Is the tax really all that severe? Lets assume at age 70 single male will need to RMD 4% of a million dollar portfolio. Also start taking SS at 3K per month or 36K per year giving a 76K annual income. At 40K of income and 36K of social security for a single person the additional taxable income would be:
Test 1: 85% of 36,000 = $30,600
Test 2: 1/2 SS Benefits : $18,000
Combined Income $58,000
Less second threshold $34,000
Excess above 2nd threshold: $24,000
85% of excess: $20,400
TOTAL TEST 2 $38,400
Test 3
Provisional Income $58,000
Less 1st threshold 25,000
Excess above 1st threshold 33,000
50% of excess above 1st thresh 1 6,500
35% of excess above 2nd thresh 8,400
Total Test 3 $24,900 equal 69 percent of SS
Taxable income would be $64,900 less standard deduction of $6,500 and personal exemption of $3,950 leaves taxable income of $54,450 and a tax for a single of $9,468.75 or 12.5% of total income based on 2014 rates. This is 23.67 percent of the total 401K withdrawl so to take an early 25% tax for a single to convert to an Roth IRA would make very little sense in this case, and if you are making a lot more than this I think you should be patting yourself on your back for being better than 90% of all other retirees.
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