Missing any tax consequences (+/-) with tIRA to Roth

[savory]

The goal is to move as much money as possible from my tIRA to my Roth. I am willing to move as much money as I can to get to the top of my tax bracket or perhaps the next. I am requesting feedback to double check that I am doing this with the best process to maximize the tax saving.

Background: Income consists of pension, deferred bonus, DW SS, capital gains, dividends and interest. There are no deductions opportunities except charitable. I have more short term losses than I have short or long term gains for this year.

Plan:

1. Open a Charitable Giving Account covering about a 3 year+ giving period funding it from a taxable account and focusing on large gain stocks. This will provide my only major deduction.
2. Move stocks (vs bonds) from my tIRA into the Roth. Although this may not matter in the short run, I am loading the tIRA with bonds to both slow the growth and keep the right profile in my taxable and Roth accounts.
3. Make sure I capture the $3,000 capital gains loss. (It is my understanding that is all I can capture. I do have more).
4. Pay Uncle Sam before the end of the year for the tIRA income based on my estimated taxes. I plan to do that with cash and not the tIRA or Roth.

Comments/thoughts/suggestions

Thanks

 

[2017ish]

Does this make NIIT an issue for you--and does it matter (Roth conversions not subject to the tax, but will increase your income that determines whether dividends and interest are)?

IRMAA?

 

[SecondCor521]

1. You might investigate if IRA QCDs work better for your giving and tIRA depletion goals.
2. Yup.
3. You can realize more; if you have more than $3K losses in excess of gains, then the remainder will carry over to future years.
4. Yup.

Other thoughts: Consider your tax rate at your age 72 to see how much to convert this year. Try to even out your marginal rate over time.

 

[pb4uski]

I assume that you already itemize deductions? Also, have you adjusted your wife's SS for any non-taxable portion in your calculations?

What I do is start with the top of the target tax bracket, then add deductions, then subtract other sources of income to derive the optimal roth conribution for the year. If your target is the top of the 12% tax bracket then it is better to use the top of the 0% qualified dividends/LTCG bracket.

 

[savory]

Does this make NIIT an issue for you--and does it matter (Roth conversions not subject to the tax, but will increase your income that determines whether dividends and interest are)?

IRMAA?

Thanks, I was not aware of this tax but given my preliminary estimate, I expect it will add cost to my approach unless I change the contribution. Thanks for the heads up.

 

[savory]

I assume that you already itemize deductions? Also, have you adjusted your wife's SS for any non-taxable portion in your calculations?

What I do is start with the top of the target tax bracket, then add deductions, then subtract other sources of income to derive the optimal roth conribution for the year. If your target is the top of the 12% tax bracket then it is better to use the top of the 0% qualified dividends/LTCG bracket.

I haven’t itemized for a few years. But I found an online tax form and filled it out following the same process you suggest. Following that approach I was able to determine my maximum IRA to Roth transfer to stay in my desired tax bracket.Tomorrow, I will view the impact, if any, of the niit. Thanks

 

[Dtail]

1. You might investigate if IRA QCDs work better for your giving and tIRA depletion goals.
2. Yup.
3. You can realize more; if you have more than $3K losses in excess of gains, then the remainder will carry over to future years.
4. Yup.

Other thoughts: Consider your tax rate at your age 72 to see how much to convert this year. Try to even out your marginal rate over time.

Bolded by me - When I play around with the Roth conversions, sometimes I use the projected tax bracket (now at 72 y.o.), but was wondering of folks also try to calculate whether to convert more due to the forced RMD rate effectively going up when 80 y.o. etc.

 

[pb4uski]

I haven’t itemized for a few years. But I found an online tax form and filled it out following the same process you suggest. Following that approach I was able to determine my maximum IRA to Roth transfer to stay in my desired tax bracket.Tomorrow, I will view the impact, if any, of the niit. Thanks

If you don't itemize, then I don't understand the benefit of the Charitable Giving Account piece of your plan.

 

[pb4uski]

Bolded by me - When I play around with the Roth conversions, sometimes I use the projected tax bracket (now at 72 y.o.), but was wondering of folks also try to calculate whether to convert more due to the forced RMD rate effectively going up when 80 y.o. etc.

I have a projection from now until age 90 of projected taxable account interest, my pension, 85% of SS, RMDs and standard deduction to get a taxable income before Roth conversions, tax and effective tax rate (tax/income) for each year. Then I add Roth conversions from now until 71 to levelize my pre-RMD average effective tax rate with my post-RMD average effective tax rate.

