Up to what bracket should I do Roth Conversions

[pb4uski]

Actually, unless the net tax rate changes, pay-now and pay-later produce exactly the same result. ...

Agree... that's the way the math works... Roth conversions are simply a tax-rate arbitrage play... the tricky part is that the future rate is unknowable, but is reasonably estimable in a lot of cases.

 

[pb4uski]

Then the ideal is that you die with 100% of your money in tIRAs and you bequeath it all to charity.

and in those circumstances Roth conversions are clearly suboptimal because today's rate is known and the rate associated with the money going to charity is 0%, but OTOH if one lives to collect RMDs the rate on those RMDs might exceed the rate paying today.

 

[COcheesehead]

Then the ideal is that you die with 100% of your money in tIRAs and you bequeath it all to charity.

LOL and that might happen.

 

[OldShooter]

... but OTOH ...

Yes. That is the crystal ball problem. I am reminded of Harry Truman wishing he could hire a one-armed economist.

 

[NW-Bound]

Once I realize that SS at 70 and RMD will put me in 24% federal tax bracket, then doing a lot of Roth conversion now is the right thing to do.

When I croak, my wife will be up in the 35% bracket as a single filer. I don't know if Roth conversion can help that.

Well, a market crash will help there. No more money, no more taxes.

 

[TheWizard]

So in addition to deciding how much to Roth convert this year into whatever tax bracket, folks might want to have a plan for how much they expect to have in their Roth IRAs vs tIRAs and other tax-deferred once they are done doing substantial Roth conversions.

For many of us, age 72 and the start of RMDs is a good age to be done making larger conversions.
I'm 72 now and plan to Roth convert just $9000 this year, vs quite a bit more in previous retirement years.

And presently, my Roth IRA is about 33% the size of my tax-deferred account, in nominal dollars. This is just fine for me...

 

[TheWizard]

Once I realize that SS at 70 and RMD will put me in 24% federal tax bracket, then doing a lot of Roth conversion now is the right thing to do.

When I croak, my wife will be up in the 35% bracket as a single filer. I don't know if Roth conversion can help that.

Well, a market crash will help there. No more money, no more taxes.

I don't know what your plans for bequeathing funds to charities or relatives are, but you you could always bequeath a PORTION of your estate upon your demise, rather than 100% to spouse. Something to ponder...

 

[gauss]

Not to mention IRMMA, PTC implications, the five year rule and if your beneficiary will be in lower tax bracket.

FWIW I did originally plan to "convert everything" before reaching my SS age for reasons that you mention.

Given the QCDs, I now plan to keep a few hundred thousand in (traditional) 401k/IRAs to fund charitable contributions for the rest of my life in a tax-free manner.

-gauss

 

[Midpack]

I posted this long ago, but here's a comparison of taxes and RMDs for us with and without Roth conversions. Lifetime taxes are reduced over $342K - and that's assuming the 2017 tax rates remain throughout after TCJA expires - I don't believe that will be the case. I've been aggressively converting since 2019 (as far into 22% as IRMAA Tier 2 allows). YMMV

 

[audreyh1]

Another option with spouse inheriting the IRAs and having to take larger RMDs thus push into a much higher tax bracket: - if it makes sense for estate planning, part or all of the IRAs can be transferred on death to other beneficiaries/heirs. The surviving spouse is not required to inherit all of it if the income is not really needed.

 

[Time2]

No one could give you a meaningful answer based on that little info, but it’s your financial security. The goal is to minimize lifetime Fed and state taxes, and that requires several consequential assumptions. And beyond that, there are other reasons to consider conversions:

• You think tax rates will increase for your bracket at withdrawal time.

I do.

• A Roth has advantages for your heirs to inherit.

I'm not sure, at least one child will be/is in a higher tax bracket, then I'm paying, and could soon be in the 24% bracket.

• The extra income from RMDs of a traditional IRA will push you into higher tax Brackets.

If nothing changes, I'll be in the 22% bracket, although I have a property, that I have a possibility of getting a large gain on, may be an additional $500k, it is a bit pie in the sky, but, I have seen others get $2M in a similar situation. (my property is not quite as valuable.)

• If one spouse dies, traditional IRA RMDs would push the remaining spouse to a higher bracket.

That would be us.

• Phaseouts and benefits based on AGI and MAGI could push you into a higher bracket with a Traditional IRA.

Don't see that, but maybe IRMAA if one spouse dies.

• More money in a Roth lowers your AGI which may make less of your social security taxable.

Yep, should get about $65k in two years.


If taxes are a wash and none of these apply, then you probably don’t have any reason to convert...[/QUOTE]


It seems all have some applicability.

 

[copyright1997reloaded]

Thank you, I didn't know i-orp was back! I spent hours last night playing with it.

i-orp tells me I should really be hitting in on my IRA2Roth, to the tune of 750K this year.

 

[Time2]

I ran a first iteration on I-orp.

My first confusion is it doesn't add in RMDs until I'm 75. I'm 67 yrs and 9 months now, I thought I had to start RMDs at 72.


