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Old 01-08-2018, 02:56 AM   #21
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One change I'm considering is converting into the new 22% bracket. Previously, I never converted beyond the top of the 15% bracket. Based on our projected mix of rates on RMDs, along with modest growth expectations, the potential downside was considerably more significant than the fairly limited upside. However, at that rate of conversion, even with more than 10 years still to go, we can only convert about 35-40% of our tax-deferred balances by 70. So I'd like to do more if it makes sense.

A couple things have changed now. Obviously, the rate is lower from 25% to 22%. But it's notable that under the new law, the rate reverts to 25% just before we start RMDs. Anything can change, but that is current law. Also, under the cumulative effect of chained CPI indexing over the next 10 years, we will convert *less* if we decide to stay inside the 12% bracket. And thus *more* of our RMDs creep into the higher incremental rates compared to prior law.

I realize it's not just about tax rate differentials. Roth balances grow tax free and we've still got a long way to go and hopefully a lot of growth along the way. So that aspect alone is very attractive, even if the tax rate then and now is the same. So I'm starting to warm up to the idea of doing some conversions at 22%.
In my personal situation, where taxable account is much larger than tax deferred, I would consider what you are proposing except that then all of my qualified dividends in my taxable account get taxed at 15% instead of 0%. So, my brackets for conversion go: 10%, 12%, 27%, 22%. For my situation, the 27% is just too high, so I am staying within the 12% bracket for the foreseeable future.
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Old 01-08-2018, 05:25 AM   #22
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One change I'm considering is converting into the new 22% bracket. Previously, I never converted beyond the top of the 15% bracket.
I agree with kramer.

The 15% bracket is still in play because qualified dividend income is still taxed at 0% if one stays below this. And a Roth conversion increases AGI so that QDI becomes taxable. At least in 2017, Roth conversions above the 15% ($75,900, taxable income) made one's marginal rate 30%.

I don't know how this will all interact with the new tax law, but I think it is something to certainly look at carefully.
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Old 01-08-2018, 06:19 AM   #23
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But Cobra says that they will only get 35-40% converted at that rate. Which means that once SS and RMDs start, they will hit that 15+15% rate every year. In that case, it makes sense to me to go through the 12+15% rate and to the end of the 22% rate. In fact I'd probably go to the end of the 24% rate too.


Since it wasn't mentioned, I'm assuming the ACA subsidy is not in play, or not enough to worry about. That's what's keeping me from this strategy.
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Old 01-08-2018, 07:00 AM   #24
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But Cobra says that they will only get 35-40% converted at that rate. Which means that once SS and RMDs start, they will hit that 15+15% rate every year.
Actually, the OP did not provide enough information to conclude this.

But that is why I said my personal situation, just to make sure folks were aware of the give/take of Roth conversion decisions.

Also, most people are going to want some money left in IRAs (as opposed to paying high marginal rates for conversions to completely empty out an IRA). Firstly, the RMDs on a low remaining balance will be low. If you will have high medical or high LTC costs, they will be deductible and you can take higher income those years. And if you are going to purchase a deferred annuity, it is generally better to do so within an IRA than outside an IRA.

Edit: Ah, I see, you were referring to the poster Cobra and not the OP.
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Old 01-08-2018, 07:29 AM   #25
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I havenít crunched the numbers yet, but I suspect that we will start doing some Roth conversions this year.

DHís pension has put us in the 25% bracket since he retired (not a bad thing) and projected SS + RMDs barely went into the 28% bracket, so I didnít see any tax advantage in doing conversions.

Now with our tax bracket dropping to 22% for (probably) eight years, Iím thinking we should move some money and pay 22% on it rather than (what I believe) will be higher tax rates in the future.

