Roth conversion

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Dahl49
Posts: 53
Joined: Tue Oct 07, 2014 9:04 am

Roth conversion

Post by Dahl49 » Wed Dec 05, 2018 3:36 pm

Should I convert $75,000 or ? ??

I will be 70 in January and will be taking RMD's from my IRA in 2019. I will also be starting Social security Jan 2019 which will be approx $3000 a month gross. I would like to convert approx. $75,000 this year which will cost me for Fed and State $32,000 which I have funds to pay these taxes outside the conversion. Doing this will mean I will have to pay $169 month more in medicare fees. (total of $305). My cost of living is very low so I could easily live off my social security and for that matter using RMD funds for 2019 if need be. With the new tax structure in 2018 I will be in 24% where if I did not convert I would be in 22%. Without the conversion I will be in 22% bracket.
[OT comment removed by admin LadyGeek]

Thanks

JBTX
Posts: 4263
Joined: Wed Jul 26, 2017 12:46 pm

Re: Roth conversion

Post by JBTX » Wed Dec 05, 2018 3:46 pm

Dahl49 wrote:
Wed Dec 05, 2018 3:36 pm
Should I convert $75,000 or ? ??

I will be 70 in January and will be taking RMD's from my IRA in 2019. I will also be starting Social security Jan 2019 which will be approx $3000 a month gross. I would like to convert approx. $75,000 this year which will cost me for Fed and State $32,000 which I have funds to pay these taxes outside the conversion. Doing this will mean I will have to pay $169 month more in medicare fees. (total of $305). My cost of living is very low so I could easily live off my social security and for that matter using RMD funds for 2019 if need be. With the new tax structure in 2018 I will be in 24% where if I did not convert I would be in 22%. Without the conversion I will be in 22% bracket.
[OT comment removed by admin LadyGeek]

Thanks
$32K additional taxes/75K conversion = 42.67% combined marginal rate. Are you sure that is correct?

JW-Retired
Posts: 6999
Joined: Sun Dec 16, 2007 12:25 pm

Re: Roth conversion

Post by JW-Retired » Wed Dec 05, 2018 10:12 pm

I think we need to know your taxable income this year before you add the $75,000 Roth conversion. Not knowing that, I would probably just convert up to the jump in medicare or the top of the 22% bracket, whichever comes first.

It's probably not going to make very much long term difference. Once you add SS and RMDs to your income your Roth conversions need to stop altogether.
JW
Retired at Last

RetiredCSProf
Posts: 182
Joined: Tue Feb 28, 2017 4:59 pm

Re: Roth conversion

Post by RetiredCSProf » Wed Dec 05, 2018 11:55 pm

JW-Retired wrote:
Wed Dec 05, 2018 10:12 pm
I think we need to know your taxable income this year before you add the $75,000 Roth conversion. Not knowing that, I would probably just convert up to the jump in medicare or the top of the 22% bracket, whichever comes first.

It's probably not going to make very much long term difference. Once you add SS and RMDs to your income your Roth conversions need to stop altogether.
JW
There's no rule that Roth conversions need to stop after adding SS and RMDs. The only rule is that the RMD needs to be completed prior to a Roth conversion for each calendar year. How much will SS and RMDs add to your income next year? Will it make sense to spread the Roth conversion over a couple years?

Carl53
Posts: 1632
Joined: Sun Mar 07, 2010 8:26 pm

Re: Roth conversion

Post by Carl53 » Thu Dec 06, 2018 6:06 am

What is probably happening is the bump up in marginal rates by up to 85% by the addition of SS to your income stream. Here are some outdated graphics from a 2011 thread ( viewtopic.php?f=1&t=70229 ) with the old tax brackets that show what adding SS to your otherwise income tax situation can result in. With regard to future conversions, note that most of the cases have room in their then 15 or 25% brackets after all SS income is taxed to convert more TIRA without having the bracket going up. It might be possible to convert extra in a few years such that less than 85% of your SS is taxed in future years by driving down the income (including future RMDs) on the horizontal axis.
Carl53 wrote:
Mon Mar 07, 2011 9:22 am
EDIT 1/2015: The poll was a little messed up over time, but the graphs I felt were still relevant even though the data was from 2010. They still show the impact of social security combined with ordinary income on the overall marginal bracket. I had to relocate the graphs to imgur as the old link to imageshack no longer functions. Just a feature of putting something out on the net and expecting it to be there always for you, not.

NOTE:: The 22.5% potential result was omitted due to a flaw in my original spreadsheet. Please accept my apologies and note your marginal rate as a reply if it is 22.5%. See my reply below regarding the graphs, they are correct.

