Those Who don't/didn't do Roth Conversions

[COcheesehead]

Just an aside. Back when I was working and maxing out all my deferred investment options, I put six figures into a deferred annuity. Similar investment options as almost any other Fidelity account, but with a .25% higher expense. The kicker is there is no RMD. It’s like a double secret IRA.

 

[ERD50]

Originally Posted by street View Post
Not sure you will get a correct answer but an opinion. For some there is only one way and one way only.

If you will be paying taxes once RMDs start and have the opportunity to convert at zero tax earlier and don't do it, it's just the correct answer unless you like paying taxes unnecessarily. No opinion at all. A no brainier.

Math is hard.

Agreed, it's math (and assumptions on future tax rates), not an opinion.

If you can reasonably expect future tax rates to be higher than the conversion tax rate, it probably makes sense to convert. If not, it probably doesn't.

street, are the majority saying there is only one answer, regardless of individual circumstances?

-ERD50

 

[SevenUp]

I'm 57 now. 12% tax bracket. Been doing Roth conversions last few years. I do conversions up till the top of 12% bracket. I'm wondering now , given RMD's wont start for me until age 73 ( before it was age 70) if it still makes sense for me to continue with Roth conversions.

Not enough information given.

If you stop converting now, what do you expect your marginal tax rate to be when you are taking SS and RMDs?

 

[FREE866]

Not enough information given.

If you stop converting now, what do you expect your marginal tax rate to be when you are taking SS and RMDs?

As of now I'm planning to take SS at 67, ten years from now. Marginal rate will still be at 12% .


RMDs wont be required until I'm 75, eighteen years from now. So really hard to determine that as value of account is what RMDs are based upon. But, assuming 7% growth on the traditional IRA ( its 100% equity) for 18 years my marginal tax rate would be 24%.



Does that help?

 

[Jerry1]

Any thoughts?

My thoughts are that converting up to the top of the 12% bracket as long as you can makes sense. There may be individual issues that need to be added to the calculation but to me, 12% tax seems like a good deal in most any situation.

 

[Sunset]

As of now I'm planning to take SS at 67, ten years from now. Marginal rate will still be at 12% .


RMDs wont be required until I'm 75, eighteen years from now. So really hard to determine that as value of account is what RMDs are based upon. But, assuming 7% growth on the traditional IRA ( its 100% equity) for 18 years my marginal tax rate would be 24%.

Does that help?

My view:

Do Roth conversions to the top of the 12% bracket, so you won't jump 2 brackets with RMD's in the future, instead that money will be in the Roth.
Stop when you only have $300K left in IRA, as huge medical costs are deductible and will balance off those RMDs + extra.

 

[SevenUp]

If you stop converting now, what do you expect your marginal tax rate to be when you are taking SS and RMDs?

As of now I'm planning to take SS at 67, ten years from now. Marginal rate will still be at 12%.

Are you sure (even if the tax code remains as is for 2023)? The Taxation of Social Security benefits can cause marginal rates higher than the bracket number.

RMDs wont be required until I'm 75, eighteen years from now. So really hard to determine that as value of account is what RMDs are based upon. But, assuming 7% growth on the traditional IRA ( its 100% equity) for 18 years my marginal tax rate would be 24%.

And depending where in that bracket, RMDs with Medicare IRMAA might make the rate even higher.

You might need a sharper pencil, but conversions at least through the 22% bracket now merit consideration....

 

[FREE866]

Are you sure (even if the tax code remains as is for 2023)? The Taxation of Social Security benefits can cause marginal rates higher than the bracket number.

The calculator I used was this:


https://www.irscalculators.com/tax-calculator

 

[FLSUnFIRE]

I do not plan to do any significant conversions. I had one non-deductable tIRA that was pretty small (one year while still working I realized significant cap gains that made me look "rich" to the IRS that year) that I converted this year mostly to clean up my accounts but as far as moving TSP->IRA->Roth it is not feasible for me as a single guy. After living expenses there is not much headroom in tax thresholds and converting any significant amount would also cost me more taxes now and also boost my MAGI to cost me ACA PTC.

If I was MFJ or thresholds were higher relative to my expenses I would as the numbers make sense wrt saving on taxes but converting $1 or $2K here and there is not worth the hassle for the amount of $ in play.

