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Re: Roth conversion-How fast

Post by WoodSpinner »

renovator20 wrote: Mon Sep 14, 2020 7:24 am
I understand the statements above. I would be doing transfers from pre taxIRA (vanguard mutual funds) to roth, and also to my after tax account for income.
My plan was to go the the top of the 24% tax rate but below the IRRMA MAGI $326K for 5 yrs.
I still do not understand NIIT relationship with pre tax transfer over $250K of 3.8%
These numbers are much larger than I have ever had experience with. We have been savers and I need a clear strategy to move the pretax assets in a prudent plan. I may be a little over my head and have to find a CPA this year.

Thanks for any input. This group is the best!
In terms of NIIT, think about how much Investment Income you generate from your taxable accounts (Capital Gains, Dividends, Interest). This will be subject to the NIIT.

FWIW, I am doing something similar but I have almost no Taxable Investment Income at this point since almost all of my assets are in a IRA and a Roth.

WoodSpinner
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renovator20
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Re: Roth conversion-How fast

Post by renovator20 »

OK, that makes sense. My pretax account transfer would be from Total stock market index and total bond index so the dividends, interest, and cap gains would be small if any.
Thanks!
crefwatch
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Re: Roth conversion-How fast

Post by crefwatch »

renovator20 wrote: Mon Sep 14, 2020 8:38 am OK, that makes sense. My pretax account transfer would be from Total stock market index and total bond index so the dividends, interest, and cap gains would be small if any.
Thanks!
You misunderstood that bit of advice. The question was about your after-tax savings, in your non-qualified brokerage and bank accounts, if any. I don't think you mentioned whether you have significant funds that are not in IRAs or Roth IRAs.

Any money you take out of a pre-tax IRA, as a rollover or a regular distribution becomes Ordinary Income. It no longer has dividend, capital gain, or any other characterization, no matter how you "got" it. The important thing that hasn't been said yet is that IRA withdrawals are NOT Investment Income for purposes of NIIT.

We just can't tell if one of you is still working, whether you have wages or annuities or dividends that you have to pay taxes on, whether or not you do a Roth conversion in any particular year. You are right to do this before you start SS (is your partner getting SS ????) because you have more room to accomodate the IRA taxation. You may get a more specific reply to your personal needs if you describe what your income picture would be, in addition to the proposed conversion.
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renovator20
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Re: Roth conversion-How fast

Post by renovator20 »

I am still working until 01/2021. Would like to start roth conversions this year
Wife retired, no income
Both of us are 65y/o
no pension or social security until 70y/o
Small after tax accounts in cash or index fund but big enough for emergency funds.
Plan to make withdrawls for income next year from pretax IRA and convert up to 24% tax bracket from pretax IRA accounts to roth over next 5 yrs.
Then draw SS and take out what we need from the pre tax IRA to be in a lower tax bracket.
So, it looks like we will not have significant after tax accounts drawing dividends/capital gains /income with a NIIT bill.
Does this sound right?
Thanks for any input.
Renovator20
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Re: Roth conversion-How fast

Post by Vanguard Fan 1367 »

It is hard to tell what will happen in the future. It is safe to say there will be changes. The tax rates are scheduled to rise.

If you haven't read, "The Tax Bomb in your Retirement" by Josh Scandlen I recommend it.

The other posters have kindly posted ideas as to how much to convert. I am 67 and plan to convert like you to the 24% tax bracket till I am 72 and have to start RMDs.

If you do pay a lot of taxes doing Roth conversions and then your investments drop significantly and don't come back that could be a negative. You had asked for negatives.
Upton Sinclair: "It is difficult to get a man to understand something when his salary depends on his not understanding it."
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FiveK
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Re: Roth conversion-How fast

Post by FiveK »

renovator20 wrote: Mon Sep 14, 2020 2:07 pm Does this sound right?
Sounds right, given that your conversion amount this year will be lower than the next few years due to work income this year. To confirm, have you been able to try the suggestion in this post?
tomd37
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Re: Roth conversion-How fast

Post by tomd37 »

Renovator20
My interpretation of your post is that you do understand that by converting such a large amount you are subjecting you and your spouse to a monthly Medicare premium increase from $144.60 to $376.00 for at least one year for Part B. If you have Medicare Part D there is also an increase applied.

