Question about which account to draw funds from

[FREE866]

Quote:

Originally Posted by pb4uski What tax bracket are you currently in if you do no Roth conversions? What tax bracket do you expect to be in once you are collecting SS and any pensions?

12% is my current tax bracket


My estimated yearly social security at age 70 is $38,000. Not collecting any pensions. Actually, I will start getting a very small pension at age 65 of $3500 per year. So at age 70 if tax rates stay the same I will be at 22% tax bracket, although my marginal rate would be less.

[pb4uski]

So it sounds like a slam dunk to do Roth conversions to the top of the 0% preferenced tax bracket ($40,000 for a single in 2020.... $125 below the top of the 12% tax bracket for a single). Not sure how much headroom you have there.

If any of your current income is qualified (qualified dividends or LTCG) then Roth conversions above the top of the 0% preferenced would be taxed at 27% to the extent of that preferenced income (12% on the Roth conversion + 15% on qualified income pushed into the 15% qualified income tax bracket)... then 22% once all the qualified income is pushed into the 15% qualified income tax bracket.

[FREE866]

Quote:

Originally Posted by pb4uski So it sounds like a slam dunk to do Roth conversions to the top of the 0% preferenced tax bracket ($40,000 for a single in 2020.... $125 below the top of the 12% tax bracket for a single). Not sure how much headroom you have there. If any of your current income is qualified (qualified dividends or LTCG) then Roth conversions above the top of the 0% preferenced would be taxed at 37% to the extent of that preferenced income (12% on the Roth conversion + 15% on qualified income pushed into the 15% qualified income tax bracket)... then 22% once all the qualified income is pushed into the 15% qualified income tax bracket.

OK...you're losing me a little with all these numbers lol but thats fine...
I just don't like the idea of currently paying very little taxes ( capital gains on stock sales in my taxable account) to an additional what I think would be a few thousand dollars if I start funneling say 40K every year from my current IRA to a Roth IRA.

[pb4uski]

I think you need to look at the rate rather than the nominal amounts. Sure a few thousand vs $0 seems like a lot but another way to look at it is a few thousand of tax on $40k of withdrawals is only 8% or so... I'd rather pay 8% now than 22% later and pocket the 14%.

If you use Turbo Tax you can use the What-If worksheet (or some other tax calculator)... put in your 2020 situation with no Roth conversions. Add in $10k of Roth conversions and note the increase in tax (both $ and %)... increase the Roth conversions to $20k and note the increase in tax (both $ and %)... repeat in $10k increments. You'll get a good feel for the tax that you are paying on the Roth conversions to be able to make a decision. Since you'll be paying 22% later anything less than 22% is a benefit.

[N02L84ER]

pb4uski has a typo. 12% + 15% = 27% not 37%

[pb4uski]

Fixed it. Thanks for the heads up.

Quote:

Originally Posted by N02L84ER pb4uski has a typo. 12% + 15% = 27% not 37%

[sengsational]

You can model your situation at https://i-orp.com/Inflate/extended.html

It will take a few hours to read and understand all of the inputs and the outputs, but once you get your footing, you can operate the levers (change assumptions) and see what it does to your available spend. It considers SS, Roth converting, PPACA, and of course taxes. Those are not perfectly modeled, but very close in most cases.

What I've found out is that you can improve the spend a little bit, but by optimizing these kinds of moves isn't going to move you from Greyhound to Lear jet, hehehe!

One caveat I always say is to keep the model focused on taxes, and not on which tax buckets get better expected return rates, make the equity allocation the same across all tax buckets.

[Animorph]

Quote:

Originally Posted by FREE866 Thank you. My accounts are with Schwab so I just opened up a Roth IRA with them, yeah extremely easy. I have no pension so my only income at 70 would be RMD's ( think now they moved age to 72) as well as SS, and dividends from the taxable account. Can you elaborate on what you mean by: "Keep an eye on 0% capital gains rate if you qualify. One of many possible reasons to limit Roth conversions. However at your age large Roth conversions are probably worth more than 0% capital gains."

For single filers in 2020 ( https://www.nerdwallet.com/blog/taxe...ins-tax-rates/ ):
Long-term capital gains tax rate Your taxable income
0% $0 to $40,000
15% $40,001 to $441,450
20% $441,451 or more
* Short-term capital gains are taxed as ordinary income according to federal income tax brackets.

Roughly, if your taxable income (regular + capital gains) stays within the 12% bracket your capital gains tax is 0%. If capital gains put you over the 12% bracket the amount over the bracket is taxed at 15%. The 12% bracket and 0% capital gains bracket have been decoupled now, so they are a little different. Try your situation with an online tax calculator to see how it works for you.

For me it looked best to Roth convert until about 10 years away from my first Roth withdrawal, allowing plenty of time for the tax free growth to accumulate. Within the 10 years before my first Roth withdrawal (next year) I'll fill just the 10% bracket with a small Roth conversion and dividends and make sure I have enough capital gains to fill the 0% capital gains bracket.

