Maximum Annual Roth conversion amount ?

[Delawaredave5]

Saw a couple recommendations to do substantial Roth conversions now because "top tax brackets are lowest ever and sure to go up a lot over next couple decades".

If you're in a high/top bracket now, and you expect to be in same high/top bracket through retirement - does it make sense to do large scale Roth conversion now ?

Is there a conversion annual limit ? (conversion, not contribution).

With the current top bracket at 35% (for below $500k), top brackets could easily go to 45% (or higher) - especially true given federal deficit and a "Bernie like" President possibility.

Anybody doing large conversions to take advantage of this ? Thanks in advance.

 

[RunningBum]

No limit on conversions.

 

[RunningBum]

And no, I'm not doing large conversions this year. I'm keeping my income low to get an ACA subsidy. In a couple of the years that I've skipped the subsidy, I made larger conversions, but not huge. Top brackets could go higher, but I don't see middle income brackets going too much higher, not enough to convert at the top rate today.

 

[GrayHare]

Guessing future tax rates is a gamble. Maybe you'll guess right, maybe you won't. When making tax guesses I prefer to assume things will stay much as they are presently.

Usually there is benefit from delaying taxes as long as possible, which in general argues against conversions to Roth, at least at high tax brackets. I never pay more than an effective 5% tax or so on a conversion to Roth. As you age and medical expenses go up, you'll have deductions against later tIRA withdrawals that might make the effective tax rate on those withdrawals quite low.

 

[kaneohe]

......................... I never pay more than an effective 5% tax or so on a conversion to Roth. As you age and medical expenses go up, you'll have deductions against later tIRA withdrawals that might make the effective tax rate on those withdrawals quite low.

Perhaps..............if you have Medicare and a good supplement (like Plan G),
you might not have enough medical expenses to deduct (not necessarily a bad thing)............just the Medicare and Medigap premiums and the small Medigap deductible.

 

[kaneohe]

...........................
Usually there is benefit from delaying taxes as long as possible, which in general argues against conversions to Roth, at least at high tax brackets. ................................................

The basic question about conversions asks about the rate at conversion vs
rate if you don't convert. If you convert now at rate X vs not converting and
then withdrawing at rate X, the math suggests that the result is the same.

 

[Sunset]

No limit on conversions.

True, but depending upon age there is a danger of dramatically increasing medicare expense if 62 or older.

Also there is (was?) an extra 3.8% net investment income tax when a couples income jumps over some number approximately $250K

 

[CyclingInvestor]

Saw a couple recommendations to do substantial Roth conversions now because "top tax brackets are lowest ever and sure to go up a lot over next couple decades".

If you're in a high/top bracket now, and you expect to be in same high/top bracket through retirement - does it make sense to do large scale Roth conversion now ?

Is there a conversion annual limit ? (conversion, not contribution).

With the current top bracket at 35% (for below $500k), top brackets could easily go to 45% (or higher) - especially true given federal deficit and a "Bernie like" President possibility.

Anybody doing large conversions to take advantage of this ? Thanks in advance.

I am just doing my standard IRA draw / Roth conversion this year (of my IRA dividends), but I might be doing a large conversion in December 2020 depending on the election results in anticipation of a large jump in tax rates.

 

[Delawaredave5]

Thanks, great input, I guess this is where the phrase "tax diversification" comes into play.

Federal rates have been substantially higher, as recent as 70s.

https://bradfordtaxinstitute.com/Free_Resources/Federal-Income-Tax-Rates.aspx
https://www.thebalance.com/tax-diversification-with-investing-2466705

 

[jollystomper]

For a couple, Roth conversions *might* make sense, since upon death of one the tax rate will jump up for the other on the renaming RMDs. This is something I consider in the small amount of Roth conversion I have done.

 

[RunningBum]

Originally Posted by GrayHare
...........................
Usually there is benefit from delaying taxes as long as possible, which in general argues against conversions to Roth, at least at high tax brackets. ................................................


The basic question about conversions asks about the rate at conversion vs
rate if you don't convert. If you convert now at rate X vs not converting and
then withdrawing at rate X, the math suggests that the result is the same.

+1. Just delaying taxes by itself is not a valid reason. If you defer taxes, the tax liability grows as the retirement account grows, so there's no advantage if the tax rate is the same. Defer/delay if you think you'll be paying taxes at a lower rate later, and pay (at least some) taxes now if you think your tax rate is lower now. It's not just the tax bracket, but ACA subsidies, IRMA, death of a spouse, and other such things are also factors.

