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Old 06-01-2020, 04:22 PM   #41
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IMO 17% combined federal and state on the first $30k of conversion is pretty good, at 17% likely a lot less than you (or your heirs) will pay later if you don't convert.
+1
I am converting between $22K and $33K each year because I am filling up the 0% FED tax bracket and going slightly into the 10% bracket (deductions + tax credits cancel out most of the conversion). I too get around $22K in capital gains and dividends from my taxable account. I will be doing these conversions for the next 12 years. It will not get all of my IRAs converted to Roth. I expect to have around $300K still in the traditional IRAs which should start my RMDs at less than $12,000 per year instead of the $44K plus that I calculated when I started doing conversions. Every little bit helps.
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Old 06-01-2020, 04:23 PM   #42
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IMO 17% combined federal and state on the first $30k of conversion is pretty good, at 17% likely a lot less than you (or your heirs) will pay later if you don't convert.

How are you coming up with 17%?
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Old 06-01-2020, 04:29 PM   #43
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yes, and heres why---here is note from my accountant.

you would have 0 tax liability for the irs and $959 due to nys/nyc.

if you take $30,000 out of an ira to convert, you will owe the irs $2,217 and $3,911 to nys/nyc.

(2217+3911-959)/30000 = 17.23%
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Old 06-01-2020, 04:37 PM   #44
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(2217+3911-959)/30000 = 17.23%

why are you subtracting 959?
I see where you get that number, but that is amount I owe IF I do no conversion at all.
If I'm paying ~$6100 in taxes--2217 +3911 on what is a total of 52K ( 30K for Roth + 22K cap gains and dividends) isnt that like ~12% effective tax rate?
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Old 06-01-2020, 04:44 PM   #45
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It is the effective tax rate on the $30K of Roth conversions. You are correct that your total effective tax rate is closer to 12%.
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Old 06-01-2020, 05:04 PM   #46
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It is the effective tax rate on the $30K of Roth conversions. You are correct that your total effective tax rate is closer to 12%.

Gotcha. Thank you so much your input. So you're a little older than me, but you are doing a similar thing?
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Old 06-01-2020, 05:52 PM   #47
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(2217+3911-959)/30000 = 17.23%
Nailed it.
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Old 06-01-2020, 05:56 PM   #48
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So are you suggesting I do only a 30K transfer into a Roth?
So I would pay ~6K in taxes.
Yes, while you'll be paying $6,128, it is only $5,169 as a result of the $30,000 Roth conversion... or 17% on the $30k. If you don't convert and wait as late as possible then you'll pay a lot more in tax won't you ... because you'll have 85% of SS additionally in income.

Your effective federal rate on a $30k conversion would be 7% [(2,217-0)/30,000=7%]... to me it is better to pay 7% now than 22% later. And then you have that pesky state tax. Now if you plan to move to a no-tax state sometime soon then the advice might be different.

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....So at age 70 if tax rates stay the same I will be at 22% tax bracket....
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Old 06-01-2020, 07:04 PM   #49
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Yes, while you'll be paying $6,128, it is only $5,169 as a result of the $30,000 Roth conversion... or 17% on the $30k. If you don't convert and wait as late as possible then you'll pay a lot more in tax won't you ... because you'll have 85% of SS additionally in income.

Your effective federal rate on a $30k conversion would be 7% [(2,217-0)/30,000=7%]... to me it is better to pay 7% now than 22% later. And then you have that pesky state tax. Now if you plan to move to a no-tax state sometime soon then the advice might be different.

Got it. Thank you so so much for your help. I really appreciate it. Ideally I'd like to have it all in Roth by the time I'm 70, but even at 30 K annually for 16 years its a good chunk of a tax free pocket to pull from.
So from a tax perspective you would opt for the 30K a year and not the higher amounts?
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Old 06-01-2020, 07:47 PM   #50
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I would go to the top of the 0% qualified income tax bracket... which for 2020 is $40,000 for a single... then add in the standard deduction of $12,400 and that is $52,400 of total income.... then subtract out your non-Roth conversion income to get your Roth conversion amount. At that amount, all your qualified income would be at 0% tax and you would be converting the maximum amount possible at 12% or less.

What you'll find it that these Roth conversions might not reduce your Roth as much as you think because of growth... sort of like a dog chasing its tail.

