Roth Conversions in 24% Bracket??

[txtig]

I’m trying to figure out if Roth conversions would make sense for us. A few facts about our situation:

Filing status: Married, filing jointly

Age 68 (so, a few years away from RMD’s)

I expect that our AGI will be slightly into the 24% bracket, for at least the next few years, without any conversions. So, lots of room to convert up to the top of the 24% bracket.

Currently retired. No W2 income. Income sources are IRA distributions, SS, DW’s smallish teacher pension and dividends.

Most of our nest egg (> $4 million, approx. 90% of total investable assets) is in taxable IRA accounts.

I’m estimating that RMD’s will push us into the 32% bracket within 10 years.

Not sure if I would be better off keeping our taxes at a minimum now (no conversions), and taking the tax hit later once RMD’s force us into a higher bracket. Or, take the hit now (start making conversions), and delay getting pushed into a higher bracket.

I guess I should also consider the possibility/probability of the new administration increasing marginal tax rates in the near future.

 

[30yeardraw]

Try https://www.i-orp.com/Plans/extended.html

You have the option of unlimited or 24% bracket.

Using it myself the tool will have me start drawing out of the Roth around RMD.

 

[pb4uski]

So if I understand your OP correctly, it is a question of paying 24% voluntarily now or 32% later when withdrawals are required... correct?

If so, I think the answer is obvious.

The 2017 Tax Act only reduced individual tax rates until 2025, unless Congress acts to make those tax cuts permanent, they will automatically increase in 2026. So add in the strong likelihood that the 2017 Tax Act personal tax cuts may not be made permanent which would result in higher tax rates beginning in 2026 and that if one or the other of you dies the surviving spouse would likely be in a much higher tax bracket, I think it is an easy decision.

P.S. Where you say "taxable IRA accounts" do you really mean tax-deferred IRA accounts?

 

[txtig]

P.S. Where you say "taxable IRA accounts" do you really mean tax-deferred IRA accounts?

That is correct.

And . . . thanks for the input.

 

[RunningBum]

A few reasons you might not want to convert:

• The marginal tax on converting more might actually be more than 24%. Examples would be pushing more dividends or social security into being taxed. At 24% I'm pretty certain all of your QDivs and LTCGs are being taxed. You probably also are fully taxed (to 85%) on your SS benefits. I mention this mostly for the benefit of anyone else in a similar situation but less income.
• If you wish to optimize for heirs, they might be in a lower tax bracket, so letting them withdraw from the tIRA at their rate might be better than converting at yours, especially if you don't see a long life remaining for you two. You would almost certainly need multiple heirs for this to be better since they have to liquidate the inherited IRA within 10 years.
• If you see yourself donating your RMD vs QCDs then you should leave at least as much in the tIRA as you want to donate.
• You may also think that tax rates will be reduced in the future, but that seems unlikely.
• If you will be moving from a state with high taxes to one with low or no taxes, that could change the math. Consider all income taxes, not just federal.

Reasons to convert:

• 24% now vs 32% later clearly favors converting now and letting the money grow tax free in a Roth.
• A surviving spouse will be in a single tax status (at least at first?) and would be paying taxes at an even higher rate, or at least more at the 32% rate.
• Increasing future tax rates, which is set to happen in 2026 unless congress acts to change. Or as you say they may even choose to raise taxes sooner.

People seem to have a thing against paying taxes before they have to, even if the math says they should. Run a spreadsheet if you're not convinced.



And keep in mind that you CANNOT access that money in the tIRA until you pay the taxes! It's not all your money. The govt let you defer it but they still get their share eventually. Once it's withdrawn to your taxable account, or converted to a Roth (subject to the 5 yr rule) it becomes all yours to spend. My mindset is to get rid of that tax liability, where it makes mathematical/financial sense.

 

[NgineER]

At one point one of you will most likely be filing as a single taxpayer unfortunately, and then it is even more penalizing. I know it is morbid to think that way but if you are looking to minimize impact of taxes that should be considered as well.

I see RunningBum beat me to it.

 

[Montecfo]

RunningBum it sounds like you have "evolved" on this issue?

Didn't you once advocate conversion even into higher brackets under the logic those taxes had to get paid at some point?

