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

[Sunset]

It is possible that PERSonalTime has a deal like mine. Part of my retirement package from my final employer is that when I start Medicare in January, my pension will be increased by the amount of Medicare Part B and D payments, including the amount of any IRMAA increase, if I should trigger that. I have always thought of it as a subsidy that allows me to ignore IRMAA thresholds when determining whether I should do Roth conversions.

Hopefully for you they keep it going..

Our small pension, just basically got a big cut as they switched from subsidy cash to: take our medicare advantage plan or nothing.

We are paying for medicare + supplement and don't want a medicare DisAdvantage plan.

 

[Koolau]

It is possible that PERSonalTime has a deal like mine. Part of my retirement package from my final employer is that when I start Medicare in January, my pension will be increased by the amount of Medicare Part B and D payments, including the amount of any IRMAA increase, if I should trigger that. I have always thought of it as a subsidy that allows me to ignore IRMAA thresholds when determining whether I should do Roth conversions.

Sweet! My Megacorp was never that generous.

 

[PERSonalTime]

I don't know what that means. IRMAA is a Medicare Parts B&D surcharge for higher income people. If you don't have enough income to trigger the first tier, you simply aren't charged that extra. That's not a subsidy.

No matter. Do what you want.

Our Part B premiums are employer paid.

 

[PERSonalTime]

It is possible that PERSonalTime has a deal like mine. Part of my retirement package from my final employer is that when I start Medicare in January, my pension will be increased by the amount of Medicare Part B and D payments, including the amount of any IRMAA increase, if I should trigger that. I have always thought of it as a subsidy that allows me to ignore IRMAA thresholds when determining whether I should do Roth conversions.

Exactly.

Thanks Gumby! You’re soooo smart.?

 

[Rianne]

I can see the value of conversions if your pre-RMD / pre-SS income is in the 12% bracket, and you'll be pushed up when those income sources hit.

We plan to use the interest generated from the CDs and treasuries in the tIRA for income. Just as our pension would have been taxed the withdrawals from the tIRA will be taxed and we'll stay in the 12% tax bracket. Since we're controlling the growth of our tIRA and will WD as needed, RMDs won't be a problem. It follows pay now or pay later. Our taxed portion of the portfolio is all LTCG (40%). We can control cashing in the I-bonds as well. The interest on those far exceeds the principal since we bought them in the early 2000s. We'll leave those alone.

 

[thatguy]

I can see the value of conversions if your pre-RMD / pre-SS income is in the 12% bracket, and you'll be pushed up when those income sources hit.

One receiving RMD and SS can have a younger spouse who's RMD & SS is in the future. DW's age 70 SS & RMD will nearly double our income.

 

[bada bing]

Our Part B premiums are employer paid.

Off topic, but I'm curious. Is your premium subsidy open ended ? Or is there a cap on medical reimbursements ?

I have what my former employer calls a RRA = Retiree Reimbursement Account. It has a nominal value based on years of service, money that I can apply to qualified medical expenses, including Part B and D premiums. But it is capped at account value earned while working. I started retirement 3 years ago with ~$120K in credit and I'm down to $90K remaining. I used $30K so far "paying" for retiree medical premiums for the last 3 years. I transition to Medicare in a few months and probably have enough credit remaining to pay part B & D for remaining lifespan. But not if I spend a couple decades paying IRMAA.

It sounds like some here have similar programs, but are they capped or open ended ?

 

[Koolau]

We plan to use the interest generated from the CDs and treasuries in the tIRA for income. Just as our pension would have been taxed the withdrawals from the tIRA will be taxed and we'll stay in the 12% tax bracket. Since we're controlling the growth of our tIRA and will WD as needed, RMDs won't be a problem. It follows pay now or pay later. Our taxed portion of the portfolio is all LTCG (40%). We can control cashing in the I-bonds as well. The interest on those far exceeds the principal since we bought them in the early 2000s. We'll leave those alone.

Yeah, it's nice to be able to control your taxable income. I find that we have less and less control now that we're into RMDs. Also, we are spending a lot more which also takes away some of the control we used to have. We need to start thinking about our I-bonds before they become a tax bomb.

 

[PERSonalTime]

Off topic, but I'm curious. Is your premium subsidy open ended ? Or is there a cap on medical reimbursements ?

I have what my former employer calls a RRA = Retiree Reimbursement Account. It has a nominal value based on years of service, money that I can apply to qualified medical expenses, including Part B and D premiums. But it is capped at account value earned while working. I started retirement 3 years ago with ~$120K in credit and I'm down to $90K remaining. I used $30K so far "paying" for retiree medical premiums for the last 3 years. I transition to Medicare in a few months and probably have enough credit remaining to pay part B & D for remaining lifespan. But not if I spend a couple decades paying IRMAA.