So for example, let's say you have $500k in a Roth and convert $30k a year for 16 years... if the Roth grows at 5% a year even if your conversions increase 3% a year beacuse tax brackets increase with inflation, after 16 years you would still have over $200k.

 Earnings @ 5%Roth conversionsBalance
0  500,000
124,250-30,000494,250
223,940-30,900487,290
323,569-31,827479,032
423,132-32,782469,382
522,625-33,765458,242
622,043-34,778445,506
721,380-35,822431,064
820,631-36,896414,799
919,790-38,003396,586
1018,851-39,143376,293
1117,807-40,317353,782
1216,651-41,527328,906
1315,376-42,773301,510
1413,974-44,056271,428
1512,437-45,378238,487
1610,756-46,739202,504
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Old 06-01-2020, 08:32 PM   #51
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Gotcha. Thank you so much your input. So you're a little older than me, but you are doing a similar thing?
I am 60 and plan to do conversions thru age 72.

Regarding pb4uski's post, my traditional IRAs are 100% bonds and money market, so I expect my growth to be between 2% and 3% per year but I agree the balance doesn't fall as fast as you might expect. My conversions are into total stock market index funds in the Roths causing a rising glide path in equities.
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Old 06-01-2020, 09:12 PM   #52
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I would go to the top of the 0% qualified income tax bracket... which for 2020 is $40,000 for a single... then add in the standard deduction of $12,400 and that is $52,400 of total income.... then subtract out your non-Roth conversion income to get your Roth conversion amount. At that amount, all your qualified income would be at 0% tax and you would be converting the maximum amount possible at 12% or less.

What you'll find it that these Roth conversions might not reduce your Roth as much as you think because of growth... sort of like a dog chasing its tail.

So for example, let's say you have $500k in a Roth and convert $30k a year for 16 years... if the Roth grows at 5% a year even if your conversions increase 3% a year beacuse tax brackets increase with inflation, after 16 years you would still have over $200k.

Earnings @ 5% Roth conversions Balance
0 500,000
1 24,250 -30,000 494,250
2 23,940 -30,900 487,290
3 23,569 -31,827 479,032
4 23,132 -32,782 469,382
5 22,625 -33,765 458,242
6 22,043 -34,778 445,506
7 21,380 -35,822 431,064
8 20,631 -36,896 414,799
9 19,790 -38,003 396,586
10 18,851 -39,143 376,293
11 17,807 -40,317 353,782
12 16,651 -41,527 328,906
13 15,376 -42,773 301,510
14 13,974 -44,056 271,428
15 12,437 -45,378 238,487
16 10,756 -46,739 202,504



Just to clarify, so if I have $22, 400 in Dividends and long term gains then $30,000 would be the appropriate amount to convert to Roth right?


and in your last paragraph you mean I would have 200K+ left in the tradition IRA right?
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Old 06-01-2020, 09:18 PM   #53
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and where do you see 0% tax rate up to 40K?
I see rates of 10, 12 , and 22 percent when income is 40K and below
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Old 06-01-2020, 09:58 PM   #54
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Assuming your total income is 22,400 + 30,000 = 52,400
For 2020 taxes, subtract the standard deduction for singles, 12,400 from your total income. 52,400 - 12,400 = 40,000. This is your taxable income.

40,000 is within the 12% tax bracket. If all your dividends and long term gains are qualified dividends, then all 22,400 is "taxed" at the 0% capital gains tax rate. If your qualified dividends and capital gains push your taxable income over 40,000, every CG+Div dollar above 40,000 in taxable income will be taxed at 15%.

The tax calculations works like this:
30,000 - 12,400 = 17,600 taxable income using normal tax bracket rates.

The 10% tax bracket for the conversion is the first $9,875. The tax is 9,875*10% = 987.50
Subtract out the 10% income that has already been calculated. 17,600 - 9,875 = 7,725 left to be taxed at the 12% tax rate. 7,725 * 12% = 927.00

So the tax on the conversion is 987.50 + 927.00 = 1,914.50
Your taxable income was 40,000. Your taxable Roth conversion income was 17,600.
40,000 - 17,600 = 22,400 of dividends and capital gains which is "taxed" at 0%.
So, your total tax is 1,914.50 for an effective tax rate of 1,914.50/52,400 = 3.65%
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Old 06-01-2020, 10:20 PM   #55
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Assuming your total income is 22,400 + 30,000 = 52,400
For 2020 taxes, subtract the standard deduction for singles, 12,400 from your total income. 52,400 - 12,400 = 40,000. This is your taxable income.

