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Roth Conversions well into RMDs, our plan
Old 12-11-2019, 11:24 AM   #1
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Roth Conversions well into RMDs, our plan

Unfortunately I drank the Kool-Aid about tax deferred IRAs and 401K's early and didn't pay much attention after that. Whoever said our tax rates will be lower in retirement was, at best, optimistic, at worst, just pushing their offerings. As a result, I found that too much of our investments were in the IRAs, >90% to be certain. FYI, we are currently 67 yrs old, have no investment accounts outside of IRAs and Roths.

Previously, Roth conversions were out of our purview due to controlling our income for ACA subsidies. Over the last 2 years, I converted a small amount without much analysis other than keeping under the max of our current tax bracket. I just ran a simple spreadsheet looking at Roth conversions from the 1,000 ft level. My intent is two fold. To minimize our later year's taxes (at the expense of today's taxes), but mostly to plan for the eventuality of one of the two of us will outlive the other, being taxed as Single. Who knows when that will happen but it certainly will occur.

The current plan is to start to conversion at ~ 4.5% this year, and the same $ amount for the next x years. We will also make ~3% withdrawals for the next 3 year's as live-on money until RMDs kick in. At the same time I will file for SS at 70, increasing from my current spousal benefit. Then the RMDs will become our live-on money. Roth conversions will continue at the same $ level during RMDs. This level of income/conversion also keeps us under IRMMA throughout or expected lifetime.

The interesting part is, if my spreadsheet assumptions are correct and the market follows typical performance, by age 78, only 8 years into RMDs, the balance will be 50/50 IRA and Roth. IF we both live till age 83, then the balance will be 25% IRA and 75% Roth. By age 90, the IRAs could be depleted/converted totally. I don't think that I will follow the Conversion plan that late. Review the plan, Adjust the plan, and Implement the plan, is THE plan.

I view the Roth bucket as tax free money if needed, since we would have no penalties. This is better than a taxable investment account IMO. So far we do not plan to ever tap into the Roth except for emergencies and if necessary, our personal LTC insurance. This plan keeps us from having to reinvest the RMDs into taxable accounts. IMO this helps to manage our future income and taxes better.

Today I took the first step and converted ~ 4.5% of our IRAs. In the next few days, I will run a proforma tax calculation and make another IRA W/D, 100% for taxes.

Should I be doing anything different/better given the situation we are currently in and our stated goals above?
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Old 12-11-2019, 11:33 AM   #2
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It appears that you are not considering Social Security. Some people won't get SS, so, OK. SS is a major part of our income. When I finally looked at the effect of the Tax Torpedo, We rushed to convert our sizable TIRA to a Roth regardless of the immediate tax rate. We were on Medicare by then, so no concern about ACA.

Your situation may be different, but it may be instructive to include SS in your calculations.
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Old 12-11-2019, 11:43 AM   #3
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We are in similar situation where our SS is a significant contributor to our current planned expenses. It will go up in 3 years. We are also now both on Medicare.

While not mentioned earlier, for the purposes of this conversion spreadsheet I am figuring 100% of my SS is taxed. In actuality it is 85%, so annual reductions from the IRA will be a bit less than the spreadsheet plans. I did mention that I was looking at the 1,000 ft level, In other spreadsheets that I have built, I actually have those formulas in there.
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Old 12-11-2019, 12:21 PM   #4
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We are in similar situation where our SS is a significant contributor to our current planned expenses. It will go up in 3 years. We are also now both on Medicare.

While not mentioned earlier, for the purposes of this conversion spreadsheet I am figuring 100% of my SS is taxed. In actuality it is 85%, so annual reductions from the IRA will be a bit less than the spreadsheet plans. I did mention that I was looking at the 1,000 ft level, In other spreadsheets that I have built, I actually have those formulas in there.
And you are sure that your conversions will not trigger IRMAA and impact your Medicare part B premiums?
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Old 12-11-2019, 12:28 PM   #5
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Quote:
Originally Posted by CRLLS View Post

Previously, Roth conversions were out of our purview due to controlling our income for ACA subsidies. Over the last 2 years, I converted a small amount without much analysis other than keeping under the max of our current tax bracket....

The current plan is to start to conversion at ~ 4.5% this year, and the same $ amount for the next x years.
Rather than converting to the top of your current tax bracket, a better strategy would have been (and still is) to convert to the top of your expected tax bracket once you start full SS and RMDs. Maybe they are the same since it sounds like you may both be taking SS now, and you are just switching to a higher benefit at 70

Is there some math/logic behind the 4.5% conversion this year?

btw, another way to reduce your tax deferred burden is to do any charitable giving with QCDs once you are eligible to do that. Using QCDs has the benefit of reducing taxes owed without having to itemize deductions, and reducing your MAGI if IRMA is a concern.
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Old 12-11-2019, 01:16 PM   #6
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And you are sure that your conversions will not trigger IRMAA and impact your Medicare part B premiums?

