$33,000 Roth Conversion -- Reasonable?

[TromboneAl]

Because our income is very low, and because we'll get a $1,400 Lifetime Learning tax credit for DD's college expenses, I calculated (thanks RiskAdverse) that we can convert $33,000 to a Roth and still pay no federal taxes. We will have to pay California income tax. This is what I plan to do.

We could in fact convert over $75,000 and still be in the 15% tax bracket.

Does that sound right -- anything I'm missing?

Is that an unusually large amount to convert (sending red flags)?

Should I actually be converting more?

Thanks,

 

[SteveL]

Not sure what your estate tax situation is....I've been doing a gradual conversion for the last four years, converting $50k per year. I've got a spread sheet in which I forecast tax brackets through the year I turn 80 (62 now). I also forecast what my income is likely to be through this period including SS. To this, I add the RMDistributions that I will have to begin taking at 70.5 age. Present economy aside, I expect recovery within the time frame of the spreadsheet. It is to my advantage to convert as long as I stay within the 25% bracket now.
Since I have a substantial IRA, we will eventually have Estate Tax issues. Roth allows my beneficiary (spouse) to disclaim passing directly to children w/o going into her estate.
Given the facts stated, your conversion looks like a no-loser deal. If you project where you are likely to be at 70.5, larger conversions may make sense as well.

 

[Koolau]

Al,

Don't know if you should convert more 'cause I don't know how much you have to convert. Full disclosure: I let my accountant do all my conversion calculations.

But, all that said, I guess I'm lucky that I have enough money in my 401(k)/Trad. IRAs that I'll get hit with relatively high taxes when I am forced into RMDs at 70 1/2. I think that is where you need to look. How much do you need to be converting now (at 0% or 15%, etc.) to avoid paying perhaps a higher % when you take RMDs.

The fly in the ointment is that we don't know what tax rates will be in the future. If you think they will go down, then conversion isn't nearly as important (for tax efficiency) though it may still be important for estate planning. (For the latter reason alone, conversion is a good idea for some folks - flexibility of the Roth is much better than for Trad/401(k).)

I've said it in other threads - I'm putting my money on higher tax rates in the future due to the the current hole we are in and the SS/Medicare hole we'll be in. Some estimates say $60 trillion will be the price tag for our current plans for the future. If so, I'm not sure how the gummint will pay that down without asking us "rich folks" (you know, the ones who actually spent less than we made, all those years ago) to make "contributions" toward the problem.

Oh, and don't forget to factor in your projected portfolio results. I find that I'm sort of emptying the ocean (make that a two-tube-blow-up kiddie pool) with a spoon. i.e., as I convert to Roth each year, my total Trad./401(k) is still increasing. I know, I know, "braggin' or complainin'?"

Seriously, this a a good problem for you to have. You seem confident to to the math yourself and I envy that. I dread this conversation with my accountant each year. He can't find a single flaw in my logic, but it just goes against his CPA nature to ever pay a penny of tax before you absolutely must.

YMMV and I'm not an accountant (obviously).

 

[REWahoo]

Al, a couple of years ago I was in a similar situation and converted $41K. No red flags that I can see and I wouldn't convert a penny more if it will put you in a higher bracket.

 

[jIMOh]

If you can convert 70k in 15% bracket, I would be looking at that number more.

33k tax free
37k at 15% is $5k in taxes.

Pay 5k in taxes so 70k is "never" taxed again. Sign me up.

When I convert I leave my bond funds in the taxable IRA and keep equity funds in the Roth.

 

[Nords]

Because our income is very low, and because we'll get a $1,400 Lifetime Learning tax credit for DD's college expenses, I calculated (thanks RiskAdverse) that we can convert $33,000 to a Roth and still pay no federal taxes. We will have to pay California income tax. This is what I plan to do.
We could in fact convert over $75,000 and still be in the 15% tax bracket.
Does that sound right -- anything I'm missing?

If you're able to finish the conversion over the next few years without having to pay any federal taxes then it sounds like you're doing fine. No reason to convert more just for the privilege of paying taxes, although it'd finish the process faster.

Is that an unusually large amount to convert (sending red flags)?

