Maximum Annual Roth conversion amount ?

[Animorph]

What my personal calculations have shown me is that it was worth it (more yearly spending possible) to Roth convert even a few percent beyond the estimated RMD tax rate if you are far enough away from Roth withdrawals (maybe more than 8 or so, everyone will be different). The benefit of essentially moving money from a taxable account to a Roth account exceeds the added tax.

Then we have a few years of Roth converting to the top of the same RMD tax bracket. Then we have five or so years of Roth converting just to the top of lower tax brackets and taking 0% capital gains. We'll have more than enough gains by then, and the benefit of moving taxable money to the Roth account for only a few years is small. We'll probably start Roth withdrawals about the same time as RMD's start (10 more years since all remaining tIRA's are in DW's name).

So three different Roth conversion modes for us, and that doesn't even include ACA limits, or tIRA inheritance, or paying taxes later at the single rates. The good thing is that just getting somewhat close to your optimum strategy gets you nearly all the benefits. At the optimum there's lots of trade-offs, like ACA subsidies vs. Roth conversion. Both can result in a substantial benefit, and there may be only a small difference between choosing one or the other. Especially considering the level of uncertainties involved.

 

[RunningBum]

Originally Posted by RunningBum
There is no 20% tax bracket. You should be able to figure out which tax bracket you'll actually be in this year. What's trickier is forecasting which tax bracket you'll be in when you start RMDs, and both of you are drawing SS, and presumably neither is working. If it's the same bracket or higher, I'd probably convert to the top of that bracket, but as others have said, there are other factors. You might try using i-orp.

What is the significance of the bold text?
I'm assuming you are looking for the top bracket.

death of a spouse often creates a notable increase in tax rate.


If someone uses a longevity annuity then the max tax rate may bump may be about be 10 years or so later than the typical RMD time.

Maybe you have another reason for identifying that time.

There are many things that can jump your tax rate...

The main thing is, you don't even know what tax rates will be in a few years. The latest tax cuts are set to expire after (in?) 2025. Will the cuts be extended, will they revert to the old brackets, or will they become something else?

Death of a spouse is certainly a major factor as you point out.

Will stocks continue surging up, taking taxable dividends with them? Will you have a need to take more capital gains for some reason, causing them to be taxed?

The future is always going to be harder to predict than the present.

I identify that particular time, mainly the start of RMDs, which certainly means that SS is being collected, under present rules; end of working was an assumption on my part. That's when the conversion opportunity often goes away, and it's when retirement income is usually at it's highest. And it's the meaningful time to compare rates: the rate I'm at now vs. and the rate I'd be at if I have to take RMDs. This tells me whether it's beneficial to convert or not.

 

[bingybear]

The main thing is, you don't even know what tax rates will be in a few years. The latest tax cuts are set to expire after (in?) 2025. Will the cuts be extended, will they revert to the old brackets, or will they become something else?

Death of a spouse is certainly a major factor as you point out.

Will stocks continue surging up, taking taxable dividends with them? Will you have a need to take more capital gains for some reason, causing them to be taxed?

The future is always going to be harder to predict than the present.

I identify that particular time, mainly the start of RMDs, which certainly means that SS is being collected, under present rules; end of working was an assumption on my part. That's when the conversion opportunity often goes away, and it's when retirement income is usually at it's highest. And it's the meaningful time to compare rates: the rate I'm at now vs. and the rate I'd be at if I have to take RMDs. This tells me whether it's beneficial to convert or not.

I agree that many think that RMD time ends the opportunity to convert. I shouldn't at least for a married couple if they have not planned for death of a spouse. At that point you may still have the ability to save some $.

As I noted earlier that RMDs can effectively be moved later with longevity annuities (QLAC). This could move RMD taxes well above 70.5 yo. But then I guess you could use 80 yo or higher.

Personally I'm dealing with an aging relative that is getting killed by the taxes after the death of a spouse. So my target to deal with is taxes after one spouse is gone. Not the start of RMDs. This relative was widowed a decade ago. When we see her at the facility she lives in we notice there are many females and very few men. I have not looked at the stats, but I'll bet that most couples will have significant time being single after the death of a spouse...

