Roth Conversions up until NIIT hits?

[DawgMan]

2022 is my first year of retirement. A combination of a little earned income and closing out some partnership interests will make my 2022 tax return a little more complicated as it relates to tax planning. None the less, I started Roth conversions this year into the 24% bracket, stopping before NIIT hits (which adds another 3.8%). Additionally, I have made my after tax account more tax efficient as it relates to lowering the naturally occurring interest/dividends/capital gains which are produced by the funds (not me creating a taxable event).

Moving forward as of 2023, my after tax account will produce around $100K of interest/dividends/capital gains. Plan is to fill the 24% bracket up until I hit NIIT. Oddly, when I play around with some online tax calculators adding as much as $250K of Roth conversions ($100K + $250K = $350K taxable before standard deduction), I do not see NIIT hitting my return?? As I understand it, if you have MAGI over $250K which includes some investment income, you will pay the NIIT on the excess. In the example above, I would surely pay NIIT, no?

 

[SevenUp]

Some online tax estimation tools don't include common additional taxes such as the NIIT.

 

[Winemaker]

DawgMan, I finally realized that this would be me conversion strategy. We're stopping at $245k, from here on out. DW's accounts have about 3 more years to empty, then we start on mine.

 

[DawgMan]

Some online tax estimation tools don't include common additional taxes such as the NIIT.

I used https://www.calculator.net/, which shows an NIIT line item so I assumed it would calculate it. What tax calculators have you found to be more accurate?

 

[DawgMan]

DawgMan, I finally realized that this would be me conversion strategy. We're stopping at $245k, from here on out. DW's accounts have about 3 more years to empty, then we start on mine.

Is there really any advantage to converting one spouse's account before the other's if you are the same age?

I am a little surprised the NIIT limits have not increased in similar fashion to other income tax brackets (i.e. AMT)... but then again, should I be surprised?

 

[SevenUp]

Some online tax estimation tools don't include common additional taxes such as the NIIT.

I used https://www.calculator.net/, which shows an NIIT line item so I assumed it would calculate it. What tax calculators have you found to be more accurate?

All the ones in the linked wiki article should give the same answer if they include the same inputs and outputs.

Personally I like the case study spreadsheet (aka the "toolbox" one covered in the wiki article) for the marginal rate chart it generates. That does require Excel, and some people don't like spreadsheets in general or Excel in particular, but for anyone who can use Excel it works well (at least for the situations I've tried).

 

[kyzymurgist]

Is there really any advantage to converting one spouse's account before the other's if you are the same age?



I am a little surprised the NIIT limits have not increased in similar fashion to other income tax brackets (i.e. AMT)... but then again, should I be surprised?

Maybe state tax considerations? In KY, up to $31,110 of income from private, government, and military retirement plans (including IRAs and 401(k) plans) is exempt for each spouse. So it makes sense to convert at least that much from both every year to maximize deductions.

Guessing you are under age 62 since IIRMA limits are not a concern.

 

[CardsFan]

Is there really any advantage to converting one spouse's account before the other's if you are the same age?

A minor advantage is to simplify RMD withdrawals. Just need to draw from one account, not 2. That's the reason we did it (and DW's tIRA was much smaller)

 

[DawgMan]

Maybe state tax considerations? In KY, up to $31,110 of income from private, government, and military retirement plans (including IRAs and 401(k) plans) is exempt for each spouse. So it makes sense to convert at least that much from both every year to maximize deductions.

Guessing you are under age 62 since IIRMA limits are not a concern.

Both 58. IIRMA will probably be the least of my worries based on our planned spend/taxable income. For now, the plan is to convert as noted based on the known tax code.

 

[DawgMan]

All the ones in the linked wiki article should give the same answer if they include the same inputs and outputs.

Personally I like the case study spreadsheet (aka the "toolbox" one covered in the wiki article) for the marginal rate chart it generates. That does require Excel, and some people don't like spreadsheets in general or Excel in particular, but for anyone who can use Excel it works well (at least for the situations I've tried).

Ahhh... did not initial catch the "additional taxes" link. Thanks!

 

[sengsational]

I used https://www.calculator.net/, which shows an NIIT line item so I assumed it would calculate it. What tax calculators have you found to be more accurate?

If you are trying to titrate just 2022 taxes, why not just buy the tax software you'll be using to submit your taxes now? A bit more involved than a calculator, but you'll be entering data there eventually.

 

[RE2Boys]

A quick search seems to indicate that IRA distributions is not classified as investment income. Though they do count as part of the MAGI thus it may drive you other investment income to be taxed by NIIT (interest, cap gains, dividends) My investigation was a quick and dirty, so other may have more info.

See:

 

[DawgMan]

A quick search seems to indicate that IRA distributions is not classified as investment income. Though they do count as part of the MAGI thus it may drive you other investment income to be taxed by NIIT (interest, cap gains, dividends) My investigation was a quick and dirty, so other may have more info.

See:

Correct. I just ran the Dinkytown calculator and it calculated the NIIT as expected. My issue is I will probably continue to have a min $100K of investment income so that is where the NIIT comes into play when trying to pick a max threshold for Roth conversions. While not the end of the world, as an example, it raises my effective tax rate on any conversions that affect my MAGI over $250K to 27.8% (vs 24%) which otherwise would have been capped at 24% up to approximately $364K in 2023. Part of me is wondering if I should pay the extra 3.8% to get an additional $100K+ converted sooner vs. later or just hold to the $250K?

