Looking for advice on Roth conversion

[Austin704]

Hi everyone,

I have a tax-deferred retirement account that I intend to leave invested before taking RMDs at age 70.5, but I’m starting to consider converting some or all to a Roth account sooner than later. Here are a few particulars:

*53 years of age, not working

*$500K in tax-deferred rollover IRA account (70/30 AA)

*Non-COLA’d pension covers all current expenses

*24% marginal tax bracket (if current rates expire in 2025, I’ll jump up to 28%)

*Could convert about $50,000 per year to the top of the 24% bracket

*Enough in taxable accounts to pay taxes on $50,000 annual conversions ($12,000 per year—ouch!)

*Past the second “bend point” for SS benefits—plan to delay until age 70, so expect fairly high SS income.

I figure these tax-deferred investments could reasonably be expected to double to $1M before I reach age 70.5 (17 years) and all withdrawals would be taxed at the highest marginal rate (24% now, 28% if not renewed). Likely 85% of my SS benefits will also be taxed and I could possibly end up in a higher bracket with SS and RMDs.

So, I’ve been thinking I would be better off converting up to the top of the 24% tax bracket at least until 2026 when rates could go up. I could convert more than half of the current balance if I start in 2020. I would probably not convert at 28%—just too painful.

If rates don’t go up, I haven’t really lost anything by converting since I’d be paying at least 24% on withdrawals anyway—and I would have the added advantage of some tax-free Roth growth along the way. What’s holding me back is the relatively high tax bracket I’m in now and the tax hit. But with the pension I don’t see it going any lower in the future. It seems to be a case of “pay me now or pay me even more later.”

Another option is to let the tax-deferred account ride until 59.5 and then start pulling $ out over time, paying the taxes, and investing the disbursements in a taxable account to avoid RMDs at age 70.5+. But if I’m going to do that, seems I may as well convert to Roth.

Thoughts?

 

[RunningBum]

Yes, I believe the best way to limit taxes over your lifetime is to spread out income as best you can, and doing Roth conversions during your ER is a great way. Some of us are limited by keeping MAGI low enough to get an ACA subsidy, and to a lesser extent, avoiding IRMAA (medicare adjustment due to higher income). Avoiding RMDs can make even more sense if it helps you avoid the SS hump.

Impossible to say how much you should convert without knowing all of your numbers, but my general rule is to convert up to the top of the tax bracket you expect to be in during retirement. If you can pay income taxes for conversion out of your taxable account, that's all the better.

 

[Sunset]

OP - from your numbers it looks like it's better to convert now, as you will be in the higher tax bracket with RMD (on 1MM) + SS added to your current income.
$36,496 + $45,xxx (todays dollars) = $81,xxx added to your current income putting you in the 32% tax bracket.

 

[CardsFan]

OP - from your numbers it looks like it's better to convert now, as you will be in the higher tax bracket with RMD (on 1MM) + SS added to your current income.
$36,496 + $45,xxx (todays dollars) = $81,xxx added to your current income putting you in the 32% tax bracket.

You are probably right, but you do need to consider all the tax brackets will be inflated, as well. And the $1million is just a guess. Could be $2million, could still be $500k.

That said, converting in the current tax bracket, that seems to be the lowest you will be in going forward, makes sense, and cannot really hurt you.

 

[Midpack]

Impossible to say how much you should convert without knowing all of your numbers, but my general rule is to convert up to the top of the tax bracket you expect to be in during retirement. If you can pay income taxes for conversion out of your taxable account, that's all the better.

I just went through all this, and I think the advice above is sound. But even if your ending portfolio value doesn’t change much with or without Roth convesions, there are still good reasons to convert:

• You think tax rates will increase for your bracket at withdrawal time.
• A Roth has advantages for your heirs to inherit.
• The extra income from RMDs of a traditional IRA will push you into higher tax Brackets.
• If one spouse dies, traditional IRA RMDs would push the remaining spouse to a higher bracket.
• Phaseouts and benefits based on AGI and MAGI could push you into a higher bracket with a Traditional IRA.
• More money in a Roth lowers your AGI which may make less of your social security taxable.

 

[pb4uski]

Yup, OP is gonna pay a lot no matter what... convert to top of the 24% bracket and use taxable funds to pay the taxes is a good plan.... however, if the tIRA is growing at then converting $50k a year or so to the top of the 24% bracket is somewhat like a dog chasing it's tail in terms of reducing the tIRA balance.

From 2013-2018, I converted over 30% of my retirement date tIRA balance and at the end of 2018 my tIRA balances were slightly higher than they were the date that I retired.