40,000 is within the 12% tax bracket. If all your dividends and long term gains are qualified dividends, then all 22,400 is "taxed" at the 0% capital gains tax rate. If your qualified dividends and capital gains push your taxable income over 40,000, every CG+Div dollar above 40,000 in taxable income will be taxed at 15%.

The tax calculations works like this:
30,000 - 12,400 = 17,600 taxable income using normal tax bracket rates.

The 10% tax bracket for the conversion is the first $9,875. The tax is 9,875*10% = 987.50
Subtract out the 10% income that has already been calculated. 17,600 - 9,875 = 7,725 left to be taxed at the 12% tax rate. 7,725 * 12% = 927.00

So the tax on the conversion is 987.50 + 927.00 = 1,914.50
Your taxable income was 40,000. Your taxable Roth conversion income was 17,600.
40,000 - 17,600 = 22,400 of dividends and capital gains which is "taxed" at 0%.
So, your total tax is 1,914.50 for an effective tax rate of 1,914.50/52,400 = 3.65%



I had to read this literally like 6x to grasp it all, but I think I get it. My head hurts!
Are you or were you an accountant? you're very good at all this--thank you!
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Old 06-01-2020, 10:40 PM   #56
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No, I was a high school math teacher. You are welcome.
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Old 06-02-2020, 12:18 AM   #57
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No, I was a high school math teacher. You are welcome.
PB or NO

will the pro-rata rule apply here ? I guess I should ask how is he getting around it ? I didn’t think you could pull from a tira to convert a small percent without that rule applying ? I’m asking for myself and how I get around it unless I misunderstand the rules.
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Old 06-02-2020, 05:08 AM   #58
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The pro-rata rule only applies where one has had non-deductible IRA contributions. Most people have never had non-deductible tIRA contributions so the pro-rate rule would not typically apply. Of course, if you don't know or don't remember or don't have recorded of how much your non-deductible tIRA contributions were then the IRS is happy to conside all withdrawals as income... essentially assuming that all contributions were deductible.
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Old 06-02-2020, 05:14 AM   #59
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Assuming your total income is 22,400 + 30,000 = 52,400
For 2020 taxes, subtract the standard deduction for singles, 12,400 from your total income. 52,400 - 12,400 = 40,000. This is your taxable income.

40,000 is within the 12% tax bracket. If all your dividends and long term gains are qualified dividends, then all 22,400 is "taxed" at the 0% capital gains tax rate. If your qualified dividends and capital gains push your taxable income over 40,000, every CG+Div dollar above 40,000 in taxable income will be taxed at 15%.

The tax calculations works like this:
30,000 - 12,400 = 17,600 taxable income using normal tax bracket rates.

The 10% tax bracket for the conversion is the first $9,875. The tax is 9,875*10% = 987.50
Subtract out the 10% income that has already been calculated. 17,600 - 9,875 = 7,725 left to be taxed at the 12% tax rate. 7,725 * 12% = 927.00

So the tax on the conversion is 987.50 + 927.00 = 1,914.50
Your taxable income was 40,000. Your taxable Roth conversion income was 17,600.
40,000 - 17,600 = 22,400 of dividends and capital gains which is "taxed" at 0%.
So, your total tax is 1,914.50 for an effective tax rate of 1,914.50/52,400 = 3.65%
Just to add to this... while the taxable income is $40,000 ($22,400 dividends and LTCG + $30,000 Roth conversion - $12,400 standard deduction) it is two components
  • $22,400 of qualified income that is taxed at 0% since taxable income is $40,000 or less and
  • $17,600 of ordinary income ($30,000 Roth contribution - $12,400 standard deduction) that is subject to the ordinary tax brackets of 10% and 12%.
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Old 06-02-2020, 07:22 AM   #60
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The pro-rata rule only applies where one has had non-deductible IRA contributions. Most people have never had non-deductible tIRA contributions so the pro-rate rule would not typically apply. Of course, if you don't know or don't remember or don't have recorded of how much your non-deductible tIRA contributions were then the IRS is happy to conside all withdrawals as income... essentially assuming that all contributions were deductible.
Thanks PB. I didnt understand that important piece.
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