Maximum Annual Roth conversion amount ?

[AbbA]

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I will be able to afford the taxes from after tax accounts so for me it is taking care of the hit now while I know I can afford.

This thread is quite fascinating but also hard to wrap my head around. Luckily or not, I don't need to delve in this topic yet but I have a few (dumb?) questions.

When you convert from tIRA to Roth, do move 100% of this pre-tax amount that you decided to convert to Roth IRA and pay 22% or 24% taxes from your taxable account?
If so, does this mean you pull that money from your savings account or CD to pay taxes or do you sell mutual funds, bonds, or stocks to pay those taxes?
If the latter, then it's another piece of taxable money that has to be included in the calculations/planning so you don't tip over into the higher tax bracket, right?
Oh, and if you don't reside in a no income tax state, then do you pay another 5-10% for state taxes?
When you plan on converting large amounts of money what kind of future growth rate (and inflation rate) do you assume for your tIRA that forces you consider/plan a conversion to begin with?
A lot of people discussing when to begin SS (62 vs. FRA vs. 70) try to guess when they will break-even, what's the break-even point for converting now and paying taxes now vs. not converting at all?

We cannot control our time on this earth but reading this thread makes me wonder which 'team' wins in the long run: one that says 'I'll pay taxes when it's due and not earlier' or the one like on this thread who plans far far into the future?

Any spreadsheets out there to look at instead of purchasing i-ORP?

Interesting but very complex topic, IMO.

[HI Bill]

Is there really a right answer for most of us? To make the right decision, you have to make assumptions on market returns, longevity, and future tax rates. And you have to assume that ROTH accounts will remain untaxed.

[SecondCor521]

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Originally Posted by AbbA This thread is quite fascinating but also hard to wrap my head around. Luckily or not, I don't need to delve in this topic yet but I have a few (dumb?) questions. 1. When you convert from tIRA to Roth, do move 100% of this pre-tax amount that you decided to convert to Roth IRA and pay 22% or 24% taxes from your taxable account? 2. If so, does this mean you pull that money from your savings account or CD to pay taxes or do you sell mutual funds, bonds, or stocks to pay those taxes? 3. If the latter, then it's another piece of taxable money that has to be included in the calculations/planning so you don't tip over into the higher tax bracket, right? 4. Oh, and if you don't reside in a no income tax state, then do you pay another 5-10% for state taxes? 5. When you plan on converting large amounts of money what kind of future growth rate (and inflation rate) do you assume for your tIRA that forces you consider/plan a conversion to begin with? 6. A lot of people discussing when to begin SS (62 vs. FRA vs. 70) try to guess when they will break-even, what's the break-even point for converting now and paying taxes now vs. not converting at all? 7. We cannot control our time on this earth but reading this thread makes me wonder which 'team' wins in the long run: one that says 'I'll pay taxes when it's due and not earlier' or the one like on this thread who plans far far into the future? 8. Any spreadsheets out there to look at instead of purchasing i-ORP? Interesting but very complex topic, IMO.

Numbers added. My answers, others may answer differently:

1. Yes and yes.

2. I think it would be wherever someone was getting their spending money from. I don't distinguish between tax expenses and any other expenses, although I do account for things by category in Quicken. So in my case I sell from taxable when I need money. The proceeds go into my savings account and then to my checking account and then to spending.

3. Correct. I do my taxes in December every year ahead of time so I know what effect any Roth conversions will have on my tax bill.

4. Correct. In my case, my state's top marginal rate is 6.95%. If you're living in a state with an income tax and plan to move at some point, you could account for that in your analysis.

5. I assume long term historical averages. In the case of my RMD projections, I assume a 10% growth rate on my IRA, 2.24% on my SS benefit, 2% on tax and IRMAA brackets, and 7.7% on IRMAA surcharges.

6. I don't calculate break even. I figure if I'm paying taxes at a lower marginal rate now vs. a higher marginal rate later, that I'm ahead.

7. It depends on what value you attach to planning ahead and whether you think it's possible to successfully do so. Personally, I like planning ahead (up to a point), and I think it's possible to do so successfully. Although I think there are more planner types on this board, there are some who just say, "Whatever, I have enough" and that's OK too.

