No. Only has projections for 2022 and greater.
Traditional 401K Roth Conversions - How to determine the Benefits?
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No. Only has projections for 2022 and greater.
TheWizard
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Point being, we need some ideas on how accurate those projections have been.
Your main focus should be next year, with projections for years after that decreasing 50% per year.
*shurg*
By how much are you expecting your income and spending (those may be different numbers) to increase (or decrease) due to inflation (or other cause)?
Expenses will decrease 10% at age 65 and about 17% at age 70. Once 2 pensions and 2 SS incomes kicks in, that will be more than enough to take care of the expenses. Until then, I will need to withdraw from wife and I 401k. We both have a 401K retirement account as well. However, at age 72 RMD will kick in because we have not withdrawn enough from the 401Ks. I guess that is a good problem to have. Not complaining.
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(Caveat: I'm no expert; please correct if needed.)
One thing I've not seen mentioned here -- the OP asked about benefits of doing the conversions. One that works for me is that when my adult offspring inherit the money, if it's been converted to a Roth, they will not have to pay any taxes on money they receive (since I've already paid it). Versus inheriting a traditional IRA, where they will a) have to withdraw all of the money w/in ten years, b) pay taxes on every dollar, and c) this will likely happen during some of their peak earning years, when their tax rates are already fairly high.
One thing I've not seen mentioned here -- the OP asked about benefits of doing the conversions. One that works for me is that when my adult offspring inherit the money, if it's been converted to a Roth, they will not have to pay any taxes on money they receive (since I've already paid it). Versus inheriting a traditional IRA, where they will a) have to withdraw all of the money w/in ten years, b) pay taxes on every dollar, and c) this will likely happen during some of their peak earning years, when their tax rates are already fairly high.
TheWizard
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The same is true for money in a taxable investment account at death, under current law: stepped up basis at death...
We have no one to inherit the leftover dollars. So our goal is to have $0 when we die.
RunningBum
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That tells me your plan should figure out the best way to distribute that 401K fully in the most tax effective way, rather than looking at the impact of RMDs. RMDs don't take the balance down to $0, so you'll be looking to convert or withdraw more aggressively.
ncbill
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Here any form of IRA is protected from creditors.
We also hope never to need our Roths so our kids can inherit.
And then allow earnings to grow tax-free for another decade before they need to withdraw the funds.
IMHO, I doubt the IRS's proposed rules for annual RMDs will be allowed to take effect as they appear to contradict the plain language of the law.
Quickly browsed through the responses. Lots of moving parts in trying to optimize Roth conversions. Like most here, I plan on trying to optimize, but to a reasonable point based on what I know the rules to be today and think I can reasonably speculate in the future. I think the analysis can get further complicated if you are planning on a higher spend (my case) as in addition to SS taxes (including some future projected means testing), NIIT, AMT, IRMAA, and arguably estate taxes will have some impact. As I am married and DW and I are 58, we will do some Roth conversions this year for the first time (yr 1 RE). While I have used some of these calculators noted, I tend to do my analysis more on the "back of an envelope"... grow my retirement accounts out to 72, calculate RMDs and guestimate my taxes. From there, determine how much of my stash I need to convert to effectively have the same tax rate today I will have then (all speculative based on my what I know today). Then, at the end of the year, once I know with more certainty what my dividend/capital gain impact is, I will run a mock tax return and most likely plug in a Roth conversion filling up the 24% bracket. Rinse and wash each year there after. At the same time, while I understand the impact of single spouse tax increases and tax implications on the kids inheriting $$, I view those "issues" as 1st world problems so really don't sweat it. My goal is to use our resources to first maximize DW's and my spending goals while we are still standing up, which includes experiences and goodies with/for kids/G-kids. If I go first, DW will be perfectly fine paying more taxes. When we both go, high probability my kids will all get a boat load of $$ and if they have to pay taxes on found money, so be it.
All this said, my nature is to be a good steward of what I have been fortunate to accumulate so I plan on being prudent as it relates to tax strategies, just not too anal about it.
Congrats to all you 1st world folks!
All this said, my nature is to be a good steward of what I have been fortunate to accumulate so I plan on being prudent as it relates to tax strategies, just not too anal about it.
Congrats to all you 1st world folks!
Quickly browsed through the responses. Lots of moving parts in trying to optimize Roth conversions. Like most here, I plan on trying to optimize, but to a reasonable point based on what I know the rules to be today and think I can reasonably speculate in the future. I think the analysis can get further complicated if you are planning on a higher spend (my case) as in addition to SS taxes (including some future projected means testing), NIIT, AMT, IRMAA, and arguably estate taxes will have some impact. As I am married and DW and I are 58, we will do some Roth conversions this year for the first time (yr 1 RE). While I have used some of these calculators noted, I tend to do my analysis more on the "back of an envelope"... grow my retirement accounts out to 72, calculate RMDs and guestimate my taxes. From there, determine how much of my stash I need to convert to effectively have the same tax rate today I will have then (all speculative based on my what I know today). Then, at the end of the year, once I know with more certainty what my dividend/capital gain impact is, I will run a mock tax return and most likely plug in a Roth conversion filling up the 24% bracket. Rinse and wash each year there after. At the same time, while I understand the impact of single spouse tax increases and tax implications on the kids inheriting $$, I view those "issues" as 1st world problems so really don't sweat it. My goal is to use our resources to first maximize DW's and my spending goals while we are still standing up, which includes experiences and goodies with/for kids/G-kids. If I go first, DW will be perfectly fine paying more taxes. When we both go, high probability my kids will all get a boat load of $$ and if they have to pay taxes on found money, so be it.