[FREE866]

Quote:

Originally Posted by Animorph For single filers in 2020 ( https://www.nerdwallet.com/blog/taxe...ins-tax-rates/ ): Long-term capital gains tax rate Your taxable income 0% $0 to $40,000 15% $40,001 to $441,450 20% $441,451 or more * Short-term capital gains are taxed as ordinary income according to federal income tax brackets. Roughly, if your taxable income (regular + capital gains) stays within the 12% bracket your capital gains tax is 0%. If capital gains put you over the 12% bracket the amount over the bracket is taxed at 15%. The 12% bracket and 0% capital gains bracket have been decoupled now, so they are a little different. Try your situation with an online tax calculator to see how it works for you. For me it looked best to Roth convert until about 10 years away from my first Roth withdrawal, allowing plenty of time for the tax free growth to accumulate. Within the 10 years before my first Roth withdrawal (next year) I'll fill just the 10% bracket with a small Roth conversion and dividends and make sure I have enough capital gains to fill the 0% capital gains bracket.

Thank you. I see what you mean.

[FREE866]

So I spoke to my accountant finally on this. Based on my expected tax situation for 2020 I would be looking at a total tax payment of 10K if I transferred 40K from my traditional IRA to a Roth IRA. I'm really conflicted what to do here.

Sure, it would be nice at age 70 to have an account that is all tax free , but to shell out 10K in taxes every year for like 15 years( assuming I transfer 40K a year and tax situation is similar) is a sizeable amount.

[aja8888]

Quote:

Originally Posted by FREE866 So I spoke to my accountant finally on this. Based on my expected tax situation for 2020 I would be looking at a total tax payment of 10K if I transferred 40K from my traditional IRA to a Roth IRA. I'm really conflicted what to do here. Sure, it would be nice at age 70 to have an account that is all tax free , but to shell out 10K in taxes every year for like 15 years( assuming I transfer 40K a year and tax situation is similar) is a sizeable amount.

Well. you can bite the bullet and pay the taxes later when you must take RMd's, and maybe at a higher tax rate.

[FREE866]

Quote:

Originally Posted by aja8888 Well. you can bite the bullet and pay the taxes later when you must take RMd's, and maybe at a higher tax rate.

I know. Im gonna owe taxes on it eventually anyway. I'm just curious does it make sense purely from a tax perspective. I do have the money sitting in cash. If I don't do it, I'm gonna get really hit hard with taxes at 70---as of today I will get close to 40k a year from SS and that will grow a bit each year with COLA.. If I then am throwing 20-30K on top of that as a required RMD. I'm looking at 70K a year in income I'll be paying out like 17K in taxes at that point.

[pb4uski]

Quote:

Originally Posted by FREE866 So I spoke to my accountant finally on this. Based on my expected tax situation for 2020 I would be looking at a total tax payment of 10K if I transferred 40K from my traditional IRA to a Roth IRA. I'm really conflicted what to do here. Sure, it would be nice at age 70 to have an account that is all tax free , but to shell out 10K in taxes every year for like 15 years( assuming I transfer 40K a year and tax situation is similar) is a sizeable amount.

So to be clear... absent a Roth conversion your tax would be ~$0.... and if you add a $40k Roth conversion your tax will be $10k? If so then the effective rate on the conversion is 25%?

Is that just Federal or both Federal and state (and city if applicable)?

[FREE866]

Quote:

Originally Posted by pb4uski So to be clear... absent a Roth conversion your tax would be ~$0.... and if you add a $40k Roth conversion your tax will be $10k? If so then the effective rate on the conversion is 25%? Is that just Federal or both Federal and state (and city if applicable)?

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.
If you take $40,000 out of an IRA to convert, you will owe the IRS $4,917 and $4,905 to NYS/NYC.
If you take $50,000 out of an IRA to convert, you will owe the IRS $7,617 and $5,901 to NYS/NYC.



I have dividends in my regular account and long term gains this year of ~22K

[pb4uski]

So combined 17% effective rate on that first $30k, 37% on the next $10k and 37% on the next $10k.

So it looks like the first $30k isn't so bad.... 7% Federal and 10% state. But then 27% Federal and 10% state after that.

I'm guessing that the 27% Federal is 12% ordinary and 15% on qualified income pushed from 0% to 15%.

[N02L84ER]

Each $10000 increase results in another $2700 in FED taxes from 30K to 40K and from 40K to 50K. So, it looks like those amounts are fully in the "27%" tax bracket (12% + 15%). The first $2217 is less than 27%, so not all of the conversion is at the "27%" tax bracket. How much FED tax would you pay on a $20K Roth conversion?

[FREE866]

Quote:

Originally Posted by pb4uski So combined 17% effective rate on that first $30k, 37% on the next $10k and 37% on the next $10k. So it looks like the first $30k isn't so bad.... 7% Federal and 10% state. But then 27% Federal and 10% state after that. I'm guessing that the 27% Federal is 12% ordinary and 15% on qualified income pushed from 0% to 15%.

yeah--his first sentence of "you would have 0 tax liability for the IRS and $959 due to NYS/NYC."

applies if I do no conversion at all.

[FREE866]

Quote:

Originally Posted by N02L84ER Each $10000 increase results in another $2700 in FED taxes from 30K to 40K and from 40K to 50K. So, it looks like those amounts are fully in the "27%" tax bracket (12% + 15%). The first $2217 is less than 27%, so not all of the conversion is at the "27%" tax bracket. How much FED tax would you pay on a $20K Roth conversion?

I didn't ask him that. My thinking is 20K a year would be too low if I want to have most if not all of money fully converted to Roth by the time I'm 70--16 years away. That is why i asked about higher amounts.

[pb4uski]

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.

[FREE866]

Quote:

Originally Posted by pb4uski 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.

So are you suggesting I do only a 30K transfer into a Roth?
So I would pay ~6K in taxes.