It sounds like some here have similar programs, but are they capped or open ended ?

Luckily for us, it's for our lifetimes. No caps.

 

[Gumby]

Off topic, but I'm curious. Is your premium subsidy open ended ? Or is there a cap on medical reimbursements ?
....
It sounds like some here have similar programs, but are they capped or open ended ?

Mine is open ended. Whatever I pay for Medicare premiums, including any IRMAA, is reimbursed by increasing my pension. And that lasts for life. Of course, I had to contribute 3% of my pay for 10 years to get that benefit, so it was by no means free.

 

[Koolau]

I have what my former employer calls a RRA = Retiree Reimbursement Account.

I think that's what we have. Megacorp used to provide subsidized retiree medical benefits, then switched to an outside provider and once on medicare, provided the equivalent of subsidized medicare supplement. Eventually, Megacorp gave us a yearly amount toward a RRA (I think that's right.) It started around $6K/year and the money went toward virtually any Medicare approved treatment (OOP, Co-pays, premiums (both MC and supplementes)) Megacorp sent us to VIA which helps us each year "shop" for the most appropriate MC supplement insurance.

By the way, the amount we receive has gone up with inflation (I think it's up to about $6500/year each now.) That's just about enough to let us break even most years. YMMV

 

[bada bing]

Off topic, but I'm curious. Is your premium subsidy open ended ? Or is there a cap on medical reimbursements ?

Luckily for us, it's for our lifetimes. No caps.

Mine is open ended. Whatever I pay for Medicare premiums, including any IRMAA, is reimbursed by increasing my pension. And that lasts for life.

I think that's what we have. Megacorp used to provide subsidized retiree medical benefits, then switched to an outside provider and once on medicare, provided the equivalent of subsidized medicare supplement. Eventually, Megacorp gave us a yearly amount toward a RRA (I think that's right.) It started around $6K/year and the money went toward virtually any Medicare approved treatment (OOP, Co-pays, premiums (both MC and supplementes)) Megacorp sent us to VIA which helps us each year "shop" for the most appropriate MC supplement insurance.

All that's interesting - although maybe off topic for the thread. I haven't done any detailed research, but find it interesting that private company Retiree medical programs exist and there isn't much standardization. Seems like the terms are pretty varied.

 

[misanman]

The company I worked for use to pay the supplement cost but froze the amount about the time I retired. Still a nice benefit but gradually shrinking in value as prices go up.

 

[PERSonalTime]

While true, the first question might be, how much do you have in deferred assets? If it's a (relatively) large amount, then the above applies. In our case, if we didn't do aggressive Roth conversions, our RMDs alone would be ridiculously large, especially on top of Soc Sec and "passive income" from dividends, interest, STCGs. Yes, first world problems.

If your deferred assets aren't that much, it won't make much difference regardless, and there's probably no need to analyze further.

How large is ridiculously large?

 

[Rianne]

Our tIRA is all laddered with CDs and treasuries $1M+. We plan to use the interest earned as income. We'll pay taxes in the 12% tax bracket as married filing together over 65. The taxes will go up if one of us passes and puts one of us in the 12-22% tax bracket. But the SS will decrease by about 1/2 if that happens.

 

[PERSonalTime]

Right now my goal is to convert all of DW's tIRA over to a Roth, that will put her close to 7 figures there. She will continue to get my pension, and hers per my unplanned demise. We will then begin to convert/spend my 7 figure tIRA, and she will have close to my 7 figure Roth. At that point, she can defer, donate or whatever.

I think that’s a great plan. I have been thinking about going that route as well. What is your current tax rate? And what do you anticipate your tax rate will be when you get to her RMD?

 

[PatrickA5]

I've started looking at my 2024 possible conversions. For the first time ever, our taxable income will be pretty low. So low, that less than 40% of my SS will be taxed. So, as you guessed, any conversions will cause more of my SS to be taxed. I calculate if I wanted to do $65K of conversions up to the top of the 12% bracket, I'd pay 16.5% in taxes on that money. Ugh.

Once RMDs kick in (8 years), with no more conversions, we'd be right at the top of the 12%, maybe bleeding a tiny bit into the 22%. Tough decision on whether I should do anymore conversions. Thoughts?

 

[pb4uski]

I've started looking at my 2024 possible conversions. For the first time ever, our taxable income will be pretty low. So low, that less than 40% of my SS will be taxed. So, as you guessed, any conversions will cause more of my SS to be taxed. I calculate if I wanted to do $65K of conversions up to the top of the 12% bracket, I'd pay 16.5% in taxes on that money. Ugh.

