Roth Conversions - Or Not

[Sunset]

If we just knew the date we were going to die, this would all be easy.


I have 5 years before I'm 73 and start RMDs, I have $200k left in tax deferred money. My wife has 9 years before her RMDs and has $300k in tax deferred. We only have 20 months before we will get $60k in SS. With dividends, that leaves little or no room in the 12% bracket and lots of room in the 22% bracket.
We can easily live in the 12% bracket, but if I die first, that will put my wife in the 22% bracket (or higher after the tax cut runs out 2025).
I'm thinking I will continue Roth conversions in the 22% bracket. I'm expecting most of our assets will be left to the kids.
My $200k could be $280k in 5 years (using 7% growth) that would require $10,000 in RMDs the first year, I expect it will grow faster then the RMDs draw it down and the same with my wife's. In 9 years hers could be $550k. At that time I see combined RMDs of $35k plus $22k dividends and $60k SS. With tax bracket creep, we may still be in the 12% bracket. But we have other assets that will add to our net income. So that, and one of us will file single at some point, leads me to believe I still need to Roth in the 22% bracket. (also want it easier for the kids)

I'm not happy going into the 22% bracket, even though our tax deferred has been whittled down, I still think it is a problem, especially if there is only one of us. I know our tax deferred is not huge compared to others, but still think it matters.

Open to other opinions.

If you don't have LTC insurance (that will actually pay), you could consider the IRA funds use if that need arises. Then the withdrawals are largely offset by deductions.
Possibly (I'm not a tax expert) if you needed modifications to the home, just to stay in the home, and a doc agreed. example change a tub to a shower (bathroom remodel).
Finally you can Will/POD/TOD the IRA assets to children/grandchildren, bypassing the spouse who already has lots of assets. Most children and grandchildren are in lower tax rates.

 

[SecondCor521]

FYI, one thing I noticed in handling parents' finances when they required LTC was that the tax deduction for medical expenses sharply reduced their taxable income. Another way of saying, I think the tax hit of future RMD's would likely be less of an issue than you would expect if/when LTC / nursing home / medical expenses are high. It's a factor I have not seen mentioned much.

I was surprised when we moved my Dad from independent living into assisted living that his overall costs went down because of this. His rent went up by quite a bit, but his taxes dropped by 2/3 because of the large itemized medical deductions. The drop in taxes offset the entire increase in rent and then some.

 

[stephenson]

Gah - the math!

I should have started this waaaay earlier - my bad - I was so thrilled with NOT working ... bad excuse, but the only one I have. I would have to make huge conversions for it to make a difference, right?

And, 70 is March 2024, so there is another way $60K/yr bump. Then RMDs start four years later at about $120K/yr. So, by 2026-2027 for sure 32% and maybe even 35% bracket (same bumps with IRMAA).

IRMAA and Tax Brackets, below.

So, I figure I will be in the 24% bracket, and in the 306-366 IRMAA (some profit taking in market) for 2023; in 2022 I was in 22% bracket due to tax loss harvesting. Harder to calculate this way, but it is what it is. I believe will stay in 24%, but if market continues recovery it’s possible I could move to 32% based on capital gains and dividends, and a bit more rental income - IRMAA jumps a category, as well.

I could continue tax lost harvesting and stay in 24% … and convert more?

Our two children will probably not make it into the same brackets as we have ... they are 34 and 39 now.

I hate the idea of giving up on doing this myself and hiring someone, but ….

 

[Dash man]

Gah - the math!



I should have started this waaaay earlier - my bad - I was so thrilled with NOT working ... bad excuse, but the only one I have. I would have to make huge conversions for it to make a difference, right?



And, 70 is March 2024, so there is another way $60K/yr bump. Then RMDs start four years later at about $120K/yr. So, by 2026-2027 for sure 32% and maybe even 35% bracket (same bumps with IRMAA).



IRMAA and Tax Brackets, below.



