Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Roth Conversions
Old 11-09-2015, 05:30 PM   #1
Recycles dryer sheets
 
Join Date: Apr 2011
Location: Castro Valley
Posts: 402
Roth Conversions

Just curious, do most people that do Roth conversions fill up the 15% bracket, or they stop at 10%?
__________________

__________________
jkern is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 11-09-2015, 05:37 PM   #2
Thinks s/he gets paid by the post
mpeirce's Avatar
 
Join Date: Feb 2012
Location: Columbus area
Posts: 1,593
We fill up the 15% federal bracket.

Assuming current tax law in the future (not true, but what are you going to do...), we'll be up in the 25% or more when RMDs kick in in 15 years so convert as much as we can.
__________________

__________________
mpeirce is online now   Reply With Quote
Old 11-09-2015, 06:30 PM   #3
Full time employment: Posting here.
 
Join Date: Apr 2014
Location: Houston
Posts: 639
I plan to do what seems to be optimal based on the I-orp tool. For my situation that will mean filling up the 25% bucket. (Large amount in tax deferred accounts).


Sent from my iPhone using Early Retirement Forum
__________________
Whisper66 is offline   Reply With Quote
Old 11-09-2015, 07:54 PM   #4
Thinks s/he gets paid by the post
 
Join Date: Jul 2005
Posts: 3,862
I fill up the 25% bracket, and for a few years a little beyond that.
__________________
Animorph is offline   Reply With Quote
Old 11-09-2015, 07:57 PM   #5
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
NW-Bound's Avatar
 
Join Date: Jul 2008
Posts: 19,431
I played a bit with I-ORP optimizer. Its recommendation for Roth conversion depends on what I enter as the projection for stock gain. At the default of 6% nominal gain over 2.5% inflation, it tells me to go max out to fill up the 25% bracket. When I cut the gain down to about 4%, it cuts back to the 15% bracket. Of course, if my 401k+IRA were larger, than there would be more chance of its RMD hitting the 25% bracket even if future market return is lousy.

I think filling up 15% bracket is safest for most people, because their distribution from their tax-deferred stash tends to be within this bracket in future years. You may not have it reach 25% bracket if the market is lousy, but if it is highly unlikely that you will be down in the 10% bracket, then you might as well pay 15% now.

Of course if you want to make use of ACA subsidy, then it gets more complicated.

PS. It also depends on how much I want to leave behind for my kids. Now, how does it decide between leaving money behind in IRA or in Roth or after-tax? Interesting problem.
__________________
"Old age is the most unexpected of all things that can happen to a man" -- Leon Trotsky
NW-Bound is offline   Reply With Quote
Old 11-09-2015, 08:53 PM   #6
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
NW-Bound's Avatar
 
Join Date: Jul 2008
Posts: 19,431
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!

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.
__________________
"Old age is the most unexpected of all things that can happen to a man" -- Leon Trotsky
NW-Bound is offline   Reply With Quote
Old 11-09-2015, 09:11 PM   #7
Moderator
Alan's Avatar
 
Join Date: Jul 2005
Location: Eee Bah Gum
Posts: 21,113
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)
__________________
Retired in Jan, 2010 at 55, moved to England in May 2016
Now it's adventure before dementia
Alan is offline   Reply With Quote
Old 11-09-2015, 09:19 PM   #8
Thinks s/he gets paid by the post
 
Join Date: Jul 2002
Posts: 1,040
Top of 15% bracket. Also trying to reduce my basis in T-IRAs for spousal simplification if I leave this world. Got all of DW T-IRAs converted, working on mine. got the basis down to about a third of original number, but it has taken many years.
__________________
RE2Boys is offline   Reply With Quote
Old 11-09-2015, 09:25 PM   #9
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
NW-Bound's Avatar
 
Join Date: Jul 2008
Posts: 19,431
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!
__________________
"Old age is the most unexpected of all things that can happen to a man" -- Leon Trotsky
NW-Bound is offline   Reply With Quote
Old 11-09-2015, 09:51 PM   #10
Moderator
Alan's Avatar
 
Join Date: Jul 2005
Location: Eee Bah Gum
Posts: 21,113
Quote:
Originally Posted by NW-Bound View Post
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!
You have that wrong.

