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Roth Conversion Math & Rationale
Old 02-25-2021, 10:29 AM   #1
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Roth Conversion Math & Rationale

As I've stated in other threads, I'm single and "retired" back in December of 2019. Because I didn't work in 2020, I was able to harvest significant capital gains at 0% and a tad at 15%...then immediately bought the shares back to raise my cost basis. I plan on doing that again in 2021 but not to such a degree.

That said, I am also planning to start Roth Conversions this year but only up to the 12% bracket, and would like to continue doing so until I'm 62. The reason I chose 62 is because another pension will kick in and I plan on taking SS then as well, which will definitely bump me into the 22% bracket. Here's what I've come up with so far regarding the conversion math:

Ordinary Income (military pension and MM interest) - $30,183
Standard Deduction - ($12,550)
Charitable Deduction - ($300)
Total Taxable Income - $17,333
(I'll also receive $20,148 in a non-taxable VA pension)

STCG - ($2,183) - A convered call that didn't go my way
LTCG/Qualified Dividends - $6,989
Total CG/QD - $4,807 (taxed at 0%)

So, for my Roth conversion, I calculated the following:

Ordinary Income Tax @ 10% (up to $9,950) - $995
Ordinary Income Tax @ 12% (up to $40,525) - $886
Amount left over for Roth conversion up to 12% bracket ($23,192) - $2,783
Total Tax Due - $4,664

The fed withholding from my military pension will be approximately $2,933, so I'll owe the IRS roughly $1,731 in conversion taxes. Sound about right? Also, does my reasoning for only converting up to the 12% bracket and only until age 62 make sense?

FWIW, if I convert roughly the same amount each year until age 62, I will have converted ~70% of my tIRA balance. I guess another another scenario could be taking the full value of the tIRA (~$360K), divide by 11 (I'm 51 now), and then pay the 12%/22% mix on that amount...although tax brackets may very well change in the future.

Decisions, decisions...
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Old 02-25-2021, 11:55 AM   #2
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I would look at factors like, if you fully converted your tIRA before taking SS, does that reduce the amount of SS that is being taxed? Does it keep you out of IRMAA?

If your SS+pensions+other income push you into 22%, what will you be paying when you add RMDs?

Those things might make converting at 22% look more attractive when you run all of your numbers.
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Old 02-25-2021, 12:24 PM   #3
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Why are you planning to take Social Security at age 62? What is your goal with the T-IRA? 100% conversion to Roth? Future RMDs but at a greatly reduced amount?

By age 62 you say you will have 70% of your tIRA converted to a Roth (and both will hopefully continue to increase in value). You can delay Social Security, and take an IRA distribution each year from age 62 that is equal to age 62 Social Security (or whatever amount you need for your budget). You can take distributions from your IRA starting at age 59-1/2, and also do Roth conversions if you like.

Your goal would then be to reduce the $108,000 remaining (30% of $360k) to avoid RMDs at age 72. If you still have an IRA balance when you combine it with with Social Security you are likely to be taxed at the 22% rate starting at age 70 when you must take your Social Security payments.

There are many ways to slice this. It all depends on your budget and your willingness to pay taxes up front. You can also increase the FICA deduction on your military pension to cover taxes you expect to pay for converting or distributing from your tIRA.

The impact in interim years (age 62-70) is that you increase your income by the amount of the distribution - but you were going to increase income with a Roth conversion anyway.

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Old 02-25-2021, 01:12 PM   #4
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My plan is to convert most of the tIRA to Roth by 70, and whatever is left I'll do QCD for the RMD. I noticed a small charitable contribution. If you convert like you plan, that would leave some for charitable causes that you never have to pay tax on. No deduction but no tax either.
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Old 02-25-2021, 04:40 PM   #5
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Leave room for your 0% LTCG's within the nominal 12% tax bracket. The 0% LTCG bracket has its own income limit of $40,400 for 2021, so it's a little bit less than the 12% bracket. That $40,400 is the sum of taxable income plus CG's (and distributions, qualified or not). That last little bit of Roth conversion could cost you a 12% (regular income tax) + 15% (LTCG's pushed into 15% tax bracket) = 27% tax rate. Not something you want to do in this case.
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