Please check my numbers - ROTH IRA conversion nearly tax-free!

[Born2Fish]

I retired last year at 61, NC resident. This will be the first full year with no earned income.

2021 unearned income/SS: 25,800 SS, 7400 pension. No taxes withheld.

I just converted $20k from my 401k to Roth IRA (both accts at Fidelity, no taxes withheld).

Total unearned income/SS $53,200.

I ran the numbers in https://www.irscalculators.com/tax-calculator (married filing jointly)

Total Fed + NC Tax = $954.75

In December I will transfer $11k from 401k into checking account. I will withhold $1k for Fed, $500 NC to cover 2021 income taxes. I will move $4600 into both DW's and my HSA accounts (both over 55). The move from pretax into HSA is essentially tax-free.

BTW my ACA BCBS HDHP premium is fully subsidized with $14k deductible, and we will have around $34k in ours combined HSA accounts after our December deposits.

After 1.5 years retired I have determined that our post-retirement "frugal" spending level is around $36k including taxes. So we only need a few thousand from checking for essential annual expenses.

I can't believe how much less we need for essential expenses compared to the height of my working years with kids on the payroll.

I'm smiling as I type this.

Have I missed anything??

 

[cathy63]

No, I don't think you've missed anything. We've been doing something similar for a few years. I don't withdraw from the 401k (IRA in our case) to the checking account though. I use funds from our existing after-tax account to fund both our HSAs and then I convert the same amount to Roth.

So basically if we started with:
regular brokerage account - $9200
HSAs - $0
Roth - $0
IRA - $9200

Then we would end up with:
regular brokerage account - $0
HSAs - $9200
Roth - $9200
IRA - $0

No tax is due on the $18400 that shifted to the tax deferred accounts, or on any of the earnings in the future. Do this over enough years and it starts to add up to a nice chunk of change. You have 3+ more years before you go on Medicare and lose the ability to add to your HSA plus however many years your spouse has, so taking advantage of the opportunity should be well worth it.

 

[Kgillen107]

Please clarify...my HSA is funded with pretax money from me (and my former employer), what is the incentive to mix funds by adding "post-tax" money?

Also why $9,200?

I am trying to learn.

 

[RunningBum]

Please clarify...my HSA is funded with pretax money from me (and my former employer), what is the incentive to mix funds by adding "post-tax" money?

Also why $9,200?

I am trying to learn.

HSA contributions reduce taxable income, so it's still got the same effective benefit as being pre-tax.

$3600 max contribution per person + $1000 catch-up contribution for 55 and over, for a couple = $9200.

 

[cathy63]

Please clarify...my HSA is funded with pretax money from me (and my former employer), what is the incentive to mix funds by adding "post-tax" money?

Also why $9,200?

I am trying to learn.

We are retired, so there are no employers or paychecks to take pre-tax money out of. If we want to put any money in our HSAs, it has to be taken from a taxable account. It makes no difference if it's mixed with pre-tax money from the past. Since the entire amount of the contribution is deductible it's all pre-tax money in the end. It might not be "worth it" if we didn't have enough other income to use the full $9200 deduction, but we do.

The $9200 is because OP said he/she is married and over 50. Assuming the spouse is also over 50, between them they can contribute a total of $9200 to their two individual HSAs.

 

[Born2Fish]

No, I don't think you've missed anything. We've been doing something similar for a few years. I don't withdraw from the 401k (IRA in our case) to the checking account though. I use funds from our existing after-tax account to fund both our HSAs and then I convert the same amount to Roth.

So basically if we started with:
regular brokerage account - $9200
HSAs - $0
Roth - $0
IRA - $9200

Then we would end up with:
regular brokerage account - $0
HSAs - $9200
Roth - $9200
IRA - $0

No tax is due on the $18400 that shifted to the tax deferred accounts, or on any of the earnings in the future. Do this over enough years and it starts to add up to a nice chunk of change. You have 3+ more years before you go on Medicare and lose the ability to add to your HSA plus however many years your spouse has, so taking advantage of the opportunity should be well worth it.

Thanks - I plan to take advantage as long as possible!

 

[bingybear]

I have a none zero basis in my IRA so that would help on conversions cost in a given year.

Is this level of roth conversions enough for you long term plan?