And what was tricky for me when investigating this matter is the IRMAA is based on modified adjusted gross income. I too am doing Roth conversions, especially this year with no RMD requirement, but for personal reasons am staying under the current $174,000 limit for IRMAA. But then I am eighteen years older than you. I look back and wish I had considered delaying taking social security benefits from 65 to 70 and done more conversions back then. Good luck!
Tom D.
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renovator20
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Re: Roth conversion-How fast

Post by renovator20 »

It looks like we will be OK doing the conversions up to the 24% tax bracket.
I understand the taxes we will pay and increased medicare costs while we convert.
Thanks to everyone who posted the cost of moving funds from pre tax IRA to after tax in Roth or personal accounts.
We will stay within 22-24% tax brackets as we move funds to the Roth.
Again, thanks for all the information as we try to make an informed plan.
Blessings to All,
Randy
ChrisC
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Re: Roth conversion-How fast

Post by ChrisC »

renovator20 wrote: Tue Sep 15, 2020 6:41 am It looks like we will be OK doing the conversions up to the 24% tax bracket.
I understand the taxes we will pay and increased medicare costs while we convert.
Thanks to everyone who posted the cost of moving funds from pre tax IRA to after tax in Roth or personal accounts.
We will stay within 22-24% tax brackets as we move funds to the Roth.
Again, thanks for all the information as we try to make an informed plan.
Blessings to All,
Randy
We’ve been doing large conversions the last several years near the upper range of the 24% tax bracket, though only one of us pays for Medicare Part B (so we don’t get too bitten by IRMAA); I declined enrollment in Part B as my retiree health insurance is more than adequate for my needs.

How will you be paying for Federal and State income taxes for these conversions? It’s generally better to pay the income taxes from after-tax accounts or from wage or pension withholdings, and not from withholdings with the conversions. I withhold from part-time earnings and pension income.
heyyou
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Re: Roth conversion-How fast

Post by heyyou »

At the OP,
Quite often here, what "celia" posts on tax related questions, is one of the better responses.
You are on a good path with your intentions to convert from your traditional IRAs.
ralph124cf
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Re: Roth conversion-How fast

Post by ralph124cf »

renovator20 wrote: Mon Sep 14, 2020 2:07 pm I am still working until 01/2021. Would like to start roth conversions this year
Wife retired, no income
Both of us are 65y/o
no pension or social security until 70y/o
Small after tax accounts in cash or index fund but big enough for emergency funds.
Plan to make withdrawls for income next year from pretax IRA and convert up to 24% tax bracket from pretax IRA accounts to roth over next 5 yrs.
Then draw SS and take out what we need from the pre tax IRA to be in a lower tax bracket.
So, it looks like we will not have significant after tax accounts drawing dividends/capital gains /income with a NIIT bill.
Does this sound right?
Thanks for any input.
Renovator20
I don't think that your SS strategy is optimal. There are several threads about optimal SS claiming strategies. If your wife's age 70 individual SS would be less than half yours, it may be best for her to claim at her full retirement age on your account. Her SS from your account will never increase beyond the 50% of your full retirement age number, so there is no advantage to her waiting to age 70 to claim, unless her own work history is reasonably comparably to your's.
tibbitts
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Re: Roth conversion-How fast

Post by tibbitts »

renovator20 wrote: Sun Sep 13, 2020 2:32 pm I did not know about NIIT. 3.8% tax added over $250K?3. What individuals are subject to the Net Investment Income Tax?

Individuals will owe the tax if they have Net Investment Income and also have modified adjusted gross income over the following thresholds:

Married filing jointly
$250,000

Married filing separately
$125,000

Single
$200,000

Head of household (with qualifying person)
$200,000

Qualifying widow(er) with dependent child
$250,000

Taxpayers should be aware that these threshold amounts are not indexed for inflation.
Thank you
You might want to reformat that, at least the way I did above; when I read it it seemed like single was $125k, which was defnitely news to me.
NancyABQ
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Re: Roth conversion-How fast

Post by NancyABQ »

I had some extra deductions in 2019 so was able to itemize.

So I did an extra Roth conversion to compensate, thinking I would be safe from the NIIT. But unfortunately NIIT is based on MAGI, not AGI, so the extra deductions didn't help me. I paid some NIIT I wasn't expecting to (not a large amount, but I was miffed that I had screwed up the calculations).

So make sure you use MAGI, not AGI, when figuring out how much to convert!
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FiveK
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Re: Roth conversion-How fast

Post by FiveK »

NancyABQ wrote: Tue Sep 15, 2020 12:44 pm I had some extra deductions in 2019 so was able to itemize.

So I did an extra Roth conversion to compensate, thinking I would be safe from the NIIT. But unfortunately NIIT is based on MAGI, not AGI, so the extra deductions didn't help me. I paid some NIIT I wasn't expecting to (not a large amount, but I was miffed that I had screwed up the calculations).

