Roth IRA conversion strategies (when and how much) for 2022

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Richard1580
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Re: Roth IRA conversion strategies (when and how much) for 2022

Post by Richard1580 »

A few years ago I did projections on our cash flow and saw that when the 2018 tax cuts expired in 2026, RMDs starting in 2032 were going to not only cause us to withdraw money we did not need, but would probably push us into the 33% tax bracket. We started converting, figuring that I would rather pay 24% now rather than 33% later. Right now I am just trying to keep our MAGI below the $194K cap that increases our Medicare premiums.

2022-2025 is a great time to take advantage of the reduced tax rates to do conversions. Of course, YMMV. :-)
"The quest is the quest."
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neurosphere
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Re: Roth IRA conversion strategies (when and how much) for 2022

Post by neurosphere »

diy60 wrote: Fri Dec 23, 2022 7:51 pm
terran wrote: Mon Jan 10, 2022 6:59 pm
Tony-S wrote: Mon Jan 10, 2022 6:53 pm
Running Bum wrote: Mon Jan 10, 2022 4:31 pm I do a safe conversion early in the year, estimating the rest of my MAGI or taxable income and keeping short of my year end goal.
If you do a conversion early, say January, do you need to pay taxes right afterwards, or can you wait until filing taxes the next year?
To avoid a penalty you'd either need to pay estimated taxes in the quarter you had the income or pay in 4 equal installments. See my post earlier in the thread.
Sorry, but the bolded underline is not entirely accurate. Perhaps you meant for safe harbor? You can still avoid a penalty paying in unequal payments. There is no requirement that estimated taxes must be paid in equal installments to avoid a penalty. As an example, I usually pay 30/30/30/10 and perform the largest % of my Roth conversions in January, with many small conversions throughout the year. So as a baseline:
- Income is assumed to be earned equally throughout the year,
- Withholding is deemed on time and equal throughout the year, and
- Estimated taxes are credited in the quarter you pay.

So you can see, I slightly front load tax payments, as it helps me with end-of-year cash flows for annual large bills. I have never owed penalties.
The wording of "equal installments" had always confused me. What it really means is "at least" equal installments. That is, installments need not be "equal", at least as defined by an identical dollar amount made each quarter. The "equal" qualification refers to a situation of the minimum possible payments needed to avoid a penalty. If you overpay Q1 by $10, you can underpay Q2 by $10. Those payments are still considered "equal" because an overpayment to Q1 COUNTS as a payment towards Q2, but simply made a little early.
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes" (even in taxable accounts).
Indyhou
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Re: Roth IRA conversion strategies (when and how much) for 2022

Post by Indyhou »

DSBH wrote: Fri Dec 23, 2022 7:25 pm
DSBH wrote: Mon Jan 10, 2022 1:03 pm So we did our homework, and plan to convert X dollars in 2022. Our current plan (or course subject to change) is to:

1. Convert 5 times a year, around 4 deadlines for 1040-ES (mid Jan, Apr, Jun, Sep) and end of December once distributions are known.
2. Convert about 20% of X each time,
3. Advance my next conversion (e.g. Apr 15 plan) for each 5% stock market decline (e.g. if market drops by 5% in Mach from 2021 ending value).
Well that was in January, and 2022 is almost over. We carried out pretty much the above plan and with our year-end fund distributions (cash) already in our Taxable account, we are thinking about converting up to the next tax bracket next week as we fortunately have an over-saved T-IRA.

FWIW we converted mostly from Total Bonds to Total Stock, and pay taxes out of our cash/Munis in Taxable. In the process we increase our stock AA by a small percentage.
If you decide to do Roth conversion this year:

1. When do you plan to convert,
2. How much of X if multiple conversions in a year, and
3. Any contingency plan(s)
Did/will you execute your 2022 conversion plan ? Make any change to your plan ?
I pretty much stuck to my plan for this year. I just completed my 2022 Roth conversion. I did the all of our Roth conversions in December after getting the final distribution information for our after tax investments.

This is the first year that my conversion will affect our Medicare costs for the full year (I turn 65 in 4Q23).

I ran a couple of cases with different MAGI limits and decided to convert up into the first IRMAA bracket. I ran a case with no MAGI limits which produced a more aggressive conversion strategy. However, the ending balance of our portfolio with the aggressive conversion strategy was only about .5% different than putting the MAGI limits on it. I didn’t think the additional cost of Medicare in 2024 was worth this potential gain 40+ years in the future…

I did an estimated tax return in 2022 TurboTax and made sure my conversions would be below my target MAGI.

One difference this year was that I just paid enough taxes to keep me out of an underpayment penalty per form 2210. In the past I wasn’t really that concerned since the interest rates were so low. This year they’re high enough that I want to keep as much money possible.
kop604
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Re: Roth IRA conversion strategies (when and how much) for 2022

Post by kop604 »

My CPA said it doesn't matter if I pay 4 estimated tax by quarter or one lump sum at the end of the year. IRS does not care as long as I paid in advance.
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neurosphere
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Re: Roth IRA conversion strategies (when and how much) for 2022

Post by neurosphere »

kop604 wrote: Thu Jan 19, 2023 12:17 pm My CPA said it doesn't matter if I pay 4 estimated tax by quarter or one lump sum at the end of the year. IRS does not care as long as I paid in advance.
This is not necessarily true. You have to pay the tax in the quarter you earned it, with some exceptions.

For example, if your only income is a Roth conversion in December, then yes, you can report your income by quarter (e.g. $0, $0, $0, $5000) and show that all of your income came in Q4 and thus the only estimated payment needed is due in mid-January.

For most other situations where there is any income earned or otherwise attributed to prior quarters (interest, wages, dividends, etc) you must "pay as you go" unless there is a safe harbor type rule which provides you an exception.
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes" (even in taxable accounts).
GAAP
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Re: Roth IRA conversion strategies (when and how much) for 2022

Post by GAAP »

For Tax Year 2021, I did effectively all of my Roth conversion in January. Roth Conversions were about 98% of taxable income. I paid equal amounts via estimated payments each quarter. TurboTax calculated no form 2210 penalty. Since I was converting to a targeted amount, estimating actual taxes due at the end of the year was fairly easy.
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HeavyChevy
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Re: Roth IRA conversion strategies (when and how much) for 2022

Post by HeavyChevy »

Retired 2 years but no SS yet. No pension.

Do mine early in the year.

2021-$260K, 2022-$180K based on the taxes I was willing to pay to get started on reducing my tIRA (contains lump sum pension equivalent)

2023-$80K already done to approximate the top of the 12% tax bracket with my other likely ordinary dividends (MFJ).

Will continue to approximate 12% tax bracket level in future years - would consider additional conversion if the market drops precipitously, say greater than 25%.

I don't obsess on hitting cutoffs exactly, my base tIRA contributions wre made while in the 35% tax bracket (via AMT).
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