Up to what bracket should I do Roth Conversions

[NW-Bound]

I don't know what your plans for bequeathing funds to charities or relatives are, but you you could always bequeath a PORTION of your estate upon your demise, rather than 100% to spouse. Something to ponder...

Another option with spouse inheriting the IRAs and having to take larger RMDs thus push into a much higher tax bracket: - if it makes sense for estate planning, part or all of the IRAs can be transferred on death to other beneficiaries/heirs. The surviving spouse is not required to inherit all of it if the income is not really needed.

My single son is already in the 24% bracket. My married daughter is also in the 24% bracket, whether she files jointly or separately. They would go to a higher bracket if inheriting pre-tax money.

And I don't know whether my wife thinks she will have enough after I croak, in order for me to give the children money early. It's hard to predict the future.

 

[TheWizard]

My single son is already in the 24% bracket. My married daughter is also in the 24% bracket, whether she files jointly or separately. They would go to a higher bracket if inheriting pre-tax money.

And I don't know whether my wife thinks she will have enough after I croak, in order for me to give the children money early. It's hard to predict the future.

Yep, those are the things to ponder.
With the ten year period to empty an inherited tIRA, it can make sense to give a modest tIRA amount to each heir upon first spouse's death and a larger tIRA amount upon surviving spouse's death, hopefully ten years later or more...

 

[copyright1997reloaded]

You have to be very careful with I-orp or you will get these kind of silly answers.

First - you must enter the same allocation in each type of account. While the program will let you enter other values, the answers are no good unless you use the same in each account. Otherwise, the program simply snoops out which type of account you've told it has the most stocks and favors that unfairly. Since Roth usually has lots of stocks and tax deferred fewer, the increased value is mostly just shifting from a low stock allocation to a high one. This is the most common and dangerous issue that users fall into.

Second, unless you plan to dies with zero, enter a residual estate value. If you plan to spend, say $80K, but have enough assets to spend $150K, then make various guesses on the estate value until it is only spending what you think you will spend. Otherwise the cash flow patterns and Roth Conversions are for the "big spender" case.

Third, realize that its tax package is not super-strong. For instance, it figures IRMAA based on the current year, not a two year loopback, so it may tell you to convert too much at age 63-64 when it doesn't realize you are already subject to IRMAA. It also doesn't see NIIT or other exotic things like AMT. It don't think it knows about the ACA ramp for the next three years either, I don't suppose it's been updated to include that.

I-orp's value is in giving a feel for what's going on and sometimes providing interesting ideas, but folks should come back here and discuss results before they act on it.

Thanks for the pointers. I wasn't seriously considering doing a 750K IRA to Roth (well, it does sound enticing in some ways), but I did have different allocations now vs. later so I will play with things like this.

 

[Gumby]

I care how much tax I pay and I care how much tax the young wife may need to pay if she survives me. I do not care one whit how much tax my eventual heirs may need to pay on their inheritance. It's free money; they should just take the check, pay the tax and be happy they got anything at all.

 

[skyking1]

^ +1
I don't have any direct heirs, but if we do leave something to nieces and nephews, that's my attitude too.
Everything about Roth converting is about mitigating the single filing tax hammer for a surviving spouse, either her or me. Living alone will be tough enough I want the financial side of it to be as smooth as possible.

 

[NW-Bound]

Yep, those are the things to ponder.
With the ten year period to empty an inherited tIRA, it can make sense to give a modest tIRA amount to each heir upon first spouse's death and a larger tIRA amount upon surviving spouse's death, hopefully ten years later or more...

I cannot get my wife to be interested in any investment/estate/tax planning. While she is good at managing the expenses given an income, she does not care how that income is managed. Oh well, a lot of people fail at both, so one out of 2 is still something.

So, I do what I can, and when I croak, she will have to figure it out, or not. Perhaps our children will be knowledgeable and caring enough to help.

 

[Dash man]

I cannot get my wife to be interested in any investment/estate/tax planning. While she is good at managing the expenses given an income, she does not care how that income is managed. Oh well, a lot of people fail at both, so one out of 2 is still something.

So, I do what I can, and when I croak, she will have to figure it out, or not. Perhaps our children will be knowledgeable and caring enough to help.

My is very intelligent and interested, but not willing to dig into the details and actually manage anything. She would still have her 401k in some good funds and some expensive funds if I didn’t push her. Now I just log on and do it for her and keep her informed of the moves, especially since I convinced her to roll it into an IRA for ease of Roth conversions.
I’ve decided to put most of our combined investments on autopilot by moving things into ETFs and a few solid dividend growth stocks that don’t need to be watched too closely. I’ll have my son watch the stocks so he can intervene if needed.

 

[audreyh1]

I care how much tax I pay and I care how much tax the young wife may need to pay if she survives me. I do not care one whit how much tax my eventual heirs may need to pay on their inheritance. It's free money; they should just take the check, pay the tax and be happy they got anything at all.

