jkern
Full time employment: Posting here.
Just curious, do most people that do Roth conversions fill up the 15% bracket, or they stop at 10%?
Out of curiosity, I just check out UK tax law.
Tax of 40% starts at £31,786, after personal exemption of £10,600. For a couple, that's £52,986, which is US$79,000.
Yikes! In the US, a couple still pays 15% up till $95,500. And then, they do not pay any tax on qualified dividends or cap gains.
I love Uncle Sam!
That's $26K nominal spread out over the 30 years, so is much less than $26K now or a few $100s/yr due to inflation. That's a lot less than what I would have expected for a pretty heavy Roth conversion!
I agree. Roth conversions are hyped pretty large here, but the author of i-orp says "the IRA to Roth IRA conversion decision should probably be made based on considerations other than increasing disposable income" in this http://www.i-orp.com/ModelDescription/Conversions.pdfThat's likely because your tax rate now is close to that expected in the future. If one's tax rate during conversion to Roth is the same as the rate during later tIRA withdrawals, conversion to Roth adds nothing to one's after-tax net worth. This assumes the tIRA contains all pre-tax dollars.
Hmmm... Perhaps the IRS or Congress is not as dumb as we think. They let us have what we think is a loophole, but it is only for appeasement. In the end, we still pay roughly the same. They throw us a little bone.
I ... There are equally plausible downside scenarios where nothing gets taxed at 25%. So who knows. I'm stopping at 15%.
I don't share the enthusiasm for Roth conversions expressed by many on this forum. Only reason I'm converting at all, is to create some incremental withdrawal flexibility. ....
Just curious, do most people that do Roth conversions fill up the 15% bracket, or they stop at 10%?
Everyone's situation is different; some people get very little benefit from conversions and/or PPACA, others more. I'm a bird in the hand kind of guy, and PPACA currently comes out on top and I see the benefit each year, which is why I'm going with the PPACA over larger Roth conversions.
OK, here's something interesting I just observed with I-ORP. This is a very interesting program that one can play with for hours.
The program has a toggle switch that you can use to tell it to do Roth conversion or not. In one situation, when I enable Roth conversion, it tells me to go max out up to the top of 25% bracket until the year when SS starts. See my earlier post. When the Roth conversion is turned off, the result was that I would pay about $26K more in taxes over the retirement period of 30 years.
That's $26K nominal spread out over the 30 years, so is much less than $26K now or a few $100s/yr due to inflation. That's a lot less than what I would have expected for a pretty heavy Roth conversion!
I've been converting to the top of the 25% bracket because RMDs + SS will move me into the 40% bracket as we will be living in the UK then. (Roth distributions are tax free in the UK as well as the US)
Correction: The above income range should have been $95.5K to $171.8K.... For 2015, the range for 25% tax rate is $99.5K to $175.8K for a married couple when standard deduction and exemptions are included...
Besides a limited (apparent) Roth benefit, Do you trust that tax laws will remain as they are ? Or will they find a way to tax (again) "excess" Roth withdrawals.
Do you trust them enough to pay up-front ? Do you trust them enough to do a large conversion ?
Pretty much agree. The actual tax savings may or may not be that great. But it will provide flexibility if I need to pull a bunch one year for some big one-time expense, esp if I've already spent down my non-deferred money ( which would probably have a fairly high cost basis, so low tax hit). Pulling from a ROTH might keep me in a lower bracket. Might.
-ERD50
I agree. Roth conversions are hyped pretty large here, but the author of i-orp says "the IRA to Roth IRA conversion decision should probably be made based on considerations other than increasing disposable income" in this http://www.i-orp.com/ModelDescription/Conversions.pdf
But do you trust them enough not to raise the rates you'll pay on tIRA withdrawals in the future?
I'm don't have enough certainty in either direction to avoid or encourage Roth conversions beyond what current tax rates support.