My ROTH conversion this year

[deserat]

Since I've seen a lot of threads on how to do a Roth conversion, I thought I would outline my process this year so that others may see one way to do this.

1) I decided the tax bracket that I wished to stay below or put another way the highest bracket I wished to pay taxes for this year.
a) This is based on my filing status, single, and my projected retirement streams of income and when they turned on. I have modeled my scenario is several calculators and spreadsheets (FireCalc, i-Orp, RPM (Bogleheads) and ABS). I have several pensions that will always keep me in the higher brackets when retired, so I have opted to use up to 24% when converting. YMMV based on your projected present an future income situation.

2) I decided I would wait until later in the year when I had a better idea of what my other income sources would be. I wanted to figure out how much room up to the top of the tax bracket I had for conversion purposes with regard to taxes. In my case I have several sources of current income: consulting (LLC-sole proprietor, salaried employee, pension, capital gains and dividends).

3) I then took the top income for the tax bracket and subtracted from that my current income sources. That gave me an amount that I could convert from the SEP IRA to my Roth IRA. I undershot a little bit so that there was a small buffer for any last minute unknowns. At the same time, I calculated about what the tax payment would be required of me from my current cash stash for that conversion.

4) I went to VG and did the exchange. They asked me four times to make sure as it was a transaction that could not be rolled back. So when I was doing step three, I made sure of my calculations several times (measure twice, cut once).

5) That exchange must be done before 31 Dec of the year to be considered part of that year's income.

6) I will fill out a form 8606 reporting the conversion as well as note it on the 1040 (wherever that is). I do not have any contributions of after-tax dollars to IRAs, so my basis is always zero, i.e., I will be paying tax on all of the dollars I have deferred in my IRAs/403bs, etc.

7) I will also fill out a 2210 (?) that tracks my income over the year to prove that I did not underhold during the year. The conversion will be noted in the fourth quarter for income purposes.

8) I will file a quarterly estimated tax form and pay that extra amount for the conversion in Jan 2021. I usually use the fourth quarter payment to 'true-up' my taxes so that the 15 April yearly filing is near zero.

Lather, rinse, repeat for next year. I know that I probably will pay more in taxes for doing my conversions late in the year, especially this year, however, it is difficult to know exactly what my total income will be based on all of the streams of income I have, so I opt for end of year. It also gives the option to not convert if I don't have the ready cash to pay the taxes and/or don't want to that year.

In any case, my goal is to have all of my tax deferred assets be Roth assets by age 63.

 

[RunningBum]

Since you are concerned with taxable income, not MAGI, did you subtract the standard or itemized deduction?

Another verification step to consider is to fill out your tax return as best you can. This can find unexpected things like NIIT.

 

[sengsational]

Looks good to me. I wouldn't be too concerned about a small bit of the conversion in the next higher tax bracket. Avoiding the ACA cliff is super critical (one mis step there and you have ruined a lifetime of Roth conversion benefits), but that's not your scenario. Thanks for laying out your steps.

 

[flyingaway]

Since I've seen a lot of threads on how to do a Roth conversion, I thought I would outline my process this year so that others may see one way to do this.

1) I decided the tax bracket that I wished to stay below or put another way the highest bracket I wished to pay taxes for this year.
a) This is based on my filing status, single, and my projected retirement streams of income and when they turned on. I have modeled my scenario is several calculators and spreadsheets (FireCalc, i-Orp, RPM (Bogleheads) and ABS). I have several pensions that will always keep me in the higher brackets when retired, so I have opted to use up to 24% when converting. YMMV based on your projected present an future income situation.

2) I decided I would wait until later in the year when I had a better idea of what my other income sources would be. I wanted to figure out how much room up to the top of the tax bracket I had for conversion purposes with regard to taxes. In my case I have several sources of current income: consulting (LLC-sole proprietor, salaried employee, pension, capital gains and dividends).

3) I then took the top income for the tax bracket and subtracted from that my current income sources. That gave me an amount that I could convert from the SEP IRA to my Roth IRA. I undershot a little bit so that there was a small buffer for any last minute unknowns. At the same time, I calculated about what the tax payment would be required of me from my current cash stash for that conversion.