 

[SevenUp]

Part of me is wondering if I should pay the extra 3.8% to get an additional $100K+ converted sooner vs. later or just hold to the $250K?

What marginal tax rate do you expect to be paying "later" and does the size of conversions you are considering now affect that?

See Roth IRA conversion - Bogleheads for some considerations and suggestions.

 

[DawgMan]

What marginal tax rate do you expect to be paying "later" and does the size of conversions you are considering now affect that?

See Roth IRA conversion - Bogleheads for some considerations and suggestions.

Of course, that's the question, right? Here's all I know today... do no Roth conversions and grow our tax deferred accounts today at conservative 5% annually, compute RMDs, add SS, add some level of investment income from brokerage accounts, and I would easily be in today's 35% bracket or above. Factor in the odds that taxes will likely be higher in the future, I get more than 5% annual avg growth, future single spouse taxes, benefits to kid's inheritance, and it would seem prudent for me to do some reasonable level of Roth conversions.

All that said, priority 1 is to try an minimize lifetime taxes so using the 14 years I have until age 72 to spread out conversions is one option, but perhaps being more aggressive while we are in the current tax environment is a better option? First world problem, I know, but one none the less I would prefer to best navigate.

 

[SevenUp]

Of course, that's the question, right?

Yes indeed!

All that said, priority 1 is to try an minimize lifetime taxes

Probably "maximize the spendable amount after taxes" is better but that may be what you meant.

so using the 14 years I have until age 72 to spread out conversions is one option, but perhaps being more aggressive while we are in the current tax environment is a better option?

Probably, and being even somewhat more aggressive in your pre-IRMAA years. See Worth pushing through the Social Security hump and/or IRMAA cliffs? for yet more.

 

[gauss]

My goal is to complete my desired conversions before the TCJA temporary tax rate reductions expire after 2025 (under current law).

Without venturing into NIIT terrirotry, I could not max out the 24% bracket and complete my goal.

Fortunately, the vast amount of my assets are in tax-prefered accounts and I have carryforward losses in my after-tax accounts so the NIIT is minimal in my case.

-gauss

 

[audreyh1]

2022 is my first year of retirement. A combination of a little earned income and closing out some partnership interests will make my 2022 tax return a little more complicated as it relates to tax planning. None the less, I started Roth conversions this year into the 24% bracket, stopping before NIIT hits (which adds another 3.8%). Additionally, I have made my after tax account more tax efficient as it relates to lowering the naturally occurring interest/dividends/capital gains which are produced by the funds (not me creating a taxable event).

Moving forward as of 2023, my after tax account will produce around $100K of interest/dividends/capital gains. Plan is to fill the 24% bracket up until I hit NIIT. Oddly, when I play around with some online tax calculators adding as much as $250K of Roth conversions ($100K + $250K = $350K taxable before standard deduction), I do not see NIIT hitting my return?? As I understand it, if you have MAGI over $250K which includes some investment income, you will pay the NIIT on the excess. In the example above, I would surely pay NIIT, no?

NIIT only applies to investment income. Is that where you are seeing the discrepancy?

A quick search seems to indicate that IRA distributions is not classified as investment income. Though they do count as part of the MAGI thus it may drive you other investment income to be taxed by NIIT (interest, cap gains, dividends) My investigation was a quick and dirty, so other may have more info.

Thanks

 

[DawgMan]

NIIT only applies to investment income. Is that where you are seeing the discrepancy?


Thanks

Actually, it also includes dividends and interest. Dinkytown calculated it correctly.

 

[MarieIG]

An article about NIIT

It contains a chart about what is included.

https://smartasset.com/investing/net-investment-income-tax

 

[DawgMan]

Actually, it also includes dividends and interest. Dinkytown calculated it correctly.

Disregard… I quickly read your comment on my phone without my glasses and misread it!

 

[audreyh1]

Disregard… I quickly read your comment on my phone without my glasses and misread it!

I may have fooled you temporarily as I had to correct something.

 

[Whisper66]

DawgMan - I initially limited my yearly Roth conversions to the NIIT limit. I found that my IRA kept growing so fast that I wasn't making the progress I wanted to before RMD's would kick in. To control future tax rates I needed conversions to exceed the NIIT limit. In my case I convert to the top of the 24% bracket. Each year I run I-ORP extended version to test how much it would suggest I convert. I find it always suggests at least the 24% bracket maximum for my specific situation. I also recognize these tools only use available info on tax rates. So I-ORP uses current tax rates and includes the 2026 sunset of existing lowered tax rates. I am of the opinion that tax rates will likely be further raised in future years to help pay the ever increasing federal debt. If that is correct, I-ORP should underestimate the benefit of convertions. So I'm fine converting more than the NIIT limit.

 

[Whisper66]

I used https://www.calculator.net/, which shows an NIIT line item so I assumed it would calculate it. What tax calculators have you found to be more accurate?

FWIW - Here's the calculator I keep coming back to. Easy to use, updated for tax codes as they change, and accounts for NIIT properly.

 

[Exchme]

I you are looking at 35% in the future, I would bite the bullet and go to the top of the 24% bracket each year until IRMAA kicks in and then re-evaluate. Otherwise you are also giving up Roth Conversion space above the point where all your investment income is has had NIIT phased in.

So your net tax cost for pushing through NIIT will not be 27.8%, it will be between 24% and 27.8%, depending on how much of your investment income is qualified dividends and LTCGs.