Roth/Tax question

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tothetune854
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Joined: Tue Jan 05, 2021 3:50 pm

Roth/Tax question

Post by tothetune854 »

My wife and i are retired collecting 95k combined SSA .Normally we would pay no tax this year and next because our income is low.
I was considering whether to do a Roth conversion of 200K this year and next in order to reduce future RMDs and IRMAA. We have 1.9M , 70% hi yield bond funds and 30% sp500 index. I ran a tax calculator and I would have to pay 50K each year to do this Roth conversion. Seems high (25% of Roth amount). I'm wondering if it would be worth it. I ran some crude projections and we would likely have first tier IRMAA, currently around 2K for both, from age 81 for me, 78 for wife. This is assuming 5% annual returns. We also have 600K brokerage (500 stock,100 money market.) which could pay the tax. Any help would be appreciated.

Joe
RyeBourbon
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Re: Roth/Tax question

Post by RyeBourbon »

You should absolutely be filling up the first few tax brackets (at least through 12%, probably 22%) with Roth conversions.

It sounds like you've got a good handle on the tax costs and the benefits. Try to as much in 2024 and 2025 as you can, since rates will be going up in 2026 (probably).
Retired June 2023. LMP (TIPS Ladder/SS Bridge) 25%/Risk Portfolio 75%, AA = 60/30/10
niagara_guy
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Re: Roth/Tax question

Post by niagara_guy »

In the fall I always model my taxes using last year's tax software and then decide how much to convert to Roth. The taxable part of your SS will increase as your other income increases so I think it's important to do this modeling (there are other tools that can also be used to do this modeling).
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Svensk Anga
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Re: Roth/Tax question

Post by Svensk Anga »

Doing Roth conversions will make some of your SS taxable. Doing $200k will make 85% of your SS taxable, which is why you are seeing a high tax rate on the conversion. You are probably also running into NIIT (Net investment income tax) on interest, dividends and capital gains since your gross would be above $250k.

Check out the Wiki article on taxation of SS benefits. I suspect there is some range of conversions where the tax hit is not so high. You might want to do smaller conversions in more than two years depending on how close you are to RMDs. You could run tax software at $10 or 20k increments of conversion and checking marginal rates on each increment to see where your sweet spot is.
evancox10
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Re: Roth/Tax question

Post by evancox10 »

tothetune854 wrote: Mon Jun 10, 2024 5:24 pm My wife and i are retired collecting 95k combined SSA .Normally we would pay no tax this year and next because our income is low.
I was considering whether to do a Roth conversion of 200K this year and next in order to reduce future RMDs and IRMAA. We have 1.9M , 70% hi yield bond funds and 30% sp500 index. I ran a tax calculator and I would have to pay 50K each year to do this Roth conversion. Seems high (25% of Roth amount). I'm wondering if it would be worth it. I ran some crude projections and we would likely have first tier IRMAA, currently around 2K for both, from age 81 for me, 78 for wife. This is assuming 5% annual returns. We also have 600K brokerage (500 stock,100 money market.) which could pay the tax. Any help would be appreciated.

Joe
To summarize, you’d like to avoid taxes on annual RMDs in the $70k-$100k range by … converting twice that amount in a single year? Even without running the numbers, I can tell you that’s unlikely to pencil out in your favor.

It really depends on your marginal rates now vs later. Are you going to have a lot more income later, like a pension kicking in? Find out at what income your marginal rate this year jumps up above your future predicted marginal rate, and try to convert up to that amount.

It would also help if you share your current age so we know how far from RMDs you are. You mention “two years “ of low income; are you 2 years away from starting RMDs?
Topic Author
tothetune854
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Re: Roth/Tax question

Post by tothetune854 »

Thinking of holding off. It would have been better to do before we started SSA but we only had a couple years to do so. Wife retired end of 2022 and we started SSA this year. I don't like the idea of getting taxed for the Roth as well as SSA. If I hold off I will have zero tax this year and next.
livesoft
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Re: Roth/Tax question

Post by livesoft »

Are you aware of QCD (qualified charitable distributions)?
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CAsage
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Re: Roth/Tax question

Post by CAsage »