There have been numerous threads implying that lower tax rates might to be expected once you are retired. I am retired (part-time) but not yet taking SS. I got interested in this last year when I realized due to this forum and the wiki page http://www.bogleheads.org/wiki/Marginal_Tax_Rate on this topic that SS benefits might generate high incremental tax rates for the recipient. I thought it would be appropriate to ask the Bogleheads what their marginal tax rates are. Take whatever tax prep software you are using and reduce your pension or interest or working income or RMD by $100 and see how much your taxes have changed. The change will be your marginal rate rounded to the nearest %. You should get one of the following -- 0%, 10%, 15%, 18.5%, 25%, 27.75%, 28%, 33%, 35% or 46.25%. If you get about 28% you ought to try a $1000 change to differentiate between 27.75 and 28%. Also if you get a number substantially different than these then I apologize for not understanding the tax code or perhaps you are just on one side of a bracket and a $100 reduction in income moved you to the next lower bracket and what you are seeing is a blend of the two. In this case try adding $100 rather than subtracting to determine your bracket.

Below are two marginal tax rate charts generated from 2010 tax rates and exemptions for those 65 and up at various levels of SS compensation and other taxable income levels. I assumed that one was taking the standard deduction in all cases. I apologize in advance for including a 40K SS level for the singles rather than the current maximum of about $34K, but it will give you an idea of what is going on. Also, I calculated the marginal rates shown as the average rate over the last $5000 of non SS taxable income for simplicity, therefore some of the values are between the possible increments as the last $5000 straddled more than one bracket.

Image



Image

I plan to run this poll for 10 days. EDIT: the poll is not reopened.

JW-Retired
Posts: 6999
Joined: Sun Dec 16, 2007 12:25 pm

Re: Roth conversion

Post by JW-Retired » Thu Dec 06, 2018 10:56 am

RetiredCSProf wrote:
Wed Dec 05, 2018 11:55 pm
JW-Retired wrote:
Wed Dec 05, 2018 10:12 pm
I think we need to know your taxable income this year before you add the $75,000 Roth conversion. Not knowing that, I would probably just convert up to the jump in medicare or the top of the 22% bracket, whichever comes first.

It's probably not going to make very much long term difference. Once you add SS and RMDs to your income your Roth conversions need to stop altogether.
JW
There's no rule that Roth conversions need to stop after adding SS and RMDs. The only rule is that the RMD needs to be completed prior to a Roth conversion for each calendar year. How much will SS and RMDs add to your income next year? Will it make sense to spread the Roth conversion over a couple years?
I didn't mean that there was a rule, only that once OP adds all that extra SS and RMD income he is very likely at his final maximum tax rate. Roth conversions boost his taxes at little or no future benefit.
JW
Retired at Last

sawdust60
Posts: 67
Joined: Tue Jul 17, 2018 12:06 pm

Re: Roth conversion

Post by sawdust60 » Thu Dec 06, 2018 4:13 pm

Here is an example which illustrates a 75k Roth converstion, and how it can cause additional SS to become taxable.

Image

The OP desires to reduce RMD in 2019 and future years; he may be just over the first IRMAA bracket.

Try this approach to your model:
1. No Roth conversion in 2018, to keep the benefit of non-taxable SS.
2. With RMD, each year that you exceed the IRMAA bracket, do Roth conversion -- and stay below the top of that IRMAA bracket.

If you do 75k in 2018 and you do it within the first two IRMAA brackets, you lose the SS benefit ($1,784 in the above example), and you pay IRMAA in 2020 ($798 + $1,368 -- two brackets Parts B+D). Total $3,950, before considering 22% or 24% tax rates. That is about 5 years of first bracket IRMAA penalty. Wrong! At 141k AGI, the third IRMAA bracket would also be charged, an additional $1,615. Now the total is about 7 years of first bracket IRMAA penalty.

Too many assumptions; please work it with your numbers --

While your model may show that you will have 22%+ tax rates in future years, don't forget that years with high medical expenses can have low tax rates.

The focus seems to be in reducing RMD. Makes me wonder if the non-SS income is more/other than pension. Is there flexibility to manage the non-SS income? And watch for tax exempt interest income; it will be included in Medicare MAGI.

User avatar
FiveK
Posts: 5841
Joined: Sun Mar 16, 2014 2:43 pm

Re: Roth conversion

Post by FiveK » Thu Dec 06, 2018 6:22 pm

If you know even a little about spreadseets, you can use the personal finance toolbox to show your marginal rates, including the SS and IRMAA effects, for various traditional withdrawal amounts, given all your other income amounts.

Dahl49
Posts: 53
Joined: Tue Oct 07, 2014 9:04 am

Re: Roth conversion

Post by Dahl49 » Fri Dec 07, 2018 11:11 am

2018 adjusted gross income - $44,875 SS $15,756 (spousal rate) adjusted at 85% = $13,393 total adjusted income $58,268
with a standard deduction = 22% Fed tax $7153 state $1455
converting $75,000 using same numbers, SS does not change still shows income of $13,393.
Yes converting $75,000 will cost me $2028 additional Medicare for the year. And would increase my tax bracket to 24%.
$22,991 Fed $4777 state
There is no pension I took lump sum, therefore my IRA is quite large,
My 2019 SS will be $36,000 and with a large RMD (based on the market) puts me in a larger adjusted growth income in 2019.
I am healthy and any medical costs will probably not be incurred for a few years.