 

[Born2Fish]

I have a none zero basis in my IRA so that would help on conversions cost in a given year.

Is this level of roth conversions enough for you long term plan?

Yes.

 

[pb4uski]

...Have I missed anything??

Perhaps. Why would you not be doing bigger Roth conversions to bring your income at least to the point where you pay a negligible premium? Unless you expect to be in a low tax bracket once pensions, SS and RMDs are happening I wonder if you are leaving some tax savings opportunities on the table.

 

[DrRoy]

Have I missed anything??

How about interest/dividends/cap gains from a taxable investment account?

 

[Born2Fish]

How about interest/dividends/cap gains from a taxable investment account?

I have pretax 401k, IRA and ROTH IRAs only.

No taxable account.

 

[Ole Red 29]

No, I don't think you've missed anything. We've been doing something similar for a few years. I don't withdraw from the 401k (IRA in our case) to the checking account though. I use funds from our existing after-tax account to fund both our HSAs and then I convert the same amount to Roth.

So basically if we started with:
regular brokerage account - $9200
HSAs - $0
Roth - $0
IRA - $9200

Then we would end up with:
regular brokerage account - $0
HSAs - $9200
Roth - $9200
IRA - $0

No tax is due on the $18400 that shifted to the tax deferred accounts, or on any of the earnings in the future. Do this over enough years and it starts to add up to a nice chunk of change. You have 3+ more years before you go on Medicare and lose the ability to add to your HSA plus however many years your spouse has, so taking advantage of the opportunity should be well worth it.

why isn't tax due on the $9200 being converted from IRA to Roth?

 

[cathy63]

why isn't tax due on the $9200 being converted from IRA to Roth?

The IRA to Roth conversion adds $9200 to our income, but the contribution to the HSA subtracts $9200 from our income. So, the net after these two moves is $0 in taxable income.

This is assuming we have enough other ordinary income to at least offset the standard deduction of $25,100 for a MFJ couple under age 65. If we really had $0 other income, then the first $25,100 of Roth conversions would be tax free no matter what.

 

[armor99]

I retired last year at 61, NC resident. This will be the first full year with no earned income.



2021 unearned income/SS: 25,800 SS, 7400 pension. No taxes withheld.



I just converted $20k from my 401k to Roth IRA (both accts at Fidelity, no taxes withheld).



Total unearned income/SS $53,200.



I ran the numbers in https://www.irscalculators.com/tax-calculator (married filing jointly)



Total Fed + NC Tax = $954.75



In December I will transfer $11k from 401k into checking account. I will withhold $1k for Fed, $500 NC to cover 2021 income taxes. I will move $4600 into both DW's and my HSA accounts (both over 55). The move from pretax into HSA is essentially tax-free.



BTW my ACA BCBS HDHP premium is fully subsidized with $14k deductible, and we will have around $34k in ours combined HSA accounts after our December deposits.



After 1.5 years retired I have determined that our post-retirement "frugal" spending level is around $36k including taxes. So we only need a few thousand from checking for essential annual expenses.



I can't believe how much less we need for essential expenses compared to the height of my working years with kids on the payroll.



I'm smiling as I type this.



Have I missed anything??

Please forgive my ignorance, but if you are already retired, why would you be wanting to shift money into your ROTH IRA from your traditional IRA? I would think this only makes sense if you were still working and had years to go for interest to compound.
Unless the intention was just to move over the max you can each year without triggering any taxes to be paid on it, but I would think the amount small enough that it would not “move the needle” much. Always trying to learn as well, maybe I am missing something here…

 

[pb4uski]

Please forgive my ignorance, but if you are already retired, why would you be wanting to shift money into your ROTH IRA from your traditional IRA? I would think this only makes sense if you were still working and had years to go for interest to compound.
Unless the intention was just to move over the max you can each year without triggering any taxes to be paid on it, but I would think the amount small enough that it would not “move the needle” much. Always trying to learn as well, maybe I am missing something here…

You're missing the magic of Roth conversions in early retirement. in many situations, between when you retire early and when pensions, SS and RMDs come on line, many early retirees are in a low tax bracket since in many cases their investment income from taxable accounts is less than the standard deduction.

