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

[Winemaker]

You aren't missing anything. People are focusing on a trivial issue and just bitching.

Whether we're bitching or focusing on a trivial issue, I like to cut costs if and when I can. Yes, I paid $990/month each for the DW and I for the past 9 years, but why pay 1.4 or 2 times the basic premium plus the IRMAA charges if I can avoid it. Look what twisting folks do to get Obamacare subsidies.

 

[Koolau]

Help me understand this “avoid higher IRMAA” comment. Yes your Medicare premiums go up as your income goes up due to things like IRA conversions, but it’s peanuts, right. Base Individual Part B monthly is $174.70 for 2024 ($2,096/yr). Part D = $31.50/month. That is for individuals making up to $129k/married $258k (like 98% of us). Even if your income jumps to $500k/$750k, your IRMAA premiums go to $419 (part b, $5k annual) and $76 (part D). My point: who cares what happens to IRMAA premiums? It’s a nothing compared to other tax issues. I always hear people complaining that their IRMAA premiums go up. What am I missing?!

You aren't missing anything. People are focusing on a trivial issue and just bitching.

Even at the highest IRMMA rate the Medicare premium is less than half what we were paying for our post-retirement employer group policy. That was $1000/mo each.


And at the income levels where IRMAA kicks in, the additional premium is just a drop in the bucket.

What one paid before MC is irrelevant. It doesn't enter the calculation. I used to pay for term life insurance. Now I don't. Same situation.


Paying the IRMAA premiums may be worth it for some financial/tax moves. But roughly $2000 "penalty" because of missing by $1 turns out to be about 1% ($2000+/- vs about $206,000.) 1% needs to be considered when making financial changes.

No, not the end of the world, but I would disagree with the "trivial" characterization. It's an amount worth considering when making other tax moves. It may or may not be a deal breaker, but it shouldn't be ignored IMHO. YMMV as always.

 

[jazz4cash]

No disrespect intended but why in the world are you still working?

….and posting on the ER forum?/JK

 

[Exchme]

You aren't missing anything. People are focusing on a trivial issue and just bitching.

Even at the highest IRMMA rate the Medicare premium is less than half what we were paying for our post-retirement employer group policy. That was $1000/mo each.


And at the income levels where IRMAA kicks in, the additional premium is just a drop in the bucket.

If we convert to the top of the 24% bracket and have some qualified dividends, we will pay an extra $11,000 in IRMAA. I guess that's a drop in the bucket for you, but it's real money to us. It's almost 5% extra on the marginal rate above the base tier, it occurs in annoying cliffs, it uses MAGI from two years prior adjusted by unknown future inflation. For us, managing IRMAA tiers is huge in the Roth Conversion calculation.

 

[4legsgood]

If we convert to the top of the 24% bracket and have some qualified dividends, we will pay an extra $11,000 in IRMAA. I guess that's a drop in the bucket for you, but it's real money to us. It's almost 5% extra on the marginal rate above the base tier, it occurs in annoying cliffs, it uses MAGI from two years prior adjusted by unknown future inflation. For us, managing IRMAA tiers is huge in the Roth Conversion calculation.

If your converting to the top of the 24% bracket and additionally have dividends taking you to the max IRMAA level, then you're probably paying a lot in federal taxes st IRMAA isn't the greatest issue. That's what I felt the poster who thought there was too much hand-wringing about IRMAA meant.

 

[Route246]

Not clear as to why the original rate is not a factor. Is it like a sunk cost?

It is financially better but you no longer have any control over what rate you originally deferred the income at. You could have made a serious blunder in deferring income at a 0% tax rate, or a great decision to defer at 39.6%. But that is in the past.

The conversion decision is mostly about the current and future tax rate*. If you are currently in the 12% bracket and expect to later be at 22%, it probably makes sense to convert to the top of 12%. There may be other factors at play, but the original tax rate long ago at time of deferral is not a factor today. You can feel good if you deferred at 39.6% and can convert at a lower 12%, or feel bad because you deferred at 0% and convert at a higher 12%, but neither is a factor in your decision to convert or not.

