Roth IRA conversion not worth is because higher SS tax ?

[Delawaredave5]

FIL had $6,000 taxable income last year, paid $600 in tax. This year expected to be about same income/deductions.

Wanted to see impact if did $10,000 Roth conversion - so I took 2015 TT file and increased distributions by $10,000

The tax went up roughly an additional $2,500. I was expecting only $1,500 increase in tax (15% tax bracket).

Looking more closely - because of the higher income, an additional $6,000 of SS became taxable.

So with additional $2,500 tax due on $10,000 added Roth conversion - this does not make sense to do - right ?

Thanks !!!

 

[RobbieB]

Yeah, pretty much.

I didn't do any conversions this year as they would have been 25%.

I made too much dough not working -

 

[ERD50]

Yep, I think the key (in general) is to get the conversions in before SS and pensions.

-ERD50

 

[pb4uski]

Yes, that is the key... do your Roth conversions while you are in a low tax bracket, before SS and pensions.

Unless your FIL expects to be in a higher tax bracket later on.

 

[Delawaredave5]

Thanks for responses !

I did another model of $20,000 conversion instead of $10,000. An additional $3,000 of SS became taxable (almost rest of it).

The additional tax on $20,000 conversion was $4,300 -- so the percentage went down to 21.5% - still probably doesn't make sense.

You're right - conversion strategy appears best suited before one draws SS.

Thanks again !

 

[RunningBum]

So with additional $2,500 tax due on $10,000 added Roth conversion - this does not make sense to do - right ?

Not enough information. What happens when he has to take MRDs? Does it become worse?

 

[merlin3942]

The other thing to consider is whether your FIL is having to take RMD's yet. If not, you might want to see what that impact will be if you don't do any conversions between now and then.

 

[Delawaredave5]

FIL is almost 80 and taking RMDs. The IRA withdrawls for living expenses have easily covered RMD requirements.

So back at same conclusion- Roth conversion that triggers effective 25% tax on converted amount (because of additional SS taxable) does not make sense.

I guess RMDs will get higher as person gets older - and at some point exceed money needed for living expenses.

At that point, does Roth conversion money count towards tIRA RMD ?

Happy New Year!

 

[RunningBum]

At no point do Roth conversions count towards RMDs.


Sounds like your conclusion is correct.

 

[gauss]

FIL had $6,000 taxable income last year, paid $600 in tax. This year expected to be about same income/deductions.

Wanted to see impact if did $10,000 Roth conversion - so I took 2015 TT file and increased distributions by $10,000

The tax went up roughly an additional $2,500. I was expecting only $1,500 increase in tax (15% tax bracket).

Looking more closely - because of the higher income, an additional $6,000 of SS became taxable.

So with additional $2,500 tax due on $10,000 added Roth conversion - this does not make sense to do - right ?

Thanks !!!

And that is why at my age (early 50s) I am making major Roth conversions each year going forward. I plan to have them complete prior to claiming SS at age 70 and hopefully also prior to Medicare to avoid these additional taxes/charges etc.

My marginal tax rate should be the same now throughout retirement so this strategy makes sense to me under current law.

It is unfortunate that this is not covered more in the popular press.

-gauss

 

[RunningBum]

It is unfortunate that this is not covered more in the popular press.

I don't think too many people have the opportunity to do this as we early retirees do. We do a pretty good job of covering it here. You have a good point that deferring SS gives you more years to be able to convert.

The ACA subsidy cliff put a big crimp in my room to convert.

 

[pb4uski]

And that is why at my age (early 50s) I am making major Roth conversions each year going forward. I plan to have them complete prior to claiming SS at age 70 and hopefully also prior to Medicare to avoid these additional taxes/charges etc.

My marginal tax rate should be the same now throughout retirement so this strategy makes sense to me under current law.

It is unfortunate that this is not covered more in the popular press.

-gauss

+1 If I continue to convert to the top of the 15% tax bracket until I take SS at FRA, then our Roths will then be ~35% of our total... vs 3% when we retired.

 

[user5027]

I've heard a thought to leave some tIRA for later in life when larger medical/long term care costs hit in order to take advantage of the medical deduction. That involves believing the medical deduction still exists.

 

[GrayHare]

If medical deductions are capped or go away entirely, that removes a reason for keeping IRA in traditional form, income that could otherwise be deducted against in the future.

 

[gauss]

No medical deduction is allowed if HSA funds are used to pay the expenses (triple tax free).