What tax bracket should I stop doing Roth Conversions

[RunningBum]

Try dinkytown with your original RMD number, then do +100 and -100. You'll see a larger than $12 difference, due to SS. This was explained before and I thought you got it, but I guess not.

 

[Time2]

Try dinkytown with your original RMD number, then do +100 and -100. You'll see a larger than $12 difference, due to SS. This was explained before and I thought you got it, but I guess not.

I did get it, but I had a $12k IRA contribution that was in the program messing things up. When you are on the edge of the 12%/22% bracket that $100 up cause the program to display, This puts you in the 22% tax Bracket.
And doing the math on the taxes due also shows that.

 

[chassis]

@Time2 I think you need to slow down and make one change at a time in your calculation tool.

What others are telling you, I think, and what I am for sure telling you is that no online tool or website will address all questions for your specific situation. Your options for this are to work with a tax professional or financial planner, or build a comprehensive Excel model yourself. I built my own Excel model.

When you build your own Excel model that takes into account today’s known tax rates, you will see what, if any, benefit you receive over your lifetime from Roth conversions.

The questions you are asking should be answered by someone making decisions for themselves such as Roth conversions.

The conclusion I came to using my detailed Excel model is that Roth conversions do not benefit me at all, or if I allow some tolerance for inaccuracy, benefit me to a very small degree. I think Roth conversions are financial wheel spinning and manufactured busyness. A chase after the wind.

Avoid solving the “future tax bullet” (fear mongering slogan by Roth conversion advocates) by piercing yourself with smaller but more harmful “current tax arrows”.

 

[RunningBum]

I did get it, but I had a $12k IRA contribution that was in the program messing things up. When you are on the edge of the 12%/22% bracket that $100 up cause the program to display, This puts you in the 22% tax Bracket.
And doing the math on the taxes due also shows that.

I'm going to punt on this because I can't follow the different numbers you've given. It would seem that converting now to max out the 12%/0% QDivs rate is a no-brainer. Going beyond that is questionable, leaning towards a bad choice since it seems like you can have at least part of your RMDs taxed at 12%. Trying to figure out how much, if any, you are in that worst case SS tax hump is the only question. In any case there's probably not a lot of difference either way.

 

[Time2]

@Time2 I think you need to slow down and make one change at a time in your calculation tool.

I only have 4 inputs MFJ, Dividends, SS and IRA withdrawals, 3 are fixed, so all I'm changing to find where I jump out of the 12% bracket is IRA withdrawals.

What others are telling you, I think, and what I am for sure telling you is that no online tool or website will address all questions for your specific situation. Your options for this are to work with a tax professional or financial planner, or build a comprehensive Excel model yourself. I built my own Excel model.

When you build your own Excel model that takes into account today’s known tax rates, you will see what, if any, benefit you receive over your lifetime from Roth conversions.

The questions you are asking should be answered by someone making decisions for themselves such as Roth conversions.

Of course I have to make the decision for myself, I'm just trying to get the details needed to make that decision.

The conclusion I came to using my detailed Excel model is that Roth conversions do not benefit me at all, or if I allow some tolerance for inaccuracy, benefit me to a very small degree. I think Roth conversions are financial wheel spinning and manufactured busyness. A chase after the wind.

Avoid solving the “future tax bullet” (fear mongering slogan by Roth conversion advocates) by piercing yourself with smaller but more harmful “current tax arrows”.

To each there own. I'm seeing some good reasons to do Roth Conversions.
1) My wife will be in a higher bracket when I die.
2) It is mostly likely that taxes will rise.
3) I will have a lot of forced income that I don't have know, We easily live on $45k now, After SS and RMDs it will be twice that much.
4) I think there are some benefit to heirs also.


What are the more harmful “current tax arrows”? I don't see the downside, I don't see how my income will every be lower, nor do I see taxes ever lower.

 

[chassis]

To each there own. I'm seeing some good reasons to do Roth Conversions.
1) My wife will be in a higher bracket when I die.
2) It is mostly likely that taxes will rise.
3) I will have a lot of forced income that I don't have know, We easily live on $45k now, After SS and RMDs it will be twice that much.
4) I think there are some benefit to heirs also.

What are the more harmful “current tax arrows”? I don't see the downside, I don't see how my income will every be lower, nor do I see taxes ever lower.

@Time2 Thanks for the reply.

1. That's OK to be in a higher tax bracket.

2. You are speculating. Financial decisions should not be made on speculation. I speculate, and am right, that the Earth will collide with a meteor some day. I'm serious, not joking. What I don't know is when this will happen. It would be speculation on my behalf to make a guess when the meteor collision would happen, as well as the size of the meteor. So I do nothing with regard to meteors colliding with the Earth. I am not being facetious with the example.