Once RMDs kick in (8 years), with no more conversions, we'd be right at the top of the 12%, maybe bleeding a tiny bit into the 22%. Tough decision on whether I should do anymore conversions. Thoughts?

Question: is the "Once RMDs kick in (8 years), with no more conversions, we'd be right at the top of the 12%, maybe bleeding a tiny bit into the 22%." with RMDs? So RMDs are being taxed at 12% plus perhaps if RMDs cause more SS to be taxed... or RMDs are on top of the 12% bracket so taxed at 22%?

Also, have you included growth in tIRA balances in your calculations?

In a way, 16.5% isn't horrible. What tax bracket were you in when that income was deferred? 28%?

The basic principle is that if the effective tax rate on conversions now is significantly less than the effective tax rate on conversions later when you have RMDs then do Roth conversions, otherwise don't bother with them.

It sounds like for you it is a push. 16.5% now vs a mix of 12% and 22% later.

 

[PatrickA5]

Question: is the "Once RMDs kick in (8 years), with no more conversions, we'd be right at the top of the 12%, maybe bleeding a tiny bit into the 22%." with RMDs? So RMDs are being taxed at 12% plus perhaps if RMDs cause more SS to be taxed... or RMDs are on top of the 12% bracket so taxed at 22%?

Also, have you included growth in tIRA balances in your calculations?

In a way, 16.5% isn't horrible. What tax bracket were you in when that income was deferred? 28%?

The basic principle is that if the effective tax rate on conversions now is significantly less than the effective tax rate on conversions later when you have RMDs then do Roth conversions, otherwise don't bother with them.

It sounds like for you it is a push. 16.5% now vs a mix of 12% and 22% later.

The income after RMDs begins includes all income (SS, Divvys/Interest from taxable and RMDs. And yes, I've included 5% growth in my tax deferred accounts (assuming no more conversions) and 2% growth in SS. I've also accounted for future bracket and standard deduction increases (also at 2%)

We will be right on the edge of the 12% bracket, with maybe up to $10K at 22% (26%).

We were mainly in the 28% bracket while working with a few years at 31% and a few years at 12/15%.

 

[pb4uski]

^^^ Given that it looks like future Roth conversions are at best a push.

 

[PatrickA5]

Question: is the "Once RMDs kick in (8 years), with no more conversions, we'd be right at the top of the 12%, maybe bleeding a tiny bit into the 22%." with RMDs? So RMDs are being taxed at 12% plus perhaps if RMDs cause more SS to be taxed... or RMDs are on top of the 12% bracket so taxed at 22%?

Also, have you included growth in tIRA balances in your calculations?

In a way, 16.5% isn't horrible. What tax bracket were you in when that income was deferred? 28%?

The basic principle is that if the effective tax rate on conversions now is significantly less than the effective tax rate on conversions later when you have RMDs then do Roth conversions, otherwise don't bother with them.

It sounds like for you it is a push. 16.5% now vs a mix of 12% and 22% later.

Another idea I'm toying with is in early 2025, I could possibly suspend my SS payments for 3 years. Due to an inheritance, we're in a different financial situation than we were a few years ago when I took SS at 62. Not sure I'd want to do that, but it's a possibility that would make the SS moot for a few years.

 

[PatrickA5]

^^^ Given that it looks like future Roth conversions are at best a push.

Agreed. Of course, there's also the tax bump when I die and DW is filing Single. She'll definitely be in a higher bracket.

 

[pb4uski]

I was actually going suggest that before but some people have very strong feelings on when to take SS and I figured that you had your reasons for taking it earlier than FRA or 70.

 

[RunningBum]

I've started looking at my 2024 possible conversions. For the first time ever, our taxable income will be pretty low. So low, that less than 40% of my SS will be taxed. So, as you guessed, any conversions will cause more of my SS to be taxed. I calculate if I wanted to do $65K of conversions up to the top of the 12% bracket, I'd pay 16.5% in taxes on that money. Ugh.

Once RMDs kick in (8 years), with no more conversions, we'd be right at the top of the 12%, maybe bleeding a tiny bit into the 22%. Tough decision on whether I should do anymore conversions. Thoughts?

You could do a smaller conversion, just enough to stay out of your 22% projection.

One of the reasons (along with longevity insurance) I've held off on taking SS is to have more room for conversions, so I like your idea of suspending SS for a few years.

 

[Brat]

I just called Fidelity to discuss IRA conversion. The customer service person said that our RMDs must go to a taxable account and couldn't go to a Roth. Nuts. It has been a while since we did conversions, maybe before RMDs kicked in.