Why limit conversions to the 12% bracket? If you will be in the 22% bracket later, and have money outside of the tIRA to pay the tax, converting now to the top of the 22% bracket (or until the IRMAA tier kicks in) works out slightly better, due to moving money from taxable to Roth.
SS and taxes
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pb4uski
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Yes, it does, I just have a real hard time writing a big check to the IRS.... illogical I know... and I'm working on getting over it.
RobbieB
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I just dunno about all this worry about taxes. Don't you guys all read the "US is bankrupt" stuff? Obviously the government needs the dough.
So, don't worry, have fun, enjoy life and blow that dough! And send uncle sam his cut too -
So, don't worry, have fun, enjoy life and blow that dough! And send uncle sam his cut too -
Fedup
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I think most people do not like to spend money now, prefer to pay tax later. I know it’s painful. I just mailed mine for the year today so I know the pain.
However, I’m still young and Roth conversion works best if you have long time horizon to let it grow. Never have to pay tax on that chunk again.
CardsFan
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I have the same problem writing the big check, hence my desire to minimize taxes, at least to 70.
Converting into the 22% bracket seems like paying a lot now to, maybe, save 2% later. Now, considering taxes when there is only one of us, then the bracket will be higher, maybe it makes sense.
Or, maybe we will take more after 70, while we are both here.
Now, if I could only find my crystal ball, i would know exactly what would be the right move for us.
Maybe RobbieB is right when he says: "So, don't worry, have fun, enjoy life and blow that dough! And send uncle sam his cut too ". I'm get a headache from all this mental exercise.
pb4uski
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IF we move to a state with no income taxes after we are on Medicare, then I may be able to talk myself into converting into the 22% bracket... but with 7% for state tax a total of 29% is more than I can bear.
Sorry to stir up the hornet's nest regarding when to take SS and should I delay to convert to Roth.
Maybe I need to read more from RobbieB and learn to blow the dough now. Then I won't have a tax problem.
There are so many knobs to the problem and local marginal rates that pop up that some people focus on. How do you invest? Do you put higher yielding investments in Roths and lower yielding (bonds?) in TIRAs or do you treat all accounts having the same AA? Personally I look at all my investment accounts as one AA, but I don't have each sub account having the same allocation. If you are part of a couple, have you considered the tax effect of when one passes and now is filing as a single. And what if you have a chunk of after tax assets?
Lots of knobs and inputs. If you over simplify you may not model your situation.
Fedup
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I put bonds, MM, Brokered CDs in TIRA. Roth is all stocks. It’s going to be a rising glide path for me in equities. But I’m a gardener so I plan well ahead, when I sow seeds and when I get to harvest my vegetables requires lots of planning. So the same trait carries over to retirement.
corn18
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I'm not a gardener, but I have the same approach. I screwed up and kept bonds in my Roth and stocks in my 401k throughout 2017. Roth was flat, 401k grew 15% IRR. Now I get to pay tax on that 15% growth in my 401k. If I had swapped the two, it would have been tax free. Oh well, lesson learned.
Fedup
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There is no such thing as screwed up, it’s called experience.
Just kidding aside, I read a lot of bogglehead posts. The trick is to know who to believe. I listen to one bogglehead and lost some money investing in bonds this year. I never invested in bonds, so technically a newbie, so I chuck that to experience or lessons learned.
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RetireBy90
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You might consider changing the conversions up to top of 22% bracket. If most will pass, then you can pass more tax free. I also believe that income tax rates will rise within the near future. For me, it is the certainty and freeing up the $$ from other restrictions. In the Roth I can take it all tomorrow if I wanted, without any worry about taxes.
NW-Bound
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Nobody has answered the 1st question. I did not know about this calculator. Tried it, and did not see anything wrong with it for some simple test cases.
CardsFan
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Thanks for trying it. Actually that was my first concern. Is this a reliable estimate? I will eventually plug it all into Turbotax, but I was only looking for a ball park, and didn't want to get down in the weeds.
No decisions made yet. Still have a few years, but do grow tired of trying to save the last 1%. If my biggest concern is saving a few % in taxes when I am over 80, then I won the game! Some times, I don't think we see the forest for the trees.
Souschef
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I feel for you, seriously. Because of my RMD's my SS is taxed at 85%
But, as much as I hate to pay taxes, I remember my dad saying, "You made the money, pay the tax".We have been totally blessed in the market. In the nine years since I had to take RMD's, my next year balance is higher after taking out the money
I have been gifting some of it to our 4 children, and spending some on travel.
NW-Bound
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I often feel the same thing, and in fact I often think I will not live till 80.... If my biggest concern is saving a few % in taxes when I am over 80, then I won the game! Some times, I don't think we see the forest for the trees.
But it's interesting as an academic exercise. Something to exercise your brain on. There are worse things to think about.
I feel for you, seriously. Because of my RMD's my SS is taxed at 85%
But paying less is better. If it is only a few $K, then it does not matter. I hate to miss something that may cost me a lot more. And we do not know until we give it some thought, particularly for people who are in their early 60s and can change their plan.