No, I sure hope not. But maybe they'll call you before they call me!

Should I actually be converting more?

I think fewer taxes over more years is better than more taxes over fewer years...

 

[riskadverse]

Because our income is very low, and because we'll get a $1,400 Lifetime Learning tax credit for DD's college expenses, I calculated (thanks RiskAdverse) that we can convert $33,000 to a Roth and still pay no federal taxes. We will have to pay California income tax. This is what I plan to do.

We could in fact convert over $75,000 and still be in the 15% tax bracket.

Does that sound right -- anything I'm missing?

Is that an unusually large amount to convert (sending red flags)?

Should I actually be converting more?

Thanks,

The amounts you are mentioning seem right in terms of size (with a significant tax credit) and I doubt if you are missing anything. Depending on how much you have locked up in 401k's you might want to be converting more - up to the limits of the 15% bracket. Calculating the number of years till you are required to pull out funds from the 401k's should give you an idea about how much to convert tax efficiently per year. In my case I haven't even calculated this, knowing there is no way I can even approach getting the bulk out of our 401k's while staying in the 15% bracket. That said, those are the kind of problems I'm glad I have!

 

[Rich_by_the_Bay]

Sounds right. Works if you have post-tax dollars to pay the tax. I heard a segment on the radio where the guy did a conversion which took him to the very top of the 15% bracket, didn't have the cash to pay the taxed on the IRA distribution, and took an additional IRA distribution to cover the income taxes. That extra withdrawal pushed him into the next tax bracket.

 

[Moemg]

I apologise in advance for a lack of knowledge in the Roth area but when you are converting how do you figure how much tax is due and at what age is it not worth converting ? Thanks !

 

[REWahoo]

Moemg, here is an excellent source of info on ROTH conversions: Guide to Roth IRA Conversions

 

[Moemg]

Moemg, here is an excellent source of info on ROTH conversions: Guide to Roth IRA Conversions

Thanks , It has answered a lot of my questions .

 

[Nords]

Thanks , It has answered a lot of my questions .

The next step is to plug through IRS Form 8606, which requires an act of faith (in completing the data entry) to arrive at the amount you may want to convert.

I don't think that age has anything to do with it, unless you're over 70.5 and taking RMDs. Most of us ERs are in a pitifully small tax bracket (10% or barely into 15%) and this year we were able to wipe out almost all investment cap gains, so this is an especially good year to convert. But you could stretch the process out over 25 years if you had the patience.

Instead of conversion, a relatively new option is making a direct charitable donation of your IRA shares instead of taking them as an RMD. While that avoids higher taxes, of course, it also relieves you of the money.

 

[landover]

I am also going through the same process, but my situation is more complicated due to Foreign Earned Income Exclusion. I am working with free version of TaxACT. You can also try as it gives you better picture with all worksheets and forms.

 

[heyyou]

I like the Fairmark site. I have almost mistakenly used the wrong tax table there so make sure you are at the correct year and the correct group i.e. single, Married Filing Jointly (MFJ), etc.

Looking at income after deductible retirement contributions, but before standard deductions and exemptions, MFJ's pay no tax on the first $17.9K with the deducts and exempts, then 10% on the next $16.05K, then 15% on the next $49.05K, so your $8962.50 due on $83K is an average tax rate of 10.8% at the top of the 15% bracket. That looks like a cheap rate to pay for sheltering part of your portfolio from most future federal taxes.

Roth conversions when the market is down is the silver lining in that dark cloud. At FIRE, I chose to not rollover my after-tax 401k contributions. I'm spending them on Roth conversions.

If you want to go deeper into R-conversions, James Lange suggests converting multiple large lump sums of different asset subclasses at the first of each year, waiting until December, then re-characterize all but the highest performing one. That way you get the most bang for your tax dollars. I'm not that pushy.

 

[TromboneAl]

Thanks, guys. I just converted $33,000. I probably should convert more, but we'll have another 6-8 years with almost no income (that is before we start taking out IRA money), so I can do conversions in those years. With the market downturn, I don't feel like spending money on taxes now, even if it makes sense in the long run.