Roth conversion calc. (34 yo)

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TheHouse7
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Roth conversion calc. (34 yo)

Post by TheHouse7 »

Hi BHs,

I'm having a difficult time wrapping my head around a job change. I will be creating a new rollover ira at vanguard and got me thinking about roth conversion strategy in our low income years.

MFJ (2021)
2 dependents (under 6 years old)
Washington State (no income tax)
Gross: $88,000
401k traditional contribution $19,500
HSA contribution: $6,500
Standard deduction: $25,100
Sold company stock: 1,800 LTCG

His rollover ira: $150k
Her rollover ira: $70k

Last year, we qualified for the EITC for the first time (amazing). I put an extra 10k of income (to represent a 401k roth contribution) and lost a $4,000 credit! This year we will receive even more child tax credit and I need help figuring out how to convert our traditional into roth while we pay little to no tax.

I think our goal should be to convert up to a 10-12% marginal rate.

After calculation and more reading, we will not qualify for EITC.
I think it is easier to ask: what lump sum is to much tax deferred that you can't withdrawal without paying 22%+?
Last edited by TheHouse7 on Wed Jul 21, 2021 10:51 pm, edited 1 time in total.
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David Jay
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Re: Roth conversion calc. (34 yo)

Post by David Jay »

I would take the EITC. There will be a low-income period between retirement and start of RMDs when you can convert.

Having about a half-million in 401K at start of retirement seems about optimal to me, if all retirement assets are in Roth then there is no way to take advantage of your standard deduction. Here is my thread on conversions after start of SS for some thoughts: viewtopic.php?f=10&t=237277
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Statistical
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Re: Roth conversion calc. (34 yo)

Post by Statistical »

What is your assumed goal for converting traditional IRA to Roth IRA now? Do you anticipate your income and thus taxes to be higher than it is now in retirement (discount inflation because tax brackets are indexed to inflation)?

To answer your direct question I absolutely would not lose a $4K tax credit to convert an IRA.
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Re: Roth conversion calc. (34 yo)

Post by 02nz »

I agree that paying an effective 40% tax on a Roth conversion (or switching from traditional to Roth contribution) is not a good idea. Actually it could be well over 50%, as 40% is just the loss of the EITC, before the tax on the additional income.
David Jay wrote: Fri Jul 16, 2021 12:33 pm
Having about a half-million in 401K at start of retirement seems about optimal to me, if all retirement assets are in Roth then there is no way to take advantage of your standard deduction. Here is my thread on conversions after start of SS for some thoughts: viewtopic.php?f=10&t=237277
I assume you mean in today's dollars. OP will need to keep that in mind, and use real not nominal returns to project portfolio growth. (I shake my head every time I see a certain poster here tell people they have a tax bomb coming ... assuming 10% growth.) In addition to taking full advantage of the standard deduction, a tax-deferred balance is also useful as a form of self-insurance for LTC and other medical expenses. Large medical expenses can come out out of a TIRA largely tax-free (over a certain threshold of AGI). Just one of the many ways tax-deferred accounts are under-appreciated by many.
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Re: Roth conversion calc. (34 yo)

Post by FiveK »

TheHouse7 wrote: Fri Jul 16, 2021 10:17 am Last year, we qualified for the EITC for the first time (amazing). I put an extra 10k of income (to represent a 401k roth contribution) and lost a $4,000 credit! This year we will receive even more child tax credit and I need help figuring out how to convert our traditional into roth while we pay little to no tax.

I think our goal should be to convert up to a 10-12% marginal rate. Am I crazy to miss out on a EITC year?
A general rule for a Roth IRA conversion is "do it if your marginal tax rate on the conversion now is lower than you expect it would be after you retire - otherwise don't do it now."

You could figure your marginal tax rate now for a range of conversion amounts by doing what it appears you have done already: change the conversion amount into tax software, see how much the tax changes, and calculate the marginal tax rate as (change in tax)/(change in conversion amount).

Or use a tool such as the personal finance toolbox (if you don't mind Excel) that will generate a chart for you (see the wiki article linked above for some "how to" screen shots)."
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TheHouse7
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Re: Roth conversion calc. (34 yo)

Post by TheHouse7 »

David Jay wrote: Fri Jul 16, 2021 12:33 pm I would take the EITC. There will be a low-income period between retirement and start of RMDs when you can convert.