All this said, my nature is to be a good steward of what I have been fortunate to accumulate so I plan on being prudent as it relates to tax strategies, just not too anal about it.
Congrats to all you 1st world folks!
Is it smart to fill up your highest marginal tax bracket with roth conversions?
For example, if most of your taxable income is in the 10 and 12% marginal tax bracket and just a small portion is in the 22% tax bracket, would it be smart to fill up the 22% marginal tax bracket with roth conversions? This would dramatically increase your tax bill.
I'm thinking about this incorrectly.
Dash man
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It depends. You need to look ahead to what your retirement income will be, especially from RMDs. When I looked at mine, between both of our social security income, my pension, interest and rental income, then calculating our projected RMDs, I made the decision to go to the top of the 24% bracket, and this year even went into the 32% bracket. Otherwise in my late 70s and 80s I’d be pushed into the higher brackets and IRMAA. I’d rather bite the bullet now on taxes and IRMAA.
BUT we have enough funds in our taxable accounts to pay for the conversion taxes.
I also am worried about leaving my wife paying high taxes should I pass first.
SecondCor521
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I agree with what @Dash man wrote.
It all depends on your predictions about the future: tax rates, growth in your traditional IRA, age of death, tax rates of beneficiaries, etc.
In my modeling, a year or two of early conversions up to the top of the 22% bracket can have quite an impact. This is because it gets all of the compounding of the converted amount over into the Roth and out of the traditional. Since I'm 53 and my spreadsheet assumes a fairly decent rate of investment growth, the effect is quite noticeable.
In other words, you might only need/want to do one or two years of top-of-the-22% bracket to have the necessary effect.
I currently only have one such year planned, and it's tentatively planned for after my kids are done with college but before TCJA rates expire. This lowers my age 80 tax rates into what I consider reasonable. After 80 the rates go up, but I don't worry about that too much because (a) I might be dead, (b) my IRA might not grow that much, and (c) if I'm alive and have that big of an IRA then paying a big tax bill is a first world problem.
Note it is possible to overdo things - converting for 5 years to the top of the 22% bracket could leave your traditional IRA small enough that you end up in the 12% bracket later. That would be a mistake.
You really have to do the math and modeling with your own particular situation and assumptions in mind. Even then, since the future is uncertain, all you can do is make your best guess and course correct each year.
Dash man
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One other reason that some of us consider, is when the TCJA sunsets, it will cut the Estate tax exclusion in half. That will put us above the exclusion if our assets grow faster than the inflation adjustments. So I'd rather pay the tax now than have my estate have to pay 40% later, that would reduce what my kids get. I know the OP doesn't have kids, but I just want to throw it out there for anybody else that might be pondering this.
TheWizard
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I mostly agree with the last few replies about Roth conversions, but not to the top of the XX% tax bracket.
I simply focused on levelizing my projected AGI, adjusted for inflation though my early 70s.
I tweaked the levelizing a bit to avoid getting into the next higher IRMAA tier, but those tiers now adjust each year for inflation as well ..
I simply focused on levelizing my projected AGI, adjusted for inflation though my early 70s.
I tweaked the levelizing a bit to avoid getting into the next higher IRMAA tier, but those tiers now adjust each year for inflation as well ..
Not sure I understand your statement below. I thought one of the reasons for executing roth conversions is to be in a lower marginal tax bracket in retirement.
"Note it is possible to overdo things - converting for 5 years to the top of the 22% bracket could leave your traditional IRA small enough that you end up in the 12% bracket later. That would be a mistake."
Assuming the estate limit gets cut and half as currently planned in 2026, I believe the appropriate strategy will be going back to certain Trust structures to eliminate the estate tax. At least that is my plan until I know differently.
Other than single spouse and inheritance benefits, the goal is not to be in a lower tax bracket but ideally be in the same tax bracket starting day 1 of retirement through the dirt nap.
Here's my quick logic. If your projections have you just touching the 24% bracket today and your future projections have you over 24% as of RMDs, then the sooner you convert the delta that would get you to 24% as of RMDs, the better, especially if you are under 65. If you can knock out this delta by loading up say 3 years of filling up the 24% bracket before 65, you help minimize the IRMAA bogie.
YMMV
RunningBum
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I think the point is you don't want to leave income space in the 12% bracket later. Don't pay 22% for conversions now if you could have had 12% RMDs later. But if you could convert enough to put you right at the top of the 12% bracket later, that would be fine.
+1
G-Man, see also the Whether to convert section of the "Roth IRA conversion" Bogleheads wiki that says pretty much the same thing.
TheWizard
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Yes, I agree.
Avoid the Ed Slott approach of converting too much at a high tax rate so you can be lower later...
TheWizard
Thinks s/he gets paid by the post
I'm 72 now and successfully converted enough in past years so that my AGI this year with RMDs should be just a bit more than last year without them. Maybe 5% more depending on what I do in December.
And one must be under 63, not 65, to do large Roth conversions without affecting IRMAA...
SecondCor521
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Others have pretty much responded for me (thanks, everyone!).
I agree with the poster who said that it would be OK to be at the very top of the 12% bracket. But if you convert so much at 24% that you could have converted later at 12% (because you're in the middle of, not the top of, the 12% bracket), then you'd be paying 24% tax now when you could have paid 12% later - that's pretty much the exact opposite of what you want with any multiyear tax arbitrage, which includes Roth conversions.
Good catch, although I understand there are certain circumstances where you can appeal the IRMAA determination, eg. "if you have had a life-changing event such as a loss of income or divorce, then you can refile or you can file for a redetermination". If you stop Roth conversions at 64 does that qualify as a "loss of income"??
