Picking a maximum tax bracket for Roths.

[Time2]

I'll hit 72 in 5 years, so that is 5 years for my IRAs to grow. I took our Tax deferred accounts and grew them at 5% and at 10%, to get values when RMDs start, to make things difficult, my wife is 4 years younger so her RMDs will be 4 years later and 4 years of growing bigger. (ever the optimist!)

9 years from now, I'm looking at an income of $105k (@5%) or $134k (@10%), this includes SS, RMDs, and Dividends, I have not added in some other assets that will be converted from property to cash in the future. This could as as much as $400k to my taxable accounts, but only an additional $8,000 of dividends to our after 72 income.
The RMD part of these incomes is $40k (@5%) and $64K (@10%).
We can easily live within the 12% bracket now, and Roth convert $45k to $50k for the next 3 years, then I will add $30k of SS, knocking down my Roth Contributions to $15k to $20k, if I stay in the 12% tax Bracket.
Looking for opinions on whether I should just max out the 12% bracket or jump to the 22% bracket. I'm now tempted to stay in the 12% bracket after looking at the numbers.
Also, I have $270k left in my IRAs (been converting), my wife has $570k, As long as we stay married, does it matter that one has more than the other. Should I try to equalize them with Roth conversions, (why) or what?

 

[RunningBum]

Is that $105K of income in 9 years taxable income, or gross? If it's gross, the standard deduction for MFJ puts you in the 12% marginal bracket, right? If so, I'd keep conversions to 12%.

I'm not married so I don't know if there are subtleties about which IRA to convert, but with her RMDs starting later it seems to me that you should be converting yours first.

 

[walkinwood]

This thread has a lot of information on income optimization in retirement & ROTH conversions are debated in depth. To get as accurate a picture as you can, you're probably looking at using some software package that can model your situation & assumptions.


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

 

[Dash man]

How long do you think you might live? Model out your RMDs at least to age 85. Then decide how much to convert.
Remember, under current law, the TCJA sunsets after 2025, so tax rates will go up. Also consider the impact if one of you passes leaving the other having to file as an individual. You may want to be more aggressive now.

 

[Jerry1]

This may not be the best, most mathematically correct answer, but I too, am maxing out to the 12% bracket. Some could argue that you should take advantage of the current lower rate in the next bracket (22%) but I can’t bring myself to do it. Another, more compelling argument is that it seems when I start my RMD’s and me and DW are on SS plus a small pension, the RMD’s will force me into the next bracket. If that bracket goes from 22% back up to 28%, then it obviously would be better for me to convert now at 22%.

Still, IMHO, I’m not going to get everything right so by at least doing what I’m doing and maxing out the 12% bracket, I’m improving my situation regarding taxes. Plus, who knows what taxes will be, or for that matter, what RMD’s will be 5 or 10 years from now.

 

[pb4uski]

I'll hit 72 in 5 years, so that is 5 years for my IRAs to grow. I took our Tax deferred accounts and grew them at 5% and at 10%, to get values when RMDs start, to make things difficult, my wife is 4 years younger so her RMDs will be 4 years later and 4 years of growing bigger. (ever the optimist!)

9 years from now, I'm looking at an income of $105k (@5%) or $134k (@10%), this includes SS, RMDs, and Dividends, I have not added in some other assets that will be converted from property to cash in the future. This could as as much as $400k to my taxable accounts, but only an additional $8,000 of dividends to our after 72 income.
The RMD part of these incomes is $40k (@5%) and $64K (@10%).
We can easily live within the 12% bracket now, and Roth convert $45k to $50k for the next 3 years, then I will add $30k of SS, knocking down my Roth Contributions to $15k to $20k, if I stay in the 12% tax Bracket.
Looking for opinions on whether I should just max out the 12% bracket or jump to the 22% bracket. I'm now tempted to stay in the 12% bracket after looking at the numbers.
Also, I have $270k left in my IRAs (been converting), my wife has $570k, As long as we stay married, does it matter that one has more than the other. Should I try to equalize them with Roth conversions, (why) or what?

It is hard to tell from what you provided, but it sounds like at the worst that your RMDs are causing your taxes to increase by some in the 12% bracket and some in the 22% bracket.

The problem with converting into the 22% tax bracket is that for the first pieces of those conversions they are really at 27% because additional conversions increase ordinary income that is taxed at 12% but that inturn pushes qualified dividends from 0% to 15% so the net impact is 27%.

What I would suggest is playing around with your age 72 tax situation and RMDs in https://www.irscalculators.com/tax-calculator and also have a separate window with your current tax situation with no Roth comversions and add some additional Roth conversions and increase the Roth conversions a little at a time and taxes to Roth conversion ratio... then stop when that percentage is painful.

 

[Time2]

It is hard to tell from what you provided, but it sounds like at the worst that your RMDs are causing your taxes to increase by some in the 12% bracket and some in the 22% bracket.

The problem with converting into the 22% tax bracket is that for the first pieces of those conversions they are really at 27% because additional conversions increase ordinary income that is taxed at 12% but that inturn pushes qualified dividends from 0% to 15% so the net impact is 27%.

What I would suggest is playing around with your age 72 tax situation and RMDs in https://www.irscalculators.com/tax-calculator and also have a separate window with your current tax situation with no Roth conversions and add some additional Roth conversions and increase the Roth conversions a little at a time and taxes to Roth conversion ratio... then stop when that percentage is painful.

Well, I'd like to say my pain threshold is low! But, last year I bit the bullet and Roth converted about $75,000 pushing me to the top of the 22%, other years it was only 12%. I paid about $26k in federal taxes.