Having about a half-million in 401K at start of retirement seems about optimal to me, if all retirement assets are in Roth then there is no way to take advantage of your standard deduction. Here is my thread on conversions after start of SS for some thoughts: viewtopic.php?f=10&t=237277
Thank you for the reply, I always figured that there was a ball park figure for tax deferred going into retirement, but lump sum investing 150k now in 30 years is like 2m?! At that point of thinking I start with how do I pay the least tax now AND later. My career later can enjoy the tax deductions when my income is higher. :confused
"PSX will always go up 20%, why invest in anything else?!" -Father-in-law early retired.
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TheHouse7
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Re: Roth conversion calc. (34 yo)

Post by TheHouse7 »

Statistical wrote: Fri Jul 16, 2021 12:58 pm What is your assumed goal for converting traditional IRA to Roth IRA now? Do you anticipate your income and thus taxes to be higher than it is now in retirement (discount inflation because tax brackets are indexed to inflation)?

To answer your direct question I absolutely would not lose a $4K tax credit to convert an IRA.
I'm estimating that we will have 3-7m in retirement. I'm assuming that there will be less wiggle room in the low to no tax marginal rate I have now.
"PSX will always go up 20%, why invest in anything else?!" -Father-in-law early retired.
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Re: Roth conversion calc. (34 yo)

Post by FiveK »

TheHouse7 wrote: Fri Jul 16, 2021 10:17 am Last year, we qualified for the EITC for the first time (amazing). I put an extra 10k of income (to represent a 401k roth contribution) and lost a $4,000 credit!
Careful - what type of income did you use?

The EITC has an "investment income" limit, so if you put in $10K of, say, interest, the law treats that different from putting $10K into a Roth 401k instead of a traditional 401k. Does that make sense?
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TheHouse7
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Re: Roth conversion calc. (34 yo)

Post by TheHouse7 »

02nz wrote: Fri Jul 16, 2021 1:07 pm I agree that paying an effective 40% tax on a Roth conversion (or switching from traditional to Roth contribution) is not a good idea. Actually it could be well over 50%, as 40% is just the loss of the EITC, before the tax on the additional income.
David Jay wrote: Fri Jul 16, 2021 12:33 pm
Having about a half-million in 401K at start of retirement seems about optimal to me, if all retirement assets are in Roth then there is no way to take advantage of your standard deduction. Here is my thread on conversions after start of SS for some thoughts: viewtopic.php?f=10&t=237277
I assume you mean in today's dollars. OP will need to keep that in mind, and use real not nominal returns to project portfolio growth. (I shake my head every time I see a certain poster here tell people they have a tax bomb coming ... assuming 10% growth.) In addition to taking full advantage of the standard deduction, a tax-deferred balance is also useful as a form of self-insurance for LTC and other medical expenses. Large medical expenses can come out out of a TIRA largely tax-free (over a certain threshold of AGI). Just one of the many ways tax-deferred accounts are under-appreciated by many.
I find it very difficult to keep in mind real instead of nominal. My life and tax situation has changed dramatic over the last 5 years. Sometimes I just think I should try to pay the least tax now and in the future. I am having an equally hard time thinking about contribution to a Roth401k vs my traditional when my marginal tax rate is 0% with such large credits.
"PSX will always go up 20%, why invest in anything else?!" -Father-in-law early retired.
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TheHouse7
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Re: Roth conversion calc. (34 yo)

Post by TheHouse7 »

FiveK wrote: Sat Jul 17, 2021 1:24 am
TheHouse7 wrote: Fri Jul 16, 2021 10:17 am Last year, we qualified for the EITC for the first time (amazing). I put an extra 10k of income (to represent a 401k roth contribution) and lost a $4,000 credit!
Careful - what type of income did you use?

The EITC has an "investment income" limit, so if you put in $10K of, say, interest, the law treats that different from putting $10K into a Roth 401k instead of a traditional 401k. Does that make sense?
I just added 10k to the top line gross taxable income.
"PSX will always go up 20%, why invest in anything else?!" -Father-in-law early retired.
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TheHouse7
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Re: Roth conversion calc. (34 yo)

Post by TheHouse7 »

FiveK wrote: Fri Jul 16, 2021 11:00 pm
TheHouse7 wrote: Fri Jul 16, 2021 10:17 am Last year, we qualified for the EITC for the first time (amazing). I put an extra 10k of income (to represent a 401k roth contribution) and lost a $4,000 credit! This year we will receive even more child tax credit and I need help figuring out how to convert our traditional into roth while we pay little to no tax.

I think our goal should be to convert up to a 10-12% marginal rate. Am I crazy to miss out on a EITC year?
A general rule for a Roth IRA conversion is "do it if your marginal tax rate on the conversion now is lower than you expect it would be after you retire - otherwise don't do it now."

