Up to what bracket should I do Roth Conversions

T

Time2

Thinks s/he gets paid by the post
Joined
Oct 3, 2019
Messages
3,687
MFJ, At 72 (I'm 67 now) we expect about $65k in SS, $15k in dividends and interest, and assuming 4% growth over the next 4 years, $52k in RMDs for a total income of $142k. I may be able to reduce the RMDs some over the next 2 years with Roth Conversions, before we take SS. But if the market does even OK, I'll may just stay at about the same level.
If we stay in the 12% bracket, I can convert around $40k each year, If I jump to the 22% it is closer to $135k. But IF, the brackets and rate stay the same I would go about $37k in to the 22% at 72 with RMDs.
Should I continue converting at $40k or jump to $135k, (22% bracket).
Asking for a [-]friend[/-] my kids. :)
 
This question is basically a pay now or pay later. With the way govt debt and spending is going, I am pretty confident that tax rates will not be going down in the future; I believe the current rates will expire in 2025 which will default back to higher rates. So my recommendation is to convert now up to the 22% range. It is also good to do now if you believe in long term market increases, taking advantage of tax free growth in Roth instead of tax delayed growth in pretax accounts. That's my $.02 to add to your savings.
 
You don't need to convert to the top of your chosen bracket.
You might try levelizing your AGI like I did: convert enough the next four years so that your AGI doesn't increase much at age 72 when RMDs start and significant Roth conversions end.

Allow a few percent growth in AGI each year for inflation...
 
No one could give you a meaningful answer based on that little info, but it’s your financial security. The goal is to minimize lifetime Fed and state taxes, and that requires several consequential assumptions. And beyond that, there are other reasons to consider conversions:
  • You think tax rates will increase for your bracket at withdrawal time.
  • A Roth has advantages for your heirs to inherit.
  • The extra income from RMDs of a traditional IRA will push you into higher tax Brackets.
  • If one spouse dies, traditional IRA RMDs would push the remaining spouse to a higher bracket.
  • Phaseouts and benefits based on AGI and MAGI could push you into a higher bracket with a Traditional IRA.
  • More money in a Roth lowers your AGI which may make less of your social security taxable.
If taxes are a wash and none of these apply, then you probably don’t have any reason to convert...
 
In general, my wife’s folks live 10+ years longer than my folks, so I look to her future single tax rate, which is 32% now. So, unless something changes, I plan to convert up to the top of the 24% bracket.
 
latexman said:
In general, my wife’s folks live 10+ years longer than my folks, so I look to her future single tax rate, which is 32% now. So, unless something changes, I plan to convert up to the top of the 24% bracket.
Click to expand...
That's ruffly what I'm doing and I'm not even married.

Normally, I would convert enough in 2022 to get my MAGI up close to but not over the next higher projected IRMAA threshold for 2024.
But things are screwy right now due to inflation adjustments, so I'm going to try to avoid getting into the 32% bracket for 2022...
 
Now that we're 65, have Medicare, and no longer need to keep our MAGI low for ACA, we will be converting in 2023. The question now is what to convert to in the Roth. I'm thinking that with the interest rates where they are, buying 5 yr CDs since you can't use Roth $$ for 5 years anyway. We already have a healthy amount in our Roths.

DH will wait until 70 for SS which will give us room to convert more. The settlement account is paying ~ 3%. Would a strategy be to convert to the settlement account and hope interest rates stay high? Convert more in 2023 because interest rates are high and buy more treasuries or CDs? I don't have much confidence in buying the market.
 
Time2 said:
Should I continue converting at $40k or jump to $135k, (22% bracket).
Click to expand...
As mentioned, there are so many moving parts, it's not possible to answer with impunity. My standard answer is go to i-orp, take the time to really understand all of the inputs (on the extended version), then run with and without Roth conversions. If the delta in the level available spending is small, which is often the case, then it really doesn't matter much what you do with conversions.
 