Each person is taxed individually so each person has the 10,600 tax free allowance and each person then has 31,786 taxed at 20% for regular income. Qualified dividends have the first 5,000 tax free and then are taxed at 5% if you are in the 20% or below. Capital gains have a tax free examption 11,100, then are taxed at 18%.

All our taxable investments are in my wife's name so we expect to pay 0% UK tax on our dividends and cap gains. I will be paying taxes only on my pension income plus SS when I start receiving it.


I have already done a test run of what we will pay in UK taxes and it is about $3k more than in the US. But the UK has health services free at point of service plus various other allowances for Seniors including free bus passes, free prescriptions, free eye tests etc.


ETA
Dividend income is actually completely free of tax at present. The new tax rates I mentioned above come into force next year.
__________________
Retired in Jan, 2010 at 55, moved to England in May 2016
Now it's adventure before dementia
Alan is offline   Reply With Quote
Old 11-09-2015, 10:31 PM   #11
Thinks s/he gets paid by the post
 
Join Date: Nov 2011
Posts: 2,366
Quote:
Originally Posted by NW-Bound View Post
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!
That'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.
__________________
GrayHare is offline   Reply With Quote
Old 11-10-2015, 08:08 AM   #12
Thinks s/he gets paid by the post
sengsational's Avatar
 
Join Date: Oct 2010
Posts: 3,840
Quote:
Originally Posted by GrayHare View Post
That'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.
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

The i-orp tool now has the capability to run an optimization with PPACA "on" (taking advantage of the premium tax credit and limiting income) as well as with or without Roth conversions. 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.
__________________
sengsational is online now   Reply With Quote
Old 11-10-2015, 08:44 AM   #13
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
NW-Bound's Avatar
 
Join Date: Jul 2008
Posts: 19,431
I did not realize the reason is as simple as explained above, until I looked closely at the tax brackets and saw that the range of the 25% marginal tax rate is large enough that it is easy to fall entirely in it, with little wiggle room to get out.

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. So, unless the market return is either terrible or exceptional, it is not likely for me to drop under or go beyond this range. It is only with good expected market returns that I have a chance to go to the 28% range, and that is when I-ORP recommendation is to do Roth conversion to the top of 25% bracket.

There's still a bit of room for "tweaking". That is SS is taxed only at 85%, so there's still a bitty bit of tax difference between pre-SS and post-SS IRA withdrawal.
__________________
"Old age is the most unexpected of all things that can happen to a man" -- Leon Trotsky
NW-Bound is offline   Reply With Quote
Old 11-10-2015, 08:58 AM   #14
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
harley's Avatar
 
Join Date: May 2008
Location: Following the nice weather
Posts: 6,433
Quote:
Originally Posted by NW-Bound View Post
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.
Actually, the loophole (IMO) is the non-taxed inheritance of the IRA. I always assumed the personal situation would be pretty much a wash, and since I'd be paying taxes on the later withdrawals with inflation depreciated dollars it might even work out better to not convert. But being able to leave a healthy inheritance to DD and her spawn that would never be taxed was a brilliant advantage, again IMO.

Of course, they're talking about shutting that down, and probably will before I shuffle off the coil.
__________________
"Good judgment comes from experience. Experience comes from bad judgement." - Will Rogers, or maybe Sam Clemens
DW and I - FIREd at 50 (7/06), living off assets
harley is online now   Reply With Quote
Old 11-10-2015, 10:32 AM   #15
Thinks s/he gets paid by the post
Cobra9777's Avatar
 
Join Date: Jul 2012
Location: Texas
Posts: 1,132
I'm planning to convert to the top of the 15% bracket starting next year. First 2 years of ER, our tax bracket has been very high due to exercising my remaining employee stock options. We also have pensions and rentals that fill up much of the 15% bracket. So even with 15 years to go, we can't convert enough to prevent RMDs being partially taxed at 25%.