I would not touch the ROTH as I have enough cash flow getting the RMD's to live off. I live in California and in approx 9% tax bracket.


thanks for your replies

JW-Retired
Posts: 6999
Joined: Sun Dec 16, 2007 12:25 pm

Re: Roth conversion

Post by JW-Retired » Fri Dec 07, 2018 11:49 am

Dahl49 wrote:
Fri Dec 07, 2018 11:11 am
2018 adjusted gross income - $44,875 SS $15,756 (spousal rate) adjusted at 85% = $13,393 total adjusted income $58,268
with a standard deduction = 22% Fed tax $7153 state $1455
Is there a typo above? I cannot make any sense of your tax calculation and can't see how you could have taxes that high. Can you break your incomes down a little finer?
JW
Retired at Last

Carl53
Posts: 1632
Joined: Sun Mar 07, 2010 8:26 pm

Re: Roth conversion

Post by Carl53 » Fri Dec 07, 2018 4:10 pm

JW-Retired wrote:
Fri Dec 07, 2018 11:49 am
Dahl49 wrote:
Fri Dec 07, 2018 11:11 am
2018 adjusted gross income - $44,875 SS $15,756 (spousal rate) adjusted at 85% = $13,393 total adjusted income $58,268
with a standard deduction = 22% Fed tax $7153 state $1455
Is there a typo above? I cannot make any sense of your tax calculation and can't see how you could have taxes that high. Can you break your incomes down a little finer?
JW
Are you filing as married separate? Need more details as to your filing status and age.

sawdust60
Posts: 67
Joined: Tue Jul 17, 2018 12:06 pm

Re: Roth conversion

Post by sawdust60 » Fri Dec 07, 2018 6:52 pm

Concerns on whether you might have missed out on a year of untaxed SS appear to be wasted -- but in case someone wanders thru, this wiki is worth reading: https://www.bogleheads.org/wiki/Taxatio ... y_benefits

Here is an updated table, but it doesn't match your before-Roth-conversion tax number of 7153. It does show Roth conversion at 22% - 24%.

133,268 AGI is really close to the top of the IRMAA bracket of 133,500 (too close for comfort?)

No issue with your plan to convert and pay IRMAA for a year.

What is the non-SS income of 44,875? Are there opportunities to manage this part of your AGI to avoid IRMAA in future years?

Image

Dahl49
Posts: 53
Joined: Tue Oct 07, 2014 9:04 am

Re: Roth conversion

Post by Dahl49 » Sat Dec 08, 2018 6:38 pm

I am single 69 standard deduction will be 70 Jan 2019. I received some income in 2018 which I will not receive in 2019. I will only have SS of $36,000 and RMD’s that will be less than the $85,000 for lower medicare premiuims.
I do not mind paying more for Medicare in 2020 approx, $2028 to be able to save taxes for the future.

JW-Retired
Posts: 6999
Joined: Sun Dec 16, 2007 12:25 pm

Re: Roth conversion

Post by JW-Retired » Sun Dec 09, 2018 11:30 am

Dahl49 wrote:
Sat Dec 08, 2018 6:38 pm
I am single 69 standard deduction will be 70 Jan 2019. I received some income in 2018 which I will not receive in 2019. I will only have SS of $36,000 and RMD’s that will be less than the $85,000 for lower medicare premiuims.
I do not mind paying more for Medicare in 2020 approx, $2028 to be able to save taxes for the future.
I'm still confused about what your income is going to be (both this year and 2019) if you did no Roth conversions? What will your 2019 RMD amount to by itself?

Also are you really single or are you "married filing single"? It might make a difference.
JW
Retired at Last

elainet7
Posts: 2
Joined: Sat Dec 08, 2018 1:52 pm

Re: Roth conversion

Post by elainet7 » Sun Dec 09, 2018 11:36 am

James Lange writes about Roths a lot
He says almost universally conversions are the right way to go

User avatar
FiveK
Posts: 5841
Joined: Sun Mar 16, 2014 2:43 pm

Re: Roth conversion

Post by FiveK » Sun Dec 09, 2018 12:08 pm

elainet7 wrote:
Sun Dec 09, 2018 11:36 am
James Lange writes about Roths a lot
He says almost universally conversions are the right way to go
A general rule in the Roth vs. traditional discussion is that the general rules have so many qualifiers that individual investigation of how those qualifiers apply to one's own situation is generally a good idea.

Post Reply