SS income vs ROTH conversions

[gooddog]

"would it make sense to do ROTH conversions"

Wasn't part of the new administrations goals to end Roth conversions?

 

[RunningBum]

"would it make sense to do ROTH conversions"

Wasn't part of the new administrations goals to end Roth conversions?

Not that I've heard. Backdoor Roths, yes.

 

[2017ish]

Thanks again to all.... this will take me a while to digest all of it. I have made it this far in life and never had to think about tax brackets... :-( But as people often say: these are good problems to have.

As others have said, both conversions and optimal ss claiming are very situation specific. Like you, we were a 2 professional couple. If things don't change too much on the program, we plan to each do ss at 70.

Until then, we are aggressively converting to Roths. First 3 years, with no other income to speak of, we went to top of 24%. This year, our calculations continued to indicate we should have been more aggressive, so went to top of 32% (we are also living out of the IRA funds now, so the actual amount converted was less). Not fun at all, but we are looking/guessing at the long term. We also invest the Roths 100% in equities, keeping all slower/no growth holdings in the traditional accounts. Between that and more conversions and spending, at some point the Roths should catch up to the deferred accounts.

Truly first world problems, but still worth trying to optimize.

 

[sroby2020]

Also check your Medicare brackets to see if you will pay more due to the Roth conversions increasing your taxable income. There is a 2 year lag for the Medicare rates to come back down after your income decreases.

 

[imnontrad]

I volunteer on a fb page for SS questions.

The current wisdom is for the spouse with the lower benefit to apply for SS first and the higher earner hold out until age 70 (and it will grow in value ~8%/year plus COLAs until then). This not only gives you an income stream but also ensures that after one spouse dies, the surviving spouse will have the highest SS amount possible for the rest of their life.

Consider making a few appointments with a fee-only Certified Financial Planner (CFP) who has at least 10 years experience, specializes in retirement, and is a fiduciary in all respects. This planner will look at your overall situation (investments, insurance, expenses, Social Security, pension, marital status, goals etc.) and can develop a multi-year plan to maximize income AND minimize taxes over your lifetime. This planner will also work to educate you about your options.
This planner does NOT handle your investments or sells you a product (hourly rate only) so there is no incentive to recommend a product based on their commission.

 

[Out of Steam]

Our issue with IRMAA is that, when one of us dies, the survivor will be in the first increase bracket once RMDs add to income. The second is unlikely, but not impossible. I suspect this is a common issue. We're in no danger of hitting the IRMAA minimum jointly.

We're doing some Roth conversions and will make prepayments on our mortgage from retirement savings to close it out before RMDs begin.

 

[targatom2019]

What is a good amount to leave in the IRA ? I got 1.6M in TIRA, low 22% bracket, age 52 and just converted up to mid 24% tax bracket today. I think 22% bracket will go up to 25% in 2026.

 

[Perryinva]

Just a reminder valid for 2021: If your AGI for 2021 thanks to the Roth conversion puts your AGI over $150k for MFJ, you will forfeit the $2800 stimulus check from earlier in the year rebate when filing, IF you didn’t get a check, due to 2019/20 income. I don’t think they take back the amount if you had a direct deposit in March, but others might know better.

I was planning to convert to the first IRMAA level, ($172k) before I realized this, so it doesn’t make sense for me to lose $2800 in order to convert an extra $22k.

I’ve never gotten any stimulus checks, so it would be nice to get the rebate this year.

 

[Exchme]

What is a good amount to leave in the IRA ? I got 1.6M in TIRA, low 22% bracket, age 52 and just converted up to mid 24% tax bracket today. I think 22% bracket will go up to 25% in 2026.

It's not a simple answer. It is affected by many things, a lot of which are unpredictable or personal goals and beliefs. Some relevant items.

Your goals-
-the worst situation for Roth conversions is if you want to give away your money
-if you have heirs you want to maximize the estate for, Roths are much more attractive
- major medical related expenses would be tax deductible, so if you want to reserve money for that possibility, it makes conversions less attractive

Marital status and spouse age-
-if you are married, then when one of you passes, the other will be in the single tax bracket, so Roths will look better to cut back on the taxes while single

Need for ACA coverage -
-The subsidy/premium credit is quite attractive, but if you have enough assets, Roth conversions may be more important, or perhaps you yo-yo Roth conversions up and down so you get the subsidy some years and forego it others.

Belief about future tax brackets/returns -
-you’ve shared that you think the brackets will snap back in 2026, obviously that makes Roths more attractive now
-A low return environment makes Roths less attractive as you may end up owing less taxes than you think or worse yet have to withdraw from the Roth to live.

Financial status-
- Expenses,
- pension if any
- SS amounts & claim age strategy
- asset allocation (it's best to load your tax deferred with your bond holding to slow its growth)
- future lumpy expenses or income (say buying or selling a property, sending a child to college, getting an inheritance)

Ultimately the seat-of-the-pants types will make a seat-of-the-pants answer and analytical types will use a financial modeling program like Pralana Gold and get an analytical answer. Only the actual events in the future can tell us what was "right".

To discuss your situation more in depth, I suggest you start a new thread to minimize thread drift.

 

[sengsational]

Just a reminder valid for 2021: If your AGI for 2021 thanks to the Roth conversion puts your AGI over $150k for MFJ, you will forfeit the $2800 stimulus check from earlier in the year rebate when filing, IF you didn’t get a check, due to 2019/20 income. I don’t think they take back the amount if you had a direct deposit in March, but others might know better.

I was planning to convert to the first IRMAA level, ($172k) before I realized this, so it doesn’t make sense for me to lose $2800 in order to convert an extra $22k.