Generally my attitude, although in all fairness in my case heirs are within the 10 year inherited IRA window and will be already in or approaching retirement age, so having an additional IRA will likely work out well.

Even with DH who is older, 2 of the heirs would be outside that window, but still approaching retirement or already retired.

But regardless it’s an estate planning option to consider. Are heirs going to get anything when the first spouse dies, or does it all go to the surviving spouse? I think setting up IRA beneficiaries is a good way to pass some of it along and something to consider if one is concerned about surviving spouse tax burden but not about the amount of investment assets left to the surviving spouse.

 

[NW-Bound]

My is very intelligent and interested, but not willing to dig into the details and actually manage anything. She would still have her 401k in some good funds and some expensive funds if I didn’t push her. Now I just log on and do it for her and keep her informed of the moves, especially since I convinced her to roll it into an IRA for ease of Roth conversions.
I’ve decided to put most of our combined investments on autopilot by moving things into ETFs and a few solid dividend growth stocks that don’t need to be watched too closely. I’ll have my son watch the stocks so he can intervene if needed.

Some years ago, I sent my wife a note telling her when I croak she was to put everything into Wellesley/Wellington at 50/50.

She said she kept that note in her computer somewhere, but I doubt it.

If she remembers anything about it, on my deathbed she will shake me awake and ask me "What are those mutual funds Well-something you told me about?".


PS. I have power of attorney over her accounts to make investment decisions. Each day, I told her about the Quicken total at the left corner of the screen for all our accounts. Surprisingly, she remembers that better than I do usually (to the nearest $100K, which means only 2 digits) .

I am usually pre-occupied with looking at individual positions and reading the news trying to discern a trend, and often forget what the total amount is.

 

[aja8888]

Some years ago, I sent my wife a note telling her when I croak she was to put everything into Wellesley/Wellington at 50/50.

She said she kept that note in her computer somewhere, but I doubt it.

If she remembers anything about it, on my deathbed she will shake me awake and ask me "What are those mutual funds Well-something you told me about?".


PS. I have power of attorney over her accounts to make investment decisions. Each day, I told her about the Quicken total at the left corner of the screen for all our accounts. Surprisingly, she remembers that better than I do usually (to the nearest $100K, which means only 2 digits) .

I am usually pre-occupied with looking at individual positions and reading the news trying to discern a trend, and often forget what the total amount is.

You can only do your best when you are living. If you pass, and she doesn't remember where to put your big stash ($$$$$$$$), her new husband will handle it for you.

 

[TheWizard]

You can only do your best when you are living. If you pass, and she doesn't remember where to put your big stash ($$$$$$$$), her new husband will handle it for you.

And then, playing Devil's Advocate, if she were to predecease the NH, where do you suppose that big stash ($$$$$$) will end up?

 

[ncbill]

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.

Yep, also doing partial conversions to fill up the 12% federal bracket...plus 5% state.

Hopefully it all goes to the kids.

I still regret not doing so for the traditional IRA I knew I'd inherit from mom back when she was sick...given her high medical expenses she might not have had to pay any tax on conversion, though I would have covered any taxes if needed.

That account has multiplied several times since she died & the annual RMDs are fully taxable, which negatively impacts our annual traditional to Roth IRA conversions.

 

[NW-Bound]

You can only do your best when you are living. If you pass, and she doesn't remember where to put your big stash ($$$$$$$$), her new husband will handle it for you.

And then, playing Devil's Advocate, if she were to predecease the NH, where do you suppose that big stash ($$$$$$) will end up?

Hmmm... Beware the pool boy.

Our children are back in the picture now.

Dang, this is too much for a guy to do and to worry about. Not just managing money while he's alive, but also after he's pushing daisy.

Makes me just want to BTD so I don't have to worry so much.

 

[Philliefan33]

I spent this morning deciding whether or not to do a Roth conversion before the end of this year. First I had to track down the estimated capital gain distributions for our taxable funds, then I completed a “what if” tax return. Then I put the results of my “what if” scenarios into a spreadsheet and calculated the effective tax rate on the conversion, taking IRMAA into account.

It turns out that we don’t have much room until the NIIT kicks in, so for this year I’m filling up the headspace until we get close (but not too close, in case my estimates are off) to the top of IRMAA Tier 2. Beyond that just felt like we would be paying too much.

It’s not a huge Roth conversion (only 3.3% of my 401K value) but it’s a start. Now that I understand the moving parts a little better we may decide to bite the bullet next year and do more.

 

[Dash man]

I spent this morning deciding whether or not to do a Roth conversion before the end of this year. First I had to track down the estimated capital gain distributions for our taxable funds, then I completed a “what if” tax return. Then I put the results of my “what if” scenarios into a spreadsheet and calculated the effective tax rate on the conversion, taking IRMAA into account.