Run a tax scenario with one survivor, the higher Social Security, and RMD on the total balance - with single tax bracket. That's your "max" tax situation, and any conversion you do that's no higher/costlier than that is a good thing.
Use Turbotax or HRBlock (or any other model) to enter your exact SS and other income, then play with the Roth conversion number. You don't want to waste a penny of your standard deduction, so take small bites and see what the hit is. Zero taxes may look good, but you could be wasting those lower brackets.
I ran a scenario with birth years 1955. SS $96K, no other income. Roth Conversion $100K >> tax $23.7K. Roth conversion $50K >> $8.4K which looks like a relative bargain. Play with the numbers, and really, check out the single scenario.
Last edited by CAsage on Mon Jun 10, 2024 6:44 pm, edited 1 time in total.
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Wrench
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Re: Roth/Tax question

Post by Wrench »

The whole idea of Roth conversions is to convert and pay tax at a lower rate now rather than a higher rate later on your RMDs. So if your RMDs will push you into 22% bracket (or possibly 25% in 2026 and after) and you can convert and only pay 12% this year and next year, then you should do it. Convert just enough to get to the top of the 12% bracket, or possibly the 22% bracket if you think your marginal rate will be at least that or higher when RMDs start.

You may want to use the free Bogleheads Retirement Portfolio Model (RPM) or commercial software (e.g. Pralana Gold or MaxFi Planner) to test different amounts. See
https://www.bogleheads.org/wiki/Retiree_Portfolio_Model
for description of RPM. You can download latest version here:
https://dl.dropbox.com/scl/fi/eyab9fojk ... 3rtwl&dl=1

I have converted aggressively to the top of the 22% bracket for several years now. By so doing I have potentially eliminated IRMAA (depending on investment returns) as long as my spouse and I are both alive. That may or may not be true for you - each case is different so YMMV.

Wrench
Topic Author
tothetune854
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Re: Roth/Tax question

Post by tothetune854 »

Great info, thanks.
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retiredjg
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Re: Roth/Tax question

Post by retiredjg »

With that large a tax-deferred account, I think some Roth conversions are likely a good idea. But why $200k and why just 2 years worth?

I suggest doing more analysis - look at converting to just under IRMAA for many years...until the tax deferred account is less than $1 million. See what you think about that.
tibbitts
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Re: Roth/Tax question

Post by tibbitts »

tothetune854 wrote: Mon Jun 10, 2024 6:22 pm Thinking of holding off. It would have been better to do before we started SSA but we only had a couple years to do so. Wife retired end of 2022 and we started SSA this year. I don't like the idea of getting taxed for the Roth as well as SSA. If I hold off I will have zero tax this year and next.
I "engineered" zero tax for a couple of year during my career and it was a mistake. There is virtually zero possibility that will work out in your favor, unless for example you just die now and leave all your money to charity.
RetiredAL
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Re: Roth/Tax question

Post by RetiredAL »

tothetune854 wrote: Mon Jun 10, 2024 5:24 pm My wife and i are retired collecting 95k combined SSA .Normally we would pay no tax this year and next because our income is low.
I was considering whether to do a Roth conversion of 200K this year and next in order to reduce future RMDs and IRMAA. We have 1.9M , 70% hi yield bond funds and 30% sp500 index. I ran a tax calculator and I would have to pay 50K each year to do this Roth conversion. Seems high (25% of Roth amount). I'm wondering if it would be worth it. I ran some crude projections and we would likely have first tier IRMAA, currently around 2K for both, from age 81 for me, 78 for wife. This is assuming 5% annual returns. We also have 600K brokerage (500 stock,100 money market.) which could pay the tax. Any help would be appreciated.

Joe
I am already taking RMD's, but I also converted some last year to try to hold the IRA balances to no higher than a specific $ level. This level was chosen to avoid the "last one standing's" IRMAA from going from our IRMAA base-level today to jumping 2 IRMAA levels as a single. This conversion amount effectively increased by 50% the withdrawals $ from my IRAs. The returns so far this year are threatening the need to do another conversion this year.
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Wiggums
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Re: Roth/Tax question

Post by Wiggums »

retiredjg wrote: Mon Jun 10, 2024 7:13 pm With that large a tax-deferred account, I think some Roth conversions are likely a good idea. But why $200k and why just 2 years worth?