You could figure your marginal tax rate now for a range of conversion amounts by doing what it appears you have done already: change the conversion amount into tax software, see how much the tax changes, and calculate the marginal tax rate as (change in tax)/(change in conversion amount).

Or use a tool such as the personal finance toolbox (if you don't mind Excel) that will generate a chart for you (see the wiki article linked above for some "how to" screen shots)."
I will try using the personal finance tool box this weekend. I used the fidelity Roth conversion tool and got intimidated by the result so I posted on the forum before going through other calculators.
"PSX will always go up 20%, why invest in anything else?!" -Father-in-law early retired.
02nz
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Re: Roth conversion calc. (34 yo)

Post by 02nz »

TheHouse7 wrote: Sat Jul 17, 2021 1:26 am
02nz wrote: Fri Jul 16, 2021 1:07 pm I agree that paying an effective 40% tax on a Roth conversion (or switching from traditional to Roth contribution) is not a good idea. Actually it could be well over 50%, as 40% is just the loss of the EITC, before the tax on the additional income.
David Jay wrote: Fri Jul 16, 2021 12:33 pm
Having about a half-million in 401K at start of retirement seems about optimal to me, if all retirement assets are in Roth then there is no way to take advantage of your standard deduction. Here is my thread on conversions after start of SS for some thoughts: viewtopic.php?f=10&t=237277
I assume you mean in today's dollars. OP will need to keep that in mind, and use real not nominal returns to project portfolio growth. (I shake my head every time I see a certain poster here tell people they have a tax bomb coming ... assuming 10% growth.) In addition to taking full advantage of the standard deduction, a tax-deferred balance is also useful as a form of self-insurance for LTC and other medical expenses. Large medical expenses can come out out of a TIRA largely tax-free (over a certain threshold of AGI). Just one of the many ways tax-deferred accounts are under-appreciated by many.
I find it very difficult to keep in mind real instead of nominal. My life and tax situation has changed dramatic over the last 5 years. Sometimes I just think I should try to pay the least tax now and in the future. I am having an equally hard time thinking about contribution to a Roth401k vs my traditional when my marginal tax rate is 0% with such large credits.
What do you find difficult about real vs nominal? And the goal isn't to pay the least tax now or in the future, it's to have the most after-tax spendable money. That doesn't necessarily mean paying the least in tax.
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TheHouse7
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Re: Roth conversion calc. (34 yo)

Post by TheHouse7 »

02nz wrote: Sat Jul 17, 2021 8:21 am
TheHouse7 wrote: Sat Jul 17, 2021 1:26 am
02nz wrote: Fri Jul 16, 2021 1:07 pm I agree that paying an effective 40% tax on a Roth conversion (or switching from traditional to Roth contribution) is not a good idea. Actually it could be well over 50%, as 40% is just the loss of the EITC, before the tax on the additional income.
David Jay wrote: Fri Jul 16, 2021 12:33 pm
Having about a half-million in 401K at start of retirement seems about optimal to me, if all retirement assets are in Roth then there is no way to take advantage of your standard deduction. Here is my thread on conversions after start of SS for some thoughts: viewtopic.php?f=10&t=237277
I assume you mean in today's dollars. OP will need to keep that in mind, and use real not nominal returns to project portfolio growth. (I shake my head every time I see a certain poster here tell people they have a tax bomb coming ... assuming 10% growth.) In addition to taking full advantage of the standard deduction, a tax-deferred balance is also useful as a form of self-insurance for LTC and other medical expenses. Large medical expenses can come out out of a TIRA largely tax-free (over a certain threshold of AGI). Just one of the many ways tax-deferred accounts are under-appreciated by many.
I find it very difficult to keep in mind real instead of nominal. My life and tax situation has changed dramatic over the last 5 years. Sometimes I just think I should try to pay the least tax now and in the future. I am having an equally hard time thinking about contribution to a Roth401k vs my traditional when my marginal tax rate is 0% with such large credits.
What do you find difficult about real vs nominal? And the goal isn't to pay the least tax now or in the future, it's to have the most after-tax spendable money. That doesn't necessarily mean paying the least in tax.
I don't know where tax rates will be in the future, I don't know what inflation will be in the future (or deflation), I don't know how much I will need to withdrawal from taxable assets on a yearly basis to cover my future living expenses. Real seems useless to actionable things right now with so many unknowns.
"PSX will always go up 20%, why invest in anything else?!" -Father-in-law early retired.
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TheHouse7
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Re: Roth conversion calc. (34 yo)

Post by TheHouse7 »

TheHouse7 wrote: Sat Jul 17, 2021 1:31 am
FiveK wrote: Fri Jul 16, 2021 11:00 pm
TheHouse7 wrote: Fri Jul 16, 2021 10:17 am Last year, we qualified for the EITC for the first time (amazing). I put an extra 10k of income (to represent a 401k roth contribution) and lost a $4,000 credit! This year we will receive even more child tax credit and I need help figuring out how to convert our traditional into roth while we pay little to no tax.

