Planning for this year's Roth conversion, hit a wall, stumped!

[RunningBum]

My tIRA is all bond funds so the conversion timing isn't such a big deal to me. This was an especially hard year to predict how much room I'd have so I just waited until all dividends were announced.

I did some projecting for the next 10 years trying to stay under the subsidy cliff until 65, then trying to keep qualified dividends from being taxed until I start SS. Looks like I'll come up $45-50K unconverted. Might just use QCDs for the rest since I'll probably have the double whammy of pushing more SS and more QDivs into being taxed.

[FIREarly]

You are going deeper into this "rabbit hole" but did you think about moving to a state with no investment/dividend taxes?
Maybe it is close to where you currently live. Maybe it is not related to your questions but will still save you a lot of money when converting TIRA to Roth.
There is a pic of all states' investment taxes at URL: https://www.forbes.com/sites/baldwin...h=2c07e2b855ac

[samcat]

I believe the December stimulus bill raises the above the line charitable deduction to $600 for joint files (still $300 for single filers). This article is dated 12/26/20 but I don't think it changed between 12/26/20 and 12/27/20 when Trump signed it.


https://www.cnbc.com/2020/12/26/new-...g-in-2021.html

[RunningBum]

Quote:

Originally Posted by samcat I believe the December stimulus bill raises the above the line charitable deduction to $600 for joint files (still $300 for single filers). This article is dated 12/26/20 but I don't think it changed between 12/26/20 and 12/27/20 when Trump signed it. https://www.cnbc.com/2020/12/26/new-...g-in-2021.html

As the headline says, that increase to $600 is for 2021.

[pb4uski]

Quote:

Originally Posted by pb4uski No Roth conversion for me for 2020 because I filled up my 0% LTCG bucket with LTCG when I sold equities in the spring and then some at 15%. However, I do plan to do a Roth conversion for ~80-90% of what I think I can do in 2021 in January... then I'll top it off in December 2021.

Quote:

Originally Posted by FIREarly You are going deeper into this "rabbit hole" but did you think about moving to a state with no investment/dividend taxes? Maybe it is close to where you currently live. Maybe it is not related to your questions but will still save you a lot of money when converting TIRA to Roth. There is a pic of all states' investment taxes at URL: https://www.forbes.com/sites/baldwin...h=2c07e2b855ac

I think your post was meant for RB but having moved to a no-tax state in 2020 is part of the reason for potentially converting even deeper in 2021 for us.... our marginal rate in our former state was 6.6% so some substantial savings there for us.

We might convert up to the $176k IRMAA limit. I wish they would tell me what the IRMAA limit will be in 2023 (based on 2021 tax return income).

[RunningBum]

Quote:

Originally Posted by FIREarly You are going deeper into this "rabbit hole" but did you think about moving to a state with no investment/dividend taxes? Maybe it is close to where you currently live. Maybe it is not related to your questions but will still save you a lot of money when converting TIRA to Roth. There is a pic of all states' investment taxes at URL: https://www.forbes.com/sites/baldwin...h=2c07e2b855ac

Not sure who that's meant for, but I'm not going to uproot and move to another state to save probably less than $2000, with no impact to MAGI.

[Sandy & Shirley]

Roth Conversions is a popular topic for us this year. We guessed right on COVID, withdrew the proper amount from our IRA to match our pensions and annuities. PS: we are domestic partners! My personal IRA withdraw was 8.15% of the 2019 year end value and even with that withdraw, my IRA is currently up just over 35% for 2020. This will cause a serious MRD problem in the future, so it is time to bite the Conversion bullet.


Without giving up our real numbers, and using the 2021 tax year’s brackets, here is basically what we discovered.