I suggest doing more analysis - look at converting to just under IRMAA for many years...until the tax deferred account is less than $1 million. See what you think about that.
We started with 2/3rds in tax deferred. We are converting each year until we are close to one million in the rollover IRA. We stay within our desired IRMAA bracket and away from NIIT. Keep in mind that your IRA will continue to have gains, so your IRA won’t drop by the conversion amount.

Also consider that the surviving spouse will file as single and the RMD divisor gets bigger each year.
"I started with nothing and I still have most of it left."
tibbitts
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Re: Roth/Tax question

Post by tibbitts »

As you convert deferred will become an increasing percentage of fixed income, so the growth may slow. And generally with regard to taxes (with some exceptions like NIIT currently, although it may not apply to deferred income specifically) real growth is what matters, not nominal growth.
Topic Author
tothetune854
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Re: Roth/Tax question

Post by tothetune854 »

retiredjg wrote: Mon Jun 10, 2024 7:13 pm With that large a tax-deferred account, I think some Roth conversions are likely a good idea. But why $200k and why just 2 years worth?

I suggest doing more analysis - look at converting to just under IRMAA for many years...until the tax deferred account is less than $1 million. See what you think about that.
Yes, good idea. Don't know that I'll be able to get under $1M but at least avoid IRMAA and reduce 33% bracket exposure. Funny thing is I never thought we would even make it to one million because of past mistakes but the post-2008 bull market has blessed us.
Thanks for all the help. A lot of great minds on this website.

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FiveK
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Re: Roth/Tax question

Post by FiveK »

The analysis suggested in Roth Conversion with Social Security and Medicare IRMAA may be worth your time.

If you do that, what does it tell you? ...what questions does it spark?
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Gennaro Dillinger
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Re: Roth/Tax question

Post by Gennaro Dillinger »

The best answer is do the analysis. There are a great many things that can impact the efficacy of a Roth conversion. I used new retirement.com. I have no affiliation with them.

The tool lets you project the efficacy of any moves over a lifetime and under any conditions. It also has a tool to propose a model that would work well for you. (In my case, I made up extreme examples past what the tool recommended and in fact they were better than even the tool's recommendations - which have stated constrictions.) It shows the effect in a down market, up market, average for what you forecast... It shows the impact on lifetime taxes paid, IRMAA...everything. I use it, still do, and I have been doing conversions at a higher tax rate than I ever would have imagined. I'll be done next year. I cannot recommend enough to do the full analysis - lots of people have opinions, well meaning and probably informed, but they cannot speak to the exact detail of your situation.
smitcat
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Re: Roth/Tax question

Post by smitcat »

tibbitts wrote: Mon Jun 10, 2024 7:20 pm
tothetune854 wrote: Mon Jun 10, 2024 6:22 pm Thinking of holding off. It would have been better to do before we started SSA but we only had a couple years to do so. Wife retired end of 2022 and we started SSA this year. I don't like the idea of getting taxed for the Roth as well as SSA. If I hold off I will have zero tax this year and next.
I "engineered" zero tax for a couple of year during my career and it was a mistake. There is virtually zero possibility that will work out in your favor, unless for example you just die now and leave all your money to charity.
+1 - a really excellent observation that most folks will not read or appreciate without some thought and calculations.
chemocean
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Re: Roth/Tax question

Post by chemocean »

Someone is likely to pay taxes at an unknown marginal tax rate 10 years after the death of the surviving spouse.
What are your legacy goals? Besides reducing the marginal tax bracket for the surviving spouse, Roth conversions reduce the taxes on the beneficiaries. If bequeathing to charities, no need to convert. If designating beneficiaries, what will there tax rate be when they stretch their inheritance over 10 years.
Distributions from IRA for QCDs and a portion of your long-term care costs are not taxed.
Under most scenarios for us, the tax rate for MFJ and for the surviving spouse will be 22%. The tax rate of your heirs will likely be higher.
Also, tax rates are schedule to go up in 2026.
With all these considerations, this year is the last year that we will be converting funds to Roth accounts such that our AGI is below the MAGI for predicted 2026 IRMAA. Today, I made projections for 2024 MAGI and convert to just under $206,000 MFJ (2024 threshold), and tried to convert at Schwab, but their website is down. In December, I may make another conversion based upon the announced 2025 IRMAA I am leaving about $600,000 in our IRAs for lifetime QCDs (no legacy bequest) and unknown out-of-pocket Long Term Care expenses.
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