 

[RunningBum]

^^
All valid points. I was just using RMD time as a typical time to evaluate against, but not the only time. I'm planning to get fully converted by then.

 

[CardsFan]

I agree that many think that RMD time ends the opportunity to convert. I shouldn't at least for a married couple if they have not planned for death of a spouse. At that point you may still have the ability to save some $.

My plan, should we both live long enough, as to take my RMD, and then convert to the top of the bracket we are in (or the next one if it is still 22/24).

In reality, my tIRA will all go to DS, minus what we take or convert. Same goes for the Roth. So, We are simply pre-paying taxes for DS. If tax laws change, this might change.

 

[Rianne]

Forecasting Taxable Amount

The basic question about conversions asks about the rate at conversion vs
rate if you don't convert. If you convert now at rate X vs not converting and
then withdrawing at rate X, the math suggests that the result is the same.

I originally asked a dumb question and I edited it out.

 

[Bruno]

There is no 20% tax bracket. You might try using i-orp.

Sorry, I don't usually have my income tax beside me when I am posting. I had been in the 28% but last year was in the 24%. Thanks for the answer about looking into i-corp.

 

[Niuatoputapu]

As mentioned, the real killer is for increased taxes for the survivor. Really only saving maybe $15k in taxes total for converting in the 22 vs 25 after 2025. Going from MFJ to Single is far worse.

+1

In similar situation, we convert at today's 22% marginal rate up to the first IRMAA limit of $170,000 MFJ. Savings due to possible 25% marginal rate in the future are minimal. But, potential savings based on one spouse surviving the other become significant depending on length of survivor period.

Consider a kicker - Future means testing of SS benefits similar to the IRMAA method is a possibility that will make past conversions beneficial.

 

[fishfactory]

Midpack,
Please let us know what your adviser recommends. I am converting every year to fill the 24% bracket per i-orp model, rightcapital software. and videos from Heritage Wealth Planning
https://www.youtube.com/channel/UCSEzy4i9xrKPoaU9z0_XbmA
Roth helps avoid the widow's tax trap, keeps medicare premiums low, avoids potentially higher future fed tax brackets, provides tax free growth, avoids RMDs, and provides tax free inheritance.

 

[devans0]

We have been converting $100k-125k per year from age 62 on. The goal is to have 100% converted by age 70. We will hopefully start to draw our max of Social Security then. Between two small pensions and Social Security, we should be around $100k, not counting investment income.

This is getting to a top number for relatively cheap tax rates for a couple. If RMDs get added too, we would be paying big tax bills. Our draw from our combined nest egg is around 3%.

I ran the numbers for us. IRA to Roth gets taxes at high rates, so we convert IRA money while drawing from compounded regular investments to pay the taxes and to carry us untill Social security starts.being drawn.

 

[Sunset]

We have been converting $100k-125k per year from age 62 on. The goal is to have 100% converted by age 70. We will hopefully start to draw our max of Social Security then. Between two small pensions and Social Security, we should be around $100k, not counting investment income.

This is getting to a top number for relatively cheap tax rates for a couple. If RMDs get added too, we would be paying big tax bills. Our draw from our combined nest egg is around 3%.

I ran the numbers for us. IRA to Roth gets taxes at high rates, so we convert IRA money while drawing from compounded regular investments to pay the taxes and to carry us untill Social security starts.being drawn.

Converting 100% could be a mistake.
Later in life you many have giant medical bills, and then could take a withdrawal from the IRA and offset the income with the medical expense.

Leaving $100K -> $200K in the IRA would make you more flexible, mean your conversions would be less taxing, and the RMD on $200K is only about $5,400 income.

 

[RunningBum]

Converting 100% could be a mistake.
Later in life you many have giant medical bills, and then could take a withdrawal from the IRA and offset the income with the medical expense.

Leaving $100K -> $200K in the IRA would make you more flexible, mean your conversions would be less taxing, and the RMD on $200K is only about $5,400 income.

I've seen this a couple times recently (maybe both from you?) and I'm trying to understand it better.