4) I went to VG and did the exchange. They asked me four times to make sure as it was a transaction that could not be rolled back. So when I was doing step three, I made sure of my calculations several times (measure twice, cut once).

5) That exchange must be done before 31 Dec of the year to be considered part of that year's income.

6) I will fill out a form 8606 reporting the conversion as well as note it on the 1040 (wherever that is). I do not have any contributions of after-tax dollars to IRAs, so my basis is always zero, i.e., I will be paying tax on all of the dollars I have deferred in my IRAs/403bs, etc.

7) I will also fill out a 2210 (?) that tracks my income over the year to prove that I did not underhold during the year. The conversion will be noted in the fourth quarter for income purposes.

8) I will file a quarterly estimated tax form and pay that extra amount for the conversion in Jan 2021. I usually use the fourth quarter payment to 'true-up' my taxes so that the 15 April yearly filing is near zero.

Lather, rinse, repeat for next year. I know that I probably will pay more in taxes for doing my conversions late in the year, especially this year, however, it is difficult to know exactly what my total income will be based on all of the streams of income I have, so I opt for end of year. It also gives the option to not convert if I don't have the ready cash to pay the taxes and/or don't want to that year.

In any case, my goal is to have all of my tax deferred assets be Roth assets by age 63.

I don't understand the highlighted part. If you convert all of your tax deferred assets to Roth by age 63, then you will have some very lower tax brackets in the future and have nothing to occupy them.

 

[jazztbone]

Has anyone considered how ROTH conversions this year will affect COVID stimulus payments? To qualify for the full payment ($1200 single, $2400 joint,) you must make less than $75,000 per year ($150,000 for a married couple filing jointly) or less than $112,500 if you're the head of household (typically single parents). If your ROTH conversion puts you over these income thresholds, you will be required to repay the stimulus payment. This could, in effect, raise your actual tax rate. I haven't seen any online ROTH conversion calculators that factor in the possibility of having to repay the stimulus money. Thoughts?

 

[Out-to-Lunch]

Thanks for the nice writeup.

In any case, my goal is to have all of my tax deferred assets be Roth assets by age 63.

That was our goal, too. But then I decided it would probably be a good idea to leave ~$500k in tax-deferred. This would be used to fund large medical expenses (if unlucky) or charitable donations (if luckier).

 

[Dtail]

Has anyone considered how ROTH conversions this year will affect COVID stimulus payments? To qualify for the full payment ($1200 single, $2400 joint,) you must make less than $75,000 per year ($150,000 for a married couple filing jointly) or less than $112,500 if you're the head of household (typically single parents). If your ROTH conversion puts you over these income thresholds, you will be required to repay the stimulus payment. This could, in effect, raise your actual tax rate. I haven't seen any online ROTH conversion calculators that factor in the possibility of having to repay the stimulus money. Thoughts?

Not sure if you are correct, but if so that is a great insight that I haven't seen mentioned anywhere.
Are the amounts before the standard/itemized deductions?

 

[Sunset]

Has anyone considered how ROTH conversions this year will affect COVID stimulus payments? To qualify for the full payment ($1200 single, $2400 joint,) you must make less than $75,000 per year ($150,000 for a married couple filing jointly) or less than $112,500 if you're the head of household (typically single parents). If your ROTH conversion puts you over these income thresholds, you will be required to repay the stimulus payment. This could, in effect, raise your actual tax rate. I haven't seen any online ROTH conversion calculators that factor in the possibility of having to repay the stimulus money. Thoughts?

Yes,
Due to a large conversion last year, we missed the Stimulus payment, so I'm aiming this year to hit the $150K mark.
Besides getting the missed stimulus payment, I'm thinking they may still send out another based on 2020 tax yr.

 

[Ian S]

3) I then took the top income for the tax bracket and subtracted from that my current income sources. That gave me an amount that I could convert from the SEP IRA to my Roth IRA. I undershot a little bit so that there was a small buffer for any last minute unknowns. At the same time, I calculated about what the tax payment would be required of me from my current cash stash for that conversion.

