Mega Roth Conversion strategy considering 0% CG's too

[mrbillium]

I was having trouble wrapping my head around how to score the benefit of 0% CG's when planning a Roth conversion strategy so tried out an edge case that looks way better than expected!

My situation:
Single, 65 yrs old with $800k taxable funds & $400k trad IRA, expected SSI at age 70 is $48k. I get $15k of Q Divs from taxable and live on $40k so requiring total CG's of $30k pa

NewRetirement’s Roth Explorer suggests $55k Roth conversions for next 5 years then $15K after SSI for min tax and similar strategy for max estate value. I end up with Trad IRA at $150k and starting RMD of $5K. This strategy costs me $10k per year in tax for 5yrs then $8k for 3 years to RMD at age 73.

But there is also a benefit in being able to Tax gain harvest at 0% if income is low enough and I think it reasonable to compare the savings.
So as an exercise I ran the following edge case that I Initially thought was crazy but now - not so much!

Scenario: Mega Roth convert all $400k in 2023
Cost: $115k of tax + $8k of IRMAA penalty = $123k + opportunity cost of missing $123k
Benefits: For next 4 years (until SSI starts) I have zero income (just $30K CG divs) so can sell extra $30K CG each year tax-free. But I would need to raise $115k in 2024 to pay tax in April so figure no saving in first year, instead selling $100k of CG in Jan = $6k of tax.
Once SSI starts, the benefit is much harder to quantify because Provisional Income means any extra CG is taxable but my baseline $15k CG not having the $5k RMD saves me $1200 a year - forever.

At age 73 the typical $55k yr conversion plan will have cost me taxes of 5x $10k + 3 x $9k = $77k . This will leave me with $150k in Trad IRA and I would need to continue Roth conversions at $10k forever just to keep the $5k RMD from increasing. This means I would have a 5 + 10 = $15k income forever.

The Mega conversion will have cost me $123k + $6k( CG tax to pay tax) less 3 yrs of tax free with extra free $30k CG = $90k) for a total of 123+6 -90 = $39k. But I also lose investing $123k for 6 years so add in $50k ‘cost’. Further add in 3 years of SSI taxed at $1k to RMD date for adjusted comparative cost of $92k.
And, with no income I save at least $3k a year in tax forever after SSI starts ( No RMD + extra Roth conv to keep up).

So, the Mega conversion costs $15k more vs typical annual plan but I save $3k a year after age 73 + the intangible of all future IRA gains tax free – FOREVER.

This surprised the hell out of me - have I missed something?

[retiredjg]

I think you are making two mistakes.

• You are assuming it is smart to convert most or all of your $400k tIRA to Roth.
  
  You are looking at taxes paid instead of how much money you end up with after taxes (which is what you should be looking at.)

Both of these are pretty common mistakes.


Getting rid of all your tax-deferred account is not necessarily a good plan. Keeping it small enough to prevent your RMDs from being onerous is a better plan for many situations.

If you convert all of the $400k in one year, you will be paying tax at the 24% and 32% and 35% marginal rates. Plus this will push your investment income into the NIIT and maybe into AMT. And it will also push you into IRMAA which will cost a few thousand.

There is no need for all of this. I think that smaller conversions (staying under IRMAA) over the years will result in a larger balance in the end.

[FiveK]

There is no need for all of this. I think that smaller conversions (staying under IRMAA) over the years will result in a larger balance in the end.

+1

mrbillium, see the chart below to put a picture to retiredjg's words. It assumes the $15K qualified dividends and also assumes $15K LTCG. The latter assumption may be too high if you can withdraw $30K from taxable without realizing many gains, but is probably too low for the amount you would have to withdraw to pay the tax on a full $400K conversion.



If you want to improve the assumptions and can use Excel you can download the personal finance toolbox and use better numbers.

The following may be worthwhile reading:
Roth conversion
Roth Conversion with Social Security and Medicare IRMAA
Worth pushing through the Social Security hump and/or IRMAA cliffs?

[mrbillium]

Thanks for the feedback and the links - I will do more research before doing anything rash!

[marcopolo]

There is no need for all of this. I think that smaller conversions (staying under IRMAA) over the years will result in a larger balance in the end.

+1

mrbillium, see the chart below to put a picture to retiredjg's words. It assumes the $15K qualified dividends and also assumes $15K LTCG. The latter assumption may be too high if you can withdraw $30K from taxable without realizing many gains, but is probably too low for the amount you would have to withdraw to pay the tax on a full $400K conversion.



If you want to improve the assumptions and can use Excel you can download the personal finance toolbox and use better numbers.

The following may be worthwhile reading:
Roth conversion
Roth Conversion with Social Security and Medicare IRMAA
Worth pushing through the Social Security hump and/or IRMAA cliffs?

The chart is the one on the Calculations tab at Cell F82?
How do you get it to update after you change entries?
The instructions say: clicking the "Update chart" button near cell L115.
But, I do not see any such button when i try to use this capability.

[FiveK]

The chart is the one on the Calculations tab at Cell F82?
How do you get it to update after you change entries?
The instructions say: clicking the "Update chart" button near cell L115.
But, I do not see any such button when i try to use this capability.

Are you using Excel?

[marcopolo]

The chart is the one on the Calculations tab at Cell F82?
How do you get it to update after you change entries?
The instructions say: clicking the "Update chart" button near cell L115.
But, I do not see any such button when i try to use this capability.

Are you using Excel?

No.
LibreOffice. I do have Macros Enabled.
Perhaps some other missing feature in LibreOffice?

[FiveK]

Unfortunately it seems Excel will do things Google Sheets and Libre Calc won't. There was a request for Any LibreOffice Calc knowledge? regarding that tool a few years ago but apparently nothing helpful came of it.