Iíll play with some spreadsheets later to see what the numbers indicate.
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Old 01-08-2018, 07:32 AM   #26
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Oh, I just thought of another variable. DH will start Medicare this year. I better check to see where we are in terms of having to pay more for Medicare Part B.
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Old 01-08-2018, 08:21 AM   #27
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Oh, I just thought of another variable. DH will start Medicare this year. I better check to see where we are in terms of having to pay more for Medicare Part B.
good info here: https://www.kitces.com/blog/irmaa-me...gi-thresholds/
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Old 01-08-2018, 08:40 AM   #28
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In my personal situation, where taxable account is much larger than tax deferred, I would consider what you are proposing except that then all of my qualified dividends in my taxable account get taxed at 15% instead of 0%. So, my brackets for conversion go: 10%, 12%, 27%, 22%. For my situation, the 27% is just too high, so I am staying within the 12% bracket for the foreseeable future.
You are right, I had overlooked the 27% rate, but it doesn't really affect the conclusion very much. In our case, the taxable account is about half the size of tax-deferred. Our QDs subject to the 27% rate are relatively small. So if we converted to the top of the 22% bracket, the average rate paid (above the 12% bracket) would be 23%, and we could convert a much higher percentage of our tax-deferred balances.

That's still obviously higher than I would like to pay, but I have to compare to the rate we would otherwise pay at the time of RMDs + SS. If the rates revert, we'd pay 30% to the extent of QDs, then 25%, and possibly 28% or higher depending mainly on portfolio growth between now and then. In addition, as I mentioned before, I'm concerned that the cumulative effect of chained CPI will subject even more of the RMDs to the higher incremental rates, although I haven't tried to quantify that yet.

If the rates don't revert, we'd pay the same 23% average rate that we would have on the conversions, and possibly 24% or higher depending on portfolio growth. In that case, the rate advantage from converting beyond the 12% bracket is zero or very small. The main advantage would be tax-free growth over the next 10+ years, and also as protection against the scenario in which one of us dies and leaves the survivor paying single rates on huge RMDs.
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Old 01-08-2018, 11:01 AM   #29
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This is one of my things to evaluate in 2018. I also am leaning towards more Roth conversions.... possibly to the top of the 22% tax bracket... to leave less in the tax-deferred IRA subject to RMDs once we start SS... and more growing tax-free quicker.

While the old 30%/new 27% marginal tax rate does turn my stomach, if I convert to the top of the 22% tax bracket, my effective tax rate on the entire converson would be ~18%... much more than the ~8-10% I pay now but probably much better than paying 25% or more later.

The extra tax on QD and LTCG is an issue but will be less so because our taxable funds are dwindling as we use that money for living expenses and to pay Roth conversion taxes.

Another issue for us is state income taxes... but those won't go away for a few years so for now I am like a deer in the headlights as to whether to convert to top of 12% or 22% but I have almost a year to figure it out.
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Old 01-08-2018, 11:31 AM   #30
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Thanks for that link. The MFJ income where IRMAA kicks in is pretty high by our standards. I think we will be ok.
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Old 01-08-2018, 11:50 AM   #31
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This is one of my things to evaluate in 2018. I also am leaning towards more Roth conversions.... possibly to the top of the 22% tax bracket... to leave less in the tax-deferred IRA subject to RMDs once we start SS... and more growing tax-free quicker.
Again, if you're going to 22%, why not 24%, unless 22% for a few years, then back to the top of 15% will be enough to empty your tIRA?
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Old 01-08-2018, 11:54 AM   #32
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Interesting idea but I would only do that once we are clear of state income taxes in a few years... perhaps the best way to frame it might be to decide an optimal amount of RMDs once SS starts, then back into the resulting tIRA balance and then back into a conversion strategy to get to that balance by age 70.
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Old 01-08-2018, 12:00 PM   #33
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Again, if you're going to 22%, why not 24%, unless 22% for a few years, then back to the top of 15% will be enough to empty your tIRA?
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Interesting idea but I would ony do that once we are clear of state income taxes in a few years... perhaps the best way to frame it might be to decide an optimal amount of RMDs once SS starts, then back into the resulting tIRA balance and then back into a conversion strategy to get to that balance by age 70.
Very interesting. I like the idea of getting more converted quicker to take advantage of tax-free growth longer. That helps reduce the risk of rate differentials going against you. I also like the idea of deciding on an acceptable tax-deferred balance at 70, and then working back from there. Lots of work to do...
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Old 01-08-2018, 12:12 PM   #34
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Very interesting. I like the idea of getting more converted quicker to take advantage of tax-free growth longer. That helps reduce the risk of rate differentials going against you. I also like the idea of deciding on an acceptable tax-deferred balance at 70, and then working back from there. Lots of work to do...
I'm not sure since both accounts would grow tax free (until taken out of IRA) that this has much positive effect, if one is paying a higher tax rate to do the conversion.
Especially if one needs to remove enough to pay the tax on the conversion from the IRA as well, or even sell stocks resulting in LTCG.
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Old 01-08-2018, 12:25 PM   #35
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Interesting idea but I would only do that once we are clear of state income taxes in a few years... perhaps the best way to frame it might be to decide an optimal amount of RMDs once SS starts, then back into the resulting tIRA balance and then back into a conversion strategy to get to that balance by age 70.
My own optimal RMD amount would be 0, because with SS benefits, a small pension and dividends from my taxable account, any RMD is going to be taxed at 15+15%, and then 25%, (or 12+15%, then 22% if the new rates become permanent). I don't think I'd be able to take any RMDs at 12 or 15% without pushing dividends into being taxed. So I'd like to get my tIRA fully converted even if I have to do a lot of it at 22 and 24%.

