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Does it matter whose IRA we convert to Roth?
Old 02-18-2017, 12:37 PM   #1
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Does it matter whose IRA we convert to Roth?

2017 is our first full year of ER, and I was running tax numbers and came up with a question.

We have the following tax-advantaged accounts:
Me - tIRA: $735K - Roth: $10K
DH - tIRA: $852K - Roth: $133K

We are 54 and 55. Both tIRAs have around 10% of their value in after-tax contributions and the remainder is 401Ks that were rolled over.

We can convert about $50K completely free of federal taxes this year. We would pay about $2300 in state tax.

Assuming we'll be able to do similar conversions for the next few years, is it better to empty one of the tIRAs before the other? Or try to even them out? Or does it matter at all?

Also, I know a lot of people talk about doing conversions into the 10% or 15% brackets, but I'm thinking these balances are not so large that we would save that much future tax by converting more and paying tax now. Am I missing something there?
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Old 02-18-2017, 12:48 PM   #2
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With respect to your main question, given what you outlined I don't think it matters much whose account you convert. DW and I had a different situation in that she had a much smaller tIRA so we did hers first to have one less IRA account.

With respect to your second question it sounds like you a paying about 5% on your conversions vs say 30% or more once your SS and any pensions begin... 25% savings on $50k is $12,500... times 10-15 years of conversions depending on when you start SS means $125-188k of tax savings... since your savings are so much, please send them to me.

You can get a notion of your savings by taking a copy of your tax return adding SS to your income and see how your taxes change.
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Old 02-18-2017, 01:21 PM   #3
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We are making these same decisions. We have looked at longevity tables, our family's health histories, and factor in our respective healths. These end in a wash so we just alternate years.
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Old 02-18-2017, 01:22 PM   #4
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Does it matter if a couple files joint returns, and has no plan to divorce soon?

If so, it should be divided 50/50.
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Old 02-18-2017, 01:27 PM   #5
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Probably won't matter much, unless one tIRA has bad/limited investment options or higher expenses.
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Old 02-18-2017, 01:49 PM   #6
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Thanks everyone. The accounts are at the same place and have the same expenses. We do file joint returns and are not planning to divorce. So I will conclude that it doesn't matter unless we can actually get one account down to $0 and do away with an annual fee, however small that is.

That is a very good idea to add the SS income to my tax return and see what happens. I was thinking that by the time we hit 70 1/2, RMDs on the remaining unconverted amount would be pretty low, and that along with SS wouldn't bump us into the 20% bracket; but we would still have income on our after-tax investments which might. So more investigation is probably a good idea.
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Old 02-18-2017, 05:29 PM   #7
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If you have second beneficiaries, it can matter to them, as I understand how funds pass. For a spouse, it doesn't matter, but children get treated differently.
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Old 02-18-2017, 06:17 PM   #8
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We have too many accounts of his/her IRAs, Roths, 401ks, etc... Thought about consolidating them, but most brokerages charge a fee to do an account transfer ($75 for one that I did recently). None of them have account maintenance fees, so there's no harm in keeping them.

We are now in the withdrawal phase, so will keep depleting the smaller ones until they are cleared out. Most of the money now is with a brokerage where I have commission-free trades. Eventually those will be the only accounts we have.
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Old 02-18-2017, 06:22 PM   #9
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Originally Posted by cathy63 View Post
We can convert about $50K completely free of federal taxes this year. We would pay about $2300 in state tax.
How does one do that?
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Old 02-18-2017, 06:30 PM   #10
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How does one do that?
By having sufficient deductions against that income.
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Old 02-18-2017, 07:34 PM   #11
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Some states make taxpayers list income separately and allow only the first $x IRA withdrawals to be tax free for each individual. In this type of situation, having some money in both DH and DW accounts would be preferable. I think Missouri does this and we may end up there before we deplete all of our IRAs. Just something to consider if you are thinking of moving after retirement or you live in a state which does something like this.
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Old 02-18-2017, 07:52 PM   #12
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We have the following tax-advantaged accounts:
Me - tIRA: $735K - Roth: $10K
DH - tIRA: $852K - Roth: $133K

We are 54 and 55.
We can convert about $50K completely free of federal taxes this year. We would pay about $2300 in state tax.

Also, I know a lot of people talk about doing conversions into the 10% or 15% brackets, but I'm thinking these balances are not so large that we would save that much future tax by converting more and paying tax now. Am I missing something there?


If you limit yourself to Fed tax free conversions you could convert $750K
$50K x 15yrs = $750,000 but....
assuming the IRAs are invested, they will grow. Even the first IRA is unlikely to be completely converted. Looking only at DH's IRA and assuming a 5% return,
$852,000 x (1 + 5%)^15 = $1,771,000
The first year's RMD on $1,771,000 is around 3.77% which is $66.7K. This will probably make 85% of your SS taxable.
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Old 02-18-2017, 08:47 PM   #13
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How does one do that?
AGI includes interest, dividends, cap gains and IRA conversions (less the 10% that's already been taxed) totalling $100K.

Deductions are approx $26K and exemptions are $8100, so taxable income is just under $66K.