 

[davebarnes]

You should convert.
Especially if you have heirs.
We are poors with only $1.9M ($1.4M in tIRAs) and we are converting.
About $200K/year.
Pushes up into 24% federal bracket.
Messes with IRMAA.
Is life.
And, you know Congress will "reform" the tax code at least once a decade.

 

[Whisper66]

For what it's worth, wife and I are in a similar position as yourself and have been converting to the max of the 24% bracket. Our reasons are those stated by others:


(1) Our savings in tax deferred IRA's are enough that we need to convert quite a bit to optimize taxes over our life times (https://i-orp.com/Plans/extended.html used to get a feel for this).

(2) We expect tax rates to go up in the near future and we really don't expect rates like this again in our lifetimes.


(3) When one of us dies, the tax impact on any income (or conversions) will be much worse.

(4) It is highly likely that much of this money will be inherited by our kids. We expect they won't be able to close out the IRA's in the required 10 yrs at less than a 24% tax rate.

 

[Dash man]

We’re in a similar boat at age 64 with $2.5M in tax deferred accounts. This past year we converted a bit into the 32% bracket. We’re planning to the top of the 24% for the next few years. We’ll rethink it when we see what remains when we start social security at 70. I did an estimated income forecast with a conservative 3% growth in investments, and it looks best to keep converting.

 

[txtig]

Thanks to all of you for all of the responses. I was already leaning toward conversion up to the top of the 24% bracket, and your input has kind of confirmed that for me. I’ve been anticipating higher tax rates as several of you mentioned, but I didn’t really appreciate the impact of the possibility that one of us could be filing as single. That could be a major impact. Thanks again for the feedback.

 

[RunningBum]

RunningBum it sounds like you have "evolved" on this issue?

Didn't you once advocate conversion even into higher brackets under the logic those taxes had to get paid at some point?

I don't think so. Can you recall when, or show me a post?

Closest I can think of is people who talked about a "break even" point for conversions, where they claim you don't come out ahead until you personally in your lifetime would be paying fewer taxes by converting. They didn't care what their heirs paid. My contention is that if you died with money left in a tIRA that someone was still going to have to pay the taxes, so there really is no break even point, and I probably included the point about not being able to access the money until you paid taxes. Does that sound like it? That wasn't about converting into higher brackets, it was just not worrying at all about some perceived break even point. I haven't changed my position if this was what you were thinking of.

It's also possible I just wrote some post with backwards logic but if someone corrected me I would've accepted that.

 

[CardsFan]

I’m trying to figure out if Roth conversions would make sense for us.

Most of our nest egg (> $4 million, approx. 90% of total investable assets) is in taxable IRA accounts.

Here is the thing. With that kind of tIRA there is no way you can realistically make a dent in it in 4 years. Would I convert, yes, but only for inheritance purposes.

No matter what you do, when you hit 72, you will have high taxes and IRMAA for the rest of your retirement years.

Don't take that as a negative. It means you most likely will have a very successful (though well taxed) retirement.

 

[Montecfo]

I don't think so. Can you recall when, or show me a post?

Closest I can think of is people who talked about a "break even" point for conversions, where they claim you don't come out ahead until you personally in your lifetime would be paying fewer taxes by converting. They didn't care what their heirs paid. My contention is that if you died with money left in a tIRA that someone was still going to have to pay the taxes, so there really is no break even point, and I probably included the point about not being able to access the money until you paid taxes. Does that sound like it? That wasn't about converting into higher brackets, it was just not worrying at all about some perceived break even point. I haven't changed my position if this was what you were thinking of.

It's also possible I just wrote some post with backwards logic but if someone corrected me I would've accepted that.

Just to be clear, I thought you gave a good answer above.

Previously you seemed.to emphasize that a break even point was something you were tired of hearing people talk about, but it is a real concept. And your comments above seem to acknowledge that the rate you are paying matters.

It is very hard to guess at what rate your beneficiaries may pay tax in a very distant future. it is also hard to know what your estate may aggregate at the time of a retiree's death, which retirement planning tools make clear. How much you end up paying in estate taxes also comes into play. Lots of moving parts. Beneficiary taxes are a consideration, but seem to be a very hazy one.