I decided to have tax withheld from the Roth conversion; as I understand it, when you do that, it's as if you've been with holding all year vs making a payment for the last quarter.

 

[RunningBum]

I don't understand the highlighted part. If you convert all of your tax deferred assets to Roth by age 63, then you will have some very lower tax brackets in the future and have nothing to occupy them.

Depends on how much you have in taxable. Dividends and interest there might already push one out of the very low tax brackets.

There are a few other factors in play that might have one want to avoid conversions beginning at age 63 (to avoid IRMAA), 65 (pension start for some), and 62-70 (whenever SS starts), 72 (RMDs start).

All of those things increase your tax or medicare premium, so it's incentive to finish conversions by then. Another reason to complete before starting SS is to limit how much of SS is taxable.

These all have to be weighed against whatever tax rate you are paying on the conversion.

So many factors. It's usually pretty complex to decide what the best course is. I find that there are some obvious cases where conversions should work out better in the long term, so I take those. The ones not so clear are probably so close that it's not a big deal one way or the other. I tend to favor with conversions in those too, but those uncomfortable converting and paying taxes upfront are probably fine not converting.

 

[RunningBum]

That was our goal, too. But then I decided it would probably be a good idea to leave ~$500k in tax-deferred. This would be used to fund large medical expenses (if unlucky) or charitable donations (if luckier).

The issue I have with that is that those large medical expenses will probably be due to memory or assisted care. I would likely have a number of years of RMDs that would whittle down my tIRA, while those RMDs are taxed and perhaps triggering IRMAA before I have the high med expenses.

 

[cathy63]

Has anyone considered how ROTH conversions this year will affect COVID stimulus payments? To qualify for the full payment ($1200 single, $2400 joint,) you must make less than $75,000 per year ($150,000 for a married couple filing jointly) or less than $112,500 if you're the head of household (typically single parents). If your ROTH conversion puts you over these income thresholds, you will be required to repay the stimulus payment. This could, in effect, raise your actual tax rate. I haven't seen any online ROTH conversion calculators that factor in the possibility of having to repay the stimulus money. Thoughts?

There is no clawback for stimulus payments made under the CARES act during 2020, so there is no possibility of having to repay money you've already received.

If you did not receive a stimulus payment in 2020 due to your 2019 income being too high or for some other reason, you can claim it on your 2020 tax return. At that point, if your 2020 income is too high, the calculation will come out to $0. You still won't have to repay anything you have already received.

 

[jazztbone]

Thanks, cathy63, I stand corrected. You will not have to repay if you've already received a check. However, income over the threshold will prevent you from being able to claim it on your 2020 return, if you did not receive it based on 2019 income. So, it that case, it will be an effective tax increase.

 

[jazztbone]

Not sure if you are correct, but if so that is a great insight that I haven't seen mentioned anywhere.
Are the amounts before the standard/itemized deductions?

I was wrong about having to repay stimulus that was already received. However, if you did not receive a check this year because your 2019 income was too high, you can get it based on your 2020 income. In that case, if a ROTH conversion puts you over the income limit, you'd effectively pay more taxes. Income used to determine if you're eligible is AGI. Adjusted Gross Income is calculated before the itemized or standard deductions, exemptions and credits are taken into account.

 

[deserat]

Has anyone considered how ROTH conversions this year will affect COVID stimulus payments? To qualify for the full payment ($1200 single, $2400 joint,) you must make less than $75,000 per year ($150,000 for a married couple filing jointly) or less than $112,500 if you're the head of household (typically single parents). If your ROTH conversion puts you over these income thresholds, you will be required to repay the stimulus payment. This could, in effect, raise your actual tax rate. I haven't seen any online ROTH conversion calculators that factor in the possibility of having to repay the stimulus money. Thoughts?

Good point - that's why having a bit of buffer allows for some things like that - I did not take that into account....

With regard to deductions; I did take the standard deduction into account, so subtracted that from my income to come up with the possible conversion amount (effectively increases it by $12,400).

