Roth Conversion Strategy Changes in 2018?

[Sunset]

Quote:

Originally Posted by pb4uski 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.

While that initially is possible, another issue with RMD's is they increase each year in percentage taken out.

[pb4uski]

Yes, I'm seeing that in my spreadsheets. However, even though I'm in the 22% bracket slightly once RMDs begin, my overall federal tax rate is 3-11% of my total income and 9-15% of the Roth conversion or RMD, as the case may be... so definitely much less than the taxes I saved when I deferred that income which was solidly in the 25% bracket or higher.... so even though I am slightly in the 22% bracket.... I win.

Plus, once we move to a no income tax state I'll be saving even more since I was in a high income tax state when I deferred that income.

[audreyh1]

Quote:

Originally Posted by kramer 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.

I see that the 24% tax bracket ends at $315K for MFJ, whereas the 22% tax bracket ends at $165K. In between those two is the $250K threshold above which you pay an additional 3.8% Net Income Investment Tax on long-term cap gains and qualified dividends. Are people taking this into account when they calculate their cap gains effective tax brackets?

[Winemaker]

Has anyone used the Retiree Portfolio Model from Bogleheads?
The spreadsheet creates a Base case and a Full case models that you can compare various conversions, SS start times, etc. While it was just released using the new tax law, it pretty much showed similar results that I had with the older version, unless I am really screwing the numbers up. While DW and I collect pensions, have a modest rental income, and under 2.08% WR, the spreadsheet shows only $148,000 difference in portfolios.
We have 5 years before one of us reaches FRA, and our projected SS benefit at 70 will equal our current pension amounts. Currently, PA does not tax SS, pensions, or retirement account withdrawals. We are both in great health... it must be the red wine.

[kramer]

Quote:

Originally Posted by audreyh1 I see that the 24% tax bracket ends at $315K for MFJ, whereas the 22% tax bracket ends at $165K. In between those two is the $250K threshold above which you pay an additional 3.8% Net Income Investment Tax on long-term cap gains and qualified dividends. Are people taking this into account when they calculate their cap gains effective tax brackets?

Thanks for noting that ... it doesn't really affect me as a single as the 3.8% surcharge kicks in at $200K which is above the top of the 24% individual tax bracket which tops out at $157.5 ... however, as you noted, for a MFJ couple, a conversion to anywhere near the top of the 24% bracket would cause their capital gains and qualified dividends to be taxed at 23.8% federal. (and it may affect interest, regular dividends and short term capital gains, too, I am not sure).

[RunningBum]

Quote:

Originally Posted by audreyh1 I see that the 24% tax bracket ends at $315K for MFJ, whereas the 22% tax bracket ends at $165K. In between those two is the $250K threshold above which you pay an additional 3.8% Net Income Investment Tax on long-term cap gains and qualified dividends. Are people taking this into account when they calculate their cap gains effective tax brackets?

Good point, and another reason to model your situation with a tax program. I made a large contribution to a DAF last year, which gave me a lot of room for Roth conversions, but combined with a large LTCG I (barely) hit NIIT, so I stopped at the top of 0%, which was really 15% for LTCGs pushed into taxable, plus 3.8% NIIT on the last $253 converted. Anything conversions beyond that would've been taxed at 10+15+3.8% or 28.8%. I knew about NIIT before doing this but hadn't really thought about it applying to me until I realized it did.

[kramer]

For a pretty easy to use spreadsheet to calculate your potential marginal rates at tax bomb time, select the Marginal Tax Rates spreadsheet to see a description and download:

Bob Hinkley Downloads

This site is from #Cruncher from the bogleheads site, he provides super helpful information on the forum. He has updated to include 2018 tax information (and also retains 2017, etc).

NOTES:
* In order for the Excel spreadsheet to load properly in Libre Office, I had to update to the most recent version, 5.4.4.2, even though I had a relatively recent version already.
* One thing that I do in my modeling is I adjust the Social Security tax threshold (for the 50% and 85% figures) by assuming it won't be adjusted for inflation, which it is not currently. For me, looking 17 years in the future, I multiply these numbers by 0.7, so instead of 25,000 and 34,000, I changed them to 17,500 and 23,800. You need to unprotect the Tables spreadsheet to do this, you can do that from the Tools menu when you are on the Tables spreadsheet and then modify the numbers.

[jroon]

Thanks for all the great responses! I learned quite a bit from this thread and the Boglehead thread. There is a lot to consider.

I am thinking of converting to the top of the 12% bracket this month; if the market tanks significantly during the year, I may convert another 50K or so.

[Trooper]

Quote:

Originally Posted by jroon I am thinking of converting to the top of the 12% bracket this month; if the market tanks significantly during the year, I may convert another 50K or so.