What giant medical bills will there be that aren't covered by Medicare? Nursing home costs?

Couldn't you use the medical expense deduction to offset the income from SS and pensions? It doesn't have to come from an IRA, does it?

 

[audreyh1]

I occasionally run some spreadsheets and have trouble convincing myself that it makes a that much of a difference. There seems to be more mileage in reducing LT cap gains income thrown off by a few inefficient taxable mutual funds. Fortunately our IRAs are only 13% of our retirement investments, so it’s not like we have an outsized torpedo. Nevertheless, some of it plus SS will be taxed at higher brackets. Still have a few years to work through our options.

 

[bingybear]

I occasionally run some spreadsheets and have trouble convincing myself that it makes a that much of a difference. There seems to be more mileage in reducing LT cap gains income thrown off by a few inefficient taxable mutual funds. Fortunately our IRAs are only 13% of our retirement investments, so it’s not like we have an outsized torpedo. Nevertheless, some of it plus SS will be taxed at higher brackets. Still have a few years to work through our options.

Look at this thread

Is mass roth conversions for everyone? likely not.

For me it it seems to make sense. I'm converting to the top of the of the 24% bracket.

Things to consider

Death of a spouse -- the tax torpedo


The break even point can be long

you may be right that the benefit may be limited based on amount of TIRA, but then it could take short time to convert also.

etc?

 

[Midpack]

For me it it seems to make sense. I'm converting to the top of the of the 24% bracket.

Things to consider

Death of a spouse -- the tax torpedo


The break even point can be long.

+1. I was shocked to see I could reduce taxes by 31% by converting to 24% vs no conversions, and yet the portfolio ending balance was less than 6% higher. I don't mind legally paying less taxes, but the goal is maximizing the portfolio. So death of a spouse, tax torpedo and taxes transferred to heirs become significant considerations for many (as I've learned from others on this thread - thanks).

 

[PatrickA5]

Last year we did conversions up to the top of the 22% bracket. I don't know if I'll do that again.

My problem in figuring this stuff out is that:

1) The vast majority of our IRA withdrawals (at age 70), will be in the 10% and 12% brackets. So if that's the case, paying 22% now doesn't make much sense.

2) But, there's a good chance of an inheritance that might push us up a bracket (or 2). And, if that inheritance happens and one of us dies then the single person will undoubtedly be in a higher than 22% bracket.

Is it worth it to convert into a higher bracket? In our case, we won't know for sure for probably another decade - and by then it will be too late to change things. Right now 77% of our retirement is tax deferred. I'd like to get that number down some in order to open up more tax options in the future.

 

[Midpack]

Is it worth it to convert into a higher bracket? In our case, we won't know for sure for probably another decade - and by then it will be too late to change things. Right now 77% of our retirement is tax deferred. I'd like to get that number down some in order to open up more tax options in the future.

Wow, I thought I had an issue at 30% tax deferred and no tax free. First world problems but issues nonetheless. Might make a good poll for someone else to start...

 

[Sunset]

I've seen this a couple times recently (maybe both from you?) and I'm trying to understand it better.

What giant medical bills will there be that aren't covered by Medicare? Nursing home costs?

Couldn't you use the medical expense deduction to offset the income from SS and pensions? It doesn't have to come from an IRA, does it?

Medicare generally does not pay for nursing home care, so if a person does not have LTC insurance they are going to pay a lot per year for it.

https://www.paelderlaw.com/does-medicare-pay-for-nursing-home-care/

It is true that any cost is deductible to any income, but if a person has $100K nursing home cost per year, that probably exceeds the taxable portion of most folks SS and pension (if any).

If the same person has converted all their IRA to ROTH, then they are paying a large chunk of the nursing home bill from ROTH or other non-taxable money.
They will basically be missing/wasting the deduction (and needlessly paid tax to convert every penny out of IRA to ROTH at perhaps 12 -> 22%)

 

[ncbill]

Last year we did conversions up to the top of the 22% bracket. I don't know if I'll do that again.

My problem in figuring this stuff out is that:

1) The vast majority of our IRA withdrawals (at age 70), will be in the 10% and 12% brackets. So if that's the case, paying 22% now doesn't make much sense.