So, I figure I will be in the 24% bracket, and in the 306-366 IRMAA (some profit taking in market) for 2023; in 2022 I was in 22% bracket due to tax loss harvesting. Harder to calculate this way, but it is what it is. I believe will stay in 24%, but if market continues recovery it’s possible I could move to 32% based on capital gains and dividends, and a bit more rental income - IRMAA jumps a category, as well.



I could continue tax lost harvesting and stay in 24% … and convert more?



Our two children will probably not make it into the same brackets as we have ... they are 34 and 39 now.



I hate the idea of giving up on doing this myself and hiring someone, but ….

If you are charitably inclined, you can alway use QCDs to reduce the RMD amounts. That’s our plan.

 

[RunningBum]

I could continue tax lost harvesting and stay in 24% … and convert more?

Our two children will probably not make it into the same brackets as we have ... they are 34 and 39 now.

I hate the idea of giving up on doing this myself and hiring someone, but ….

I don't think I'd hire someone. When Roth conversions get hard to figure out where the value of converting ends, it probably means it's almost a toss up, and you've really only got this year to do anything significant.

It seems clear you should convert to the top of 24% this year. I'm not sure what you mean by tax loss harvesting letting you convert more, since it offsets cap gains, and only regular income by $3000 if you have no gains left to offset.

Should you convert to the top of 32%? Maybe. It's about $100K more you could convert, for a possible 3% gain. That's $3000 advantage if it's there, or loss if you over convert. For someone to take a close look at your numbers enough to decide, they might charge close to that amount, which loses any advantage. And they might not even do it right.

I'm of the mindset to convert when it's a toss up , especially for married people since if one passes the survivor is now filing single. Plus the higher tax brackets are scheduled to revert back in a couple of years. But there are reasons not to convert, namely your heirs lower tax brackets, using QCDs, and the possibility of being able to write off the income with assisted or memory care. However, at your income level, the first X% percent of income is not deductible for medical expenses, so it may not be that big of an advantage. (I forget what X is.)

So, kind of a toss up, and IMO the tiebreaker is which factor in the preceding paragraph you think is more likely, or more important.

 

[TheWizard]

You posted the IRMAA tiers for this year, 2023.
But your income for 2023, your MAGI, determines your IRMAA tier for 2025, not 2023.

So you should be working with the projected MAGI tiers for 2025 from The Finance Buff...

 

[SecondCor521]

However, at your income level, the first X% percent of income is not deductible for medical expenses, so it may not be that big of an advantage. (I forget what X is.)

X is 7.5% of AGI at all income levels. And then the amount exceeding 7.5% of AGI plus whatever other itemized deductions has to exceed the standard deduction in order to be worthwhile.

 

[fishfactory]

In my situation (everyone is different) filling the 24% bracket with conversions is the sweet spot. The current MFJ top of 24% is about $364k. In 2026 the 25% bracket will be about HALF of that figure.

I agree with Runningbum on not hiring an advisor. I spoke with one and it was obvious I knew more about conversions. He suggested converting the whole account in one yr. More than $2 million. Crazy.

 

[Kings over Queens]

For me, it's not so much the tax benefit today, but rather, the long term effect.

I'd rather starve the government of future tax revenue with the conversion.

If I let the money sit, currently around 1.4 (we are both 56), its going to grow, and we don't need to touch it until RMD's kick in. I hate the thought of all that growth between now and then being taxable.

Cutting nose to spite face?

 

[Time2]

If you are charitably inclined, you can alway use QCDs to reduce the RMD amounts. That’s our plan.

QCDs are recommended often and while giving is nice, most are looking for a way to reduce taxes to have more money, not a way to give away $100 so they don't have to pay $32 in taxes.
I'd rather pass the bulk of my money to my kids.

 

[SecondCor521]

QCDs are recommended often and while giving is nice, most are looking for a way to reduce taxes to have more money, not a way to give away $100 so they don't have to pay $32 in taxes.
I'd rather pass the bulk of my money to my kids.

If one doesn't want to give, then you're right.