There are some higher return scenarios which would cause RMDs to push us into the 28% and even 33% brackets. But I'm very hesitant to convert into the 25% bracket based on that. If it happens, then I suppose that'll be a "good" problem to have. 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. In all likelihood, I'm just pre-paying taxes for the kids. Hard to get enthusiastic about that, particularly given the recurring budget proposals to weaken the Roth's legacy-friendly attributes.
__________________
Retired at 52 in July 2013. On to better things...
AA: 55% stock, 15% real estate, 27% bonds, 3% cash
WR: 2.0% SI: 2 pensions, some rental income, SS later
Cobra9777 is online now   Reply With Quote
Old 11-10-2015, 12:57 PM   #16
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Sep 2005
Location: Northern IL
Posts: 18,284
Quote:
Originally Posted by Cobra9777 View Post
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. ....
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
__________________
ERD50 is online now   Reply With Quote
Old 11-10-2015, 01:13 PM   #17
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
youbet's Avatar
 
Join Date: Mar 2005
Location: Chicago
Posts: 9,965
Quote:
Originally Posted by jkern View Post
Just curious, do most people that do Roth conversions fill up the 15% bracket, or they stop at 10%?
I filled up the 25% bracket the past few years. Our upcoming RMD's will come out above that.
__________________
"I wasn't born blue blood. I was born blue-collar." John Wort Hannam
youbet is offline   Reply With Quote
Old 11-10-2015, 01:56 PM   #18
Thinks s/he gets paid by the post
SecondCor521's Avatar
 
Join Date: Jun 2006
Location: Boise
Posts: 2,405
Quote:
Originally Posted by sengsational View Post
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.
What PPACA limit do you target (if any)?

I'm trying to figure out my own plan for next year, and I'm thinking 249% of FPL to get both subsidies and cost-sharing.

2016 will be the first year where I get to choose my AGI and it's freaking me out a little.
__________________
"At times the world can seem an unfriendly and sinister place, but believe us when we say there is much more good in it than bad. All you have to do is look hard enough, and what might seem to be a series of unfortunate events, may in fact be the first steps of a journey." Violet Baudelaire.
SecondCor521 is offline   Reply With Quote
Old 11-10-2015, 05:07 PM   #19
Thinks s/he gets paid by the post
MasterBlaster's Avatar
 
Join Date: Jun 2005
Posts: 4,359
Quote:
Originally Posted by NW-Bound View Post
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!
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 ?
__________________
MasterBlaster is offline   Reply With Quote
Old 11-10-2015, 05:14 PM   #20
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
NW-Bound's Avatar
 
Join Date: Jul 2008
Posts: 19,431
No, I do not trust anybody to do anything. There is really no way to run, hide, or crawl away from the long reach of the taxman's arm.

Why don't we just draw the whole thing at once, eat the 39.6% top tax bracket? It hurts but once, and what is left is now really ours, so we can convert to krugerrands and hide it under the mattress, or bury it in the backyard. See if they can find it now!

Then now being a "poor" man of no means, you get full SS benefits!
__________________

__________________
"Old age is the most unexpected of all things that can happen to a man" -- Leon Trotsky
NW-Bound is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Ruh-roh: Roth IRA conversions-- the IRS way. Nords FIRE and Money 14 06-03-2006 07:36 PM
Roth Conversions for Retirees mickeyd FIRE and Money 5 03-12-2006 10:35 AM
Roth IRA Conversions for Retirees mickeyd FIRE and Money 4 12-17-2005 11:38 AM
Roth Conversions?? stevelb FIRE and Money 18 02-28-2005 05:46 PM
ER Roth conversions unclemick FIRE and Money 8 03-05-2004 11:25 PM

 

 
All times are GMT -6. The time now is 09:06 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.