I think these are reasons why folks may prefer to manage in terms of what is known or reasonably knowable. But having said that, I thought you did a good job or laying out the pros and cons in your list above.

 

[2017ish]

Thanks to all of you for all of the responses. I was already leaning toward conversion up to the top of the 24% bracket, and your input has kind of confirmed that for me. I’ve been anticipating higher tax rates as several of you mentioned, but I didn’t really appreciate the impact of the possibility that one of us could be filing as single. That could be a major impact. Thanks again for the feedback.

I'm late, but throw one more into the convert category. When we retired in 2017, we had 170K in Roths, and 4 mill in traditional. We've been converting to top of 24% for all the reasons cited, and still have 3.9 mill in traditional, but now have 1.8 in roths. (roths are 100% equities). Even though we otherwise would have paid no taxes, beginning to wish that we had been more aggressive and converted to top of 32% bracket, and may do so beginning this year.

 

[DawgMan]

Ok, I will offer a contrarian opinion as I will be faced with this dilemma in the near future. First, mathematically, it seems somewhat obvious that the Roth conversions make sense depending upon some of your legacy/gifting goals and the potential strategies you may want (RunningBum alluded too).... BUT, I might suggest one other way to view this...

1) IF you do no Roth conversions and draw your income in the most tax efficient way up until RMDs, and then face the taxes once RMDs hit, can you (and your DW) fund your projected lifestyle thru end of days?
2) Same as 1), except one of you dies first, putting the other in a single tax bracket with higher taxes... can the surviving spouse live comfortably despite the higher taxes?

If so, then one could argue who cares if you pay more in taxes over your lifetime? You accomplished the goal of funding your lifestyle (priority 1 for most of us). Specific legacy goals may require more strategic engineering. Frankly, I expect my kids will by default get a rather large inheritance and if it is mostly in tax deferred accounts that they have to withdrawal in 10 yrs that pushes them into a higher tax bracket... well, I hope they can pay their bills!

Like most here, I am wired to "maximize" and hate to give the tax man more than I have too. I will have a big RMD issue as well that I wrestle with and will probably do some Roth conversions, but at the same time, my numbers work with or without, which sometimes gets me scratching my head and wondering should I care?

Just another perspective...

 

[street]

Very interesting topic every time one of these comes up. I do beleive there has been some numbers run before from some here that not converting any money from 401K or pension lump sums and waiting till RMD time. That you actually do about the same or leaving till RMD and pay the higher bracket is some what better for the numbers.

Does anyone have the numbers to confirm that? I may have not remembered it correctly or translated what was discussed wrong also.

 

[Dtail]

Ok, I will offer a contrarian opinion as I will be faced with this dilemma in the near future. First, mathematically, it seems somewhat obvious that the Roth conversions make sense depending upon some of your legacy/gifting goals and the potential strategies you may want (RunningBum alluded too).... BUT, I might suggest one other way to view this...

1) IF you do no Roth conversions and draw your income in the most tax efficient way up until RMDs, and then face the taxes once RMDs hit, can you (and your DW) fund your projected lifestyle thru end of days?
2) Same as 1), except one of you dies first, putting the other in a single tax bracket with higher taxes... can the surviving spouse live comfortably despite the higher taxes?

If so, then one could argue who cares if you pay more in taxes over your lifetime? You accomplished the goal of funding your lifestyle (priority 1 for most of us). Specific legacy goals may require more strategic engineering. Frankly, I expect my kids will by default get a rather large inheritance and if it is mostly in tax deferred accounts that they have to withdrawal in 10 yrs that pushes them into a higher tax bracket... well, I hope they can pay their bills!

Like most here, I am wired to "maximize" and hate to give the tax man more than I have too. I will have a big RMD issue as well that I wrestle with and will probably do some Roth conversions, but at the same time, my numbers work with or without, which sometimes gets me scratching my head and wondering should I care?

Just another perspective...

Understand this perspective, but still think why pay more taxes than one has to.
The concept of Roth conversions is fairly straightforward and doesn't require that much planning, ONCE one calculates the proper bracket to convert into.

As another example, managing MAGI for ACA subsidies requires more planning in many cases and might not be worth the time to the folks that can possibly do so.

 

[DawgMan]

Understand this perspective, but still think why pay more taxes than one has to.