 

[Dtail]

I have a projection from now until age 90 of projected taxable account interest, my pension, 85% of SS, RMDs and standard deduction to get a taxable income before Roth conversions, tax and effective tax rate (tax/income) for each year. Then I add Roth conversions from now until 71 to levelize my pre-RMD average effective tax rate with my post-RMD average effective tax rate.

Makes sense.
So if I understand it correctly, your starting expected tax rate at 72 would be lower than the current rate and vice versa at age 90, but the overall average rate would be leveled.

 

[pb4uski]

^^^^ Not sure what you mean.

With no Roth conversions and currently no SS benefits (we haven't started SS yet and are living off of taxable account money) our effective tax rate would be very low... and would increase once I start SS at 70 and further increase once RMDs start.

My Roth conversions are designed to level off the effective tax rate. First graph is effective tax rate with no Roth conversions and the second is with Roth conversions.

ETA: Actually I'm glad that you asked because I didn't have a graph and once I graphed it was able to tweak the annual conversions to levelize it even more.

 

[Gumby]

...
What I do is start with the top of the target tax bracket, then add deductions, then subtract other sources of income to derive the optimal roth conribution for the year. If your target is the top of the 12% tax bracket then it is better to use the top of the 0% qualified dividends/LTCG bracket.

My basic approach as well. Keep in mind, however, that IRMAA and NIIT work on AGI, not taxable income.

 

[Dtail]

^^^^ Not sure what you mean.

With no Roth conversions and currently no SS benefits (we havent' started yet and are living off of taxable account money) our effective tax rate would be very low... and would increase once I start SS at 70 and further increase once RMDs start.

My Roth conversions are designed to level off the effective tax rate. First graph is effective tax rate with Roth conversions and the second is without any Roth conversions.

Let me use an example with made up numbers.
Current tax rate with no Roth conversions is 12%.
Expected tax rate at 72 with no Roth conversions is 24%.
Expected tax rate at 80 with no Roth conversions is 32%.
Average tax rate during RMD period through 95 y.o. is 29%.

So would you convert Roth currently up to 24% or 29% or 32% or some other percentage?

 

[Time2]

^^^^ Not sure what you mean.

With no Roth conversions and currently no SS benefits (we haven't started SS yet and are living off of taxable account money) our effective tax rate would be very low... and would increase once I start SS at 70 and further increase once RMDs start.

My Roth conversions are designed to level off the effective tax rate. First graph is effective tax rate with no Roth conversions and the second is with Roth conversions.

ETA: Actually I'm glad that you asked because I didn't have a graph and once I graphed it was able to tweak the annual conversions to levelize it even more.

I'm confused by this. My plan (but looking for more understanding) is to maximize my Roth Conversions until I'm 72 then Maximize my wife's Roth conversions until she's 72. That will reduce the amount in taxable IRAs and help limit my income when I/we collect SS and have RMDs.

After that I think it's a new ballgame to maximize Roths.


My wife is 4 years younger, so I will maximize Roths for 4 years, then probably split the maximum amount between the two of us.

 

[pb4uski]

What do you mean by maximze? Maximize to what? You could convert it all in one year so I'm not sure what maximize means.

 

[pb4uski]

Let me use an example with made up numbers.
Current tax rate with no Roth conversions is 12%.
Expected tax rate at 72 with no Roth conversions is 24%.
Expected tax rate at 80 with no Roth conversions is 32%.
Average tax rate during RMD period through 95 y.o. is 29%.

So would you convert Roth currently up to 24% or 29% or 32% or some other percentage?

It isn't to the top of a particular tax bracket because for me the "sweet spot" that levelizes our effective tax rate is only ~10% into a tax bracket.

 

[Time2]

What do you mean by maximize? Maximize to what? You could convert it all in one year so I'm not sure what maximize means.

Maximize to the top of the 12% tax bracket for me.
Sorry, details, details.

 

[Montecfo]

It isn't to the top of a particular tax bracket because for me the "sweet spot" that levelizes our effective tax rate is only ~10% into a tax bracket.

Quick sidebar: I understand your basic strategy, but as a defensive tactic, is there some reason you would not take more income currently at whatever your marginal rate is, in order to mitigate the possibility that your gains between now and RMD time are higher than expected?

And to mitigate possible loss of spouse and expected trend of higher tax rates?

