Roth Conversion Guide

[CardsFan]

Quote:

Originally Posted by pb4uski What I would do, is using either the TurboTax What-If Worksheet or the dinkytown tax calculator is to sketch out 2020 tax assuming $0 Roth conversions. Then add Roth conversions to the top of the 12% bracket and compare the increase in tax to the amount of the conversion to get the effective rate on the conversion. As noted, the harder part is to get an idea of your future tax rate before and after RMDs, but since SS and tax brackets grow with inflation and RMDs grow at at least the rate of inflation due to investment growth, I think you could get a rough approximation by using today's SS at the age you plan to take it (excluding COLA growth) and RMDs assuming you were now 72 (or maybe a little more).

I have done the same the last few years, staying in the 12% bracket. This year, I decided to convert up to the IRMAA threshold (we are 65 and on Medicare).

The marginal rate on the additional conversion was about 25%, but the rate for the entire conversion was 16%. Since I avoided taxes at the 28% rate to make the contributions, this is a win (but paying an additional $10k in taxes is still tough to swallow).

[JustVisitingThisPlanet]

On the suggestion to convert at end of year vs. early in year... End would be ideal unless you have an opportunity early in year you don't want to pass up, especially for those in private equity via SD-IRA and can't easily sell a holding for a new opportunity. I had one year where I did convert early in year, which paid off.

[schellem]

I'm in the conversion calculation dilemma, I just retired in June at 58, DW will follow in a year or so. We will have a lot of time to do conversions with little income. I've started on spreadsheet but just keeps getting more and more complex.

The latest issue to add to the spreadsheet is to figuring out the road between shooting for low nearly tax free income and getting ACA subsidies versus trying to take advantage of the 24% bracket while we have it. I think we can get subsidies of around 8-10K.

Anyone have any tips in relation to considering ACA subsidies?

[MarieIG]

I am going to print out this article and the thread.

Pb4uski had explained to me (on an old thread - couldn't update it) how to do a backdoor Roth; which I did. I will be rolling over my taxable 401k (costly administrative fees) into an IRA on January 2nd; and want to be prepared for Roth conversions.

[SecondCor521]

^ I don't have the math for you, and haven't done it myself, but it seems that most people here think that ACA subsidies are worth more than the Roth conversion tax arbitrage savings.

I think some of that opinion is probably based on the "bird in the hand" sentiment.

It's harder for married folks I think, as you have the potential for the surviving spouse to be socked with higher income tax brackets and IRMAA adjustments after the first spouse dies.

[Time2]

Quote:

Originally Posted by pb4uski What I would do, is using either the TurboTax What-If Worksheet or the dinkytown tax calculator is to sketch out 2020 tax assuming $0 Roth conversions. Then add Roth conversions to the top of the 12% bracket and compare the increase in tax to the amount of the conversion to get the effective rate on the conversion. As noted, the harder part is to get an idea of your future tax rate before and after RMDs, but since SS and tax brackets grow with inflation and RMDs grow at at least the rate of inflation due to investment growth, I think you could get a rough approximation by using today's SS at the age you plan to take it (excluding COLA growth) and RMDs assuming you were now 72 (or maybe a little more).

Yes, I am using Dinkytown to calculate my maximun Roth Conversion in the 12% bracket. It is a little convoluted for me because, I get next years expenses this year, I also have to generate a December $30k tuition payment. Add to those any taxes due and money for an HSA. Then add in the Roth Conversions which generate taxable income, so I have rerun the taxes due and generate more income to pay those extra taxes which also means more income and more taxes. But I have it pretty well figured out, although my first asset sale generated a several hundred dollars more LTCG than I calculated.

I think I'll sneak up on the proper amount
with a bigger asset sale, redo the calculations to see how close I am and then one or two smaller asset sales to get it close.

[pb4uski]

x/(1-t) can be quite useful... where x is the desired net proceeds and t is the tax rate.

So if I want to net $10,000 and the marginal tax rate is 12%, an $11,364 withdrawal will result in $1,374 in tax and net proceeds of $10,000.

[Rocket Man]

Thanks! Great piece of information!