If one does want to give, then QCDs are pretty hard to beat financially as a method to do so.

 

[Dash man]

If one doesn't want to give, then you're right.



If one does want to give, then QCDs are pretty hard to beat financially as a method to do so.

Absolutely! We give more each year than we expect our RMDs to be, so QCDs will save us more than contributions to our Donor Advised Fund.

 

[FLJim]

As Yogi said, “The future ain’t what it used to be.” So Social Security was exempt from Federal Income Tax, but now that has changed. The ROTH IRA is currently exempt. How confident are we THAT will not change as well? I am not confident, based on what I've witnessed in Washington, DC over the years. So the best decision about converting may or may not work out. For those of us with more than enough to live on until 'the end', are all the mental and math gymnastics worth it? Not for me.

 

[RunningBum]

As Yogi said, “The future ain’t what it used to be.” So Social Security was exempt from Federal Income Tax, but now that has changed. The ROTH IRA is currently exempt. How confident are we THAT will not change as well? I am not confident, based on what I've witnessed in Washington, DC over the years. So the best decision about converting may or may not work out. For those of us with more than enough to live on until 'the end', are all the mental and math gymnastics worth it? Not for me.

Extremely confident. And if it does, it will be done with notice so that we can all drain our Roths into our taxable accounts the year before it takes effect, so that the only thing we'd lose out on is continued tax free growth. I wouldn't like that, but I don't consider it a reason to avoid Roth contributions or conversions.

Making Roths taxable effectively kills them off. Nobody would contribute to one with after tax money only to be taxed again. It's possible they would terminate Roth IRAs and we'd all have to pull our money out, but I doubt that will happen, nor does it have much impact on past conversions. So I don't know why they would do that since it wouldn't raise much tax revenue at all.

Could they pass a law after Jan 1 that Roth withdrawals are taxable starting with the current year, such that we don't get notice to do a full tax-free withdrawal? I can't say it's impossible, but have you ever seen THAT done?

Of all the reasons to not do Roth conversions, I feel that this holds the least water. You can make your own determination of risk, but a simple withdrawal before the law takes effect should allay any fears.

 

[RetireBy90]

Extremely confident. And if it does, it will be done with notice so that we can all drain our Roths into our taxable accounts the year before it takes effect, so that the only thing we'd lose out on is continued tax free growth. I wouldn't like that, but I don't consider it a reason to avoid Roth contributions or conversions.

Making Roths taxable effectively kills them off. Nobody would contribute to one with after tax money only to be taxed again. It's possible they would terminate Roth IRAs and we'd all have to pull our money out, but I doubt that will happen, nor does it have much impact on past conversions. So I don't know why they would do that since it wouldn't raise much tax revenue at all.

I don’t expect taxing of Rothy’s either, but if they do I could see allowing it to be tax free up to income of some number. Lots of ideas have been about how to get more taxes from “wealthy”. Could even be a deal where all IRA traditional and Roth up to a certain level. I don’t support this or think it is likely, but I one other option.

 

[pb4uski]

...So Social Security was exempt from Federal Income Tax, but now that has changed. The ROTH IRA is currently exempt. How confident are we THAT will not change as well?...

Extremely confident. And if it does, it will be done with notice so that we can all drain our Roths into our taxable accounts the year before it takes effect, so that the only thing we'd lose out on is continued tax free growth. I wouldn't like that, but I don't consider it a reason to avoid Roth contributions or conversions.

Making Roths taxable effectively kills them off. Nobody would contribute to one with after tax money only to be taxed again. It's possible they would terminate Roth IRAs and we'd all have to pull our money out, but I doubt that will happen, nor does it have much impact on past conversions. So I don't know why they would do that since it wouldn't raise much tax revenue at all.

Could they pass a law after Jan 1 that Roth withdrawals are taxable starting with the current year, such that we don't get notice to do a full tax-free withdrawal? I can't say it's impossible, but have you ever seen THAT done?