For those still working and deferring income, or course it is a factor in that decision. But this thread is about conversion, not income deferral.

* Other factors might be expected tax rate of your heirs, impact on ACA subsidy or IRMAA, and other things that I don't want to mention every time. My point is that the original tax rate when income was deferred is not a factor.

 

[pb4uski]

Not clear as to why the original rate is not a factor. Is it like a sunk cost?

Yes, it is like a sunk cost in that it is a past decision that it is too late to do anything about.

It's not relevant to the decision whether to do a Roth conversion or not today.

However it is relevant to your earlier wondering whether or not it was wise to defer that income to begin with. From what you have written it sounds like in your case your tax rate today and in the future is a lot higher than when you deferred that income. If so, in retrospect, deferring that income was not a good decision, but you obviously could not have known that you would be so financially successful back then.

On the other hand, for most people their tax rate when they withdraw that money will be lower than it was when the income was deferred. In my case I deferred at 28% or more but am withdrawing at ~10-18%.

Make sense?

 

[RunningBum]

Yes, it is like a sunk cost in that it is a past decision that it is too late to do anything about.

It's not relevant to the decision whether to do a Roth conversion or not today.

However it is relevant to your earlier wondering whether or not it was wise to defer that income to begin with. From what you have written it sounds like in your case your tax rate today and in the future is a lot higher than when you deferred that income. If so, in retrospect, deferring that income was not a good decision, but you obviously could not have known that you would be so financially successful back then.

On the other hand, for most people their tax rate when they withdraw that money will be lower than it was when the incoem was deferred.

Make sense?

Good, pb4 gave a great answer so I didn't have to write all that. Agree with everything here.

 

[Retch The Grate]

….and posting on the ER forum?/JK

Not the person this was responding to, but since I've been beating this drum for almost 30 years now (WTF??) for some of us, the FI component of FIRE is the important part, not the RE.

 

[Sunset]

Not the person this was responding to, but since I've been beating this drum for almost 30 years now (WTF??) for some of us, the FI component of FIRE is the important part, not the RE.

+1
Otherwise it's just a break from work since it won't last.

 

[Exchme]

If your converting to the top of the 24% bracket and additionally have dividends taking you to the max IRMAA level, then you're probably paying a lot in federal taxes st IRMAA isn't the greatest issue. That's what I felt the poster who thought there was too much hand-wringing about IRMAA meant.

I am just as incentivized to minimize my taxes as folks with less money and folks with more money.

Folks that are always going to be in the base IRMAA tier or folks that are always going to be in the maximum tier can ignore the IRMAA issue. But for the those of us in the middle, it's a real thorn and can drive the planning.

For instance, we've done Roth Conversions to the top of the 24% in 2021 and 2022 because neither of us were Medicare age in 2023 or 2024. We did a little less (top of the 3rd tier) in 2023 because I will be on Medicare in 2025. We do all this because careful study showed it was a good bet as a way to duck some IRMAA costs in the future.

 

[RunningBum]

+1
Otherwise it's just a break from work since it won't last.

You two must be looking for the independent-financially.org forums.

 

[RetireBy90]

We have done conversions for couple years now, but always considered the total cost to include taxes and the IRMAA. My figures show breaching first level would cost about $4K using 2023 or 2024 schedule. $4K May be a number of importance to you or not so much. We actually paid higher IRMAA for 2 years so that I could convert to my goal and from 2023 and going forward we shouldn’t be subject to IRMAA even with RMDs.
I’m interested and have been educated by the discussions of how to think about these issues.

ETA: FI has always been my number 1 goal. RE is only a choice after FI for me.

 

[Flyfish1]

We are not planning on any conversions as the math doesn't make sense in our case. My old FA was in favor of them. I would rather let the money grow and maximize spending in the first decade or two of retirement. Not worried about taxes or RMD's. My 2 cents.

 

[rayvt]

On the other hand, for most people their tax rate when they withdraw that money will be lower than it was when the income was deferred. In my case I deferred at 28% or more but am withdrawing at ~10-18%.