Time2 said:
MFJ, At 72 (I'm 67 now) we expect about $65k in SS, $15k in dividends and interest, and assuming 4% growth over the next 4 years, $52k in RMDs for a total income of $142k. I may be able to reduce the RMDs some over the next 2 years with Roth Conversions, before we take SS. But if the market does even OK, I'll may just stay at about the same level.
If we stay in the 12% bracket, I can convert around $40k each year, If I jump to the 22% it is closer to $135k. But IF, the brackets and rate stay the same I would go about $37k in to the 22% at 72 with RMDs.
Should I continue converting at $40k or jump to $135k, (22% bracket).
Asking for a [-]friend[/-] my kids. :)
Click to expand...

It sounds like you are projecting that once RMDs start that you'll be in the lower end of the 22% tax bracket, so I would Roth convert only to the top of the 12% tax bracket.
 
If I thought there was a good probability that one of the couple would survive many years longer than the other, I would split the difference and do $87k conversions. Otherwise, I would convert only to the top of the 12% tax bracket.
 
I'm in a very similar situation, wondering if I should start making withdrawals before I have to in five years. I use a rather elaborate spreadsheet to plot my NTW estimate for the next 30 years (my dad lived to 95), and ran a scenario where I withdraw all pre-tax money now. That would result in a mid six figure tax bill this year at the top rate, but strangely, while I take a big hit up front it actually comes out ahead 30 years down the road. The spreadsheet assumes inflation adjusted spending and tax brackets with no increase in tax rates. Not sure if there is an error in my calcs or not.... If I assume tax rates increase (likely with the state of affairs in DC), that "buy it now" option looks even better.
 
Rianne said:
Now that we're 65, have Medicare, and no longer need to keep our MAGI low for ACA, we will be converting in 2023. The question now is what to convert to in the Roth. I'm thinking that with the interest rates where they are, buying 5 yr CDs since you can't use Roth $$ for 5 years anyway. We already have a healthy amount in our Roths.
Click to expand...

It depends what you want the Roth funds for. In our case I consider them transfer funds to our son. So they are invested for the long term in stock funds.
 
38Chevy454 said:
Paying the tax later. Tax delayed
Click to expand...

A lot to be said for that.

RMDs keep getting pushed out.

Opportunity cost of not having the growth of funds used to pay the current tax.

Prepaying in today’s cash for a guess at a future cost…at an inflation reduced level.

I often wonder if the great rush to do Roth conversions turns out to be something we look back at and say that was a mistake.
 
:)
COcheesehead said:
A lot to be said for that.

RMDs keep getting pushed out.

Opportunity cost of not having the growth of funds used to pay the current tax.

Prepaying in today’s cash for a guess at a future cost…at an inflation reduced level.

I often wonder if the great rush to do Roth conversions turns out to be something we look back at and say that was a mistake.
Click to expand...

Another point to counter against "convert everything" is too keep some money in a traditional IRA or traditional 401k for the following:

At age 70 and greater, traditional IRA funds can be donated to charities/churches etc before taxes via Qualified Charitable Contributions (QCDs) as long as specific rules are followed.

QCDs are both similar and different to donor advised funds (DAFs) at the same time.
The similarity is that both of these methods allow contributions to charities/churches with pre-tax money without itemizing (ie taking the Standard Deduction).

I believe that one of the changes in the tax code in recent years made the QCD provisions permanent.:)

-gauss
 
Last edited:
gauss said:
:)

Another point to counter against "convert everything" is too keep some money in a traditional IRA or traditional 401k for the following:

At age 70 and greater, traditional IRA funds can be donated to charities/churches etc before taxes via Qualified Charitable Contributions (QCDs) as long as specific rules are followed.

QCDs are both similar and different to donor advised funds (DAFs) at the same time.
The similarity is that both of these methods allow contributions to charities/churches with pre-tax money without itemizing (ie taking the Standard Deduction).

