Should I Do A Roth Conversion Tutorial

[SecondCor521]

Quote:

Originally Posted by SevenUp Yes, (change in tax)/(change in income) is of course the correct calculation, regardless of what one calls it. Unfortunately "effective rate" is often used to mean (total tax)/(total income). E.g., see Marginal Vs Effective Tax Rates And When To Use Each. For someone in that situation, and particularly if we add, say, a 22% (or the 27% "hidden" rate) option, the choice can (and should) be made one step at a time: - the amount subject to a 0% rate, then - the amount subject to a 10% rate, then - the amount subject to a 12% rate, then - the amount subject to a 27% rate, etc. One should not "blend" the amounts to reach, say, a 16% rate on the whole conversion and think that's good if expecting to pay, say, a 22% rate later. The amount converted at a 27% rate would have been a losing proposition.

Agree, and this is what I do. I conceptually Roth convert a dollar at a time - some years (including 2022) I've gotten it dialed in to within $1 of the actual tax bill I want to have (my case is complicated with refundable credits which creates a shadow 0% bracket, plus ACA subsidies which shift the sand as well).

On the last paragraph, although it doesn't currently apply to me, I can conceptualize that there are "tax hump" scenarios like the SS tax hump and the 27% shadow bracket where a somewhat narrow tax hump might be followed by a wide, low, plain of an appealing lower tax region. In situations like these, it might be worth powering through the tax hump and utilizing the lower plain to convert a relatively large amount.

To extend your example, if one expected a 26% marginal rate later (say, 25% plus some IRMAA) and the 27% shadow bracket were only $1K wide, it might be worth it to do an additional $15K in Roth conversions, paying 27% on that $1K to gain access to paying 22% on $14K.

That may be too fiddly for most people, possibly including me. At this point my marginal Roth conversion rates are monotonically increasing, and this year I expect mostly flat in the area of interest. So as long as I'm in the ballpark, getting in the right area is really good but optimizing to the last dollar isn't that critical.

[SevenUp]

Quote:

Originally Posted by SecondCor521 To extend your example, if one expected a 26% marginal rate later (say, 25% plus some IRMAA) and the 27% shadow bracket were only $1K wide, it might be worth it to do an additional $15K in Roth conversions, paying 27% on that $1K to gain access to paying 22% on $14K.

Yes it could. Worth pushing through the Social Security hump and/or IRMAA cliffs? discusses that issue.

[pb4uski]

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Originally Posted by Alex The Great .... There is a chance Roth income is included into the tax liability which would reduce SS. I would not rush too much with those conversions.

WADR, the chance that Roth income is taxable is between slim and none.

There isn't any proposed legislation that would do that so it is foolish to suggest it.

The closest thing was a 2021 Biden administration proposal that would prohibit Roth conversion by individuals with more than $400,000 in income... but it seems unlikely to me that anyone with over $400,000 in income would even be considering doing Roth conversions so it was a tooth-less tiger.

[TheWizard]

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Originally Posted by pb4uski WADR, the chance that Roth income is taxable is between slim and none. There isn't any proposed legislation that would do that so it is foolish to suggest it.

Totally agree.
It's already post-tax.
Cripes...

[CRLLS]

One can do nothing in fear that something MAY change, and it may change for the worse. There are always going on in DC, that could be detrimental to any retirement savings. There are also discussions that could be beneficial too. I follow the path of, if it makes sense now, I'll do it. IOW, deal with what is and don't be scared of what might be. That would be stagnation.

[BooBoo]

I'm having difficulty making the decision to convert.(Age 67) I have not started social security. The majority of our income is from our IRA. We withdrawal from the trad IRA up to the top of the 12%. Don't these withdrawals serve the same purpose as conversion by reducing the Trad IRA amount ? If we are lucky, we could have 2 million in the IRA by age 79 and more if really lucky. This would put us is the tax rate of 22% or whatever that rate would be in the future. Am I missing something?


Thanks,
Boo

[CardsFan]

Quote:

Originally Posted by BooBoo I'm having difficulty making the decision to convert.(Age 67) I have not started social security. The majority of our income is from our IRA. We withdrawal from the trad IRA up to the top of the 12%. Don't these withdrawals serve the same purpose as conversion by reducing the Trad IRA amount ? If we are lucky, we could have 2 million in the IRA by age 79 and more if really lucky. This would put us is the tax rate of 22% or whatever that rate would be in the future. Am I missing something? Thanks, Boo

If you are withdrawing for your spending needs, you are at least reducing the tIRA. If you could get that spending money elsewhere (after tax savings) then conversions to the top of the 12% bracket "could" be more helpful.

Based on the comment that it "could be" 2 million in 12 years, I am guessing you have around 1 million now.

Without any more to go on, I think you might be in the range where conversions "might" give you an incremental boost, but nothing earth-shattering.

[NW-Bound]

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Originally Posted by pb4uski To be clear, the blend is the result from a conscious decision the convert to the top of the 12% tax bracket based on knowing that after my SS starts but before RMDs we will be deep into the 12% bracket so RMDs will be a mix of the rest of the 12% bracket and the 22% bracket. Our effective rate on conversion is currently a 0%, 10% and 12% blend only because I haven't yet started SS.

SS+RMD will push me deep into the 22% bracket, and maybe even into the 24% bracket. So, it just makes sense to at least use up the 12% bracket with Roth conversion.

In fact, I have been going deep into the 22% bracket too, because that's where we will be with SS+RMD. If 22% is unavoidable, I just want to pay sooner rather than later, because I will have more money in Roth to generate tax-free income. In fact, I have been doing Roth conversion up to close to the 24% MFJ bracket.

Looking at my brokerage acccounts, I see that the return on my tax-deferred accounts is so much better than that of my post-tax accounts. Why so? It's because I am reluctant to make trades on the latter accounts, due to tax complications. When I am free from tax considerations, I can make trades purely based on gain/loss aspects.

And I often wish my tax-deferred accounts were no-tax accounts (Roth). No longer the problem with the tail (tax) wagging the dog (return). I want a tail-less dog.

[SecondCor521]

Quote:

Originally Posted by BooBoo I'm having difficulty making the decision to convert.(Age 67) I have not started social security. The majority of our income is from our IRA. We withdrawal from the trad IRA up to the top of the 12%. Don't these withdrawals serve the same purpose as conversion by reducing the Trad IRA amount ? If we are lucky, we could have 2 million in the IRA by age 79 and more if really lucky. This would put us is the tax rate of 22% or whatever that rate would be in the future. Am I missing something? Thanks, Boo

Yes, spending from the traditional IRA reduces the balance and produces a tax bill the same way a Roth conversion would.

You probably but might not know that you can both spend from and do Roth conversions from your traditional IRA.

The advantage to a Roth conversion over a withdrawal is that if those funds would otherwise be unspent, it is probably better that they end up in a tax free Roth account rather than a regular taxable account. Lower tax bill that way.

[NW-Bound]

Quote:

Originally Posted by SecondCor521 Yes, spending from the traditional IRA reduces the balance and produces a tax bill the same way a Roth conversion would. You probably but might not know that you can both spend from and do Roth conversions from your traditional IRA. The advantage to a Roth conversion over a withdrawal is that if those funds would otherwise be unspent, it is probably better that they end up in a tax free Roth account rather than a regular taxable account. Lower tax bill that way.

Yes. Not the immediate tax bill, but future ones. I love to have gains in my Roth accounts.