Well, you are not withdrawing as 10%-18%. You are withdrawing at your marginal rate, with is 12% or 22%.

Buy anyway, early in retirement I used to think the same thing, and was pleased at how low our tax rate was. But a few years later things switched. Since we were Early Retired & Financial Independent our income had steadily and rapidly grown and now we are bumping up against 22%-24% and hitting IRMAA.

 

[pb4uski]

Well, you are not withdrawing as 10%-18%. You are withdrawing at your marginal rate, with is 12% or 22%. ...

Ray, you are not considering that the conversion is not necessarily all at a single rate.

My 2023 conversion was taxed at 11.5%, a combination of some at 10% and some at 12% because the conversion was enough to shift my marginal rate from 10% to 12%.

The 18% is because I project that after I have started my SS and when I am subject to RMDs that a small portion of the RMD will be at 12% and the remainder at 22% (based on current tax brackets) but the effective rate on the RMD (increase in tax caused by RMD divided by RMD) is ~18%.

So I'll amend the 10%-18% to 11.5% -18%. Happy?

 

[SevenUp]

Ray, you are not considering that the conversion is not necessarily all at a single rate.

My 2023 conversion was taxed at 11.5%, a combination of some at 10% and some at 12% because the conversion was enough to shift my marginal rate from 10% to 12%.

The 18% is because I project that after I have started my SS and when I am subject to RMDs that a small portion of the RMD will be at 12% and the remainder at 22% (based on current tax brackets) but the effective rate on the RMD (increase in tax caused by RMD divided by RMD) is ~18%.

If your conversion now decreases your RMD, then you have two sets of dollar amounts (assuming you don't decrease the RMD so much that none of it is taxed at 22%):
1) The amount converted at 10% that will save 22% on the decreased RMD
2) The amount converted at 12% that will save 22% on the decreased RMD.

You wouldn't want to convert more at 22% if that would decrease your RMD so much that the whole RMD is taxed at 12%, even if the effective rate on your conversion is lower than the effective rate on the RMD reduction.

 

[pb4uski]

^^^ Perhaps I wan't clear enough... I'm only converting to the top of the 12% tax bracket... none at the 22% tax bracket.

And I agree on the second part... if I over convert too much I would be paying 22% today to avoid paying 12% later and that would be unwise.

 

[LateToFIRE]

Not the person this was responding to, but since I've been beating this drum for almost 30 years now (WTF??) for some of us, the FI component of FIRE is the important part, not the RE.

Lol, well that's certainly been the case for me - the FI part is what has made all the stress tolerable - knowing that I was doing it for the fun part and not feeling trapped. I happen to truly enjoy my work (mostly), buuuutt I don't want to die in my office (actually know someone that literally dropped dead in their office in his 50's). And DW insists she wants to spend more time with me (for reasons unknown), so stay tuned for the RE part.

 

[SevenUp]

^^^ Perhaps I wan't clear enough... I'm only converting to the top of the 12% tax bracket... none at the 22% tax bracket.

And I agree on the second part... if I over convert too much I would be paying 22% today to avoid paying 12% later and that would be unwise.

Understood.

Rather than looking at effective rates, it is useful to look at the marginal rates for the different amounts. For example, if one were to
* Pay 10% and save 22% = Great!
* Pay 12% and save 22% = Great!
* Pay 22% and save 22% = A wash if tax paid from the conversion; slightly favorable if tax paid from other income.
* Pay 22% and save 12% = Bad.

That last line might seem "intuitively obvious" but if one looks only at the effective rate for the entire conversion vs. the effect rate on the RMD reduction, one might think (assuming effective rate X% < effective rate Y%)
* Pay X% and save Y% = Great!

 

[SecondCor521]

Ray, you are not considering that the conversion is not necessarily all at a single rate.

My 2023 conversion was taxed at 11.5%, a combination of some at 10% and some at 12% because the conversion was enough to shift my marginal rate from 10% to 12%.