 

[RunningBum]

If you don't itemize, then I don't understand the benefit of the Charitable Giving Account piece of your plan.

Right. The only thing you might consider is itemizing one year and doing a bulk donation of appreciated stocks to a DAF or whatever charitable giving account you have that year. Beware that there are limits on how much of a deduction you can take this way, something like only half of your income. It may be even less with stock deductions vs. cash, or maybe it was the other way around.

 

[savory]

A few more facts about me. DW is 70.5 next year. I think it opens an option to move IRA money into a charitable account without penalty, next year. So, now I am thinking I would delay the charitable account transfer from her IRA to next year. (We manage our accounts as one portfolio).

More information: My deferred bonus ends when my SS starts. (I made a mistake having it paid until 72 vs 70 and got lucky when the SS was moved to age 72). SS will be lower in both actual and taxable income vs my deferred bonus. But DW will get increased SS. I am not sure what that amount is right now but I expect not much different than she is receiving today.

I have not done the calculation yet but my thoughts given the very helpful comments is to convert IRA to Roth to the top of my current tax bracket beginning this year. Next year, when DW turns 71.5, she can convert some of her IRA to the charitable fund without any tax consequences. I would continue to convert at a rate that would hold my taxes at or near a steady rate per pb4uski shared and appreciated analysis.

Make sense?

 

[Gotadimple]

Several questions:
So the charitable trust is a charitable remainder trust? Or are you speaking of a Qualified Charitable Distribution?
Your wife is already on Medicare, so any change in your AGI will impact her Medicare Part B premiums, called IRMAA - Medicare looks back at the two most recent tax returns to determine if IRMAA applies. I know you are still researching this, but, the effect is clearly described on the Medicare site. I do conversions limited to just below the IRMAA threshold.

- Rita

 

[SecondCor521]

^^^^ Not sure what you mean.

With no Roth conversions and currently no SS benefits (we haven't started SS yet and are living off of taxable account money) our effective tax rate would be very low... and would increase once I start SS at 70 and further increase once RMDs start.

My Roth conversions are designed to level off the effective tax rate. First graph is effective tax rate with no Roth conversions and the second is with Roth conversions.

ETA: Actually I'm glad that you asked because I didn't have a graph and once I graphed it was able to tweak the annual conversions to levelize it even more.

Sidebar, questions:

1. What do you plan for your tIRA ending balance?

2. Why did you choose "evening out effective tax rate" as your objective function? Currently I am choosing "maximize NPV of after-tax income" where I first take each year and subtract federal income and IRMAA taxes from taxable income, then apply a discount rate of 3% to each of those years (*), then sum those numbers. I then try to maximize that sum by tweaking my "convert to top of X% bracket" number. Clunkier than your approach, but probably close?

(*) To account for me thinking that the value to me of spending a $1 when I'm 60 is more useful than the value of spending $1 when I'm 90.

My graph, with my current strategy (which approximately aligns with staying below 400% FPL while on ACA to age ~65 in ~2034):

 

[pb4uski]

Quick sidebar: I understand your basic strategy, but as a defensive tactic, is there some reason you would not take more income currently at whatever your marginal rate is, in order to mitigate the possibility that your gains between now and RMD time are higher than expected?

And to mitigate possible loss of spouse and expected trend of higher tax rates?

I might well do that. Until 2020 we only converted to the top of the 12% bracket because we were also paying state income tax of 6.6%... so our combined state and federal marginal rate was 18.6%. 2021 will be our first full year free of state income taxes and we expect to be in the 22% bracket once SS starts. Beginning in 2021, we may expand Roth conversions deeper into the 22% bracket from current leveling plan, but we need to be careful in that if we do too much in these early years at 22% it would put us below the top of the 12% tax bracket later on... in effect paying 22% now to avoid 12% later, which would be unwise. For example, if from 2021 until I'm 72 I converted to the top of the base IRMAA tier then we will be below the top of the 12% bracket later on.

Add in possible increases in tax rates just from sunset of current lower rates and the implications to the surviving spouse (be it me or her) and my head starts spinning.

 

[RunningBum]

DW is 70.5 next year. I think it opens an option to move IRA money into a charitable account without penalty, next year. So, now I am thinking I would delay the charitable account transfer from her IRA to next year. (We manage our accounts as one portfolio).

Yes, that's the QCD that was mentioned in post 3.

 

[pb4uski]

Yes, and actually something that I don't have in my plan at this point are QCDs once I am eligible to do them.