I think our goal should be to convert up to a 10-12% marginal rate. Am I crazy to miss out on a EITC year?
A general rule for a Roth IRA conversion is "do it if your marginal tax rate on the conversion now is lower than you expect it would be after you retire - otherwise don't do it now."

You could figure your marginal tax rate now for a range of conversion amounts by doing what it appears you have done already: change the conversion amount into tax software, see how much the tax changes, and calculate the marginal tax rate as (change in tax)/(change in conversion amount).

Or use a tool such as the personal finance toolbox (if you don't mind Excel) that will generate a chart for you (see the wiki article linked above for some "how to" screen shots)."
I will try using the personal finance tool box this weekend. I used the fidelity Roth conversion tool and got intimidated by the result so I posted on the forum before going through other calculators.
I used the personal finance toolbox. Wildly helpful. I'm not elegable for the EITC this year so I will be focusing on how much tira>roth I can convert.
:sharebeer
"PSX will always go up 20%, why invest in anything else?!" -Father-in-law early retired.
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Re: Roth conversion calc. (34 yo)

Post by 02nz »

TheHouse7 wrote: Sat Jul 17, 2021 11:30 am I don't know where tax rates will be in the future,
No one else knows either. The more important thing is that the progressive tax income system is very likely to remain in place even decades from now, regardless of what the precise tax rates are. That means most people will face lower rates in retirement than they do in their working years, because their income is much lower in retirement.
TheHouse7 wrote: Sat Jul 17, 2021 11:30 am I don't know what inflation will be in the future (or deflation), I don't know how much I will need to withdrawal from taxable assets on a yearly basis to cover my future living expenses. Real seems useless to actionable things right now with so many unknowns.
Maybe you're not understanding what "real returns" means. It means the return after inflation - for example you project your future portfolio assuming 5% real growth instead of 8% nominal. This way you keep all numbers in today's dollars, as the whole point is to leave inflation out of the equation. What's more meaningful to you - knowing that your portfolio is projected to grow to $1 million in today's dollars by year 2050, or to $2 million in inflated, future dollars? The former is much more meaningful, because the latter means nothing without knowing what inflation will be for the next 30 years.
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Re: Roth conversion calc. (34 yo)

Post by teen persuasion »

The EITC phaseout w/ 2 kids is 21%. You may have a state version (NY matches 30%, so the corresponding state phaseout is 6.3%). Then add your 12% federal bracket, and any state tax. In NY we'd be at 44.3% or so.

EITC is definitely something to plan around if you are in range, or can put yourself in range with retirement/HSA contributions. We had a bunch of nonrefundable credits, which would have covered the tax on Roth conversions, but the increased AGI would have eliminated fed + state EITC and some nonrefundable credits like Saver's credit. The loss of refunds far outweighed the bit of conversion we could do, and the refunds were being used to fund Roth IRAs.
Last edited by teen persuasion on Thu Jul 22, 2021 9:44 am, edited 1 time in total.
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Re: Roth conversion calc. (34 yo)

Post by celia »

TheHouse7 wrote: Fri Jul 16, 2021 10:17 am This year we will receive even more child tax credit and I need help figuring out how to convert our traditional into roth while we pay little to no tax.
Once you recognize that you have two contradictory goals (the child tax credit requires that you have low income, while Roth conversions give you higher income), you need to decide which one you to aim for. You can alternate each year if you want, but just recognize which one you are doing.

For this year, continue what you’ve been doing, which is probably tax-deferring. For at least one year, I would do Roth conversions, or at least, make Roth contributions (if eligible) to start the 5-year clock and get some tax-free growth going in the Roths. (You apparently recognize the power of compounding, which will apply to both the traditional and Roth IRAs.) When you do that, be mindful of what tax brackets you are in and go to the top of your tax bracket. If you will have some years when one of you is not working, that would be a good time to go the Roth route too.

One way you can think of the Child Tax Credit is that savings on your taxes can go to the Roth IRA. But this is just a mental accounting trick since you still need earned income and are still bound by the $6,000 maximum contribution per person.
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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Re: Roth conversion calc. (34 yo)

Post by celia »

TheHouse7 wrote: Sat Jul 17, 2021 1:31 am I will try using the personal finance tool box this weekend. I used the fidelity Roth conversion tool and got intimidated by the result so I posted on the forum before going through other calculators.
Another great tool to use is last year’s tax software. Plug your estimated numbers in for this year or next to see what happens to your taxes.