I thought, maybe I'm on the cusp, so I increased my current age to 68, then it starts my RMDs at 77 yrs old.

 

[Winemaker]

And don't forget the non indexed NIIT 3.8% tax at $250,000 for MJFers.

 

[TheWizard]

i-orp tells me I should really be hitting in on my IRA2Roth, to the tune of 750K this year.

$750k Roth conversion is a freaking LOT.
I would double check that...

 

[copyright1997reloaded]

$750k Roth conversion is a freaking LOT.
I would double check that...

I think it is i-orp's way of telling me to get it over with as soon as possible as when my RMD's plus social security plus pension hit in my 70's, it will be positively painful?

This is with the unlimited conversion option (no artificial limit e.g. 24%). Not filing MFJ, so the brackets are lower.

Keeping the unlimited conversion rate, it does produce lower conversion #'s (i.e. keeping me to the top of the 32% bracket) if I tell it I want to have left over about half of my current estate. This option would likely my my child and other heirs happier, but less spend spend spend for me.

 

[MarieIG]

I ran a first iteration on I-orp.

My first confusion is it doesn't add in RMDs until I'm 75. I'm 67 yrs and 9 months now, I thought I had to start RMDs at 72.


I thought, maybe I'm on the cusp, so I increased my current age to 68, then it starts my RMDs at 77 yrs old.

Yeah, when I first ran it, I got some shocking number when I ran it with an unlimited tax cap. I think I hyperventilated . . .

It improved when I fixed my tax/bond allocation and left it alone, and also put in an amount for the remaining estate.

P.S. - I went back to check, and it did start RMDs for me at 72.

 

[Time2]

I ran a first iteration on I-orp.

My first confusion is it doesn't add in RMDs until I'm 75. I'm 67 yrs and 9 months now, I thought I had to start RMDs at 72.


I thought, maybe I'm on the cusp, so I increased my current age to 68, then it starts my RMDs at 77 yrs old.

Yeah, I got some shocking number when I ran it with an unlimited tax cap. I think I hyperventilated . . .

Maybe I misunderstand, I thought I had to start RMDs at 72, why does it start them at 75 or even 77?

 

[sengsational]

Maybe I misunderstand, I thought I had to start RMDs at 72, why does it start them at 75 or even 77?

When I run it, it's starting at age 72. When you're on a solution page and you download the csv, the intersection of row "72" and column "05_RMD" is zero? Strange, unless your tIRA balance is zero already at that point.

 

[sengsational]

i-orp tells me I should really be hitting in on my IRA2Roth, to the tune of 750K this year.

It can be very aggressive if it "thinks" you'll be in high tax brackets later. I think there's value in comparing unlimited to various limits on conversion; if the level available spend doesn't change too much, you can rest easy that not doing the huge conversion isn't going to be much better than just paying later.

 

[MarieIG]

Maybe I misunderstand, I thought I had to start RMDs at 72, why does it start them at 75 or even 77?

As far as I know, the RDM still starts at 72. I'm not sure why it started yours later if you still had $ in your traditional IRA. I did go back and check, and it did start mine at 72.

 

[pb4uski]

i-orp tells me I should really be hitting in on my IRA2Roth, to the tune of 750K this year.

$750k Roth conversion is a freaking LOT.
I would double check that...

I've always been skeptical of i-orp's advice... seemed to me to advise converting WAY more than I was comforatble converting.

 

[TheWizard]

I've always been skeptical of i-orp's advice... seemed to me to advise converting WAY more than I was comfortable converting.

I don't like Ed Slott's infomercials on PBS either...

 

[MarieIG]

And don't forget the non indexed NIIT 3.8% tax at $250,000 for MJFers.

Nope, didn't forget that for a minute.(I think of it as the NIT-picking tax.)

 

[Exchme]

i-orp tells me I should really be hitting in on my IRA2Roth, to the tune of 750K this year.

You have to be very careful with I-orp or you will get these kind of silly answers.

First - you must enter the same allocation in each type of account. While the program will let you enter other values, the answers are no good unless you use the same in each account. Otherwise, the program simply snoops out which type of account you've told it has the most stocks and favors that unfairly. Since Roth usually has lots of stocks and tax deferred fewer, the increased value is mostly just shifting from a low stock allocation to a high one. This is the most common and dangerous issue that users fall into.

Second, unless you plan to dies with zero, enter a residual estate value. If you plan to spend, say $80K, but have enough assets to spend $150K, then make various guesses on the estate value until it is only spending what you think you will spend. Otherwise the cash flow patterns and Roth Conversions are for the "big spender" case.

Third, realize that its tax package is not super-strong. For instance, it figures IRMAA based on the current year, not a two year loopback, so it may tell you to convert too much at age 63-64 when it doesn't realize you are already subject to IRMAA. It also doesn't see NIIT or other exotic things like AMT. It don't think it knows about the ACA ramp for the next three years either, I don't suppose it's been updated to include that.

I-orp's value is in giving a feel for what's going on and sometimes providing interesting ideas, but folks should come back here and discuss results before they act on it.