Of all the reasons to not do Roth conversions, I feel that this holds the least water. You can make your own determination of risk, but a simple withdrawal before the law takes effect should allay any fears.

+2 Never say never but politically is is so unlikely as to not be worthy of consideration.

Also, it is true that SS wasn't taxed for a long time and is now. But the arguments that it should not be taxed are extremely weak. There are similar instruments like contributory pension plan benefits, life annuities, deductible IRA withdrawals and others where growth or interest is taxed but return of principal is tax-free. SS taxation does that in a very broad brush way so it really isn't a good example to use... part of SS probably should have been taxed from the beginning.

 

[Rianne]

Just curious about Roth conversions. We have not done one yet, b/c we were on the ACA with income issues. Now that we're 65, on Medicare, waiting until 70 for SS converting to Roth has finally become a possibility. What are you buying into? Index funds, bonds, other safe investments?

 

[pb4uski]

You can just transfer securities from your tIRA to your Roth as the transfer, so you hold the same securities and what to invest in is a moot issue. Any securities transferred are transferred at fair value on the date of transfer.

Alternatively, sell in tIRA, transfer cash to Roth and buy whateveryou need to in the Roth keeping your target AA in mind.

 

[Out-to-Lunch]

Just curious about Roth conversions. We have not done one yet, b/c we were on the ACA with income issues. Now that we're 65, on Medicare, waiting until 70 for SS converting to Roth has finally become a possibility. What are you buying into? Index funds, bonds, other safe investments?

You are asking about asset location, i.e., which parts of your portfolio to hold in which kinds of accounts. Here is an accessible article on this. In particular, the quoted portion pertains best to your question:


https://obliviousinvestor.com/asset-location-fundamentals-which-investments-to-own-in-which-account/

Asset Location: Roth vs. Tax-Deferred

On the topic of which assets should go in Roth and which should go in tax-deferred, the general principle is that the assets with the highest expected returns should go in Roth accounts. This is because Roth accounts have no RMDs during the original owner’s lifetime, so if you have the choice of allowing one account or the other to grow most quickly, it’s best to have the Roth account growing most quickly.

And a more advanced treatment of the topic:

https://www.bogleheads.org/wiki/Tax-efficient_fund_placement

 

[Rianne]

You can just transfer securities from your tIRA to your Roth as the transfer, so you hold the same securities and what to invest in is a moot issue. Any securities transferred are transferred at fair value on the date of transfer.

Alternatively, sell in tIRA, transfer cash to Roth and buy whateveryou need to in the Roth keeping your target AA in mind.

Can you transfer CDs and treasuries and keep the original interest/coupon?

 

[Morgan22]

Can you transfer CDs and treasuries and keep the original interest/coupon?

Are you 100% fixed income in your tIRA's?
I would think if you have stocks, stock mutual funds, or stock ETF's you would want to convert those to ROTH from your tIRA's. Reason being, stocks have a higher expected return. Let the growth occur in the Roth instead of tIRA's.

 

[RunningBum]

Can you transfer CDs and treasuries and keep the original interest/coupon?

I haven't done that but I think I saw that you could as long as you convert the entire CD/T-Bill/t-note. This is at Vanguard.

 

[Rianne]

I haven't done that but I think I saw that you could as long as you convert the entire CD/T-Bill/t-note. This is at Vanguard.

Great! I’ll double check with the bond desk. We are 100% in CDs, treasuries in our tIRA earning 4-5%. Some are maturing this year. We could also sell from settlement fund then buy in Roth. Our index funds are in after tax growing nicely.

 

[target2019]

Just curious about Roth conversions. We have not done one yet, b/c we were on the ACA with income issues. Now that we're 65, on Medicare, waiting until 70 for SS converting to Roth has finally become a possibility. What are you buying into? Index funds, bonds, other safe investments?

I decided on a simple solution. In my SEP-IRA the largest position is VTSAX - Total US Mkt. After conversion it is added to VTSAX in my Roth-IRA. This is all at Vanguard, so the conversion process is just a few clicks.