2) But, there's a good chance of an inheritance that might push us up a bracket (or 2). And, if that inheritance happens and one of us dies then the single person will undoubtedly be in a higher than 22% bracket.

Is it worth it to convert into a higher bracket? In our case, we won't know for sure for probably another decade - and by then it will be too late to change things. Right now 77% of our retirement is tax deferred. I'd like to get that number down some in order to open up more tax options in the future.

Inheritance is from a traditional IRA or other tax-deferred account(s)?

I only ask to clarify because usually inheritances come to a beneficiary after-tax, stepped up in basis as of date of death.

 

[Gumby]

I agree that many think that RMD time ends the opportunity to convert.

I would like to better understand this statement. Do you mean that you cannot Roth convert to satisfy your RMD obligation? As, I see it, you are still removing the money from the IRA/401k account and paying the taxes on it. The question is where it ends up.

Since I was planning to keep Roth converting after 70, although at an amount that would be determined by the RMD schedule, I am particularly interested in the answer to that.

 

[RunningBum]

1) The vast majority of our IRA withdrawals (at age 70), will be in the 10% and 12% brackets. So if that's the case, paying 22% now doesn't make much sense.

It's not where the vast majority is, it's where your last dollar is taxed. If you convert now at 22% and still have a few dollars later (after 70) in the 22% bracket, it makes total sense (especially if you pay the conversion tax with money from your taxable account).

 

[RunningBum]

I would like to better understand this statement. Do you mean that you cannot Roth convert to satisfy your RMD obligation? As, I see it, you are still removing the money from the IRA/401k account and paying the taxes on it. The question is where it ends up.

Since I was planning to keep Roth converting after 70, although at an amount that would be determined by the RMD schedule, I am particularly interested in the answer to that.

My understanding has always been that you must put RMDs in taxable. You cannot convert RMDs to a Roth.

You can convert any amount above your RMD to a Roth, but for most people, SS+pensions+RMDs are pushing you into a higher bracket already, so you don't want even more income. The more ideal time is after you ER, but before you start SS, pension and RMDs, when you're likely to be in a lower bracket.

 

[RunningBum]

Medicare generally does not pay for nursing home care, so if a person does not have LTC insurance they are going to pay a lot per year for it.

https://www.paelderlaw.com/does-medicare-pay-for-nursing-home-care/

It is true that any cost is deductible to any income, but if a person has $100K nursing home cost per year, that probably exceeds the taxable portion of most folks SS and pension (if any).

If the same person has converted all their IRA to ROTH, then they are paying a large chunk of the nursing home bill from ROTH or other non-taxable money.
They will basically be missing/wasting the deduction (and needlessly paid tax to convert every penny out of IRA to ROTH at perhaps 12 -> 22%)

OK, thanks for answering. I'm guessing I won't need a nursing home until many years after 70, so RMDs will probably have depleted most of my tIRA by then. In that case I'd be better off converting in a lower tax bracket and not leaving some for RMDs. Of course if I wind up needing a nursing home in my 70s, it would've been better to leave a chunk in the tIRA.

I suppose I could model this in a spreadsheet. Compare doing conversions at 12% or maybe up to 22% now vs holding some out and paying a higher tax for RMDs and then getting a total write-off some number of years later for the balance of the tIRA.

 

[gwraigty]

My understanding has always been that you must put RMDs in taxable. You cannot convert RMDs to a Roth.

+1

Easy to read source:

https://www.marketwatch.com/story/can-i-convert-my-rmd-to-a-roth-ira-2017-07-26

Official IRS source:

https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-required-minimum-distributions

Can RMD amounts be rolled over into another tax-deferred account?

No. Please refer to Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs), for additional information.

 

[PatrickA5]

Inheritance is from a traditional IRA or other tax-deferred account(s)?

I only ask to clarify because usually inheritances come to a beneficiary after-tax, stepped up in basis as of date of death.

About half would be from be from Traditional IRA's and half from taxable accounts. Even with stepped up basis, this amount of money will throw quite a bit of income yearly on top of what we will be getting.