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Old 09-11-2020, 12:15 PM   #21
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Roth conversions do not make sense for everyone. I had an accountant do the numbers for me and he was able to show that it made little sense for my particular situation. For some people Roth conversions are a wash and for others they make sense. If you are not sure, ask an accountant to go over the numbers for you. The cost is far less than making a mistake.
This topic seems to be as dividing as the debate about owning rental property. If you convert enough that you are taxed at a higher rate than you plan for when doing withdraws then this would not be wise. However, unless you plan to be in a lower tax rate when you withdraw the funds how can it cost you ? I agree they may not be a big savings or may break even, and as mentioned there are several income cliffs that need to be considered but IMHO few situations where it would cost you.
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Old 09-11-2020, 12:34 PM   #22
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Isn't it fairly safe to say that converting to the top of the 12% bracket is a no-brainer?
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Old 09-11-2020, 01:19 PM   #23
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Isn't it fairly safe to say that converting to the top of the 12% bracket is a no-brainer?
Maybe. Unless you're under 65 and benefitting from an almost $10K a year ACA subsidy for health insurance that you would most likely lose.
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Old 09-11-2020, 01:45 PM   #24
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Maybe. Unless you're under 65 and benefitting from an almost $10K a year ACA subsidy for health insurance that you would most likely lose.
Converting to near the ACA cliff is my target. It's pretty close as to whether it's better to convert some or get a bigger subsidy. I'm already pretty close to the cliff, so I can't convert much, so any difference between the two choices is pretty trivial.
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Old 09-11-2020, 01:53 PM   #25
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Isn't it fairly safe to say that converting to the top of the 12% bracket is a no-brainer?
It may seem like it, but there are actually several instances where this may not be a good idea, such as for those receiving SS or ACA subsidies.
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Old 09-11-2020, 02:04 PM   #26
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For us converting to the 12% bracket is not a nobrainer. We've already converted a significant amount. Now with both of us on SS, going to the top of the 12% bracket would result in another 45k in taxes to save about 2k per year in the future. I explained to DW that if I pass she would have an additional 10% per year in taxes. She said she's willing to accept the consequences. End of discussion in this household.
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Old 09-11-2020, 02:16 PM   #27
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It depends. I don't think that converting make sense if your heirs are likely to have a much lower tax bracket than you do.... let them withdraw pay the lower tax rate.
Exactly... it depends on how long and how low the heirs tax bracket is predicted to be, assuming taxes usually go up, the conversion appears like a no-brainer if that estate plan is the goal and you can also avoid tax torpedo's while converting...

else, not probably for you or marginal if best savings. For my own DF I did some very complex math in spreadsheets, and you can come out with a $1 for $1 estimate of how much you are actually saving yourself and your heirs with some assumed death dates and other data points...

In DF case, and likely in mine, we have a bit of an opportunity or a lost opportunity if he does not convert on a multi-generational scale.

IF you are in one of the lower 10, 15, even 22% brackets converting becomes a bit more of a game of what-if's when analyzing, but well worth doing the math on the napkin. In DF case it is LITERALLY 100s of thousands in 1. Compounded Roth gains tax free with the advantage of time working its magic, and 2. Better tax rate per dollar over the lifetime of the taxpayer+heirs, assuming a break-even death date of X...
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Old 09-11-2020, 05:22 PM   #28
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.... Now with both of us on SS, going to the top of the 12% bracket would result in another 45k in taxes ...
Given that for a couple if you have $105,050 of ordinary income less $24,800 standard deduction, so you're at the $80,250 top of the 12% tax bracket you would only have $9,235 of taxes... how in the world could Roth conversions to the top of the 12% bracket result in "another 45k in taxes"?