Of course, that only helps you see a single year financial situation, not a multi-year projection.
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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Re: Roth conversion calc. (34 yo)

Post by 02nz »

celia wrote: Sat Jul 17, 2021 1:38 pm
TheHouse7 wrote: Sat Jul 17, 2021 1:31 am I will try using the personal finance tool box this weekend. I used the fidelity Roth conversion tool and got intimidated by the result so I posted on the forum before going through other calculators.
Another great tool to use is last year’s tax software. Plug your estimated numbers in for this year or next to see what happens to your taxes.

Of course, that only helps you see a single year financial situation, not a multi-year projection.
Or this year's tax software when it comes out. TurboTax usually comes out in November, plenty of time to put in some numbers and see if a Roth conversion is worth it or not.
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TheHouse7
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Re: Roth conversion calc. (34 yo)

Post by TheHouse7 »

02nz wrote: Sat Jul 17, 2021 12:04 pm
TheHouse7 wrote: Sat Jul 17, 2021 11:30 am I don't know where tax rates will be in the future,
No one else knows either. The more important thing is that the progressive tax income system is very likely to remain in place even decades from now, regardless of what the precise tax rates are. That means most people will face lower rates in retirement than they do in their working years, because their income is much lower in retirement.
TheHouse7 wrote: Sat Jul 17, 2021 11:30 am I don't know what inflation will be in the future (or deflation), I don't know how much I will need to withdrawal from taxable assets on a yearly basis to cover my future living expenses. Real seems useless to actionable things right now with so many unknowns.
Maybe you're not understanding what "real returns" means. It means the return after inflation - for example you project your future portfolio assuming 5% real growth instead of 8% nominal. This way you keep all numbers in today's dollars, as the whole point is to leave inflation out of the equation. What's more meaningful to you - knowing that your portfolio is projected to grow to $1 million in today's dollars by year 2050, or to $2 million in inflated, future dollars? The former is much more meaningful, because the latter means nothing without knowing what inflation will be for the next 30 years.
I think I know what "real returns" mean. Thank you for reminding me of the retirement planning application of it.
"PSX will always go up 20%, why invest in anything else?!" -Father-in-law early retired.
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TheHouse7
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Re: Roth conversion calc. (34 yo)

Post by TheHouse7 »

teen persuasion wrote: Sat Jul 17, 2021 12:33 pm The EITC phaseout w/o 2 kids is 21%. You may have a state version (NY matches 30%, so the corresponding state phaseout is 6.3%). Then add your 12% federal bracket, and any state tax. In NY we'd be at 44.3% or so.

EITC is definitely something to plan around if you are in range, or can put yourself in range with retirement/HSA contributions. We had a bunch of nonrefundable credits, which would have covered the tax on Roth conversions, but the increased AGI would have eliminated fed + state EITC and some nonrefundable credits like Saver's credit. The loss of refunds far outweighed the bit of conversion we could do, and the refunds were being used to fund Roth IRAs.
Very useful input, I just switched jobs to not be eligible for the EITC with a maxed traditional 401k and HSA. I just figured out that sometimes there is a portion of credits that are not refundable. Thank you for commenting.
"PSX will always go up 20%, why invest in anything else?!" -Father-in-law early retired.
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Re: Roth conversion calc. (34 yo)

Post by tomsense76 »

David Jay wrote: Fri Jul 16, 2021 12:33 pm I would take the EITC. There will be a low-income period between retirement and start of RMDs when you can convert.

Having about a half-million in 401K at start of retirement seems about optimal to me, if all retirement assets are in Roth then there is no way to take advantage of your standard deduction. Here is my thread on conversions after start of SS for some thoughts: viewtopic.php?f=10&t=237277
+1

I don't understand the need to convert to Roth now. While you are working and still accumulating assets, you have relatively little control of your tax rate (beyond saving in tax advantaged vehicles) and as you have seen the costs are high if this is not done carefully. In retirement you have a lot more control of this (like which buckets to draw from and how much).

Would continue saving in traditional 401k for now. If you want a little Roth money, open a Roth IRA and fund that. With an aggressive allocation in Roth and a conservative allocation in the 401k, this can be a tidy sum in Roth in retirement without additional taxes paid between here and there.
"Anyone who claims to understand quantum theory is either lying or crazy" -- Richard Feynman
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Re: Roth conversion calc. (34 yo)

Post by TheHouse7 »

celia wrote: Sat Jul 17, 2021 1:29 pm
TheHouse7 wrote: Fri Jul 16, 2021 10:17 am This year we will receive even more child tax credit and I need help figuring out how to convert our traditional into roth while we pay little to no tax.
Once you recognize that you have two contradictory goals (the child tax credit requires that you have low income, while Roth conversions give you higher income), you need to decide which one you to aim for. You can alternate each year if you want, but just recognize which one you are doing.

