Time to consider I.R.A. to Roth rollovers.

[Out of Steam]

That's the big one, yes, but having a tax-free slush fund for major purchases in the future is another good reason, even if no immediate tax savings.

Another reason is to reduce your tax-deferred balance a bit so that RMDs at age 72+ don't get your AGI into higher IRMAA tiers...

The second of these is a major reason why I'm doing it, though current rules say that we won't be affected by IRMAA until one of us dies. What got me started on conversions is that we had some headroom in the 12% bracket for 2021, though my whole conversion will probably be in the 22% bracket for 2022.

Having more after-tax funds available is also useful.

 

[Sunset]

Are you saying if RMDs go away, you wouldn't withdraw from your tIRA at all? You can't spend money in a tIRA until you pay the tax on it. If a law passed tomorrow that did away with RMDs I'd still be converting. I like having that money I saved available to me to use. I don't get the reluctance to pay some taxes to free up a much larger amount for me to use.

....

+1
I think it's possible we could buy a second home sometime or plane or land, I'd rather convert $50K per year and build up the Roth, so we can pull out $400K at one time without it being a taxable event.

Without conversions or extra IRA withdrawals, we'd have to do a big withdrawal and pop into a higher tax bracket or two.

 

[DawgMan]

Are you saying if RMDs go away, you wouldn't withdraw from your tIRA at all? You can't spend money in a tIRA until you pay the tax on it. If a law passed tomorrow that did away with RMDs I'd still be converting. I like having that money I saved available to me to use. I don't get the reluctance to pay some taxes to free up a much larger amount for me to use.

Not meaning to single you out; I've seen a lot of people wish to not have RMDs. I'm trying to understand the benefit.

As far as legacies go, my plan is to leave taxable investments with large unrealized gains, so that neither I nor my heirs pay tax on those gains. If the step up in basis goes away, that will change my plans.

Well, here is my thought, and perhaps it revolves more around my particular situation. IF RMD requirements were to go away, the required annual increasing withdrawal amounts would disappear and I would then have the flexibility to withdraw the amount of dollars I wanted from my tax deferred accounts, as opposed to some arbitrary amount which kicks me into a higher tax bracket. In my case, roughly 55% of my retirement assets are in after tax accounts and I have a higher than average planned annual spend (very discretionary) which give gives me some flexibility as to where/when to pull from various accounts. While I do agree the current tax code, especially relative to the past, makes a strong argument to do Roth conversions through 2025, we only know what we know today. So for now, at age 58, I will go hard on Roth conversions for 4 years (2022 - 2025) and then see what the rules of the game are again.

 

[daver]

Back to OP, I agree if you have 100 shares at $10 and convert that adds $1,000 for taxes. If it drops 30% and you convert, only $700. I did some conversion earlier but due to IRMAA I’m at the top for this year. Next year I’ll look to do some more opportunistic conversions but will stay under IRMAA cliff. Lots of reasons to convert, as have been discussed in other threads many times. However, I recently started working with my brother and it sure appears that he will be in lower tax rates in retirement, except when they go from married joint to single tax rates. If you file joint I don’t see how your tax rate won’t be subject to increase unless you have no income.

What is your "top" this year? 2022 AGI will be used in 2024 to determine IRMAA premiums. My original plan was to keep my 2022 AGI below 182K but that is the IRMAA threshold using 2020 AGI. Due to inflation the 2024 IRMAA thresholds could be higher but who knows for sure...

 

[ncbill]

Yep, the more research I do on historical tax rates relative to today, impacts of IRMAA and NIIT, I'm convinced we are probability in the lowest income tax environment we may be in for some time. While there is a chance the the current tax rates may be extended after 2025 (depending upon mid-term election results), I plan on filling up the 24% bracket starting this year until I hit 63. Interesting, the historical tax code has as few as 2 and as many as 16 brackets!
https://taxfoundation.org/historical-income-tax-rates-brackets/

Based on what we know today (and past history), IMHO, a good argument to fill up the 24% bracket if you are top heavy in tax deferred accounts.

Yep that's why we're doing Roth conversions every year, though only up through the top of the 12% bracket (MFJ)

We still should finish by the time we're both 59 1/2, so any withdrawals afterwards come out tax-free.

 

[SecondCor521]

Yep that's why we're doing Roth conversions every year, though only up through the top of the 12% bracket (MFJ)

We still should finish by the time we're both 59 1/2, so any withdrawals afterwards come out tax-free.

You could even take until age 65 or 70 or 72 if needed, depending on SS and RMD start times, accounting for age differences between spouses.

 

[TheWizard]

What is your "top" this year? 2022 AGI will be used in 2024 to determine IRMAA premiums. My original plan was to keep my 2022 AGI below 182K but that is the IRMAA threshold using 2020 AGI. Due to inflation the 2024 IRMAA thresholds could be higher but who knows for sure...