It turns out that we don’t have much room until the NIIT kicks in, so for this year I’m filling up the headspace until we get close (but not too close, in case my estimates are off) to the top of IRMAA Tier 2. Beyond that just felt like we would be paying too much.

It’s not a huge Roth conversion (only 3.3% of my 401K value) but it’s a start. Now that I understand the moving parts a little better we may decide to bite the bullet next year and do more.

Honestly, we weren’t concerned with the NIIT or IRMAA this year. Roth conversions are on sale! Stock prices have been suppressed all year plus tax rates are low compared to after the TCJA sunsets in 2026. This is a great time to do over the top conversions while markets are down and you can move more shares at a discount.

 

[audreyh1]

Honestly, we weren’t concerned with the NIIT or IRMAA this year. Roth conversions are on sale! Stock prices have been suppressed all year plus tax rates are low compared to after the TCJA sunsets in 2026. This is a great time to do over the top conversions while markets are down and you can move more shares at a discount.

Great points!

 

[Philliefan33]

Honestly, we weren’t concerned with the NIIT or IRMAA this year. Roth conversions are on sale! Stock prices have been suppressed all year plus tax rates are low compared to after the TCJA sunsets in 2026. This is a great time to do over the top conversions while markets are down and you can move more shares at a discount.

Yes, good points, but I don't have time to get DH onboard before the end of the year. He doesn't pay attention to these things so I will have to do some educating before he can help make the decision. It was easy to justify this Roth conversion; anything significantly larger (and it will have to be significantly larger to have a significant effect) will take some convincing.

 

[TheWizard]

I spent this morning deciding whether or not to do a Roth conversion before the end of this year. First I had to track down the estimated capital gain distributions for our taxable funds, then I completed a “what if” tax return. Then I put the results of my “what if” scenarios into a spreadsheet and calculated the effective tax rate on the conversion, taking IRMAA into account.

It turns out that we don’t have much room until the NIIT kicks in, so for this year I’m filling up the headspace until we get close (but not too close, in case my estimates are off) to the top of IRMAA Tier 2. Beyond that just felt like we would be paying too much.

It’s not a huge Roth conversion (only 3.3% of my 401K value) but it’s a start. Now that I understand the moving parts a little better we may decide to bite the bullet next year and do more.

You might want to replace the managed funds in your taxable account with Index Funds, which don't generally have CGDs.
That's what I have and it's easy to project the dividend income for the year, and therefore my AGI, after Thanksgiving...

 

[sengsational]

Thanks for the pointers. I wasn't seriously considering doing a 750K IRA to Roth (well, it does sound enticing in some ways), but I did have different allocations now vs. later so I will play with things like this.

It is true that i-orp preferentially spends the lowest earning assets first. I often remind people that if you balance across all taxable categories, the proportion equities entered should be the same in all buckets. And I'd also agree that the ACA ramp is probably not in there, and that the federal tax calculation is simplified, as it would have to be, given all of it's twists. I've always said it's a good data point, not something to blindly apply.

 

[PaunchyPirate]

I just did my very first Roth conversion! I did some estimating in TurboTax and determined that I could convert a small amount ($7500) without doing too much damage to my ACA subsidy. I settled on this amount because it only forces me to pay back about $770 of the subsidy and doesn't increase my overall tax liability above the $770 either.

This is the only money I have in a Roth, so I'm quite excited to get it started. Hopefully, I'll be able to add to it in the coming years and certainly after I start Medicare.

 

[sroby2020]

Now that we're 65, have Medicare, and no longer need to keep our MAGI low for ACA, we will be converting in 2023.

Careful! Medicare has some surprises to your Part B and D premiums if you exceed certain income thresholds.

 

[MarieIG]

Did a little conversion in DH's 401k for him this afternoon. The only thing I don't like about his 401k is that I can't pick a specific fund to convert.

I then converted some shares in kind from my IRA.

Finally, I opened a Roth in Fidelity, funded by a small transfer from Vanguard - just to have a Roth over a Fidelity too.

 

[LARS]

Careful! Medicare has some surprises to your Part B and D premiums if you exceed certain income thresholds.

True, but thresholds are dramatically higher than ACA.

 

[audreyh1]

True, but thresholds are dramatically higher than ACA.

For sure! And depending on what you are trying to accomplish may be the lesser of two evils.

 

[JBTX]

I find this graphic heat map representation pretty informative


https://www.bogleheads.org/w/images/6/6a/SSHeatMapMFJ2023.png


https://www.bogleheads.org/wiki/Taxation_of_Social_Security_benefits

With $60k of SS income you will hit a 22% marginal rate pretty early (marginal rate isn’t always the same thing as tax bracket ). If rates revert in 2026 as scheduled then they will be higher. Given that it would seem pretty safe to do more Roth conversions now at 22%.