To answer the other poster regarding my goal to have all of my tax-deferred in a Roth by Age 63: I receive a COLA'd pension at age 60, I am receiving a small non-COLA'd pension right now, and my SS will be close to the maximum available at 67 or 70; I will possibly be in a worse situation with RMDs at that point and want my conversions done while the tax rates are lower (I believe tax rates will go up from where they are now to be able to meet the ever increasing federal obligations) and I am in a lower bracket. Also, the Medicare IRMAA (sp?) has a two year look back, so it takes into account my 'income' at age 63; I don't want the larg-ish conversion amounts taken into account for the Medicare purposes, although I will be TRICARE and probably TRICARE for life at the Medicare decision point.

Side point - I currently for Dept of Army military health system and DHA. With my future goggles on, I see further increases in TRICARE monthly fees and co-pays and continued reduction of retiree care at military facilities, effectively pushing care onto the civilian sector and more use of TRICARE as the civilian health insurance for retired military.

FEHB is for non-military federal government employees; my current plan is not to stay in this GS position long enough to get tenure (5 years), but if I did (big if), I would have the option of either or both (possibly).

My BS bucket is getting very full, however, the COVID situation locking down everything means I wouldn't be able to do much anyhow if retired, so I will stay put for now until things settle out more.

 

[Out-to-Lunch]

That was our goal, too. But then I decided it would probably be a good idea to leave ~$500k in tax-deferred. This would be used to fund large medical expenses (if unlucky) or charitable donations (if luckier).

The issue I have with that is that those large medical expenses will probably be due to memory or assisted care. I would likely have a number of years of RMDs that would whittle down my tIRA, while those RMDs are taxed and perhaps triggering IRMAA before I have the high med expenses.

I totally agree that this is the tradeoff. My projections all assume that we are alive and filing MFJ, and I acknowledge that this will not necessarily be the case. In our case, I estimate that we will have RMDs of ~$20k while the tIRA is being whittled away, and that this will not be enough to trigger IRMAA or kick us into a higher tax bracket. I acknowledge that all of those things may turn out differently, depending on rules in place at the time, etc., etc.

So, I acknowledge that choosing the amount to leave in tIRA is a game of playing the odds. That ($500k) seemed like the right level to me. (I admit that this nice round number likely has something to do with the number of fingers I have on each hand! )

 

[Dtail]

I was wrong about having to repay stimulus that was already received. However, if you did not receive a check this year because your 2019 income was too high, you can get it based on your 2020 income. In that case, if a ROTH conversion puts you over the income limit, you'd effectively pay more taxes. Income used to determine if you're eligible is AGI. Adjusted Gross Income is calculated before the itemized or standard deductions, exemptions and credits are taken into account.

No problem.
It was an interesting concept.

 

[SecondCor521]

Since I've seen a lot of threads on how to do a Roth conversion, I thought I would outline my process this year so that others may see one way to do this.

Pretty much how I do it in broad strokes.

Comments (my numbers align with yours):

1. I have a spreadsheet set up for this with all of my income sources and my standard deduction. This way I just plug in the numbers and it does the math for me. Slightly less chance of an error that way, and makes the process replicable from year to year.

2. I wait until my last taxable income hits, which is the December VFIAX dividend. That usually hits about 12/22, which gives me a week to calculate and do my Roth conversion.

5. Be aware that orders for Roth conversions probably must be received before close of the market, and the market may be closed or may close early on the last calendar day of the year. I never leave it that late so I don't know the exact deadline.

6. It's Form 8606 part II, which flows this year to IRS 1040 line 4b.

7. It's Form 2210, and you may or may not need to file it with your tax return; check the flowchart at the top for your particular scenario. I don't file stuff with the IRS if they tell me not to. I keep stuff for my records if the IRS tells me to. I try to make things easy that way.

 

[RunningBum]

I totally agree that this is the tradeoff. My projections all assume that we are alive and filing MFJ, and I acknowledge that this will not necessarily be the case. In our case, I estimate that we will have RMDs of ~$20k while the tIRA is being whittled away, and that this will not be enough to trigger IRMAA or kick us into a higher tax bracket. I acknowledge that all of those things may turn out differently, depending on rules in place at the time, etc., etc.