 

[RetireBy90]

Note that even if due to gains in your TIRA the balance is the same or higher than today, every dollar you convert is one less you have to pay taxes on later. You also get an expense paid today rather than later. I am also converting in 24% bracket with best reason for me being the hit when either DW or I go before the other and tax rates are for single rates for RMDs.

Midpack did lots of thinking and work on this subject recently.

 

[pb4uski]

Yes, I know that the 30% that I converted at ~8% federal tax is a very good thing it is just a bit discouraging that the 30% of conversions hasn't made much of a dent in the balance... a nice problem to have I suppose.

 

[Austin704]

Yup, OP is gonna pay a lot no matter what... convert to top of the 24% bracket and use taxable funds to pay the taxes is a good plan.... however, if the tIRA is growing at then converting $50k a year or so to the top of the 24% bracket is somewhat like a dog chasing it's tail in terms of reducing the tIRA balance.


I noticed that too when I was running the numbers. The account will still be growing and even though I’d be converting $50k per year, it would take something like 15 years to convert the entire account with growth factored in. Which is one reason I hesitated, but I figured better to convert as much as I can as soon as I can. But I don’t relish the thought of paying all this tax so early in retirement...

I did consider perhaps paying the tax from taxable one year, then paying it from the IRA the next, just to lighten the load on my taxable... alternating.

 

[Austin704]

Thanks for all the helpful feedback everyone. I guess the consensus in my scenario is to convert as much as I can up to the top of the 24% bracket. There’s no way to get it all converted before 2026, but I can at least make a sizable dent. This is such difficult decision because electing to pay taxes now on a tax-deferred account is counterintuitive, but it seems to be the financially smart thing to do.

Again, thank you.

 

[googily]

Just chiming in to say that our situations are very similar (though I am still working) and I'm converting into 24% as well. Pensions, SS, inherited IRA, and my own 401k will be a lot of income if I don't get some converted. Or spent. Or both. [emoji16]

 

[Austin704]

Yes, I believe the best way to limit taxes over your lifetime is to spread out income as best you can, and doing Roth conversions during your ER is a great way. Some of us are limited by keeping MAGI low enough to get an ACA subsidy, and to a lesser extent, avoiding IRMAA (medicare adjustment due to higher income). Avoiding RMDs can make even more sense if it helps you avoid the SS hump.

Impossible to say how much you should convert without knowing all of your numbers, but my general rule is to convert up to the top of the tax bracket you expect to be in during retirement. If you can pay income taxes for conversion out of your taxable account, that's all the better.

I’m fortunate to have health care covered by my former employer, it’s complex enough without having to thread the ACA needle. I continue to be impressed with the knowledge of forum members who have more complexity to deal with than I do.

 

[Austin704]

Just chiming in to say that our situations are very similar (though I am still working) and I'm converting into 24% as well. Pensions, SS, inherited IRA, and my own 401k will be a lot of income if I don't get some converted. Or spent. Or both. [emoji16]

Yikes! Yes, it’s a good problem to have, but a problem just the same... Glad to know I’m not alone in this scenario!

 

[RunningBum]

Yes, I know that the 30% that I converted at ~8% federal tax is a very good thing it is just a bit discouraging that the 30% of conversions hasn't made much of a dent in the balance... a nice problem to have I suppose.

Compare the balance today with what it would be without converting. That would be more significant. And it is a good problem to have!

 

[SecondCor521]

I did consider perhaps paying the tax from taxable one year, then paying it from the IRA the next, just to lighten the load on my taxable... alternating.

If you're interested in lightening the load on your taxable, another option to consider would be a modest 72(t) program. Here's what I'm thinking about for my own situation (I'm 50 now):

1. Figure out a low number that I definitely want to have as taxable and spendable income (for example, $10K per year).
2. Use a 72(t) calculator to back into the size of an IRA that would result in that spendable income (using the amortization method and 120% of November AFR means an IRA of approximately $250K).
3. Split my IRA into two: one the size determined by step 2, and the rest in the second.
4. Take $10K from the first IRA each year as a 72(t) withdrawal. Supplement with taxable, Roth contribution withdrawals, whatever.
5. Roth convert from the second IRA each year to the top of whatever bracket (24% in your example). Pay taxes from the taxable.
6. When I hit 59.5, stop taking SEPPs and recombine the two IRAs into one again.

The benefit of this is that it helps to preserve your taxable account (maybe only to pay Roth conversion taxes, but hey, it's something) and avoids 10% early withdrawal penalties.