Tax is calculated on the cap gains worksheet and comes to $84, which happens to equal the foreign tax credit, so total is $0.

The way I got this was to take my 2016 Turbotax file, remove this year's W2 and a carryover loss that's now used up, and then juggle the conversion number to get it as high as possible while still having a tax bill of $0. There's more analysis to do, especially regarding converting into the 10% or 15% bracket. And who knows, the way the stock market is going we could end up with crazy cap gains on the funds in our taxable accounts, so I plan to look at it again much later in the year and see what makes sense.

I just wanted to get an idea now of what we might do later.
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Old 02-18-2017, 09:01 PM   #14
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Originally Posted by N02L84ER View Post
Some states make taxpayers list income separately and allow only the first $x IRA withdrawals to be tax free for each individual. In this type of situation, having some money in both DH and DW accounts would be preferable. I think Missouri does this and we may end up there before we deplete all of our IRAs. Just something to consider if you are thinking of moving after retirement or you live in a state which does something like this.
We plan to stay in California, which taxes every penny. Since there's no tax free amount, it doesn't matter which spouse has money to withdraw and which doesn't.
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Old 02-18-2017, 09:14 PM   #15
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The tax rate on dividends and cap gains is just wonderful. I have washed enough of the cap gains off in recent years that I do not have much anymore. And having been living on after-tax accounts while waiting for 59-1/2 to tap IRA and 401k, I spent principal on my after-tax accounts too.

So, I am back to joining the masses in paying income taxes now that I draw on IRA/401k. Well, it was nice while it lasted.
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Old 02-19-2017, 07:09 AM   #16
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Originally Posted by cathy63 View Post
AGI includes interest, dividends, cap gains and IRA conversions (less the 10% that's already been taxed) totalling $100K.

Deductions are approx $26K and exemptions are $8100, so taxable income is just under $66K.

Tax is calculated on the cap gains worksheet and comes to $84, which happens to equal the foreign tax credit, so total is $0.

.................................................. ..........................
Peripheral to your main question but pls tell me what I'm missing:

You said you were converting 50K of which 5K was basis. I assumed all of the rest of income was QDIV/LTCG (you said you had interest too but ignored that to make things more favorable)........that makes 50K for a total of 100K total income. The 5K of basis in TIRA withdrawal makes AGI 95K of which 50K is QDIV/LTCG. Using your 26K deduction /8.1K exemption makes taxable income 60.9K. Removing the 50K QDIV/LTCG taxed at 0 yields 10.9K of ordinary income taxed at 10%. Taxcaster says $1093 which is pretty low but not 0. (you also had FTC of 84) so tax slightly over 1K.
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Old 02-19-2017, 07:42 AM   #17
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Peripheral to your main question but pls tell me what I'm missing:

You said you were converting 50K of which 5K was basis. I assumed all of the rest of income was QDIV/LTCG (you said you had interest too but ignored that to make things more favorable)........that makes 50K for a total of 100K total income. The 5K of basis in TIRA withdrawal makes AGI 95K of which 50K is QDIV/LTCG. Using your 26K deduction /8.1K exemption makes taxable income 60.9K. Removing the 50K QDIV/LTCG taxed at 0 yields 10.9K of ordinary income taxed at 10%. Taxcaster says $1093 which is pretty low but not 0. (you also had FTC of 84) so tax slightly over 1K.
AGI is $100K. I grabbed the numbers straight from the 1040 pg 2, and TurboTax had already calculated the taxable portion of the IRA conversion before then. I did round off -- the actual AGI is something like $100,404, and the other numbers are also off by a few hundred, so that'll make a difference, not sure if it should be as much as $1000 though. I'll look at the tax calculation worksheet next time I open up the file, but I'm pretty sure TTax gets that math right and something in our specific situation makes it come up as $0.

edit: I don't use taxcaster, but I wonder if it might be more conservative when estimating future tax so as to avoid recommending that people underpay enough to end up in a penalty situation.
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Old 02-19-2017, 07:46 AM   #18
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Agree with kaneohe, from what the OP described the taxable amount of the conversion in excess of deductions and exemptions would be subject to 10% federal tax... so in this case ~($45-$26-$8)*10% = $1.1k (before FTC)... but still pretty good on a $50k conversion (2.2%) and probably a lot lower than the tax avoided when that income was deferred and lower that what it would be if taken after SS starts.... so definitely worthwhile.
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Old 02-19-2017, 08:00 AM   #19
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I recall that there was one year my federal income tax was driven much lower by college tuition credit. The OP may have some special circumstances like that.
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Old 02-19-2017, 08:24 AM   #20
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It is possible to get stuck with a marginal federal tax rate that is higher than your tax bracket rate when collecting social security. See bogleheads wiki article here: https://www.bogleheads.org/wiki/Taxa...urity_benefits

This effect may make it worthwhile to convert into the 10 or 15% bracket now. (or the 12% bracket if Trump gets his proposed tax schedule.)

Keep in mind that the thresholds for taxation of SS are not indexed for inflation, so a situation that looks good today might inflate into a bad zone ten years from now.
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