For this year, continue what you’ve been doing, which is probably tax-deferring. For at least one year, I would do Roth conversions, or at least, make Roth contributions (if eligible) to start the 5-year clock and get some tax-free growth going in the Roths. (You apparently recognize the power of compounding, which will apply to both the traditional and Roth IRAs.) When you do that, be mindful of what tax brackets you are in and go to the top of your tax bracket. If you will have some years when one of you is not working, that would be a good time to go the Roth route too.

One way you can think of the Child Tax Credit is that savings on your taxes can go to the Roth IRA. But this is just a mental accounting trick since you still need earned income and are still bound by the $6,000 maximum contribution per person.
I think our marginal tax rate is 12% on conversions until we lose a $400 savers credit. What I'm worried about is compounding over 38 years pushing us in to RMDs at 22% marginal. Roth 401k is an option. When do we need to bite the 12% bullet because the more I read about it, it could be never.
"PSX will always go up 20%, why invest in anything else?!" -Father-in-law early retired.
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TheHouse7
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Re: Roth conversion calc. (34 yo)

Post by TheHouse7 »

celia wrote: Sat Jul 17, 2021 1:38 pm
TheHouse7 wrote: Sat Jul 17, 2021 1:31 am I will try using the personal finance tool box this weekend. I used the fidelity Roth conversion tool and got intimidated by the result so I posted on the forum before going through other calculators.
Another great tool to use is last year’s tax software. Plug your estimated numbers in for this year or next to see what happens to your taxes.

Of course, that only helps you see a single year financial situation, not a multi-year projection.
I would try last year's tax software, but the feds keep changing the child tax credit. :beer
"PSX will always go up 20%, why invest in anything else?!" -Father-in-law early retired.
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TheHouse7
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Re: Roth conversion calc. (34 yo)

Post by TheHouse7 »

02nz wrote: Sat Jul 17, 2021 3:16 pm
celia wrote: Sat Jul 17, 2021 1:38 pm
TheHouse7 wrote: Sat Jul 17, 2021 1:31 am I will try using the personal finance tool box this weekend. I used the fidelity Roth conversion tool and got intimidated by the result so I posted on the forum before going through other calculators.
Another great tool to use is last year’s tax software. Plug your estimated numbers in for this year or next to see what happens to your taxes.

Of course, that only helps you see a single year financial situation, not a multi-year projection.
Or this year's tax software when it comes out. TurboTax usually comes out in November, plenty of time to put in some numbers and see if a Roth conversion is worth it or not.
Thank you about the heads up in November. I will definitely be watching out for turbo tax.
"PSX will always go up 20%, why invest in anything else?!" -Father-in-law early retired.
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TheHouse7
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Re: Roth conversion calc. (34 yo)

Post by TheHouse7 »

tomsense76 wrote: Wed Jul 21, 2021 10:21 pm
David Jay wrote: Fri Jul 16, 2021 12:33 pm I would take the EITC. There will be a low-income period between retirement and start of RMDs when you can convert.

Having about a half-million in 401K at start of retirement seems about optimal to me, if all retirement assets are in Roth then there is no way to take advantage of your standard deduction. Here is my thread on conversions after start of SS for some thoughts: viewtopic.php?f=10&t=237277
+1

I don't understand the need to convert to Roth now. While you are working and still accumulating assets, you have relatively little control of your tax rate (beyond saving in tax advantaged vehicles) and as you have seen the costs are high if this is not done carefully. In retirement you have a lot more control of this (like which buckets to draw from and how much).