So make sure you use MAGI, not AGI, when figuring out how much to convert!
Itemized deductions affect neither AGI nor any of the various MAGI calculations.

But yes there is an MAGI for net investment income tax.
NancyABQ
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Re: Roth conversion-How fast

Post by NancyABQ »

FiveK wrote: Tue Sep 15, 2020 12:58 pm
NancyABQ wrote: Tue Sep 15, 2020 12:44 pm I had some extra deductions in 2019 so was able to itemize.

So I did an extra Roth conversion to compensate, thinking I would be safe from the NIIT. But unfortunately NIIT is based on MAGI, not AGI, so the extra deductions didn't help me. I paid some NIIT I wasn't expecting to (not a large amount, but I was miffed that I had screwed up the calculations).

So make sure you use MAGI, not AGI, when figuring out how much to convert!
Itemized deductions affect neither AGI nor any of the various MAGI calculations.

But yes there is an MAGI for net investment income tax.
Good point (that deductions are post-MAGI and AGI). I mean I had assumed NIIT was calculated after deductions, not before. Anyway, I messed it up :oops:
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renovator20
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Re: Roth conversion-How fast

Post by renovator20 »

Next question,

These are estimated numbers and not exact.

We are 60/40 index funds/bonds
Wife starts SS at FRA in 2021(aprox 10k yr). I'll wait till 70y/o in 2025 for SS

Goal- get pretax Ira below 6 figures by 2026

If I disburse $270-$320K per year from my pre tax IRA for 5 yrs
Direct transfer of index funds to my roth of $100-150K
transfer pretax IRA (index bonds) to my after tax account for income $170K
withold portion of bond disbursement for tax payment (aprox 50-70K)
That would leave me aprox $100-120k yr for annual spending.

Is there a better strategy to pay taxes on the $270-320K ?
I understand Ill be pushing into the 24% tax bracket and paying more for medicare.
I do not have a lot of funds in my after tax account to cover this for 5 yrs and will pay as I go.

The end question is what is the best way pay taxes out of the pretax IRA when taking disbursements.
Hopefully this is not too confusing.
Thanks
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FiveK
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Re: Roth conversion-How fast

Post by FiveK »

renovator20 wrote: Wed Sep 16, 2020 8:04 am Next question,

These are estimated numbers and not exact.

We are 60/40 index funds/bonds
Wife starts SS at FRA in 2021(aprox 10k yr). I'll wait till 70y/o in 2025 for SS

Goal- get pretax Ira below 6 figures by 2026
That may be an overly aggressive goal. RMDs on a 100,000 IRA will be much lower than $300K/yr. Often, choosing pre-RMD conversion amounts that will cause RMDs to be about the same as those conversion amounts will be a good choice.
Is there a better strategy to pay taxes on the $270-320K ?
I understand Ill be pushing into the 24% tax bracket and paying more for medicare.
I do not have a lot of funds in my after tax account to cover this for 5 yrs and will pay as I go.

The end question is what is the best way pay taxes out of the pretax IRA when taking disbursements.
The "best" way to pay tax is from taxable accounts because, in effect, that "moves" the tax amount from the taxable account to the Roth IRA. But paying the tax by withholding from the tIRA withdrawal is not "bad".
ChrisC
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Re: Roth conversion-How fast

Post by ChrisC »

The OP appears to be still working and will retire in 2021. And he's planning on doing a conversion in 2020. If I were the OP, I'd do a modest conversion in 2020, enough to get him up to the lower range of the 24% tax bracket and below the third tier of IRMAA. He has enough time to increase and tinker with his tax withholding from his 2020 wages in October-December to be in the safe harbor rules for Federal income taxes. In 2021, he can convert at a higher level and pay his income taxes on a quarterly estimated tax basis, if he has taxable accounts like savings or checking, or from withholdings from the conversions/distributions.
Topic Author
renovator20
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Re: Roth conversion-How fast

Post by renovator20 »

I just saw my goal to reduce pretax ira below 6 figures. I meant below 7.
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FiveK
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Re: Roth conversion-How fast

Post by FiveK »

renovator20 wrote: Wed Sep 16, 2020 1:25 pm I just saw my goal to reduce pretax ira below 6 figures. I meant below 7.
Even that goal, while not as overly aggressive as getting below $100K, may not be optimal. E.g., RMDs will average ~5% over the first 10 years, and 5% of $1,000,000 is only $50K, not the $300K being contemplated for conversion.

Of course, what's optimal will depend on future tax law, individual life spans, and other unknowable things....
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