 

[Austin704]

If you're interested in lightening the load on your taxable, another option to consider would be a modest 72(t) program. Here's what I'm thinking about for my own situation (I'm 50 now):



1. Figure out a low number that I definitely want to have as taxable and spendable income (for example, $10K per year).

2. Use a 72(t) calculator to back into the size of an IRA that would result in that spendable income (using the amortization method and 120% of November AFR means an IRA of approximately $250K).

3. Split my IRA into two: one the size determined by step 2, and the rest in the second.

4. Take $10K from the first IRA each year as a 72(t) withdrawal. Supplement with taxable, Roth contribution withdrawals, whatever.

5. Roth convert from the second IRA each year to the top of whatever bracket (24% in your example). Pay taxes from the taxable.

6. When I hit 59.5, stop taking SEPPs and recombine the two IRAs into one again.



The benefit of this is that it helps to preserve your taxable account (maybe only to pay Roth conversion taxes, but hey, it's something) and avoids 10% early withdrawal penalties.

Thanks for the idea. I’m going to need to dig into that one a bit more. Seems complex but I’m okay with that if it gets the result I’m after. And good luck to you with your plan!

 

[SecondCor521]

The basic point is that if you're willing to do a SEPP (72(t) program), you can use up some of your traditional IRA and preserve some of your taxable if you want to.

The detail was based on an assumption that you're not particularly familiar with 72(t) programs. I could be wrong about that.

 

[pb4uski]

Thanks for the idea. I’m going to need to dig into that one a bit more. Seems complex but I’m okay with that if it gets the result I’m after. And good luck to you with your plan!

Since your non-COLA pension covers your expenses I don't see where a 72t would be of more benefit to you than simple Roth conversions.

 

[Austin704]

The basic point is that if you're willing to do a SEPP (72(t) program), you can use up some of your traditional IRA and preserve some of your taxable if you want to.

The detail was based on an assumption that you're not particularly familiar with 72(t) programs. I could be wrong about that.

Thanks, you’re right. I’m not familiar with that program. Appreciate the detail. One thing I didn’t mention in my OP is that I have a separate employer-sponsored 457 plan that I didn’t roll over to an IRA, that does allow penalty free (but not tax free) distributions before age 59.5 as long as you’re separated from employment. Could be another way to draw down tax-deferred and preserve taxable.

 

[Austin704]

Since your non-COLA pension covers your expenses I don't see where a 72t would be of more benefit to you than simple Roth conversions.

Yes, I’m really looking to keep as much money in tax deferred accounts as possible, while simultaneously minimizing the tax hit—seems like Roth conversions are the way to go, but in my case expensive in the short term. I have enough income from the pension to cover my expenses for quite some time, assuming I don’t get crazy.

 

[rkser]

I want to do more Roth Conversion, upto max 22% Tax Bracket if feasible & keep income below $170k to prevent medicare premium surcharge.

Help me calculate this year projected taxable income, so to get a good idea of how much to convert.

Married filing Jointly, both retired, will be paying Roth Conversion Taxes from Taxable Funds.

Have converted to Roth so far = $ 60k
Total Dividends Projected = $ 65k
Cap Gains LT = $ 4k
Bank CD income projected = $ 10k
__________
$ 139000

Standard Deduction = $24400
Home Property Tax = $ 4500
___________
Deductions =$ 28900

Taxable Income = !39000 minus 28900 = $110100

No Mortgage
No Student Loan
No Debt
No Dependents

Projected Tax Exempt Tax = $32000

MAGI = 110100 + 32000 = $ 142100

$168400 (22% max) minus-110100 = $58300

Do I have room of approximately $58000 to convert into Roth ?

Where am I going wrong ?

- If I buy 2019 Turbo Tax Premier CD (1st time user) now, will I have access to a CPA starting now ??

Thanks in advance

 

[RetireBy90]

I believe your figures for deductions should be only standard $24,000 without adding in the mortgage.

 

[RetireBy90]

That would leave about $53,000 for conversion. However I’m doing same math right now and will leave about $5K room for anything I forgot to include as income.

 

[rkser]

"I believe your figures for deductions should be only standard $24,000 without adding in the mortgage."

There is no mortgage to be paid,
The $4500 is the property Tax Which I thought was deductible.

 

[SecondCor521]

"I believe your figures for deductions should be only standard $24,000 without adding in the mortgage."

There is no mortgage to be paid,
The $4500 is the property Tax Which I thought was deductible.

It usually is, but only if you itemize. Normally people only itemize if the total of their itemized deductions exceed the standard deduction. So since your $4,500 is less than the $24,400 standard deduction, you wouldn't itemize (usually) and would just take the standard deduction. So it's sort of an either/or kind of thing.

See IRS instructions for Schedule A.