Roth Conversions make sense?

[oldphd]

This is an excellent point. Is there somewhere/site that might help in estimating this?

Here's one, Kaiser family foundation:

https://www.kff.org/interactive/subsidy-calculator/

 

[oldphd]

Thanks. The sherpa site was a great help in estimating her costs for the 2 years we are not on the same plans (her - ACA; me-Medicare). I can't believe how much more the premiums can be because just one of us on ACA while another on Medicare.

How about a site where I can get an estimate of my medicare costs. Do you know of any of those?

Medicare Part B premium is pretty easy, don't forget to check for IRMAA. My understanding is the supplemental costs can vary a fair amount depending on deductibles, etc. In DW's case, she has a supplemental through her retirement that is partially subsidized. It's excellent coverage, low deductible, etc., the total retail cost is about $350/month; that's in addition to Part B premium. She has enough going on health wise that she wouldn't benefit from foregoing this and going to a less expensive plan on her own.

I've been estimating cost per person on medicare of $500/month.

 

[thepalmersinking]

Does it make sense to switch to a Roth 401K or stay with traditional 401K and convert after retirement ?

 

[pb4uski]

It depends on your marginal tax rate today, your marginal tax rate when you first retire and your marginal tax rate once any pension and SS are online.

Generally, if your marginal tax rate today exceeds your marginal tax rate in retirement then you are better off with the tax deferred 401k... if it is the same then it is a push... and if your marginal rate is lower now then the Roth 401k is preferable.

 

[LarryMelman]

I am still working and have significant taxable investment income, in addition to my salary. Some of the investment income is above the threshold for the 3.8% Net Investment Income Tax. Every dollar that I put into my tax-deferred 401k, saves my bracket rate of 24% PLUS 3.8% because it allows a dollar of investment income to drop below the NIIT line. Total tax savings on deferral = 27.8%.

My plan has been to retire in my mid 50's and do Roth conversions every year, to reduce MRD's when the time comes. I was planning to fill up the 0%, 10% and 12% brackets with conversions. However it just occurred to me that with no conversions, my taxable investment income will be taxed at 0 below $52K (I'm single) and 15% above that. Every dollar that I Roth-convert will incur its own tax AND it will push a dollar of investment income into the 15% tax range. So the marginal rates on the conversion dollars are not 0/10/12 as I'd been assuming - they are really 15/25/27!!! So even if retiring early and trying to beat the tax man, I'm really not saving much at all.

Am I looking at this correctly?

 

[kaneohe]

...............................................

Am I looking at this correctly?

yes, but................you may want to consider what might happen in the future.....mostly not known for sure.

Even if the marginal tax rate is the same now as later, I believe the Roth is considered no worse and perhaps a little bit better since you are eliminating the tax drag on the taxable amount you spend on the conversion for taxes.

When the tax laws revert back? in a few yrs, will the AMT return in its old form
and will you be subjected to them.

Some yrs back I did the taxes for a person who had the same situation you are describing and didn't want to pay the 30% for conversion (=15% for the conversion + 15% for displacing QDIV/LTCG into the next bracket). Instead, when RMDs started, he got caught by the old AMT and paid 36% instead. He then got rescued by luck by the new tax law so now is paying 24% on ordinary income. In this case, not converting helped (by luck) .

In your case, you may want to consider what happens if the old AMT comes back. Also is there a way to reduce the investment income which is the source of the "problem" here............e.g. if CG distributions are significant, switch to more efficient funds.

 

[Marc]

I too have not done any Roth conversions primarily because I used to live in a state with income tax while I am now in a state without one; however, I am planning to do Roth conversions next two years to the max of the 22% bracket. After that I was planning to look at what indexed IRMAA levels will be to consider whether to continue conversions. In addition to possibly higher rates when social security kicks in in 2027, one factor not often talked about here is the impact of Single tax rates for surviving spouse after a grace year. Whichever one of us survives will likely be in a much higher tax bracket; therefore, I am now considering Roth conversions all the way to age 70 just keeping income to the first IRMAA penalty level.

Marc

 

[LarryMelman]

yes, but................you may want to consider what might happen in the future.....mostly not known for sure.

Also is there a way to reduce the investment income which is the source of the "problem" here............e.g. if CG distributions are significant, switch to more efficient funds.

About 5 years ago, I started transitioning to QDI-paying stocks ("dividend growth" commons and preferreds). The QDI I generated in 2018 was about 2/3 from the stocks (known, largely predictable, growing) and 1/3% from estimated (and unpredictable) distributions from old mutual fund holdings. New investments and reinvestments go entirely into the stocks. The investment income is already about half my salary (which is enough for me to live on) and it's already over the ACA subsidy cliff.

I've put a lot of thought into this plan, and it makes sense to me. However I've tried talking to some planners and they go glassy-eyed at even the basics of it (or of ER issues in general). No one mentioned this marginal tax issue that I've just discovered on my own. Maybe this says more about the quality of the planners, I don't know.

I guess I need to suck it up and accept that my conversions (and other ordinary income) will be taxed 0/10/12 and all the investment income all taxed at 15%, and that's the best I can do. (Where to ultimately take my living income from, including paying all the taxes, is still under consideration.) The need to get money converted out of the traditional IRA is much more important in the long-term, than having some of my qualified income taxed 0.

Maybe this should be a new thread but I'll leave it here for now.