The Finance Buff knows.
Check his blog on this topic...

 

[TheWizard]

You could even take until age 65 or 70 or 72 if needed, depending on SS and RMD start times, accounting for age differences between spouses.

I'm 72 and taking RMDs from now on, so I'm done doing the "larger" Roth conversions of the past ten years.
But the IRMAA tiers have gone up with inflation so I'll still do a modest conversion this year.

And in 2023, my RMD will likely be less than this year's, so a somewhat larger conversion then...

 

[zinger1457]

Starting next year I no longer need to manage my income to maximize my ACA subsidy, will be on Medicare, so was planning to start drawing down from my qualified plans, maybe in the 5% range. Does it make sense to dump those funds into my Roth and use the Roth as a holding tank for when I want to use the funds? Don't really need the funds for my normal living expenses but plan on splurging (Die With Zero) a little, just don't have any definite plans yet. My tax bracket (22%) should be the same for the foreseeable future whether I take qualified distributions or not, close to borderline with the qualified distributions so could go up into the next bracket.

 

[CRLLS]

Starting next year I no longer need to manage my income to maximize my ACA subsidy, will be on Medicare, so was planning to start drawing down from my qualified plans, maybe in the 5% range. Does it make sense to dump those funds into my Roth and use the Roth as a holding tank for when I want to use the funds? Don't really need the funds for my normal living expenses but plan on splurging (Die With Zero) a little, just don't have any definite plans yet. My tax bracket (22%) should be the same for the foreseeable future whether I take qualified distributions or not, close to borderline so could go up into the next bracket.

If you are past managing ACA subsidies, am i correct in assuming you are going to medicare? I'll also assume you are past any penalties for withdrawals from a Roth. If both are true, there is every benefit in doing Roth conversions over just moving that to a after tax account. Any growth in the Roth is tax free.

 

[zinger1457]

^^^^ Yes, will be on Medicare and will be past the 5 year holding requirement.

 

[SecondCor521]

Starting next year I no longer need to manage my income to maximize my ACA subsidy, will be on Medicare, so was planning to start drawing down from my qualified plans, maybe in the 5% range. Does it make sense to dump those funds into my Roth and use the Roth as a holding tank for when I want to use the funds? Don't really need the funds for my normal living expenses but plan on splurging (Die With Zero) a little, just don't have any definite plans yet. My tax bracket (22%) should be the same for the foreseeable future whether I take qualified distributions or not, close to borderline with the qualified distributions so could go up into the next bracket.

Yes, it makes sense.

It's pretty much the same as a withdrawal tax-wise, but has the additional benefit that any unspent funds grow tax free.

 

[Bruno]

The Finance Buff knows.
Check his blog on this topic...

Hey Wiz did you forget the link?

 

[TheWizard]

Hey Wiz did you forget the link?

No, but Google knows:
https://thefinancebuff.com/medicare-irmaa-income-brackets.html

 

[JackJester]

I retired in July. In 2023 and 2024 we will be living exclusively on cash that we have saved. So it seems that this would be a good time to do Roth conversions. Is there a calculator I can use to help plan this? I searched the forum and didn't find any obvious threads, but I'm sure some calculators have been mentioned. It seems that we will be in the 10% bracket these next 2 years since we have no income except Divs, so we could convert up to the MFJ value of $22K. Sorry for the stupid question, but is it simply a matter of converting enough IRA funds that approximate $21Kish? I wouldn't want to bust this 10% bracket since I will likely never see it again except for these couple of years. I'm not very tax savvy, and it didn't matter much when I was working and always in the 24% bracket, so I'm trying to learn now. Thx

 

[SevenUp]

I retired in July. In 2023 and 2024 we will be living exclusively on cash that we have saved. So it seems that this would be a good time to do Roth conversions. Is there a calculator I can use to help plan this? I searched the forum and didn't find any obvious threads, but I'm sure some calculators have been mentioned. It seems that we will be in the 10% bracket these next 2 years since we have no income except Divs, so we could convert up to the MFJ value of $22K. Sorry for the stupid question, but is it simply a matter of converting enough IRA funds that approximate $21Kish? I wouldn't want to bust this 10% bracket since I will likely never see it again except for these couple of years. I'm not very tax savvy, and it didn't matter much when I was working and always in the 24% bracket, so I'm trying to learn now. Thx

Roth IRA conversion - Bogleheads mentions a couple of spreadsheets.

Why not convert at least to the top of the 12% bracket?

The more general question is "what do you expect for income in the years after 2024, and what marginal tax rates do you expect to incur then?"

 

[zinger1457]

^^^^I wouldn't worry too much about busting the 10% bracket and going to the 12% bracket, especially if your future income goes way up and you expect to be in the 22% bracket or higher. Don't forget to subtract the standard deduction (~$25K), so with no other income you could convert ~$46K to the top of the 10% bracket.