I believe that one of the changes in the tax code in recent years made the QCD provisions permanent.:)

-gauss
Click to expand...

Not to mention IRMMA, PTC implications, the five year rule and if your beneficiary will be in lower tax bracket.
 
sengsational said:
As mentioned, there are so many moving parts, it's not possible to answer with impunity. My standard answer is go to i-orp, take the time to really understand all of the inputs (on the extended version), then run with and without Roth conversions. If the delta in the level available spending is small, which is often the case, then it really doesn't matter much what you do with conversions.
Click to expand...

Thank you, I didn't know i-orp was back! I spent hours last night playing with it. :LOL:
 
COcheesehead said:
... I often wonder if the great rush to do Roth conversions turns out to be something we look back at and say that was a mistake.
Click to expand...

In our case it is a tradeoff of us paying 12% now vs us or our kids who will inherit that money paying 22% or 25% or more later... so that 10-13%+ difference makes it an easy decision.

If our circumstances were different and it was the difference between paying 22% now vs paying 24% or 28% later then the decision would not be as clearcut.
 
For us it is simple enough. It's 99% certain that a surviving spouse will get bumped from the 12% to the 22%, and all the RMD's would be above that line.
 
38Chevy454 said:
Paying the tax later. Tax delayed
Click to expand...
Actually, unless the net tax rate changes, pay-now and pay-later produce exactly the same result. Here is the gedanken experiment that finally made my understanding of Roth conversions "click:"

Assume a tIRA of $100K, current net tax rate of 30%, future net tax rate of 30%, and portfolio growth of 8%. (The numbers don't really matter but make the experiment clearer IMO.)

So, of the $100K tIRA, consider/mental accounting that a $30K pot belongs to the government and a $70K pot is mine.
Case 1, Pay-Now: I give the government its $30K, keep my pot and let it grow in the account at 8%.

Case 2, Pay-Later: I invest my $70K and the government's $30K at the 8% rate. Both pots, of course, grow at the same rate and the government's pot is always 30% of the account value. Finally, I give the government its pot. What's left is my pot, having grown at 8%. Exactly the same amount as the Pay-Now option balance.
​
So the question is only this: Will the government's future take be 30% or will it be some other number. If it is smaller, I win, and I get to keep some of the money that I thought was the government's. If it is bigger, I lose and I should have taken the Pay-Now option.

Before I figured this out, I had some kind of vague notion that by paying later I was earning money by investing the government's money. But as you can see, that is not the case.
 
pb4uski said:
In our case it is a tradeoff of us paying 12% now vs us or our kids who will inherit that money paying 22% or 25% or more later... so that 10-13%+ difference makes it an easy decision.

If our circumstances were different and it was the difference between paying 22% now vs paying 24% or 28% later then the decision would not be as clearcut.
Click to expand...

You have clarity on your situation and that takes a lot of the risk out of your decision. I commend your thought process.
I have a lot of current income, no heirs other than charities and I am trying to do the IRMMA, PTC dance. For us the future is far from clear.
I have earned income so we contribute the max to Roths and we’ll have HSAs next year so we’ll contribute the max to those. So I am getting some advantage of tax free accounts without doing conversions, but in our case conversions may end up being a wash since the tax bracket arbitrage isn’t as big. In that case I’ll play the time value of money card and sit on my cash today to pay in 15-35 years in the future.
 
You must log in or register to reply here.

Similar threads

F
Rethinking my yearly Roth conversions
2 3 4
Replies
98
Views
6K
RunningBum
RunningBum
Badger
Roth conversion before there is one spouse left
Replies
8
Views
610
sengsational
sengsational
FiveDriver
Calculator for Estimating Roth Conversions?
Replies
16
Views
1K
Exchme
E
G
Next-year Roth conversion?
Replies
22
Views
1K
Echard
E
twobits
All Roth Conversion or some IRA withdrawal for tax withholding
Replies
15
Views
1K
Koolau
Koolau

Latest posts

Back
Top Bottom