It gets generally good comments (with a few caveats) at https://forum.mrmoneymustache.com/taxes/increasing-agi-help-us-choose/msg2135032/#msg2135032 and the post following that one.
pb4uski
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I feel for you, seriously. Because of my RMD's my SS is taxed at 85%
RMDs will cause my SS to be taxed at 85% too.
However, it is unreasonable to have expected SS not to be partially taxed. If you saved for retirement in a non-deductible tIRA and the bought a SPIA or saved in a deferred annuity and then annuitized it, a portion of the benefits representing growth/inside build up would be taxed. Comparing what I will receive to what I paid, 75% would be taxed, so 85% isn't all that far off.
I've pretty much given up on the thought of paying tax on less than 85% of SS. Last time I ran the SS calculations using "future" dollars, our combined SS at age 70 (in 10 years) would be over $100K ($73K in todays dollars). With RMD's and other taxable income, the taxable SS by itself will throw us out of the 10% bracket.
Oh well, maybe I'll take it at 62, instead. But, even those smaller SS payments will still probably end up being 85% taxed.
Oh well, maybe I'll take it at 62, instead. But, even those smaller SS payments will still probably end up being 85% taxed.
CardsFan
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My first reaction to your post was: Why bother?
Today I ran a few scenarios. If I delay SS to 70, and convert to the top of the 24% bracket, we can convert virtually all of my tIRA (depending on growth) at an effective tax rate of about 18%. With no RMD's, our taxes after 71 will be minimal (< $1000/year). Of course, this would mean paying about $50,000 a year in taxes for the next 6 years!
If one of us lives into their late 80's, or if I want to maximize the future value of DS's inheritance, this makes some sense.
At this point I am seriously thinking about consulting with a tax expert to look at the pros and cons of the various options. It might be a thousand dollars well spent.
NW-Bound
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For a couple under 65 and claiming just the standard deduction, going to the top of the 24% bracket means drawing $339K from IRA/401k. This also assumes no other income besides the IRA/401k withdrawal, such as after-tax dividend and cap gain.
The federal tax on that amount is $64,179. That leaves you with $275K, unless you use after-tax money to pay the tax. And then you need some money to live on, plus something to pay the state tax. So, you can stuff perhaps only $200K/year into Roth.
Do that for 6 years, and you deplete $2034K out of your IRA/401k. You gain $1200K into Roth.
If you have enough after-tax money to live on, and to be able to stuff the whole $275K into Roth, you will have $1650K in Roth, but your after-tax pile shrinks by $450K.
PS. Forget about the money to live on, which one needs to do anyway. Just looking at the tax loss, the conversion loss is 64179/339000 = 19%.
The federal tax on that amount is $64,179. That leaves you with $275K, unless you use after-tax money to pay the tax. And then you need some money to live on, plus something to pay the state tax. So, you can stuff perhaps only $200K/year into Roth.
Do that for 6 years, and you deplete $2034K out of your IRA/401k. You gain $1200K into Roth.
If you have enough after-tax money to live on, and to be able to stuff the whole $275K into Roth, you will have $1650K in Roth, but your after-tax pile shrinks by $450K.
PS. Forget about the money to live on, which one needs to do anyway. Just looking at the tax loss, the conversion loss is 64179/339000 = 19%.
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CardsFan
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NW-Bound: I hear you. I don't think I could pull the trigger on this, but intend to look at it.
Any way I look at it, the tax man is going to get his pound of flesh from me and/or my heirs (and I have no real problems with that. After all I have not paid any taxes on it yet). My gut tells me to pay as little as possible until I need to pay more. Just want to be sure that is the right approach (though I will continue to convert to the top of the 12% bracket until we take SS).
Any way I look at it, the tax man is going to get his pound of flesh from me and/or my heirs (and I have no real problems with that. After all I have not paid any taxes on it yet). My gut tells me to pay as little as possible until I need to pay more. Just want to be sure that is the right approach (though I will continue to convert to the top of the 12% bracket until we take SS).
NW-Bound
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I have the same problem you have. I was just thinking out loud.
To convert up to the top of 12% should be a no-brainer. You can transfer $104K from IRA to Roth each year. The tax will be $8907, which is more palatable.
Now, you need to spend after-tax money to pay that tax, and also to live on. I think it is OK to spend after-tax money to gain more in Roth.
It's because $1 in Roth > $1 in after-tax > $1 in tax-deferred.
But with $104K each year, it does not make that big a dent in the IRA/401k till RMD hits at 70. Nice problem to have, eh?
Depending on how much you have, it may still drive down the RMD enough, such that when added to the SS you take at 70, you are still inside the 12% bracket. A lot depends on the individual circumstance.
To convert up to the top of 12% should be a no-brainer. You can transfer $104K from IRA to Roth each year. The tax will be $8907, which is more palatable.
Now, you need to spend after-tax money to pay that tax, and also to live on. I think it is OK to spend after-tax money to gain more in Roth.