I concede that there may be some obscure scenario that does that but it seems unlikely, so show me the numbers, otherwise I call bullsh!t.
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Old 09-11-2020, 05:24 PM   #29
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This topic seems to be as dividing as the debate about owning rental property. If you convert enough that you are taxed at a higher rate than you plan for when doing withdraws then this would not be wise. However, unless you plan to be in a lower tax rate when you withdraw the funds how can it cost you ? I agree they may not be a big savings or may break even, and as mentioned there are several income cliffs that need to be considered but IMHO few situations where it would cost you.
One way it can cost you is with SS, which has a certain percentage taxed, based on income. Another way it can hurt you is by losing income-based benefits, such as ACA subsidies.
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2 Additional Factors
Old 09-11-2020, 08:51 PM   #30
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2 Additional Factors

2 more factors to consider. These stopped me from making Roth conversions.

1. LTCG’s are taxed at $0 up the $80K or so. If you have $80K Or more of LTCG’s each Year as I do, any Roth conversion adds 25-27% in taxes on the first $80K or so. That is a pretty big hill to climb. That is because you end up paying an extra 15% on top of the 10-12% bracket. I just can’t do it.

2. Live in high tax state and might move to low tax state later. Hate to pay high now, when I might pay low later.
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Old 09-12-2020, 06:32 AM   #31
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.... Now with both of us on SS, going to the top of the 12% bracket would result in another 45k in taxes ...
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Given that for a couple if you have $105,050 of ordinary income less $24,800 standard deduction, so you're at the $80,250 top of the 12% tax bracket you would only have $9,235 of taxes... how in the world could Roth conversions to the top of the 12% bracket result in "another 45k in taxes"?

I concede that there may be some obscure scenario that does that but it seems unlikely, so show me the numbers, otherwise I call bullsh!t.
Yes, as I thought, there is no way one can get $45k in taxes by adding Roth conversion to the top of the 12% tax bracket to SS... even if each person gets the maximum SS benefit of $3,790/month.... no matter what the total tax is $9,235 (or $9,241 if using the tax tables).

What does happen is that the effective tax rate on your Roth conversion increases and is higher than if you didn't have SS and if you had a married couple where each person had the maximum benefit it peaks at 33%. The average annual benefit for a married couple is about $28,000, so even a couple with double the average annual benefit would benefit from Roth conversions.

Roth conversionSSTaxable SSTotal incomeStandard deductionTaxable incomeTaxEffective tax rate on Roth conversion
105,05000105,05024,80080,2509,2358.8%
96,55010,0008,500105,05024,80080,2509,2359.6%
88,05020,00017,000105,05024,80080,2509,23510.5%
79,55030,00025,500105,05024,80080,2509,23511.6%
71,05040,00034,000105,05024,80080,2509,23513.0%
62,55050,00042,500105,05024,80080,2509,23514.8%
54,05060,00051,000105,05024,80080,2509,23517.1%
45,55070,00059,500105,05024,80080,2509,23520.3%
37,05080,00068,000105,05024,80080,2509,23524.9%
27,73490,96077,316105,05024,80080,2509,23533.3%
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Old 09-12-2020, 06:44 AM   #32
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It depends. I don't think that converting make sense if your heirs are likely to have a much lower tax bracket than you do.... let them withdraw pay the lower tax rate.
Or your heirs like ours, are 3 of your favorite charities.
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Old 09-12-2020, 06:47 AM   #33
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Or your heirs like ours, are 3 of your favorite charities.
In that case, if you darn tootin sure that you'll never need that money you may want to do QCDs in place of your RMDs while you are alive and can enjoy seeing those favoriate charities receive the money and see what they do with it and enjoy the accolades of being one of their big donors.
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Old 09-12-2020, 08:53 AM   #34
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Using my 2019 return for an estimate of my future taxable interest and qualified dividend income, with my projected pension, puts me just into the 22% tax bracket (single.) Nuts. Considering that the top of the 24% tax bracket is $160k, there doesn't appear to be a significant opportunity for me under the current tax code. Now I begin to understand why people seek to minimize their ordinary interest and dividends.
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Old 09-12-2020, 09:07 AM   #35
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One advantage that is often mentioned here is a Roth IRA is not subject to RMDs and one can withdraw when/as needed. A taxable IRA is subject to RMDs and the account holder must withdraw yearly without regard to need.
This is certainly one, we expect that if for some reason we have a spike in spending needs one year, we can draw from our Roth to cover and not think twice about the tax ramifications. With ACA subsidies and such if you are planning to be close to the cliffs, the Roth sure comes in handy to ensure you don't go over, yet have plenty of money you can access.
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Old 09-12-2020, 04:17 PM   #36
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Speaking as one of those widows who now has to file single on a nest egg that was planned to support two of us, I can never decide what to do. We had no Roth money when DH died, and I have managed to get about $160k built up through conversions and after-tax 401k rollovers, but that's still only about 10% of my holdings. I'm at the very very very top of the 22% bracket, still working, but with a future of two pensions, starting survivor SS at 60 and my own at 70, and big RMDs if I don't do anything (and a strong belief that taxes will go up for me probably even before 2026), I feel like I should be converting to the top of 24%. Especially if maybe I want to buy a second home in a few years, since as of now about 85% of my stash is in pre-tax, and I'd get clobbered with a big tax bill.