Just curious - what does market performance have to do with conversion amounts? Taxable income is based on how much is converted at the time of conversion, not ending balance, correct?

[user5027]

Quote:

Originally Posted by jroon I am thinking of converting to the top of the 12% bracket this month; if the market tanks significantly during the year, I may convert another 50K or so.

Quote:

Originally Posted by Trooper Just curious - what does market performance have to do with conversion amounts? Taxable income is based on how much is converted at the time of conversion, not ending balance, correct?

Correct.

jroon is considering a market timing strategy by converting a large number of shares when they are "cheap" and anticipating they will rebound.

[SecondCor521]

Quote:

Originally Posted by user5027 Correct. jroon is considering a market timing strategy by converting a large number of shares when they are "cheap" and anticipating they will rebound.

Color me confused.

jroon is converting this month per your quote above. I don't think many people would argue that shares are "cheap" now.

[jroon]

I will be paying taxes on the amount I convert and will not be able to recharacterize. I realize no one knows what the market will do this year (or any year. I am trying to avoid a situation where, for example, I convert 32K in Stocks (US and/or International) and at the end of the year it is only worth 20K for example. I still owe the taxes on the 32K.

So, is there a way to avoid this situation now that we can't recharacterize, or am I looking at this the wrong way? Sorry if this question was not clear in my earlier post (or if it still is not clear).

[43210]

Quote:

Originally Posted by jroon ..., or am I looking at this the wrong way?

Possibly. Do you think it would be a problem if (hypothetically) there were a flat tax? If yes, then you are thinking about it in the wrong way.

[user5027]

Quote:

Originally Posted by SecondCor521 Color me confused. jroon is converting this month per your quote above. I don't think many people would argue that shares are "cheap" now.

I'll try to help you.

jroon is thinking about converting this month, but also mentions maybe converting another 50k or so if the market tanks and the shares are cheaper.

Does that help?

[user5027]

Quote:

Originally Posted by jroon I will be paying taxes on the amount I convert and will not be able to recharacterize. I realize no one knows what the market will do this year (or any year. I am trying to avoid a situation where, for example, I convert 32K in Stocks (US and/or International) and at the end of the year it is only worth 20K for example. I still owe the taxes on the 32K. So, is there a way to avoid this situation now that we can't recharacterize, or am I looking at this the wrong way? Sorry if this question was not clear in my earlier post (or if it still is not clear).

The only way to avoid that is to convert as late in the year as possible, but then you will not enjoy almost a years worth of potential tax free gains and dividends on the amount converted.

I liked your idea about taking a bigger bite of the conversion apple if the market tanks.

[SecondCor521]

Quote:

Originally Posted by user5027 I'll try to help you. jroon is thinking about converting this month, but also mentions maybe converting another 50k or so if the market tanks and the shares are cheaper. Does that help?

Yeah. I thought you were referring to his first conversion, not his second one. Thanks.

[Sunset]

My dream is to be home for two weeks when the market falls 99% in 1 day , so I can convert everything to ROTH, and then the market rebounds to its normal 100% level.

Otherwise, we will move some from IRA and towards the end of the year move the rest, unless there is a drop in which case we will move shares (without selling) as there is no need to have the sell & buy cost if I'm just going to get the same thing.

[jazz4cash]

Quote:

Originally Posted by user5027 The only way to avoid that is to convert as late in the year as possible, but then you will not enjoy almost a years worth of potential tax free gains and dividends on the amount converted. I liked your idea about taking a bigger bite of the conversion apple if the market tanks.

How about selling the stock to lock in the gain. Convert at any time you wish. I think the main concern is paying taxes on a loss.

[user5027]

Quote:

Originally Posted by jazz4cash How about selling the stock to lock in the gain. Convert at any time you wish.

I'm not following you here. I'm in ETFs. When I convert, XX shares of VTI, equal to the $$ I want converted, move from my tIRA to my Roth. No sale involved.

Once you sell when do you get back in? Isn't that always the problem, being right twice?

[RunningBum]

Quote:

Originally Posted by jroon I will be paying taxes on the amount I convert and will not be able to recharacterize. I realize no one knows what the market will do this year (or any year. I am trying to avoid a situation where, for example, I convert 32K in Stocks (US and/or International) and at the end of the year it is only worth 20K for example. I still owe the taxes on the 32K. So, is there a way to avoid this situation now that we can't recharacterize, or am I looking at this the wrong way? Sorry if this question was not clear in my earlier post (or if it still is not clear).

I don't see how to avoid it. You are correct that you'd like to convert at a low, so that you pay lower taxes and get the recovery gains tax free forever. But there's no way to predict where that low is. History says that most the market will go up, so that favors converting early. Or you could do a little market timing and wait for a dip. The market seems to be high now, but we could have another 15-20% gain this year before a fall next year.