Would continue saving in traditional 401k for now. If you want a little Roth money, open a Roth IRA and fund that. With an aggressive allocation in Roth and a conservative allocation in the 401k, this can be a tidy sum in Roth in retirement without additional taxes paid between here and there.
Roth conversion is considered for us because of
Max Roth iras
Max HSA
Just quit a job creating my first meaningful traditional IRA rollover,
And I don't think my tax burden is going down now/or in the future.
220k traditional now could grow into 782k in 24 years.
Last edited by TheHouse7 on Wed Jul 21, 2021 10:42 pm, edited 1 time in total.
"PSX will always go up 20%, why invest in anything else?!" -Father-in-law early retired.
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FiveK
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Re: Roth conversion calc. (34 yo)

Post by FiveK »

TheHouse7 wrote: Wed Jul 21, 2021 10:34 pm Roth conversion is considered for us because of
Max Roth iras
Max HSA
Just quit a job creating my first meaningful traditional IRA rollover,
And I don't think my tax burden is going down now/or in the future.
What marginal tax rates did you see for Roth conversions when you did the toolbox tax calculations?
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TheHouse7
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Re: Roth conversion calc. (34 yo)

Post by TheHouse7 »

FiveK wrote: Wed Jul 21, 2021 10:36 pm
TheHouse7 wrote: Wed Jul 21, 2021 10:34 pm Roth conversion is considered for us because of
Max Roth iras
Max HSA
Just quit a job creating my first meaningful traditional IRA rollover,
And I don't think my tax burden is going down now/or in the future.
What marginal tax rates did you see for Roth conversions when you did the toolbox tax calculations?
12% I think 🤔 I'll have to look again. FiveK I'm honored that your on my thread after reading so much of your other posts about Roth vs traditional!
"PSX will always go up 20%, why invest in anything else?!" -Father-in-law early retired.
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TheHouse7
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Re: Roth conversion calc. (34 yo)

Post by TheHouse7 »

David Jay wrote: Fri Jul 16, 2021 12:33 pm I would take the EITC. There will be a low-income period between retirement and start of RMDs when you can convert.

Having about a half-million in 401K at start of retirement seems about optimal to me, if all retirement assets are in Roth then there is no way to take advantage of your standard deduction. Here is my thread on conversions after start of SS for some thoughts: viewtopic.php?f=10&t=237277
Your real world example is priceless for my brain 😂! I'm planning on a Tira balance of 1.8m(60 yo) if I don't change course (5% real rate of return with no job loss for 26 years). That's why I'm interested in tax rates in low/no income years.
"PSX will always go up 20%, why invest in anything else?!" -Father-in-law early retired.
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Re: Roth conversion calc. (34 yo)

Post by FiveK »

TheHouse7 wrote: Wed Jul 21, 2021 10:44 pm
FiveK wrote: Wed Jul 21, 2021 10:36 pm What marginal tax rates did you see for Roth conversions when you did the toolbox tax calculations?
12% I think 🤔 I'll have to look again.
Assuming you gave it all the appropriate inputs (e.g., number of children, age ranges, other income, etc.), that 12% should be accurate. If you expect to be paying no less that 22% in all future years, it makes much sense to pay only 12% now.

Kudos to you for engaging with all the commenters in this thread. One might think that would always happen - and probably does more often than not - but there are enough times posters don't respond to questions that it's worth noting. :)
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Re: Roth conversion calc. (34 yo)

Post by TheHouse7 »

FiveK wrote: Wed Jul 21, 2021 11:08 pm
TheHouse7 wrote: Wed Jul 21, 2021 10:44 pm
FiveK wrote: Wed Jul 21, 2021 10:36 pm What marginal tax rates did you see for Roth conversions when you did the toolbox tax calculations?
12% I think 🤔 I'll have to look again.
Assuming you gave it all the appropriate inputs (e.g., number of children, age ranges, other income, etc.), that 12% should be accurate. If you expect to be paying no less that 22% in all future years, it makes much sense to pay only 12% now.

Kudos to you for engaging with all the commenters in this thread. One might think that would always happen - and probably does more often than not - but there are enough times posters don't respond to questions that it's worth noting. :)
I just imagine my wife goes back to work and retirement ends up great (RMDs). Just a way to pass time while I'm stressed out about my new job change. I don't want to be one of those "unicorns" that should have put more into Roth early on.
"PSX will always go up 20%, why invest in anything else?!" -Father-in-law early retired.
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Re: Roth conversion calc. (34 yo)

Post by tomsense76 »

TheHouse7 wrote: Wed Jul 21, 2021 10:34 pm Just quit a job creating my first meaningful traditional IRA rollover
Got it. So you are not planning on working in the near future? Agree it makes sense to do some Roth conversions now.
"Anyone who claims to understand quantum theory is either lying or crazy" -- Richard Feynman
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Re: Roth conversion calc. (34 yo)

Post by TheHouse7 »

tomsense76 wrote: Thu Jul 22, 2021 12:24 am
TheHouse7 wrote: Wed Jul 21, 2021 10:34 pm Just quit a job creating my first meaningful traditional IRA rollover
Got it. So you are not planning on working in the near future? Agree it makes sense to do some Roth conversions now.
Sorry my wording is weird, I'm just changing jobs, 401k being rolled into tira. I will still have a similar income (88K).
"PSX will always go up 20%, why invest in anything else?!" -Father-in-law early retired.
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Re: Roth conversion calc. (34 yo)