                    Sweet       Top of       Max       Max 22%       Max         Max         Max       Max 24%
                     Spot        Hump       Med 1       Med 2       Med 2       Med 3       Med 4       Med 5
WST / IRA / 401K   $31,837     $39,706     $57,999     $75,124     $80,999    $107,999    $134,999    $153,674
Long Term Gains     $4,000      $4,000      $4,000      $4,000      $4,000      $4,000      $4,000      $4,000
Social Security    $30,000     $30,000     $30,000     $30,000     $30,000     $30,000     $30,000     $30,000
Fed Tax Due         $4,169      $7,559     $11,583     $15,351     $16,761     $23,241     $29,721     $34,203
MD Tax              $1,915      $2,525      $3,943      $5,270      $5,725      $7,821      $9,990     $11,531
MAGI               $61,837     $69,706     $87,999    $105,124    $110,999    $137,999    $164,999    $183,674
Medicare         $1,782.00   $1,782.00   $1,782.00   $2,494.80   $2,494.80   $3,564.00   $4,633.20   $5,702.40
Convert                 $0      $7,869     $26,162     $43,287     $49,162     $76,162    $103,162    $121,837
Plus Fed                $0      $2,790      $6,814     $10,582     $11,992     $18,472     $24,952     $29,434
Plus MD                 $0        $610      $2,028      $3,355      $3,810      $5,906      $8,075      $9,616
Plus Medicare           $0          $0          $0     $712.80     $712.80      $1,782      $2,851      $3,920

Convert                         $7,869     $26,162     $43,287     $49,162     $76,162    $103,162    $121,837
Total Cost                      $3,400      $8,842     $14,650     $16,515     $26,160     $35,878     $42,970
Rate                            43.21%      33.80%      33.84%      33.59%      34.35%      34.78%      35.27%

Convert                                    $18,293     $35,418     $41,293     $68,293     $95,293    $113,968
Total Cost                                  $5,442     $11,250     $13,115     $22,760     $32,478     $39,570
Rate                                        29.75%      31.76%      31.76%      33.33%      34.08%      34.72%

Crossing over the 49.94% and 40.7% Marginal Tax Hump can be costly, 43.21% taxation for Federal and Maryland taxes in this example.


Then thing generally even out within the 22% and 24% Federal tax brackets. The one extra thing that we are including in our calculations is MAGI, the modified adjusted gross income level that Medicare will use two years later to determine our Medicare premiums. The first MAGI crossover costs $712.80, then the next three crossovers cost $1,069.20 each.

[SecondCor521]

Quote:

Originally Posted by pb4uski However, I do plan to do a Roth conversion for ~80-90% of what I think I can do in 2021 in January... then I'll top it off in December 2021.

Sincerely curious question: why convert in January and lock in your tax situation that early in the year? I'm sure you have a good reason but I can't figure out what it is.

I could understand if you thought the market was going up more next year, but I thought you think the market is overvalued, so I would expect you to expect it to drop.

I could also understand if you were going to move to your zero income tax state, but you said in another post on this thread you've already done that.

(The first few years I waited until December to Roth convert. This year I did about half of my Roth conversion in mid-March to take advantage of the low stock market. That worked out well, but it also meant that at the end of the year I was prevented from executing a possible tax idea for 2020 because my AGI was already locked in and about $1800 too high for the idea.)

[Telly]

Quote:

Originally Posted by DR1959 I did a Roth conversion this year. First one. When market took a hit I did it. I have already recovered the tax and gains tax free. I wouldn’t do it now at a high. You can convert certain stocks which is what I did and I picked ones that were beaten down. I would wait. Market may take a hit next year. Then convert the beaten down stocks. If dividend payers even better. Now it’s a tax free dividend. I am trying to stay In a certain bracket and being retired and wife deferring income I did it this year. Next year I am taking her income. You have to pay tax eventually but the goal is to smooth out the income to stay in a lower bracket and even if you step a toe into the next one remember it’s just the amount over that is taxed at the higher bracket.

Waiting may work if you have just a small T-IRA, or have many years of possible conversions before RMD-time. Neither is true for me! I doubt the market would drop so much as to negate the conversion I just fired off for 2020. I can't sit on the sidelines and market time. YMMV
EDIT - And holding off SS to 70 also increases the size of the target for the tax torpedo when taking RMDs.

[Telly]

Quote:

Originally Posted by pb4uski Telly, sorry to say this but I'm going to make you head hurt even more. And it did! You can play with https://www.dinkytown.net/java/1040-tax-calculator.html to see the impact.

Thanks for the dinkytown link. It was fast and easy to use to run and fiddle with different scenarios, then we ran the most likely through our 2020 tax program, and the numbers agreed. Saw and felt the bump.

[Skitso999]

Quote:

Originally Posted by cat4ever Am I crazy for wanting to avoid all this complication and spreadsheets and just plan to convert ~50K per year until 65 (i.e. for 10 years) and let the chips fall where they may? I didn't retire to pore over spreadsheets, and none of us really have any idea what brackets will be in 10 years anyway. My only guess is they'll be higher, which is why I'd do them at all.