No heirs, so that's not really even a consideration. I don't have any real objections to paying taxes, but would be aggravated if down the road I get some huge bills that I had known how to anticipate and mitigate but didn't bother.

If anyone feels like imagining what they'd do in this scenario, feel free to opine.
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Old 09-12-2020, 04:49 PM   #37
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You say no heirs, but what will happen with your money when you die? Charities?
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Old 09-12-2020, 05:07 PM   #38
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Given that for a couple if you have $105,050 of ordinary income less $24,800 standard deduction, so you're at the $80,250 top of the 12% tax bracket you would only have $9,235 of taxes... how in the world could Roth conversions to the top of the 12% bracket result in "another 45k in taxes"?

I concede that there may be some obscure scenario that does that but it seems unlikely, so show me the numbers, otherwise I call bullsh!t.
Over the course of 7 years it would add up to the above numbers. I feel No need to go further in discussing the issue with you.
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Old 09-12-2020, 06:10 PM   #39
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You say no heirs, but what will happen with your money when you die? Charities?
I should have said no children. There are nieces and nephews and friends and charities, though of course my main plan is to bounce the check to the cemetery.
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Old 09-12-2020, 08:05 PM   #40
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Speaking as one of those widows who now has to file single on a nest egg that was planned to support two of us, I can never decide what to do. We had no Roth money when DH died, and I have managed to get about $160k built up through conversions and after-tax 401k rollovers, but that's still only about 10% of my holdings. I'm at the very very very top of the 22% bracket, still working, but with a future of two pensions, starting survivor SS at 60 and my own at 70, and big RMDs if I don't do anything (and a strong belief that taxes will go up for me probably even before 2026), I feel like I should be converting to the top of 24%. Especially if maybe I want to buy a second home in a few years, since as of now about 85% of my stash is in pre-tax, and I'd get clobbered with a big tax bill.

No heirs, so that's not really even a consideration. I don't have any real objections to paying taxes, but would be aggravated if down the road I get some huge bills that I had known how to anticipate and mitigate but didn't bother.

If anyone feels like imagining what they'd do in this scenario, feel free to opine.
Unless there are strong state tax reasons to the contrary, I'd think using the 24% bracket to the utmost for conversions would be prudent. Plus, whatever your portfolio equity allocation is, I'd put 100% of Roth in stocks and overweight income/bonds in the tax deferred accounts to reach your allocation.

(This is our approach, as we choose to convert to top of 24% even in these years where we'd otherwise pay no taxes. We believe the underweighting of equities in deferred accounts should help in the long run in getting as much as possible in the roths.)
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