That has been the case for us for almost 10 years now. If I didn't do any Roth conversions then our taxable income and income tax would be $0. It would be silly to let that standard deduction and those low 10% and 12% tax brackets go unutilized, especially when we expect to be solidly in the 22% tax bracket once RMDs start. So this year I'll convert ~$80k to Roth and gleefully pay ~$9k in tax, knowing that from here forward that money will grow tax-free.

Since I retired I've converted $469k and gleefully paid $42k in federal income taxes on those conversions... but I figure that I've saved $61k in tax because if I had left them in the tIRA and had to take them out as RMDs they would be taxed at 22%.

 

[MRG]

Please forgive my ignorance, but if you are already retired, why would you be wanting to shift money into your ROTH IRA from your traditional IRA? I would think this only makes sense if you were still working and had years to go for interest to compound.
Unless the intention was just to move over the max you can each year without triggering any taxes to be paid on it, but I would think the amount small enough that it would not “move the needle” much. Always trying to learn as well, maybe I am missing something here…

In addition the excellent information pb4uski posted another poster brought up an interesting notion of "the last double". Many of us have saved and saved letting go is harder. Another 5-7 years of great returns and boom now you have a great problem; why not make it a fantastic problem by not owning taxes on even more money?

I was really shocked looking at the RMD table and applying those percentages to our IRA balances. This is my last year on ACA and I'm looking forward to converting some next year.

 

[Born2Fish]

I have a none zero basis in my IRA so that would help on conversions cost in a given year.

Is this level of roth conversions enough for you long term plan?

Perhaps. Why would you not be doing bigger Roth conversions to bring your income at least to the point where you pay a negligible premium? Unless you expect to be in a low tax bracket once pensions, SS and RMDs are happening I wonder if you are leaving some tax savings opportunities on the table.

OK everyone - thanks for nudging me!

Please refer to table below. I listed conversion amounts under "2021 Options". I have already converted $20k.

I can convert up to $60k total without paying an ACA premium.

My only post-tax cash right now is $30k Checking. I would want to pay withholding with the pretax funds.

I am already withdrawing SS and small pension. Planned for DW to start SS at 62 in 4 years.

RMDs will bump me up into the 12% bracket.

What else do I need to be looking at? Would it make sense for me to withdraw an additional 30k, withhold the ~6k in Fed/NC taxes and add the remainder (~24k) to my existing ROTH IRA?

2021 Options	Roth Conversion Amount	Total Taxes	ACA Premium Cost	ACA Credit
Currently	20000	955	1876	2270
Opt 1	30000	3276	1876	2027
Opt 2	40000	6021	1876	2142
Opt 3	50000	7995	1876	1956
Opt 4	60000	9720	1876	1885

 

[bobbyr]

I can't believe how much less we need for essential expenses compared to the height of my working years with kids on the payroll.

I'm smiling as I type this.

Have I missed anything??

Love it! We landed on the same realization and it is so liberating!

 

[braumeister]

Love it! We landed on the same realization and it is so liberating!

No question. I believe it's a psychological effect. While we're w*rking, it SEEMS like we're using most of what we earn, mainly because we're socking away as much as we can for our retirement. That feels like spending, while it's really just saving.

 

[pb4uski]

OK everyone - thanks for nudging me!

Please refer to table below. I listed conversion amounts under "2021 Options". I have already converted $20k.

I can convert up to $60k total without paying an ACA premium.

My only post-tax cash right now is $30k Checking. I would want to pay withholding with the pretax funds.

I am already withdrawing SS and small pension. Planned for DW to start SS at 62 in 4 years.

RMDs will bump me up into the 12% bracket.

What else do I need to be looking at? Would it make sense for me to withdraw an additional 30k, withhold the ~6k in Fed/NC taxes and add the remainder (~24k) to my existing ROTH IRA?

2021 Options	Roth Conversion Amount	Total Taxes	ACA Premium Cost	ACA Credit
Currently	20000	955	1876	2270
Opt 1	30000	3276	1876	2027
Opt 2	40000	6021	1876	2142
Opt 3	50000	7995	1876	1956
Opt 4	60000	9720	1876	1885

IF once you are both on SS with RMDs you'll be in the 12% bracket... so RMDs will effectively be taxed at 12%, then I would stand pat at $20k of Roth conversion. Right now, any additional Roth conversions are costing you ~22-23% (federal and state)... it is more than 12% + 5.25% because additional Roth conversions are causing more of your SS to be taxable.