[Brat]

I wish I had converted more of DH's tIRA during the years before required minimum distributions. That would have been before the ACA so didn't need to factor that in.

[braumeister]

One of the best things I ever did was to take advantage of a special deal offered in 2010. I converted my entire traditional IRA to Roth at a stroke. Of course that led to an enormous tax liability, but for that one year only you could pay the tax over two years, half with the 2011 taxes and half with 2012. I bit the bullet and did it, and it feels so good to have that behind me!

Considering the state of things today, I wouldn't be at all surprised if they offered the same deal again next year.

[RunningBum]

Quote:

Originally Posted by braumeister One of the best things I ever did was to take advantage of a special deal offered in 2010. I converted my entire traditional IRA to Roth at a stroke. Of course that led to an enormous tax liability, but for that one year only you could pay the tax over two years, half with the 2011 taxes and half with 2012. I bit the bullet and did it, and it feels so good to have that behind me! Considering the state of things today, I wouldn't be at all surprised if they offered the same deal again next year.

That was a great deal and I regret not taking advantage of it. It turned out to be a big winner because the gains in the next couple of years following made up for the tax liability, or at least would have in my case. It would've been good even for normal years. I didn't really do the math on it.

[Out-to-Lunch]

I did that, too, but since I was w*rking, I only had ~$20k in a rollover IRA from a previous employer. Too bad.

[FREE866]

Such an interesting topic. And thank you to all , esp PB4uski for helping me though this earlier in year.


I started doing Roth conversions this year and my effective tax rate is 7.38%. I am assuming when SS and RMDs start hitting ( 16-18 years from now) my effective tax rate will be much higher.

[Bigdawg]

Quote:

Originally Posted by pb4uski x/(1-t) can be quite useful... where x is the desired net proceeds and t is the tax rate. So if I want to net $10,000 and the marginal tax rate is 12%, an $11,364 withdrawal will result in $1,374 in tax and net proceeds of $10,000.

11364
-1374
=9900

Or did I miss something?

[pb4uski]

Quote:

Originally Posted by Bigdawg 11364 -1374 =9900 Or did I miss something?

We both did. I typed $1,374 and it should have been $1,364... the 6 and the 7 are adjacent on the keyboard so obviously it's a typo.

But... $11,364 - $1,374 = $9,990... Not $9,900. Miscalculation or typo? I don't know, but in any event we're even.

[Out-to-Lunch]

EDIT: Dang, I gotta start hitting refresh before I submit these! Another crossing in the ether.

Quote:

Originally Posted by Bigdawg 11364 -1374 =9900 Or did I miss something?

Well, Pb4 meant to say that the tax was $1364.

And your subtraction was off by $90

11364
-1374
=9990

[SevenUp]

Quote:

Originally Posted by pb4uski Yes, to figure that tax drag you'd have to model it out.

See Break-even withdrawal rate for said model.

[sengsational]

Quote:

Originally Posted by SevenUp See Break-even withdrawal rate for said model.

This is a bogleheads thread.

[Time2]

Quote:

Originally Posted by pb4uski x/(1-t) can be quite useful... where x is the desired net proceeds and t is the tax rate. So if I want to net $10,000 and the marginal tax rate is 12%, an $11,364 withdrawal will result in $1,374 in tax and net proceeds of $10,000.

I'm having a tough time extending this x/(1-t).
My 1 is made of LTCGs, only 56% are taxable.

My long way into this is Percentage taxable = Gross - (Gross- LTCG percentage) OR 1-(1-.56) =1-(.44) = .56
t = .56 * tax rate, then t = .56 * .12, so, t=0.0672 now if I plug t into x/(1-t)
x/(1-0.0672) = x/.9328. So if I want $40,000, I divide by .9328 and get $42,881.
Can anyone simplify that?

[Brat]

Everyone is pushing the numbers based on the current tax code and I will admit that the impact of ACA substudies is significant. That said, if ACA substudies are not a factor, consider that the tax rate for high-income taxpayers is likely to increase significantly in the near future. If your tIRA is expected to grow significantly your RMDs will flow directly to taxable income.