True dat! BUT, while we only know what we know today and most of us think tax rates will be higher in the future, what's to say we don't have another pro-low tax president in the White House 16 yrs from now (when I start my RMDs).

None the less, I hear ya

 

[Dtail]

True dat! BUT, while we only know what we know today and most of us think tax rates will be higher in the future, what's to say we don't have another pro-low tax president in the White House 16 yrs from now (when I start my RMDs).

None the less, I hear ya

Haha, I hear you too Dawgman.
Curious if you felt rates would stay the same in the future, but the RMD's still push you into a higher bracket, would your thoughts change?

 

[DawgMan]

Haha, I hear you too Dawgman.
Curious if you felt rates would stay the same in the future, but the RMD's still push you into a higher bracket, would your thoughts change?

I suppose in my case my after tax investments will fund me to/beyond RMDs (assuming conservative positive average returns) any my tax liability looks very small during this period. I kinda like that! Of course, that makes an argument for Roth conversation s too. I just happen to like how my low tax liability looks on a spreadsheet for the first 15 yrs... makes me happy! ? As soon as I run Big Roth conversions, my spreadsheet makes me ?

 

[donheff]

Every time I read one of these threads I get irritated at myself for not paying attention a decade or more ago.

 

[pb4uski]

Ok, I will offer a contrarian opinion as I will be faced with this dilemma in the near future. First, mathematically, it seems somewhat obvious that the Roth conversions make sense depending upon some of your legacy/gifting goals and the potential strategies you may want (RunningBum alluded too).... BUT, I might suggest one other way to view this...

1) IF you do no Roth conversions and draw your income in the most tax efficient way up until RMDs, and then face the taxes once RMDs hit, can you (and your DW) fund your projected lifestyle thru end of days?
2) Same as 1), except one of you dies first, putting the other in a single tax bracket with higher taxes... can the surviving spouse live comfortably despite the higher taxes?

If so, then one could argue who cares if you pay more in taxes over your lifetime? You accomplished the goal of funding your lifestyle (priority 1 for most of us). Specific legacy goals may require more strategic engineering. Frankly, I expect my kids will by default get a rather large inheritance and if it is mostly in tax deferred accounts that they have to withdrawal in 10 yrs that pushes them into a higher tax bracket... well, I hope they can pay their bills!

Like most here, I am wired to "maximize" and hate to give the tax man more than I have too. I will have a big RMD issue as well that I wrestle with and will probably do some Roth conversions, but at the same time, my numbers work with or without, which sometimes gets me scratching my head and wondering should I care?

Just another perspective...

I read this as I have plenty so if I suboptimize on taxes then no worries since I still have plenty. And in a sense you have a point. My view is that improving on that is very easy to do and at the end of days will result in more for my heirs and charities and I would rather that they get it over the federal government, so I'll continue Roth conversions.

But you make a good point for me that while I want to optimize, there is no real need to squeeze every nickel out of the opportunity.

 

[rkser]

A similar situation with us - $1.8 m odd in Tax Deferred.
I converted to the top of 24% in 2020, & plan to do the same going forward.

I wish there was a easier software to help project optimal Roth Conversions, I find i-orp difficult to make any sense of.

 

[CardsFan]

I read this as I have plenty so if I suboptimize on taxes then no worries since I still have plenty. And in a sense you have a point. My view is that improving on that is very easy to do and at the end of days will result in more for my heirs and charities and I would rather that they get it over the federal government, so I'll continue Roth conversions.

But you make a good point for me that while I want to optimize, there is no real need to squeeze every nickel out of the opportunity.

A similar situation with us - $1.8 m odd in Tax Deferred.
I converted to the top of 24% in 2020, & plan to do the same going forward.

I wish there was a easier software to help project optimal Roth Conversions, I find i-orp difficult to make any sense of.

Let's be honest with ourselves. Any plan any of us use is suboptimal, unless you have a crystal ball for things like date of death, future tax rates for you, future tax rates for heirs, etc.

That said, what we CAN do is take steps lower the tax bite, and to play the odds on what the future might bring.

So, since no plan is perfect, as said by pb4uski, I don't sweat the details to "squeeze out every nickel".

Or, as said years ago, I don't squeeze the nickel until the buffalo sh$ts.