 

[GrayHare]

The benefit of delaying taxes comes from new situations that arise. An example is a year in which one has significant medical or other deductions. Another example is what happened in 2010: the tax on conversions could be delayed and split across 2011 and 2012. The more time you have pre age 70, the greater the chance some special situation arises to reduce your conversion tax.

 

[Animorph]

We have been converting up to $250k AGI, avoiding the extra taxes that kick in at that point.

If you will have a period of very low income before having to take RMD's that would be a good time to do large Roth conversions. That gets some of it out of the tIRA at the lowest tax rates.

A bear market and/or low current tax rates increase the value of doing Roth conversion now.

If you expect tax rates to remain the same for you, Roth conversion may still have a benefit. At a 35% tax rate, 35% of your tIRA belongs to the IRS regardless of when you pay it. But if you convert now you can put your 65% into a Roth, plus add the 35% tax amount to the Roth from your currently fully taxable account. Now, all of the money in your Roth belongs to you and saves you from paying taxes on money that used to be in your taxable account.

That tax-free benefit lasts until you have to withdraw that money, so it is more valuable the earlier you convert. If you are within a few years of making Roth withdrawals then it might be too small of a benefit to bother with.

 

[Whisper66]

We are retired with minimal income. Not collecting SS yet. We have substantial assets in t-IRAs that will drive high RMDs at a later date if nothing is converted to Roth now. We see the current low tax environment as a excellent environment for conversions. We don't expect our government will leave taxes at this lower rate for too many years. We are also aware that our tax brackets will be higher if one of us passes.

So yes, we are doing large conversions at this time. We use the I-ORP program each year to estimate amount of conversion that may make sense for our situation. This year, our conversion target will put us at the top of the 24% tax bracket.


No there is no conversion limit though you do pay an extra 3.8% Net Investment Income Tax if your conversions drive your income over 250k.

 

[Midpack]

I am currently looking at plans that would have me converting anywhere from $100K/yr to $340K/yr (up to 24% bracket) over the next 6 years before I turn 70. I have a consultation to talk it over next week. Like many here, it's hard to voluntary pay a lot in taxes now, but odds are it'll save us over the long haul. Not an easy decision.

 

[CardsFan]

I am currently looking at plans that would have me converting anywhere from $100K/yr to $340K/yr (up to 24% bracket) over the next 6 years before I turn 70. I have a consultation to talk it over next week. Like many here, it's hard to voluntary pay a lot in taxes now, but odds are it'll save us over the long haul. Not an easy decision.

I look forward to anything you can share about the consultation. We convert about $70k/year, and stay in the 12% bracket. I, also, have a hard time with paying a big tax bill voluntarily.

When I run the numbers, the incremental taxes for converting another $30k (up to $100k) are crazy. Due to losing cap gains and QD benefits, the tax on that $30k is 25%.

 

[Midpack]

I look forward to anything you can share about the consultation. We convert about $70k/year, and stay in the 12% bracket. I, also, have a hard time with paying a big tax bill voluntarily.

When I run the numbers, the incremental taxes for converting another $30k (up to $100k) are crazy. Due to losing cap gains and QD benefits, the tax on that $30k is 25%.

WADR staying in the 12% bracket is a no brainer for almost anyone. It's become clear we can better preserve our nest egg by converting more aggressively (to 22% or 24%) even if tax rates stay as is (seems highly unlikely to me). The software I am using clearly shows limiting ourselves to 12% would cost us dearly in the long run. Yes our taxes will be higher over the next 6 years, but lower in the aggregate over the next 30. And yes, it's a first world problem, we're grateful for if not a little ashamed about...

 

[CardsFan]

WADR staying in the 12% bracket is a no brainer for almost anyone. It's become clear we can better preserve our nest egg by converting more aggressively (to 22% or 24%) even if tax rates stay as is (seems highly unlikely to me). The software I am using clearly shows limiting ourselves to 12% would cost us dearly in the long run. Yes our taxes will be higher over the next 6 years, but lower in the aggregate over the next 30. And yes, it's a first world problem, we're grateful for if not a little ashamed about...

I agree with the 12% bracket being a no-brainer. But paying $50k for a $250k conversion just is hard to take. But looking realistically, it is only 20% (We would pay no taxes if we did not convert), and we will be in the 22% bracket, or higher, at RMD time.