 

[Animorph]

My DW is five years younger than me. I converted all of my tIRA first and we're working on hers now. Converting all of my tIRA delayed RMD's for five years, which helped reduce future taxes and gave us a little more income flexibility. We'll still have some RMD's throughout retirement, but they shouldn't be increasing our marginal tax bracket.

To see if you want to Roth convert to a higher tax bracket, make your best estimate of your marginal tax rate when all RMD's and other income have all started. If that tax rate is higher than 12% then it is probably worthwhile to Roth convert up to or including that higher tax bracket. If all you are doing is Roth converting, the tax rate of your withdrawal is all that matters, not the year of the withdrawal.

Another thing to consider is the passing of one spouse placing you in a higher tax bracket in the future, which may favor extra Roth conversions.

 

[SecondCor521]

(It's always interesting to me how it's easier for me to answer other people's Roth conversion questions than my own...)

@Time2, I think the only reason to convert into the 22% bracket now is if you might be in a higher bracket later.

The TCJA expiry probably won't do it by itself - I think the 12% bracket will mostly revert to a 15% bracket, although the bracket cutoff dollar amount might very well be different.

When one of you passes, the surviving spouse might be in the 22% bracket. Depending on your SS/pension/overall situation, they might be in the 24% bracket. With that plus TCJA expiring, that might be the 28% bracket. You'd have to do an analysis.

The only other situation is one where you live a long time and have good investment growth. You'd have to do the math and see where your situation ends up when you're in your 80s and how much you're concerned about it.

I'm single, I ignore TCJA out of simplicity, but I assume fairly good growth rates on my investments (I'm an optimist). So I project myself to be in a fairly high tax bracket when I'm 82 (my approximate life expectancy per SS). Which leads me to be inclined to Roth convert up to fairly high brackets now.

("Fairly high" is relative, of course.)

 

[OldShooter]

... I think the only reason to convert into the 22% bracket now is if you might be in a higher bracket later. ...

Yes.

I used to think Roth conversions were complex but have come to the conclusion that I was wrong. It's simply an attempt at tax rate arbitrage that is complicated by the fact that the future tax rate is unknown.

The question is: Will the net tax cost of converting a dollar of tIRA today be less than the net tax cost at some future date when that dollar would be otherwise withdrawn and taxed. If yes, you convert. If no, you don't.

The first half of the equation, figuring today's net tax cost, is a bit complex (as @pb4uski points out) but done correctly it produces a high quality number. The second half of the equation, future tax cost, is a crap shoot. In the end you are left remembering Clint Eastwood/Dirty Harry's famous line "...you've got to ask yourself one question: 'Do I feel lucky?' Well, do you, punk?"

 

[SecondCor521]

The second half of the equation, future tax cost, is a crap shoot. In the end you are left remembering Clint Eastwood/Dirty Harry's famous line "...you've got to ask yourself one question: 'Do I feel lucky?' Well, do you, punk?"

Indeed.

At age 53, trying to [-]calculate[/-]guess my age 82 tax bracket is honestly close to impossible. TCJA, future governmental tax policy changes, investment returns, IRMAA premiums, SS, etc. Then compound all that over 30 years.

I like to think it's a broad plateau and doing something approximately correct is at least a good idea. And I like the idea of iterating by updating and looking at the numbers and strategy each tax year. Keeps me entertained, anyway.

 

[ncbill]

This may not be the best, most mathematically correct answer, but I too, am maxing out to the 12% bracket. Some could argue that you should take advantage of the current lower rate in the next bracket (22%) but I can’t bring myself to do it. Another, more compelling argument is that it seems when I start my RMD’s and me and DW are on SS plus a small pension, the RMD’s will force me into the next bracket. If that bracket goes from 22% back up to 28%, then it obviously would be better for me to convert now at 22%.

Still, IMHO, I’m not going to get everything right so by at least doing what I’m doing and maxing out the 12% bracket, I’m improving my situation regarding taxes. Plus, who knows what taxes will be, or for that matter, what RMD’s will be 5 or 10 years from now.

Ditto.

But our combined traditional IRA balances are relatively small so I still project finishing around age 60 by staying in the 12% federal bracket (MFJ).

Statistically I could live another 30 years, spouse another 40...so I hope our Roth accounts are not needed by us & can go to our heirs instead.

 

[Exchme]

Well technically, you probably want to convert a bit less, limiting yourself to the top of the 0% LTCG bracket now ($109,250 MAGI). Going beyond that would put your qualified dividends/LTCGs into effectively a 27% bracket as an extra $ of Roth conversion beyond there gets taxed at 12% and pushes a $ of LTCGs to be taxed at 15%, making those last dollars expensive.

I can think of two major justifications for converting above that in your case.

1)After one of you passes, the other will pay higher rates. Statistically, with you older and male, your wife could have quite a few years in higher brackets.

2)The TCJA expires after 2025, so today's 22% become 25%. If you believe the 22% bracket be rescued, then paying 22% today to avoid 22% in the future is not going to make you richer.

Once RMDs start, you should evaluate filling the tax bracket or IRMAA tier you are in (whichever is lower) as RMDs keep growing for several years. So if you are in the 22% bracket, going to the top of the 1st IRMAA tier may prevent IRMAA surcharges in some future year. But as OldShooter said, it's a crapshoot.

 

[TheWizard]

@Time2, I think the only reason to convert into the 22% bracket now is if you might be in a higher bracket later...

I Roth converted into the middle of the 24% Federal bracket the past few years, which is where I'll be this year and henceforth, now that I've started RMDs.

As you know, I subscribe to the AGI Levelizing concept where my Roth conversion amount at age 71(last year) was approximately equal to my RMD amount this year.

This is more complicated in the 24% bracket since you're dealing with IRMAA thresholds as well...