Everyone's situation is different though. My own is complicated by the subsidy, which has become to big for me to skip, so I don't expect to be able to convert much at all in 2018.
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Old 01-08-2018, 12:58 PM   #36
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It may not be so bad... if I take 85% of our SS and my pension less $24k standard deduction and back into the Roth needed to keep RMDs out of the 22% tax bracket, I will need to reduce my tIRA by 15-20% between now and 70 1/2.... so that would be 2-3% a year plus growth.

So it will be close but if we continue our path of converting to the top of the 12% tax bracket and I defer SS to 70 then we should be able to get close... what will help is as our taxable accounts dwindle with living expenses I'll be able to convert more each year for the next 4 years until DW starts her SS and then some for the next 4 years until I start my SS and RMDs begin. Also, the tIRA growth will moderate as it becomes more and more of our bond allocation... so between the two it will be close... we may end up in a higher tax bracket for a few years.

I can also do higher conversions once we are redomesticated to a no income tax state in a few years.
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Old 01-08-2018, 02:30 PM   #37
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I'm not sure since both accounts would grow tax free (until taken out of IRA) that this has much positive effect, if one is paying a higher tax rate to do the conversion...
Not sure I follow. We've got 13-14 years until 70, during which time the tax-advantaged portfolio will hopefully grow. Any of that growth that occurs in the tIRA *will* be taxed... either as an RMD or as a conversion prior to RMDs. Any of that growth that occurs in the Roth will never be taxed. So unless I'm missing something, converting sooner will allow more of the growth to escape taxation. This is a positive effect regardless of which way the rate differentials ultimately play out. Even converting at 22-24%, it should be positive or neutral. Negative is possible, but far less likely.
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Old 01-08-2018, 03:06 PM   #38
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Initial analysis suggests that even if I continue to Roth convert to the top of the 12% tax bracket that I'll be in the 22% tax bracket once RMDs begin.... it will be close... I'll have to monitor year by year but it will be hard to avoid it... nice problem to have I guess.
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Old 01-08-2018, 04:51 PM   #39
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Going thru my personal situation, I think I am finding the only significant reason for converting is if you can get the IRA and 401K's into a Roth for estate planning purposes. Admittedly we would have to pay taxes from those same IRA's and 401K's which reduces the amount actually put into the Roth. Every time I look at it, because we are 65/66 and our money is predominately in IRA's and 401K's, it will be close to a wash either way when considering it all tax brackets, IRMMA and beneficiary's after tax benefits.

Unless there is >5% benefit in the end (whenever that is) I consider things to be not worth the bother.

I am still evaluating though. And I can change at any time things change significantly.
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Old 01-08-2018, 05:23 PM   #40
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I, too am considering conversions up to the 22% bracket. Probably won't, but I might. Right now our tax deferred retirement savings are at 85% with Roth (Tax Free) at 15%. I'd love to even that out substantially over the next 10 years until RMD's. Ultimately, I'd like to have only enough in tax deferred to generate RMDs up to the standard deduction amount (currently $24K) - basically making those RMDs tax free (kind of). Using MFJ, we could have around $650K in tax deferred wherein RMD's would be below the standard deduction amount. Obviously, there is more to the puzzle such as taxation of SS, any tax cliffs that we might fall off, etc.
I always get my money's worth from buying TurboTax and playing with it doing these "what ifs".
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