8. i-orp is free - or at least I thought it was. You could investigate the case study spreadsheet published by the user MDM on the MMM forum. It's free also.

[Trooper]

The issue I'm having with converting to higher than the 12% bracket is that some of the conversion will be at 27% until we reach 22%. For us that is about $38K, until our ordinary income hits $78,950 (MFJ), when the marginal rate goes back to 22%.

Am I looking at this correctly?

[pb4uski]

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Originally Posted by Trooper The issue I'm having with converting to higher than the 12% bracket is that some of the conversion will be at 27% until we reach 22%. For us that is about $38K, until our ordinary income hits $78,950 (MFJ), when the marginal rate goes back to 22%. Am I looking at this correctly?

Yes, you are looking at it perfectly, just perfectly.

Once you breach the top 12% bracket (actually the top of the 0% qualified income bracket which is $200 less than the top of the 12% ordinary income bracket), additional conversions up to the amount of qualified income get taxed at 27% (the additional ordinary income at 12% and the additional ordinary income pushes qualified income from 0% to 15%). And once all qualified income has been pushed out of the 0% bracket to the 15% bracket then the marginal rate reverts to the 22% ordinary rate.

[RunningBum]

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Originally Posted by Trooper The issue I'm having with converting to higher than the 12% bracket is that some of the conversion will be at 27% until we reach 22%. For us that is about $38K, until our ordinary income hits $78,950 (MFJ), when the marginal rate goes back to 22%. Am I looking at this correctly?

Yes, you definitely are. What I've done is stop conversions to the point at which qualified dividends and LTCGs start getting pushed into being taxed at 15% (avoiding that effective 27% rate) most years, and then pick a year where I blow past it and convert to the top of 22% or 24%.

Whether it makes sense for you to do a larger conversion in some years depends on how big your tIRA is and whether you'll hit other such tax humps like the SS hump where you could be pushed into even higher rates as you also push more SS benefits into being taxed.

[Trooper]

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Originally Posted by pb4uski Yes, you are looking at it perfectly, just perfectly.

Thanks

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Originally Posted by RunningBum Yes, you definitely are. What I've done is stop conversions to the point at which qualified dividends and LTCGs start getting pushed into being taxed at 15% (avoiding that effective 27% rate) most years, and then pick a year where I blow past it and convert to the top of 22% or 24%.

Thanks and same here. I have yet to pick the "blow past it" year, however. Thinking that this might be the year, but the taxes due are scaring me off.

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Originally Posted by RunningBum Whether it makes sense for you to do a larger conversion in some years depends on how big your tIRA is and whether you'll hit other such tax humps like the SS hump where you could be pushed into even higher rates as you also push more SS benefits into being taxed.

Totally agree. Currently our tIRAs represent about 70% of our egg. We are aged 61 and 60 now and plan to take SS at 70, right when RMDs kick in. Oh, where's the crystal ball?

[RetireBy90]

I'm sure this has already been posted to some degree but to add another data point, we have pension and other income of around $100K and will continue this for our lifetime. This number is COLA adjusted. Due to this, our current rate is close to 22% after standard deduction. This is my first year of no W2 income.

Starting this year we are doing conversions into 24% bracket for 2 reasons. 1) I believe our marginal rate will be higher after current rates expire at end of 2025; and 2) I want to pay the tax man now while I can afford it and have that monkey off my back. In 7 years when I turn 70 and get into the RMD game I hope to have enough converted that the RMD can be covered with a QCD. Hoping this makes finances a bit easier to manage as cognitive ability makes it more of a challenge.

[SecondCor521]

I'm fairly certain that the new SECURE Act that is likely to become law tomorrow raises the RMD age to 72 for those who are not already 70.5. That change probably doesn't affect people's decisions much, but we should all probably revise our spreadsheets.

[bingybear]

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Originally Posted by SecondCor521 I'm fairly certain that the new SECURE Act that is likely to become law tomorrow raises the RMD age to 72 for those who are not already 70.5. That change probably doesn't affect people's decisions much, but we should all probably revise our spreadsheets.

some others may need to change plans if they're likely to inherit a non-spouse IRA. This may be a good reason to ignore the 27% hump and do conversion to higher brackets. It may depend on how wide the 27% hump is. Preparation for additional assets (non-spousal IRAs) may become more important for some.