 

[RunningBum]

I retired in July. In 2023 and 2024 we will be living exclusively on cash that we have saved. So it seems that this would be a good time to do Roth conversions. Is there a calculator I can use to help plan this? I searched the forum and didn't find any obvious threads, but I'm sure some calculators have been mentioned. It seems that we will be in the 10% bracket these next 2 years since we have no income except Divs, so we could convert up to the MFJ value of $22K. Sorry for the stupid question, but is it simply a matter of converting enough IRA funds that approximate $21Kish? I wouldn't want to bust this 10% bracket since I will likely never see it again except for these couple of years. I'm not very tax savvy, and it didn't matter much when I was working and always in the 24% bracket, so I'm trying to learn now. Thx

i-orp.com was such a tool, but it's been offline for awhile. There are factors other than simply your tax bracket, notably ACA subsidies and IRMAA thresholds.

What do you project your tax rate to be once you taking SS and RMDs? I might convert to the top of that tax rate, though you start playing whack-a-mole with that because if you convert a lot, your RMDs are reduced.

Why do you not want to go over 10%? It's usually better to level out your tax rate over your remaining years rather than keep your current rate as low as you can. A common threshold for converting is to the point where qualified divs and LTCGs would start getting taxed. That would keep you in the 12% bracket for ordinary income and 0% for those divs. Those with larger tIRAs might convert more, smaller tIRAs less.

Use your income tax program or an online calculator like https://www.irscalculators.com/tax-calculator to see where that is. That will help remind you to take the deduction into account.

It's hard to pin a conversion threshold down but the big gainers are probably obvious. Where it gets harder to determine will give you less of an advantage, so maybe don't sweat trying to get it perfect.

 

[Family]

Some non-financial (aka family & sleep at night) thoughts:

Since the financial aspect is a toss-up for me...I am converting now: - I'm fairly cognitive now...no guarantees later on. I don't want to be aging and making financial decisions (losing sleep) over future tax increases on income or capital gains. - I'm still alive now (my DW is very smart, but if I'm gone, probably doesn't want to actively manage investments based on a changing tax landscape). With ROTH - it's easy..."what you see is what your get!" But what if my tax rate declines?...I'll still be happy overall as my other taxable income will be taxed less.

 

[zinger1457]

Have a question on making estimated tax payments on a ROTH conversion. If I do a lump sum conversion in January, can I pay the estimated tax payments quarterly in that year or do I have to pay it all during the first quarter when I received the lump sum?

 

[SevenUp]

Have a question on making estimated tax payments on a ROTH conversion. If I do a lump sum conversion in January, can I pay the estimated tax payments quarterly in that year or do I have to pay it all during the first quarter when I received the lump sum?

You can do it quarterly. See Form 2210, particularly part III, rows 10 and 11.

 

[TheWizard]

You can do it quarterly. See Form 2210, particularly part III, rows 10 and 11.

Actually, no.
He would need to do a estimated tax payment in the quarter that he did the Roth conversion.
This assumes the Roth conversion is large compared to other income.

But if he did tax WITHHOLDING, he could do it anytime during the year, including all in December...

 

[SevenUp]

You can do it quarterly. See Form 2210, particularly part III, rows 10 and 11.

Actually, no.
He would need to do a estimated tax payment in the quarter that he did the Roth conversion.
This assumes the Roth conversion is large compared to other income.

But if he did tax WITHHOLDING, he could do it anytime during the year, including all in December...

Actually, yes. See Form 2210, particularly part III, rows 10 and 11.

 

[TheWizard]

Actually, yes. See Form 2210, particularly part III, rows 10 and 11.

Let's clarify with an example.
Assume our taxpayer's normal income is $8333 per month, or $100k per year.
Then on top of that he does a Roth conversion in January of $100k, for a total of $200k income that year.

Whether taxes on his base income are paid by withholding or by estimated quarterly payments, he will still need to make a larger than normal estimated tax payment for the first quarter to avoid modest penalties.
This assumes he chooses to do estimated payments rather than increasing his withholding for the remaining months of the year.

If you don't agree with my explanation, that's totally fine...

 

[SecondCor521]

I personally think Form 2210 and estimated tax payments are a complicated topic.

I agree with SevenUp that they technically can make quarterly payments and use Form 2210 part III rows 10 and 11.

But I agree with TheWizard in the sense that if a January Roth conversion were large compared to the rest of the income the rest of the year, it seems to me that the first estimated quarterly payment would have to be quite a bit larger than the other three to reflect the "large" and "early" Roth conversion.

It looks to me like the "large" Roth conversion would go on Form 2210 Schedule AI line 1, get annualized on line 6, create a "large" tax liability on line 17, getting prorated on line 21, but still end up requiring a "large" estimated payment on line 27, which would go back to part III row 10.

But maybe I'm missing something.