12% now or 12% later doesn't matter.... even though it might be 15% later if the 2017 tax cuts end up sunsetting.

Especially if you have any plans to ultimately be in a no tax state.

 

[Born2Fish]

IF once you are both on SS with RMDs you'll be in the 12% bracket... so RMDs will effectively be taxed at 12%, then I would stand pat at $20k of Roth conversion. Right now, any additional Roth conversions are costing you ~22-23% (federal and state)... it is more than 12% + 5.25% because additional Roth conversions are causing more of your SS to be taxable.

12% now or 12% later doesn't matter.... even though it might be 15% later if the 2017 tax cuts end up sunsetting.

Especially if you have any plans to ultimately be in a no tax state.

PB4 - thanks for your input.

 

[Done]

Some also consider what tax bracket they would be in if they later found themselves to be single or widowed. In addition, future tax rates may be higher, so these two factors can be motivation for accelerating conversions.

 

[Still Learning]

Interesting thread to add to our research.



We retired 18 months ago at age 61 and are considering converting 2 IRAs ($1.1 Million) to Roth IRAs to avoid RMDs that start in about 10 years. We reduced our tax rate from 35% to 24% in retirement and could reduce that further to 12% by replacing our IRA 3.5% withdrawal rate through savings for 10 years while maintaining a significant buffer, including our estimated long term care fund.


Currently looking to do smaller Roth conversions over the next 9 years. Have a meeting with our CPA next week to estimate RMDs without Roth conversions and estimated taxes should we decide to proceed with Roth conversions. Once we have a better picture of taxes and continued IRA growth over the 9 years to offset conversion costs we hope to have our plan. Hopefully paying taxes with a lower tax rate now will be better than converting during our working years.

 

[mebden]

You're missing the magic of Roth conversions in early retirement. in many situations, between when you retire early and when pensions, SS and RMDs come on line, many early retirees are in a low tax bracket since in many cases their investment income from taxable accounts is less than the standard deduction.

That has been the case for us for almost 10 years now. If I didn't do any Roth conversions then our taxable income and income tax would be $0. It would be silly to let that standard deduction and those low 10% and 12% tax brackets go unutilized, especially when we expect to be solidly in the 22% tax bracket once RMDs start. So this year I'll convert ~$80k to Roth and gleefully pay ~$9k in tax, knowing that from here forward that money will grow tax-free.

Since I retired I've converted $469k and gleefully paid $42k in federal income taxes on those conversions... but I figure that I've saved $61k in tax because if I had left them in the tIRA and had to take them out as RMDs they would be taxed at 22%.

Hey Pb4 I like all the help you are giving us newer peeps looking to get the most out of our monies in retirement accounts. My question is I see you have converted tons of your IRa's to Roth and paid the taxes. Did you pay the taxes with your your ira money or pay the taxes with money you had in a savings account plus people need to understand taxes are not just at federal but also if state taxes are due you have to pay that along with any Parrish or county tax you live in so its just not the federal tax you have to worry about paying as I was thinking pf converting my IRA to a Roth then all the other bullshit taxes i'd have to pay? I'm just thinking of waiting till I relocate to a no state tax state to convert

 

[pb4uski]

Hey Pb4 I like all the help you are giving us newer peeps looking to get the most out of our monies in retirement accounts. My question is I see you have converted tons of your IRa's to Roth and paid the taxes. Did you pay the taxes with your your ira money or pay the taxes with money you had in a savings account plus people need to understand taxes are not just at federal but also if state taxes are due you have to pay that along with any Parrish or county tax you live in so its just not the federal tax you have to worry about paying as I was thinking pf converting my IRA to a Roth then all the other bullshit taxes i'd have to pay? I'm just thinking of waiting till I relocate to a no state tax state to convert

I've paid taxes from income/taxable account money. And yes, depending on where you live state income taxes may apply. From when I ERed until mid 2020 I paid state income taxes (about 5% of conversions). Waiting until we were no longer subject to state income taxes would not have worked for us as we wouldn't be able to convert enough. In my case the state income taxes are noise, but not enough to change the decision. YMMV.