plan for Roth Conversions + tax torpedo

[Clone]

plan for Roth Conversions

I would appreciate a review of my plan for Roth Conversions. I am still working on taxes, but it appears that I hit the top of the 15% tax bracket. (next dollars would be incremental tax rate of 25%) With the changes in tax structure, I am trying to develop my plan for future Roth Conversions.

From age 61 to Age 70, draw down Tax advantaged IRAs, 401k, + Roth Conversions to top of 12% bracket. (Incremental tax rate 22%)

From Age 70 on, with my SS plus RMDs, we expect to be in middle of 22% tax bracket. (Incremental tax rate 22%)

Tax torpedo- when I die, DW SS goes to survivor SS, pension goes to Survivor pension benefit, standard deduction for MFJ goes to Single. Income drops from 140K to 131K, taxes go from 23K to 26K. Middle of the 24% tax bracket. (Incremental tax rate 24%)


My initial plan was to do draw down plus Roth Conversions to the top of the 12% bracket. Given that a single filing status will have one of us firmly in the 24% tax bracket, does it make sense to convert to the top of the 22% tax bracket now? Or does it not really make much difference because 22% is so close to 24%? ACA is not in play as I have megaCorp retirement healthcare. Also- am I missing anything?

I appreciate any comments.

 

[woodguy00]

I'd only go to the top of the 12% bracket. 22% vs 24% is too close together for me to want to pay tax now. Some may argue that the 22% rate won't last. To each their own.

You do say 'draw down Tax advantaged IRAs, 401k, + Roth Conversions' - If you have it available, I'd use after tax savings during those years to allow as much Roth conversion as possible.

 

[CardsFan]

I'd only go to the top of the 12% bracket. 22% vs 24% is too close together for me to want to pay tax now. Some may argue that the 22% rate won't last. To each their own.

This^^^

 

[bingybear]

I'm starting to look at something similar.... now expanding scope.
any inheritance coming your way?
how much does taxable generate?

you may be different, but if I look just at our TIRAs, I miss the problem. I have more in after tax investments than in TIRAs. Unless you have most of your assets in TIRA and Roths.. broaden the scope. Your tax issue my be different than you are solving for.

 

[mpeirce]

Does your state have high income tax rates? And is there a possibility of moving to a lower income tax rate state later in life?

If so that can come into play in the ROTH calculation as well.

For example I live in Ohio which has a maximum income tax rate of 5%. If I was to move to a 0% state, that might affect things as much as which federal brackets.

 

[Clone]

Thank you for the responses. Answers to a couple of the questions-

I estimate that we need about $70K per year.

I have locked in income (pension, long term rent contract, DW SS) of approx 70K per year. After tax accounts are minimal. Tax deferred accounts (esp 401k) are where the bulk of the investments are located (current value approx $800K).

My math shows that approx $105K will result in an AGI of $78K, or top of the 12% bracket. So, if I do approx 35K of Roth conversions, and maybe pull 5K straight withdrawal, then what is removed from the tIRA covers the conversion plus taxes.

State taxes are middle of the road. While there may be some minor savings elsewhere, I don't see relocating have much impact on withdrawal strategies. A few states which have no tax on withdrawals from 401ks would have some tax advantage.

It looks like our Fed tax rate is pretty much locked into a 22% incremental from here on out.

 

[pb4uski]

Similar situation here... likely to be in 22/25% or higher for life once SS starts when added to pension so I'm just converting as much as I can each year to top of 12% tax bracket until then. First world problem many others would like to have so I'm not complaining... also, 22/25% is still a lot lower than the taxes that I avoided when I deferred that income so I am still coming our ahead by having deferred.... just not as much as I thought that I would.... a "success" penalty I guess.

 

[SecondCor521]

Similar situation here... likely to be in 22/25% or higher for life once SS starts when added to pension so I'm just converting as much as I can each year to top of 12% tax bracket until then. First world problem many others would like to have so I'm not complaining... also, 22/25% is still a lot lower than the taxes that I avoided when I deferred that income so I am still coming our ahead by having deferred.... just not as much as I thought that I would.... a "success" penalty I guess.

I'm still thinking this through for myself.

Would you convert higher than top-of-12% now if it meant avoiding entering the 32% bracket later? (I assume yes.)

If so, when would you advise doing so? As soon as possible so that the converted amounts spend more time on the tax-free side of the ledger? Even it out over time - so if one needed to convert $250K over 25 years, just convert top-of-12% plus $10K each year? As late as possible just on the principle of avoiding taxes as long as possible?

I'm converting to an AGI point related to financial aid for college, which may be dumb, but I may hit all three of my kids' four FAFSA years in the next five to six years. So my tentative plan is to ramp up conversions after that. I may lose ACA subsidies, but I'll still be in my mid-50's so I'd rather lose them then than in my early 60's.

Also in 1-10 years there is a possible inheritance that would likely be a big red reset button on my overall plan.