Since the ACA subsidy cliff has been removed for 2021 and 2022, Roth IRA conversion planning has become more complicated. I'm posting my thoughts here to see if this makes sense and / or am I missing something.
If one makes Roth conversions while keeping taxable income below $80,000 (capital gains 0% bracket), AGI could be $105,000 (with the standard deduction)
Taxes are paid at 12% on the converted dollars.
At that income range, every extra dollar of income loses $0.085 in subsidy, essentially an extra 8.5% tax paid on the conversion.
Adding these two together = 20.5%. If you expect to be in the 22% bracket or higher when traditional IRA withdrawals kick-in, then converting up to this amount makes sense, albeit within a slim margin.
With the unknowns about future tax rates and policy changes, it also makes sense to me to diversify the tax status of one's investments.
Thoughts?
If one makes Roth conversions while keeping taxable income below $80,000 (capital gains 0% bracket), AGI could be $105,000 (with the standard deduction)
Taxes are paid at 12% on the converted dollars.
At that income range, every extra dollar of income loses $0.085 in subsidy, essentially an extra 8.5% tax paid on the conversion.
Adding these two together = 20.5%. If you expect to be in the 22% bracket or higher when traditional IRA withdrawals kick-in, then converting up to this amount makes sense, albeit within a slim margin.
With the unknowns about future tax rates and policy changes, it also makes sense to me to diversify the tax status of one's investments.
Thoughts?