 

[target2019]

My view:

Do Roth conversions to the top of the 12% bracket, so you won't jump 2 brackets with RMD's in the future, instead that money will be in the Roth.
Stop when you only have $300K left in IRA, as huge medical costs are deductible and will balance off those RMDs + extra.

That is interesting. In the last year of M-I-L life she had huge medical qualified deductions due to long term care facility payments. It more than wiped out the RMDs she needed to take for that year.

I may add that to notes about our investing strategy.

 

[old medic]

How about just some factors that might make you less likely to do conversions:

+Never getting above the 12% bracket
+MFJ with IRA balance below $1M

This describes us. When I 1st found this forum, I truly didn't understand the difference between regular and Roth investments. Then I was planning on doing Roth conversions to "save" on taxes, and our heirs estate. By the time the DW retires we wont have even half a million in 401Ks, but our 2 pensions will be more than enough to support us. Once I get passed ACA we might start pulling money out up to the 22% to do something with.

 

[G-Man]

That is interesting. In the last year of M-I-L life she had huge medical qualified deductions due to long term care facility payments. It more than wiped out the RMDs she needed to take for that year.

I may add that to notes about our investing strategy.

Wow. I did not know Long Term Care cost was tax deductible.

 

[target2019]

Wow. I did not know Long Term Care cost was tax deductible.

Emphasis on *qualified* medical expenses. See https://www.irs.gov/publications/p502

The bill went to over $10,000 per month when she could no longer communicate. Some portion of that (which I forget) was considered to be qualified medical care for a chronically-ill patient in LTC.

 

[Sunset]

With the higher standard deduction medical expenses fell out of favor as most times the standard deduction is higher.
Plus only amounts higher than 7.5% of AGI are allowable.

But if you have really big expenses best to do them in 1 year rather than spread out the cost

However, for many folks, there can be large expenses to accommodate being old which are eligible:
Besides the cost of Medicare, supplemental and part D (these are all eligible)
LTC insurance if paid with non-sheltered money.
Dental, vision.
Altering the house: StairChairs, widen doorways, etc..

 

[EarlyandLate]

I have not and probably won't make the effort to do so. Prior to age 65, I wanted to keep the ACA subsidies, which were pretty substantial and my income from investments put me in the sweet spot for those, with very little headroom. Why I likely will not now that I'm on Medicare? My 401k is so bloated (1st world problem) that any Roth conversion I could do and stay in a reasonable tax bracket would only be a blip. I'll have a huge tax bill on my future RMDs and it is pretty unavoidable.

 

[Chuckanut]

Figured I'd just throw this question out here as opposed to starting a brand new thread.


I'm 57 now. 12% tax bracket. Been doing Roth conversions last few years. I do conversions up till the top of 12% bracket. I'm wondering now , given RMD's wont start for me until age 73 ( before it was age 70) if it still makes sense for me to continue with Roth conversions.I really like the idea that I already have 100K in Roth and planned to continue for ~10 years so I really like the idea of possibly having ~500K in tax free money to pull from at age 67+



Any thoughts?

Because of my multiple sources of income, Roth conversions to fill on the 12%bracket were often unavailable to me. Therefore, as one who often was denied boarding on that boat, I encourage others who can catch it to do so.

 

[SecondCor521]

Emphasis on *qualified* medical expenses. See https://www.irs.gov/publications/p502

The bill went to over $10,000 per month when she could no longer communicate. Some portion of that (which I forget) was considered to be qualified medical care for a chronically-ill patient in LTC.

In AARP Tax Aide training, we're regularly taught that in addition to the medical care costs, 100% of room and board while living in a facility where a primary purpose for being there is to receive medical care is also deductible as a medical expense. In my opinion, assisted living and memory care would both qualify, but not independent living in a retirement community. You can read details for yourself in Pub 502.

I do not plan to do any significant conversions. I had one non-deductable tIRA that was pretty small (one year while still working I realized significant cap gains that made me look "rich" to the IRS that year) that I converted this year mostly to clean up my accounts but as far as moving TSP->IRA->Roth it is not feasible for me as a single guy.