Post by celia »

02nz wrote: Sat Jul 17, 2021 12:04 pm The more important thing is that the progressive tax income system is very likely to remain in place even decades from now, regardless of what the precise tax rates are.
A progressive tax system means those with higher incomes pay more in taxes and at a higher tax rate than those who have less income. Is that the definition you use?
That means most people will face lower rates in retirement than they do in their working years, because their income is much lower in retirement.
I do not see this as a consequence to the first sentence at all. The consequence/conclusion I come up with is that those with higher incomes in their working years are more likely to be in higher tax brackets not only when working but also in retirement. That is because they are likely the ones who had better benefits while working (higher employer match going to 401k, more likely to have pensions, tax-deferred account grew more than the average person—which means higher RMDs and higher taxes). Even if you are not in the same tax bracket as when working, you would still be doing better than ‘average’.
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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Re: Roth conversion calc. (34 yo)

Post by FiveK »

TheHouse7 wrote: Fri Jul 16, 2021 10:17 am I think it is easier to ask: what lump sum is to much tax deferred that you can't withdrawal without paying 22%+?
About $40K, based on
Image

Is that what you get also?
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Re: Roth conversion calc. (34 yo)

Post by 02nz »

celia wrote: Thu Jul 22, 2021 1:10 am
02nz wrote: Sat Jul 17, 2021 12:04 pm The more important thing is that the progressive tax income system is very likely to remain in place even decades from now, regardless of what the precise tax rates are.
A progressive tax system means those with higher incomes pay more in taxes and at a higher tax rate than those who have less income. Is that the definition you use?
That means most people will face lower rates in retirement than they do in their working years, because their income is much lower in retirement.
I do not see this as a consequence to the first sentence at all. The consequence/conclusion I come up with is that those with higher incomes in their working years are more likely to be in higher tax brackets not only when working but also in retirement. That is because they are likely the ones who had better benefits while working (higher employer match going to 401k, more likely to have pensions, tax-deferred account grew more than the average person—which means higher RMDs and higher taxes). Even if you are not in the same tax bracket as when working, you would still be doing better than ‘average’.
How a person compares against the rest of the population in income during retirement is irrelevant to the Roth conversion (or Roth vs traditional) decision. The relevant comparison is of marginal rates during withdrawal (i.e. retirement) vs during the year in which that income was originally earned. If the withdrawal tax rate is lower, then the person comes out ahead with traditional. Most Americans, including high earners (and especially today's high earners, who generally have no pension), face lower tax rates in retirement than they do in their working years.

To give a specific example: here is a thread (viewtopic.php?f=1&t=328485) in which OP is in the top tax bracket, has only 100K in tax-deferred, yet you recommended converting that to Roth - at 37%! Yes, this person will likely have above-average income in retirement. But if that person's retirement tax rate is less than 37%, then doing Roth conversions during working years will have been a costly mistake. And at a 4% withdrawal rate it takes a $13M portfolio, in today's dollars, for even a single filer to have any income in the 37% bracket (with most dollars falling into lower brackets).
Last edited by 02nz on Thu Jul 22, 2021 10:13 am, edited 1 time in total.
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Re: Roth conversion calc. (34 yo)

Post by teen persuasion »

TheHouse7 wrote: Wed Jul 21, 2021 11:17 pm
FiveK wrote: Wed Jul 21, 2021 11:08 pm
TheHouse7 wrote: Wed Jul 21, 2021 10:44 pm
FiveK wrote: Wed Jul 21, 2021 10:36 pm What marginal tax rates did you see for Roth conversions when you did the toolbox tax calculations?
12% I think 🤔 I'll have to look again.
Assuming you gave it all the appropriate inputs (e.g., number of children, age ranges, other income, etc.), that 12% should be accurate. If you expect to be paying no less that 22% in all future years, it makes much sense to pay only 12% now.

Kudos to you for engaging with all the commenters in this thread. One might think that would always happen - and probably does more often than not - but there are enough times posters don't respond to questions that it's worth noting. :)
I just imagine my wife goes back to work and retirement ends up great (RMDs). Just a way to pass time while I'm stressed out about my new job change. I don't want to be one of those "unicorns" that should have put more into Roth early on.
If you currently have one income, and might go to two in the future, you are likely at your lowest tax rate now. Couple that with rates reverting higher in the near future (12% -> 15%) and Roth conversions now look sensible.

Just watch how much to convert with LTCG in the mix.
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