3. Why do you care about forced income? A Roth conversion is forced income. You are doing the forcing in that case. Maybe that feels better to you? It's done on your terms?

4. I don't think your heirs will benefit from your Roth conversions. If they do benefit, it will be negligible. In my analysis, I don't benefit from Roth conversions, so I don't see that my heirs will benefit from my Roth conversions.

Current tax arrows are the income taxes paid on Roth conversions. It's tax that is not otherwise due in the year of conversion. Said differently, it's an investment in a future speculative endeavor - higher income tax rates. Leave the cake (money that would be Roth converted) in the oven to bake until it's time (RMD time). The cake will be better and not mushy in the middle or burned on the edges.

I use net worth as the singular parameter to maximize in my Excel model. Accelerating taxes by forcing income through Roth conversions results in a lower net work for me across each year of my life expectancy. Who cares if I bump into a higher tax bracket at age 72+? Net worth until "end of plan" is what matters to me. I am MFJ and assume my wife will outlive me, and her life expectancy is "end of plan".

Uncle Sam will get paid. Have no doubt about this. Forget about tax rates. You can even forget about income. If you have net worth in liquid instruments (i.e. not real estate), and you are older than 59.5, plus SS, income will take care of itself.

 

[CardsFan]

I might be out of place here, but that's nothing new.

I think the problem is that the calculations done by others are based on the original post, looking at the future, with SS.

OP is now looking at his current situation (no SS), so his calculations seem to be correct.

FWIW, I have found the dinkytown calculator, and others, to be quite accurate, based on my own taxes.

To OP: This is not a science, so there is no perfect answer (well there could be if you know your date of death)

In your case I would max out the 12% bracket, depleting your tIRA first, since DW has 4 more years than you. If you want to be aggressive, you can go into the 22% bracket. You might find the effective tax rate on the conversion is still under 15%.

 

[Time2]

I'm going to punt on this because I can't follow the different numbers you've given. It would seem that converting now to max out the 12%/0% QDivs rate is a no-brainer. Going beyond that is questionable, leaning towards a bad choice since it seems like you can have at least part of your RMDs taxed at 12%. Trying to figure out how much, if any, you are in that worst case SS tax hump is the only question. In any case there's probably not a lot of difference either way.

MFJ, $12k dividends qualified, $45k SS, and $55,600 of IRA distributions.

probably not a lot of difference either way.

If I converted $300k over the next 6 years at 12% That's $36k in taxes.
If I wait and have to pay 22% on $300,000 that's $66k, so I save $30k for my work and that is spread out over many years. Not life changing, but when I was 26, that was a lot of money!

 

[CardsFan]

......
4. I don't think your heirs will benefit from your Roth conversions. If they do benefit, it will be negligible.

.......

Wrong in many cases.

In my case, with a rather large tIRA, my son would need to deplete it within 10 years. The money he takes out, with 2 of them working at jobs paying over $100k/yr each, would be at least in the 24% bracket, and some in the 32%.

If I convert today, at an effective 15%+/-, that's a 10% gain, plus all the gains going forward are tax free.

 

[chassis]

Wrong in many cases.

In my case, with a rather large tIRA, my son would need to deplete it within 10 years. The money he takes out, with 2 of them working at jobs paying over $100k/yr each, would be at least in the 24% bracket, and some in the 32%.

If I convert today, at an effective 15%+/-, that's a 10% gain, plus all the gains going forward are tax free.

@CardsFan What are the many cases?

What is the difference in your net worth at end of plan, with and without Roth conversions? A percentage figure is fine. At end of plan does it benefit you by 1%? 10%? 100%? More?

 

[Time2]

I might be out of place here, but that's nothing new.

I think the problem is that the calculations done by others are based on the original post, looking at the future, with SS.

OP is now looking at his current situation (no SS), so his calculations seem to be correct.

FWIW, I have found the dinkytown calculator, and others, to be quite accurate, based on my own taxes.

To OP: This is not a science, so there is no perfect answer (well there could be if you know your date of death)

Also need to know future tax rates and brackets.

In your case I would max out the 12% bracket, depleting your tIRA first, since DW has 4 more years than you. If you want to be aggressive, you can go into the 22% bracket. You might find the effective tax rate on the conversion is still under 15%.

Yes, I need to get a handle on effective and cumulative tax rate and what important. It seems I could use effective rate and just keep that below the effective rate I expect to pay in the future.

 

[CardsFan]

@CardsFan What are the many cases?

What is the difference in your net worth at end of plan, with and without Roth conversions? A percentage figure is fine. At end of plan does it benefit you by 1%? 10%? 100%? More?

Well, I gave you a case. Not affecting MY net worth, but the benefit to the heir regarding taxes.