It's because $1 in Roth > $1 in after-tax > $1 in tax-deferred.
But with $104K each year, it does not make that big a dent in the IRA/401k till RMD hits at 70. Nice problem to have, eh?
Depending on how much you have, it may still drive down the RMD enough, such that when added to the SS you take at 70, you are still inside the 12% bracket. A lot depends on the individual circumstance.
CardsFan
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FWIW, we are limited to about $70k in conversions (in the 12% bracket), due to poor tax planning with tax inefficient after tax accounts. Never thought about it before, and too late now without taking a cap gains tax hit. At that pace, we will be lucky to convert enough to simply not have a higher balance than we do now. So, yeah, nice problem to have.
In the grand scheme of things, I am not complaining. We were more successful saving than we needed to be, and have little concern about running out unless there is an unthinkable black swan event, and then we we would be toast no matter what we had done.
pb4uski
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Ditto here, and we have state income taxes too, at around 4.3%, so almost 15% projected effective tax on Roth conversions for 2018.
IF once we start Medicare we redomesticate to a no tax state, I may convert to the top of the 22% tax bracket until we start RMDs.
IF once we start Medicare we redomesticate to a no tax state, I may convert to the top of the 22% tax bracket until we start RMDs.
My solution is to Roth convert everything I can up to 24% level till 70. This will clean a huge amount from my TIRA. Presently I'm living on cash. My total cost of conversion is $256k over 4 years. My analysis is this money belongs to the government anyway. The taxes will only continue to accrue as the portfolio grows and RMD on top of SS will eat you alive. You won't be in the 12% bracket for long. My analysis is at first the TIRA portfolio grows faster than the Roth but so do the taxes. Eventually the value of the Roth conversion is paid for by a low tax life and once that happens the 2 portfolios diverge in favor of the Roth. A significant problem is when one spouse dies. The tax write off is cut in half and there is often a 2 level increase in bracket. SS from one spouse is lost as well. So if your at top of 12% as a couple you can easily reach into 24% as a single depending on the RMD. Basically one spouse dies and Uncle Sam climbs into the bed with the remaining spouse to drain the account.
This is avoided to large extent with a Roth. Living on cash is also a good deal. If the market crashes my portfolio is closed to SORR and I don't need to sell anything as my hamburgers are already paid for till age 70. At 70 I start SS so my need to access the portfolio is reduced thereby decreasing SORR a 4% withdrawal has a much larger failure rat than a 2% withdrawal. I'm not taking SS till 70. I have the larger SS. My wife is younger and when she reaches 66 She will take and I will claim spousal. When I reach 70 I will take and she will claim spousal which is larger than her SS. When I die she will take survivor. It works out to about 175K extra SS over the years. There are calculators to analyze this and each situation is unique but this maximizes our payout. You have to figure out your particular situation. I analyzed nearly an extra million bucks in end portfolio value doing the Roth conversion + SS ju-jitsu and the picture is MUCH better for a spouse that is widowed.
If the market is only going to pay 4% for the next decade, why would you give up a guaranteed 8% return on your SS? I think part of the problem with NW-Bounds analysis is he forgot both Roth and TIRA continue to grow and as the conversion happens and TIRA is emptied the growth is reduced while as Roth is filled it's growth increases dramatically. Once 70 is reached SS kicks in and the need for portfolio money goes down but if you're forced to RMD taxes continue to grow basically forever and more money is coming out of the portfolio than needed. I analyzed top of 24% top of 22% and top of 12%. The conversion order for me was top 24% best, somewhere between 24% and 22% second best, top 22% third best, and 12% barely made any difference.
This is avoided to large extent with a Roth. Living on cash is also a good deal. If the market crashes my portfolio is closed to SORR and I don't need to sell anything as my hamburgers are already paid for till age 70. At 70 I start SS so my need to access the portfolio is reduced thereby decreasing SORR a 4% withdrawal has a much larger failure rat than a 2% withdrawal. I'm not taking SS till 70. I have the larger SS. My wife is younger and when she reaches 66 She will take and I will claim spousal. When I reach 70 I will take and she will claim spousal which is larger than her SS. When I die she will take survivor. It works out to about 175K extra SS over the years. There are calculators to analyze this and each situation is unique but this maximizes our payout. You have to figure out your particular situation. I analyzed nearly an extra million bucks in end portfolio value doing the Roth conversion + SS ju-jitsu and the picture is MUCH better for a spouse that is widowed.
If the market is only going to pay 4% for the next decade, why would you give up a guaranteed 8% return on your SS? I think part of the problem with NW-Bounds analysis is he forgot both Roth and TIRA continue to grow and as the conversion happens and TIRA is emptied the growth is reduced while as Roth is filled it's growth increases dramatically. Once 70 is reached SS kicks in and the need for portfolio money goes down but if you're forced to RMD taxes continue to grow basically forever and more money is coming out of the portfolio than needed. I analyzed top of 24% top of 22% and top of 12%. The conversion order for me was top 24% best, somewhere between 24% and 22% second best, top 22% third best, and 12% barely made any difference.