I look at Roth conversions as follows.

I first figure out what my "rate later" is going to be. That fluctuates from year to year as my investments vary in performance and if my plan changes, but let's say it's 22%.

I then conceptually Roth convert $1 at a time, and as long as that incremental dollar is taxed at less than 22%, I keep going.

If I hit a tax hump like the phantom 27% bracket, I look at the dimensions - the height and width of the hump, and the height and width of the subsequent trough to see if swallowing the whole thing makes sense. For example, if I have to convert $1K at 27% but then can convert another $10K at 15%, I would do that because ($1K * 27% + $10K * 15%)/$11K < 22%.

I use the Case Study Spreadsheet and do a pro forma in December each year to figure this out. It seems accurate, and can provide a marginal and cumulative effective rate vs. Roth conversion graph.

This year I'm aiming to end up at 400% of FPL minus $1; probably will be the same for 2024.

 

[Winemaker]

If our current plan continues, and I take SS at 70 (and no cuts), DW and I will receive ~$143k in pension and SS benefits combined. A RMD taken at 72 of a $2.5mil retirement plan is ~$94k. So $237k, puts us squarely in the current 24% bracket. But if I go room temperature in thereabouts, she would be clearly in the 32% as a single tax payer. If rates change in '26, which I doubt, but I gotta plan, puts it at 35%. plus IRMAA and possible NIIT. I know, a nice problem to have.

 

[SecondCor521]

If our current plan continues, and I take SS at 70 (and no cuts), DW and I will receive ~$143k in pension and SS benefits combined. A RMD taken at 72 of a $2.5mil retirement plan is ~$94k. So $237k, puts us squarely in the current 24% bracket. But if I go room temperature in thereabouts, she would be clearly in the 32% as a single tax payer. If rates change in '27, which I doubt, but I gotta plan, puts it at 35%. plus IRMAA and possible NIIT. I know, a nice problem to have.

Rates are scheduled to change 1/1/2026, not 1/1/2027.

 

[Winemaker]

Slip of the finger, I guess. Thanks for note, I corrected my post.

 

[LateToFIRE]

If our current plan continues, and I take SS at 70 (and no cuts), DW and I will receive ~$143k in pension and SS benefits combined. A RMD taken at 72 of a $2.5mil retirement plan is ~$94k. So $237k, puts us squarely in the current 24% bracket. But if I go room temperature in thereabouts, she would be clearly in the 32% as a single tax payer. If rates change in '27, which I doubt, but I gotta plan, puts it at 35%. plus IRMAA and possible NIIT. I know, a nice problem to have.

You raise a good point that's gotten lost in the ongoing debate. Sounds similar to our situation: at point I reach RMD age, SS+pension benefits would be +$100K, RMD on $4M tIRA [projected], which would have gone untouched assuming no Roth Conversions, would be ~$160K and climbing rapidly, putting us at +$260K combined and that's not even counting other pot'l income sources, putting us in the 24% bracket as a couple, 35% as a widow(er).

That being the case, I've tried modeling converting about $400K into Roth over the next several years, which would get my tIRA down to $3M in the comparable timeframe (I'm using bogglehead's RPM model which is quite robust tool for this analysis). I can get the RMD down to $120K (vs $160K), so [if I meet an untimely demise] adjusting SS and my pension goes away, her total income would be ~$200K (vs $260K). So, that could put her at 32% bracket.

So, wondering if I'm buried and DW inherits my tIRA, are the RMD's calc'd differently for her? [seems its calc'd on her life expectancy]

Hard to know if conversions will be worth it (given so many potential variables). I go back to, if its not gonna be a big hassle, then I like hedging my bets a bit and expanding that pot of "tax-free" [i.e. tax prepaid] funds even if the final dollar benefit might be negligible.

As for the past decision to load up the 401k/tIRA's, that was a no-brainer - have been fortunate to reside in or near the top bracket for past 20 years, so already [likely] "won" the tax arbitrage game in that regard. This conversion stuff seems like it's all about collecting those last few bonus points.