I’ve never gotten any stimulus checks, so it would be nice to get the rebate this year.

I presume this clawback would be in the tax forms somewhere? I didn't see a bump at 150 MFJ when I ran my pro-forma. I already did my conversion for just under the expected future IRMAA limit, so might get hit by this

 

[RunningBum]

It's not a simple answer. It is affected by many things, a lot of which are unpredictable or personal goals and beliefs. Some relevant items.
...

Great answer, including all of the specifics that I edited out for brevity.

For myself, I think a good amount to leave in the tIRA is $0, if I can get there with tax efficient conversions. If somewhere down the line I have large LTC expenses to deduct, I'll sell from taxable to pay for them and deduct the expenses from the LTCG income. That seems better to me than taking RMDs for years until I might need LTC, especially since I might not ever need it.

 

[Dash man]

Great answer, including all of the specifics that I edited out for brevity.

For myself, I think a good amount to leave in the tIRA is $0, if I can get there with tax efficient conversions. If somewhere down the line I have large LTC expenses to deduct, I'll sell from taxable to pay for them and deduct the expenses from the LTCG income. That seems better to me than taking RMDs for years until I might need LTC, especially since I might not ever need it.

Just make sure whoever you give a PoA to knows that. You may not be able to yourself.

 

[Perryinva]

I don’t know if they do a clawback for a check already received. I get mine as a rebate against FIT due. But yes, one of the forms will ask if you received a stimulus check. If you did not, then it calculates the amount if credit you are due based on your current AGI.

 

[pb4uski]

"would it make sense to do ROTH conversions"

Wasn't part of the new administrations goals to end Roth conversions?

No. Why would they want to defer the collection of tax revenue? Doesn't make sense.

 

[Time2]

The real sweet spot for doing low tax-cost Roth conversions is in the 10% and 12% tax brackets if you'll be in the 22% tax bracket once pensions, SS and RMDs are going.

If you're already in the 22% tax bracket are going then there is a lot less benefit unless your tax deferred accounts are huge. Similarly, if will be in the 12% tax bracket once RMDs are going then there isn't much bang for the buck from Roth conversions, but it doesn't hurt either.

The bolded is good point I had not thought of, although this year I'm going to the top of the 22% with Roth Conversions, as I expect for however many years I live past 72, we will be in at least the 22% bracket and if rates increase, even higher. Hmm, the wife will inherit my IRAs, so she will continue in a high bracket or even go into a higher bracket.

 

[sengsational]

I don’t know if they do a clawback for a check already received. I get mine as a rebate against FIT due. But yes, one of the forms will ask if you received a stimulus check. If you did not, then it calculates the amount if credit you are due based on your current AGI.

It seems unfair if getting the check vs as a rebate against taxes are treated differently. I searched in the Block tax software for "stimulus" and "impact" and didn't get any hits. Maybe they'll update it in January and give me the bad news then.

 

[oldtimer]

The Recovery Rebate Credit (EIP#3) has no clawback. It is like the previous 2 RRCs, if you got the check based on previous year's income, then they let you keep it even if your AGI >150k MFJ for that tax year. But if you did not get a check or only received a partial credit, then keep your 2021 AGI below the limit to receive the remaining portion of the 2021 credit as part of your tax return.

 

[oldtimer]

It seems unfair if getting the check vs as a rebate against taxes are treated differently. I searched in the Block tax software for "stimulus" and "impact" and didn't get any hits. Maybe they'll update it in January and give me the bad news then.

Search for Economic Impact Payment (EIP) or Recovery Rebate Credit.

 

[sengsational]

The Recovery Rebate Credit (EIP#3) has no clawback. It is like the previous 2 RRCs, if you got the check based on previous year's income, then they let you keep it even if your AGI >150k MFJ for that tax year. But if you did not get a check or only received a partial credit, then keep your 2021 AGI below the limit to receive the remaining portion of the 2021 credit as part of your tax return.

Thanks for that clarification. I did get the check, so I'm out of the woods.

 

[rkser]

We too are doing yearly Roth Conversions to the top of 24%, we are retired, I am 65 & DW is 60. I being the higher earner will claim my SS at age 70, & she will claim at 62.

We do not need her SS income for living expenses per se, but as per Open Social Security, 62 is the right age for DW to claim.

 

[Time2]

We too are doing yearly Roth Conversions to the top of 24%, we are retired, I am 65 & DW is 60. I being the higher earner will claim my SS at age 70, & she will claim at 62.

We do not need her SS income for living expenses per se, but as per Open Social Security, 62 is the right age for DW to claim.

We are waiting on SS, because we want all that room for Roth Conversions, if she got her check now, that's just less room for Roths while staying in the same bracket. I'm also waiting until 70 for SS.

 

[Dash man]

After reviewing projections on my spreadsheets and Pralana Gold, it looks like we might push a bit into the 32% bracket for conversions. If we can get our tax deferred accounts low enough before my wife’s SS kicks in and the tax brackets revert to previous rates, we might be able to avoid IRMAA and the higher tax brackets for the rest of our time here. It also allows a longer period of tax free growth in the Roth accounts that will benefit our kids a great deal. Filling only to the top of the 24% bracket may not be enough, especially if one of us passes sooner than we expect.

 

[Out of Steam]

I think 22% bracket will go up to 25% in 2026.

I'm not sure anyone in Congress will want that to happen on their watch, but it will probably be easier to let it happen than to work together to keep it from happening.

In any case, Roth conversions in the 22% bracket look like a decent idea to me.