I have this opinion as well! I'd much rather stick with the traditional IRAs and 401Ks rather than sweat the conversion difficulties. Especially if the taxes were to end up the same anyway. I'm thinking that the tax rates when taking the money out of my TIRA will be lower because of my lack of income elsewhere.

ALSO, just to make it more complicated, if you invest in TIRAs all your life (ex. $100), then you'll have a lot more money in that IRA, when compared to investing money after taxes in a Roth (ex. $100 * 0.78 tax factor = $78). That money can be transferred to your heirs at their dollar value on the day that you died, if you were to set up a family trust. What would your heirs prefer, the $100 invested 30 years ago, or the $78 invested 30 years ago, considering they won't need to pay taxes on it, if they sell the investments the day after you die?

[misanman]

Quote:

ALSO, just to make it more complicated, if you invest in TIRAs all your life (ex. $100), then you'll have a lot more money in that IRA, when compared to investing money after taxes in a Roth (ex. $100 * 0.78 tax factor = $78). That money can be transferred to your heirs at their dollar value on the day that you died, if you were to set up a family trust. What would your heirs prefer, the $100 invested 30 years ago, or the $78 invested 30 years ago, considering they won't need to pay taxes on it, if they sell the investments the day after you die?

I'm confused. Heirs have to pay taxes on inherited IRAs, right?

[pb4uski]

Quote:

Originally Posted by SecondCor521 Sincerely curious question: why convert in January and lock in your tax situation that early in the year? I'm sure you have a good reason but I can't figure out what it is. I could understand if you thought the market was going up more next year, but I thought you think the market is overvalued, so I would expect you to expect it to drop. I could also understand if you were going to move to your zero income tax state, but you said in another post on this thread you've already done that. (The first few years I waited until December to Roth convert. This year I did about half of my Roth conversion in mid-March to take advantage of the low stock market. That worked out well, but it also meant that at the end of the year I was prevented from executing a possible tax idea for 2020 because my AGI was already locked in and about $1800 too high for the idea.)

I have done it at the end of the year in the past. However, my tax situation is very predictable now that I have no equities in taxable accounts... it's only interest, my fixed pension, SS and tIRA withdrawals/Roth conversions and the standard deduction... I would just as soon get that money into tax free earlier rather than later (not that it really matters all that much).

It was a totally different story when I had significant dividends, possible capital gain distributions, possible LTCG, etc. but I still could have done some early in the year and then top it off later as the tax situation crystalized.

What the investments do isn't as relevant because the money is in the same investments whether it is in the tIRA or in the Roth.

Given how simple our tax situation is I just don't see much downside of doing it earlier rather than later... much different from when I had oodles of unrealized LTCG that I might want to harvest.

[pb4uski]

Quote:

Originally Posted by misanman I'm confused. Heirs have to pay taxes on inherited IRAs, right?

+1 his post makes no sense.

[cathy63]

Quote:

Originally Posted by Skitso999 ALSO, just to make it more complicated, if you invest in TIRAs all your life (ex. $100), then you'll have a lot more money in that IRA, when compared to investing money after taxes in a Roth (ex. $100 * 0.78 tax factor = $78). That money can be transferred to your heirs at their dollar value on the day that you died, if you were to set up a family trust. What would your heirs prefer, the $100 invested 30 years ago, or the $78 invested 30 years ago, considering they won't need to pay taxes on it, if they sell the investments the day after you die?

When both accounts are inherited, the Roth IRA is not taxed and the tIRA is taxed at the heir's ordinary income tax rate. So in your example, if the tIRA money pushes your heir into a 22% or higher marginal rate, the Roth is a better inheritance.

[cathy63]

Quote:

Originally Posted by FIREarly You are going deeper into this "rabbit hole" but did you think about moving to a state with no investment/dividend taxes? Maybe it is close to where you currently live. Maybe it is not related to your questions but will still save you a lot of money when converting TIRA to Roth. There is a pic of all states' investment taxes at URL: https://www.forbes.com/sites/baldwin...h=2c07e2b855ac

The problem with all those tax maps is they use the highest possible number and treat it as if it applied to everyone. E.g. that 13.3% they show for California is the marginal rate on income over $1M. My actual California tax rate last year was 1.18%. I think the highest it ever got while we were working and cashing out stock options was about 4%.