FWIW, as a practical matter, aside from RMD's, we expect the full tIRA (and any Roth conversions) will ultimately be inherited by our son. So tax changes, like the SECURE act could push me over the edge.

 

[copyright1997reloaded]

My new strategy (for better or worse) is to contribute/convert to Roth as much as possible while sticking in the 24% marginal rate bracket (single). (I am still working plus drawing a pension.) My first priority is to max out Roth contributions at work, followed by conversions as possible.

 

[Bruno]

Who does a person need to visit with about if a roth conversion is BEST for you? I am 66 just retired in July drawing SS and wife is still working with a good job and we are probably in 20% tax bracket.

Thanks in advance...

 

[Perryinva]

WADR staying in the 12% bracket is a no brainer for almost anyone. It's become clear we can better preserve our nest egg by converting more aggressively (to 22% or 24%) even if tax rates stay as is (seems highly unlikely to me). The software I am using clearly shows limiting ourselves to 12% would cost us dearly in the long run. Yes our taxes will be higher over the next 6 years, but lower in the aggregate over the next 30. And yes, it's a first world problem, we're grateful for if not a little ashamed about...

Exact same decision here but I doubt it will be a 30year aggregate of savings for us, that would put us at 93 & 99! As mentioned, the real killer is for increased taxes for the survivor. Really only saving maybe $15k in taxes total for converting in the 22 vs 25 after 2025. Going from MFJ to Single is far worse.

 

[RunningBum]

Who does a person need to visit with about if a roth conversion is BEST for you? I am 66 just retired in July drawing SS and wife is still working with a good job and we are probably in 20% tax bracket.

Thanks in advance...

There is no 20% tax bracket. You should be able to figure out which tax bracket you'll actually be in this year. What's trickier is forecasting which tax bracket you'll be in when you start RMDs, and both of you are drawing SS, and presumably neither is working. If it's the same bracket or higher, I'd probably convert to the top of that bracket, but as others have said, there are other factors. You might try using i-orp.

 

[Midpack]

Who does a person need to visit with about if a roth conversion is BEST for you? I am 66 just retired in July drawing SS and wife is still working with a good job and we are probably in 20% tax bracket.

Thanks in advance...

It’s not enough to me, but start with iORP for free, it might be all you need. From there it costs from $20 to no limit. There are thousands of sources, some great and some useless. I’m working with an online firm that’ll end up costing me $145. The more financially savvy you are, the less it could cost - IOW it’ll probably cost a lot (e.g. $1500) to get good advice if you’re not a hands on investor.

But you probably realize “the answer” is unknowable as there are several unknowns, future tax rates, future Soc Sec, sequence of returns, actual spending needs, longevity (widows), heirs, etc. Even the best advice depends on all your assumptions coming true...

 

[RetireBy90]

I've just started doing conversions this year. I'll add another $70K in December or before if we get a drop in the market. My plan is to convert now up to top of 22% and then about $35K in 24% federal bracket, careful to keep taxable below $214K to avoid higher IRMAA for Medicare. This will get most of TIRA converted to Roth by 2025 when current rates are scheduled to revert back to previous levels. 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. Then when I need the Roth money I can take without having to worry about the tax implications. I did run the plan by my Fido advisor who has been very helpful and she only suggested I could get more aggressive with slightly higher conversions each year. I'll have a small amount left and I'm OK with that come 2026.



There are 2 other threads I've been following on the topic that should be of interest for those thinking of conversions or devising a plan for how much and when to convert.

http://www.early-retirement.org/forums/f28/retirement-tax-planning-income-optimization-99854.html

http://www.early-retirement.org/forums/f28/how-to-pay-for-roth-conversions-100021.html

 

[bingybear]

There is no 20% tax bracket. You should be able to figure out which tax bracket you'll actually be in this year. What's trickier is forecasting which tax bracket you'll be in when you start RMDs, and both of you are drawing SS, and presumably neither is working. If it's the same bracket or higher, I'd probably convert to the top of that bracket, but as others have said, there are other factors. You might try using i-orp.

What is the significance of the bold text?
I'm assuming you are looking for the top bracket.

death of a spouse often creates a notable increase in tax rate.


If someone uses a longevity annuity then the max tax rate may bump may be about be 10 years or so later than the typical RMD time.

Maybe you have another reason for identifying that time.

There are many things that can jump your tax rate...