Unless there is an uptick in the market, I am safely buffered from future IRMMAs.
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Rather than converting to the top of your current tax bracket, a better strategy would have been (and still is) to convert to the top of your expected tax bracket once you start full SS and RMDs. Maybe they are the same since it sounds like you may both be taking SS now, and you are just switching to a higher benefit at 70

Is there some math/logic behind the 4.5% conversion this year?

btw, another way to reduce your tax deferred burden is to do any charitable giving with QCDs once you are eligible to do that. Using QCDs has the benefit of reducing taxes owed without having to itemize deductions, and reducing your MAGI if IRMA is a concern.
We are both collecting SS now. As you observed, I am collecting spousal only at the moment. My conversion amount puts us in the middle (not the top) of the next higher tax bracket now, which I would be in anyways in 3 years.

The 4.5% is worked back from the actual dollar amount. That amount was a PFA number that works out to be a "reasonable" dollar amount in a "reasonable" time period. Others may disagree on the reasonable part.

My spreadsheet is in today's dollars. That eliminates my need to project IRMMA and tax rate changes over the next 30 years or so. Changing a fixed dollar amount was easy to change to see how close I came to IRMAA and the next tax bracket, as well as the year 50/50 balance is met.

Following the Review, Adjust and Implement process should keep me out of harm's way when tax rates change. No?
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Old 12-11-2019, 03:18 PM   #7
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you might already know this but just in case............once you start RMDs, the first $$ out are considered RMDs and you are not supposed to convert RMDs.
So........be sure you take the RMDs out and spend/stash them before you do your withdrawals for Roth conversion.

If you do things in the wrong order, things on the surface may look the same but if IRS finds out , you will have a big mess on your hands.
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Old 12-11-2019, 03:34 PM   #8
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My spreadsheet is in today's dollars. That eliminates my need to project IRMMA and tax rate changes over the next 30 years or so. Changing a fixed dollar amount was easy to change to see how close I came to IRMAA and the next tax bracket, as well as the year 50/50 balance is met.

Following the Review, Adjust and Implement process should keep me out of harm's way when tax rates change. No?
I'm not clear why it eliminates your need to project tax rate changes and out of harm's way. If you mean bracket adjustments for inflation, probably, but if the new rates expire and return to higher rates, you will be affected. I just don't really understand what you're trying to say here.

It's not unreasonable to use the assumption that taxes will stay as they are today. Personally I'm being more aggressive with my conversions in case they do go higher. You don't have to use my assumptions though. There's no way to have any certainty about things like this. Without seeing your actual numbers and putting a lot of effort into figuring out the moving parts (which I'm not going to do), I don't see anything wrong with your plan. If you're off, it shouldn't be by too much. And you may not be off at all.
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Old 12-11-2019, 04:25 PM   #9
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Kaneohe, I knew that RMD's could not be converted to Roth. I wasn't aware that the IRS considers The 1st out is RMD's. That is something that I need to keep in the back of mu head when the time comes.

RunningBum, I do make the big assumption that bracket adjustments as well as IRMMA will somewhat keep up with inflation. Maybe not dollar for dollar, but somewhat close. Closer than I could guess what those increases would be from year to year. We all have to use something in our prognostications. I don't believe that the current tax brackets will stay close to the same for the next few years. I don't want to shorten the conversion period at the expense of higher taxes (brackets) and IRMMA. It is all a hedge of sorts. I could be hit by a bus tomorrow and the whole plan goes in the tank.
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Old 12-11-2019, 08:17 PM   #10
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Glad to see your topic. Our 1st distribution was done this week. Itís not a RMD. We want to do some things w/o taking cash reserves. Also, did some IRA to Roth. 60k total. Spouse started Medicare, me not yet and I donít want to get to a higher bracket for premiums. This could become dicey if we choose not to commit some brain cells to math work. Unfortunately Iíd rather be doing other stuff. The 1st time we do something itís like throwing a spit wad....
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Old 12-16-2019, 08:49 PM   #11
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I just completed the conversion today. It turns out to be easier to calculate than I had tried to make it. I figured 85% of our SS plus the taxable amount of a small annuitized WL insurance benefit. Subtracted that from the IRMMA limit. That becomes the withdrawal amount from the IRA. A bit lower for a bit of a buffer. We have no taxable investment income or other taxable income to be added to our AGI. Then figure the tax on the AGI amount. Subtract the tax already withheld. That is how much of the withdrawal gets withheld as taxes, the rest gets converted. It sounds like a lot, but is easier than what I had worked out. I ran the same numbers thru the 2018 TurboTax and they closely match so I have confidence in my numbers.

Conversion was simple with Fidelity. Since I was withholding from the IRA withdrawal, I could not do this online. I had to talk to a real person. It was a quick transaction.
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