If you had other traditional IRA accounts, you may have not followed the pro rata rule properly. Even if a person has multiple IRA accounts, one of which was funded entirely with nondeductible contributions and the others were funded with deductible contributions, that doesn't allow the taxpayer to segregate the basis for purposes of a Roth conversion. The taxpayer is expected to add the account values together and treat the conversion as being pro rated across the nondeductible and deductible contributions. It should say that somewhere in the instructions for Part II of Form 8606.

Right. When the changes were announced like a year ago or whenever that was I thought I had seen age 75 as the start of requiring RMDs but for some reason I couldn’t get confirmation. Thank you for clarifying. Then I’m even more pondering whether Roths still make sense.

I think it's still mostly an arbitrage play between your rate now and your rate at age 75 or 80. Having more time just gives you more flexibility to convert at a lower dollar per year rate - $10K a year rather than $15K a year or whatever - or skip a year if you have an income spike.

 

[SecondCor521]

For families who might be impacted by the reduction in the estate tax exclusion amount in 2026, this article may be relevant: https://www.kitces.com/blog/how-the...th-conversions-to-avoid-federal-estate-taxes/

 

[SevenUp]

Are you sure (even if the tax code remains as is for 2023)? The Taxation of Social Security benefits can cause marginal rates higher than the bracket number.

The calculator I used was this:
https://www.irscalculators.com/tax-calculator

Apparently that calculator merely reports the nominal bracket amount (e.g., 12%) you are in, and not the actual marginal tax rate you are hitting.

As it says in the marginal rate article, "The marginal tax rate is often the same as the individual's tax bracket, but not always."

You could use the tool referenced in both those wiki articles to see your situation quickly, or take the time to increment your conversion amount by $1000 and then divided the change in tax by $1000 to get your marginal rate for that $1000. Repeat over as broad a range as you want....

 

[FREE866]

Apparently that calculator merely reports the nominal bracket amount (e.g., 12%) you are in, and not the actual marginal tax rate you are hitting.

As it says in the marginal rate article, "The marginal tax rate is often the same as the individual's tax bracket, but not always."

You could use the tool referenced in both those wiki articles to see your situation quickly, or take the time to increment your conversion amount by $1000 and then divided the change in tax by $1000 to get your marginal rate for that $1000. Repeat over as broad a range as you want....

But then to the right of "marginal " it has a column for "average"

 

[SevenUp]

Apparently that calculator merely reports the nominal bracket amount (e.g., 12%) you are in, and not the actual marginal tax rate you are hitting.

As it says in the marginal rate article, "The marginal tax rate is often the same as the individual's tax bracket, but not always."

You could use the tool referenced in both those wiki articles to see your situation quickly, or take the time to increment your conversion amount by $1000 and then divided the change in tax by $1000 to get your marginal rate for that $1000. Repeat over as broad a range as you want....

But then to the right of "marginal " it has a column for "average"

True, but using "average" would be even worse for this purpose.

 

[Franklin]

I have not done any conversions because my income will not drop below the highest brackets. I retired at 62 and set up my deferred income to run 10 years out to RMD time. Once the deferred runs out I will evaluate. Therefore there was no reason to pay it in advance. My income 1o years from now will be much lower to match the slow go years. By that time I should be in a lower bracket.

 

[LateToFIRE]

Emphasis on *qualified* medical expenses. See https://www.irs.gov/publications/p502

The bill went to over $10,000 per month when she could no longer communicate. Some portion of that (which I forget) was considered to be qualified medical care for a chronically-ill patient in LTC.

+1

I saw the same thing when I was handling tax filings for MIL.

 

[RunningBum]

I have not and probably won't make the effort to do so. Prior to age 65, I wanted to keep the ACA subsidies, which were pretty substantial and my income from investments put me in the sweet spot for those, with very little headroom. Why I likely will not now that I'm on Medicare? My 401k is so bloated (1st world problem) that any Roth conversion I could do and stay in a reasonable tax bracket would only be a blip. I'll have a huge tax bill on my future RMDs and it is pretty unavoidable.

Have you considered that RMDs and other income may creep you just into the next IRMAA tier? It would be a shame to hit that and realize that a little blip of a Roth conversion in 2023 and years after might have averted that.

 

[Jenna]

No conversions here -- single with pension (retired at 51 over 15 years ago), no heirs, 22% or higher tax bracket. Still a few years away, but RMDs will most likely go to charity.

With all these posts...thinking of changing my name to "Charity"