So, I acknowledge that choosing the amount to leave in tIRA is a game of playing the odds. That ($500k) seemed like the right level to me. (I admit that this nice round number likely has something to do with the number of fingers I have on each hand! )

Yes, and I meant to comment that I'm not saying it's wrong, just that there are a lot of unknowns.

An alternate plan for those high medical expenses just came to me. If life goes smoothly, I will probably pass on a good amount of highly appreciated mutual funds, that today would get a stepped up basis, but may not in the future. And if I do need expensive care, I may have to sell some of those anyway, so that's income I can write the medical expenses against. So I'm leaning against keeping some of my tIRA unconverted, though if I'm not able to get it all done I'm not going to push it.

 

[RetireBy90]

Has anyone considered how ROTH conversions this year will affect COVID stimulus payments? To qualify for the full payment ($1200 single, $2400 joint,) you must make less than $75,000 per year ($150,000 for a married couple filing jointly) or less than $112,500 if you're the head of household (typically single parents). If your ROTH conversion puts you over these income thresholds, you will be required to repay the stimulus payment. This could, in effect, raise your actual tax rate. I haven't seen any online ROTH conversion calculators that factor in the possibility of having to repay the stimulus money. Thoughts?

When working and I could do IRA contributions I tried to make them early in the year to get the entire year of market gains. I carried this over to Roth conversions and made my conversions in Jan so I missed opportunity to grab the stimulus

 

[pb4uski]

Thanks, cathy63, I stand corrected. You will not have to repay if you've already received a check. However, income over the threshold will prevent you from being able to claim it on your 2020 return, if you did not receive it based on 2019 income. So, it that case, it will be an effective tax increase.

There is an obscure situation where you might have to pay it back... if you received a stimulus payment based on being married and your spouse died before 2020 then my understanding is that they'll be asking for half of it back.

 

[cathy63]

There is an obscure situation where you might have to pay it back... if you received a stimulus payment based on being married and your spouse died before 2020 then my understanding is that they'll be asking for half of it back.

Yes, they did ask for half of the payment back if one spouse died before the stimulus payment was received. In that case, you were supposed to send a check directly to the IRS though. There's no way to reconcile that situation on the 1040.

 

[Out-to-Lunch]

An alternate plan for those high medical expenses just came to me. If life goes smoothly, I will probably pass on a good amount of highly appreciated mutual funds, that today would get a stepped up basis, but may not in the future. And if I do need expensive care, I may have to sell some of those anyway, so that's income I can write the medical expenses against. So I'm leaning against keeping some of my tIRA unconverted, though if I'm not able to get it all done I'm not going to push it.

That is a good thought!

On reflection, it does not help me much. I am Bernstein's "Sheltered Sam." Only ~4% of my stash is in taxable equities! But a good idea for the right profile.

 

[Cobra9777]

There is an obscure situation where you might have to pay it back... if you received a stimulus payment based on being married and your spouse died before 2020 then my understanding is that they'll be asking for half of it back.

Yes, they did ask for half of the payment back if one spouse died before the stimulus payment was received. In that case, you were supposed to send a check directly to the IRS though. There's no way to reconcile that situation on the 1040.

It's my understanding that there is no REQUIREMENT to return that money. The IRS has "asked" people to return it. And made statements like, people "should" return it. But the fact remains that the CARES Act had no clawback provision whatsoever. So there is no statutory basis for those requests, which I suppose is why they are using weak language. I keep thinking the next stimulus bill will clean this up and/or clarify the situation. But the federal government is so dysfunctional right now, I'm not sure when or if that will ever happen. So for now, I continue to advise DMIL to hang on to the extra $1200.

 

[pb4uski]

I suspect that the CARES act probably says $1,200 for a single and $2,400 for a couple, so there wouldn't need to be a specific provision for a clawback for a mistaken payment. IOW, your DMIL and my friend are not legally entitled to the extra $1,200.

Now how aggressively the IRS will chase these mistaken payments is a whole different question. I wouldn't be surprised if refunds were reduced for it.