[RunningBum]

I did a final analysis of my conversion planning for this year, and projected tax rates in the future.

I had already converted enough to cover my std deduction, Roth conversion, and cap loss carryover. The tax on that conversion is 0, with a (rounded up ) 10% "tax", or reductions of ACA subsidy.

I converted a little more to have some income to take a FTC credit. Still 0% + 10% subsidy loss.

I planned to stop here because each additional $100 would be taxed at 10% + 10% subsidy loss, for a cost of 20%. My thought was that I'd probably be in the 12% bracket in retirement.

But then I projected that when I hit RMDs, I'd be a little short of getting through the SS tax hump, so I'd be paying a 49.9% rate. If my RMD pushed me through that, I'd still be paying the 12+15%=27% rate by pushing more QDivs into being taxable. If I got through that, I'd be in the 22% tax bracket. I don't see a way that I'd be in the 12% bracket with no tax on QDivs.

So, this morning I topped off my conversion to get a little closer to the subsidy cliff, with some safety cushion. 20% now is better than 49.9% or 27% or 22% later.

I hope that a conversion started today counts for this year, even if it's not completed until after Jan 1. If not, I got an early start on 2021. I think my last conversion got into the Roth the next day.

[SecondCor521]

^If the $$$ leaves your traditional IRA today or tomorrow it will count towards 2020. I'd be fairly confident that the big three (Vanguard, Fido, Schwab) would get it on the books today.

[Skitso999]

Quote:

Originally Posted by misanman I'm confused. Heirs have to pay taxes on inherited IRAs, right?

Heirs do not need to pay taxes on trust held assets. They're transferred to the names of the persons within the trust with a valuation at the date of death of the trust creators (Mom & Dad). No need to pay the capital gains that have accrued from the time of purchase through the date of death.

This is the way I understand it.

I'm not entirely certain whether you must dissolve the IRA before the date of death to make this work as I've said. If so, you would need to pay the taxes. Perhaps an accountant reading this could verify.

An example of this is, if your parents bought a house in 1961, and held it within a trust that was set up in 2003, and they both passed away in 2011, then the appreciation from the date of death of the last parent in 2011 through the time of house sale in 2021 is all you would be taxed on. Not too sure that stock shares or mutual fund shares within a TIRA would be treated the same way, but if they were OUT of the TIRA I know they would be.



AND, after a tiny bit of research, I may be overstating the benefits of this strategy. Here's a website I found:
https://www.investopedia.com/ask/ans...-ira-trust.asp

Here's a quote from it:
Advantages of a Trust Beneficiary
Naming a trust as the beneficiary to an IRA can be advantageous because owners can dictate how beneficiaries use their savings. A trust instrument can be designed in such a way that special provisions for inheritance apply to specific beneficiaries—a helpful option if beneficiaries vary greatly in age, or if some of them have special needs to be addressed. Many people also believe the trust provides tax savings for beneficiaries, but that is rarely the case.

Important factors to consider are how beneficiaries take possession of the IRA assets and over what time period. Seek advice from a trust adviser well-versed in inherited IRAs. To gain the maximum stretch option for the distribution of the account, the trust must have specific terms such as "pass-through" and "designated beneficiary." If a trust does not contain provisions for inheriting an IRA, it should be rewritten, or individuals should be named as beneficiaries instead.

AND, now it's getting really complicated:
While trusts can streamline most estate-planning areas, they can create more paperwork and even additional tax burdens for beneficiaries of an inherited IRA. Work closely with an estate planner, attorney, and accountant, who are all knowledgeable about trusts and IRAs, to maximize a legacy.

[GalaxyBoy]

Quote:

Originally Posted by SecondCor521 ^If the $$$ leaves your traditional IRA today or tomorrow it will count towards 2020. I'd be fairly confident that the big three (Vanguard, Fido, Schwab) would get it on the books today.

I transferred shares from DW's Schwab tIRA to her Schwab Roth on Sunday and it showed up as completed when I checked it early Monday morning. There was a small cash dividend that hit today so I transferred that as well, and it showed up instantaneously.

BTW, with Schwab you can only transfer whole positions of shares online, otherwise you have to make a phone call. Since her whole position of the ETF brought us to within $500 of our Roth conversion target for the year, we left it at that. I could have sold some shares and transferred cash to avoid picking up the phone, but laziness took over.

[edit to add] Schwab says there could be a long wait for a phone call, so I didn't want to mess with it.