I paid a tax rate of about 15%. DS inherits it tax free (and tax free until he is required to deplete, I forget if it is 5 years or ten years for a Roth).

If he inherited it today, and took 10% per year (tIRS's need to be depleted in 10 years), the withdrawal would at least be in the 24% bracket, with some folding into 32%.

Just one example.

 

[RunningBum]

If I converted $300k over the next 6 years at 12% That's $36k in taxes.
If I wait and have to pay 22% on $300,000 that's $66k, so I save $30k for my work and that is spread out over many years. Not life changing, but when I was 26, that was a lot of money!

Right. As I said, converting at 12% is a no-brainer. The questionable part, as I also said, is converting beyond that.

I agree, $30K is low hanging fruit and quite worthwhile for most of us, no matter what someone else says.

 

[pb4uski]

Ya, I found a $12k IRA deduction, that should not have been in there.
So, I find I can have about $55.6k of tIRA distribution and stay in the 12% bracket.
MFJ, $12k Dividends Qualified, $55.6k Taxable IRA distribution, $45k SS.
I get $7,843 of tax.
If I add $100 to the $55.6k it cost me $20 in tax.
If I subtract $100 from the $55.6k It lowers my tax $12.

Here is what I get using both irscalculators and dinkytown (I like both but slightly prefer the former). For 2021, MFJ both under 65, $45k SS and $12k qualified dividends. No idea why/how dinkytown gets such a large jump in tax from $55,600 to $55,700.

	Tax		Incremental tax rate
Roth conv	irscalculators	dinkytown	irscalculators	dinkytown
55,500	7,840	7,843
55,600	7,852	7,855	12%	12%
55,700	7,864	7,875	12%	20%

 

[pb4uski]

Wrong in many cases.

In my case, with a rather large tIRA, my son would need to deplete it within 10 years. The money he takes out, with 2 of them working at jobs paying over $100k/yr each, would be at least in the 24% bracket, and some in the 32%.

If I convert today, at an effective 15%+/-, that's a 10% gain, plus all the gains going forward are tax free.

+1 ditto for me with DD and DSIL.

 

[RunningBum]

Here is what I get using both irscalculators and dinkytown (I like both but slightly prefer the former). For 2021, MFJ both over 65, $45k SS and $12k qualified dividends. Interestingly, dinkytown uses $27,800 for the standard deduction and irscalculators uses $27,700. I think the right number is $27,800. But no matter how you cut it it is 12% incremental.

Tax Incremental tax rate

Roth conv irscalculators dinkytown irscalculators dinkytown

55,500 7,528 7,519

55,600 7,540 7,531 12% 12%

55,700 7,552 7,543 12% 12%

But there is a lower amount of RMD income, which the OP could get to if they converted more now, where the incremental rate is more than 12%, due to SS taxation. It's probably not worthwhile for the OP to do, but it does exist. I suggested early that the OP start at $15K (below this there is no tax) and increase $1K at a time to see this.

 

[SevenUp]

I don't know because, with my method I'd have to run many runs varying the income and graph it. What are you using to make this graph?

The case study spreadsheet. In particular, the 2021 taxes version.

Your options for this are to work with a tax professional or financial planner, or build a comprehensive Excel model yourself.

Or use the reasonably comprehensive Excel model linked above.

 

[pb4uski]

But there is a lower amount of RMD income, which the OP could get to if they converted more now, where the incremental rate is more than 12%, due to SS taxation. It's probably not worthwhile for the OP to do, but it does exist. I suggested early that the OP start at $15K (below this there is no tax) and increase $1K at a time to see this.

Sorry, edited post to reflect MFJ both under 65 as OP had it rather than over 65. But I agree with your up to top of 0% preferenced income bracket is a no brainer.

 

[Time2]

Sorry, edited post to reflect MFJ both under 65 as OP had it rather than over 65. But I agree with your up to top of 0% preferenced income bracket is a no brainer.

OH! I see I have confused the issue here with before RMDs and after RMDs.
I even confused myself. Sorry.
I do think I got some ideas to work with, thanks all.

 

[SevenUp]

Dinkytown is close at $55,600 vs the $58,000 I glean from the graph, with the numbers I provided. I don't know what the discrepancy is.

Assuming both filers under age 65 vs. over age 65?

I have used the CSS, but found the learning curve long, so much detail I didn't feel I needed.

Yes, many ways to do this. It appears the example screenshots in the Using a spreadsheet section of the Bogleheads Roth IRA conversion wiki are very close to your situation - maybe that would help?

I don't get why the graph rises to about 13% when part of the income is taxed at 10% and the rest at 12%, where does the 13% come from?

This is a very important concept: none of the Roth conversion amount incurs a 10% or 12% marginal tax rate until you reach ~$47,400 converted. Until that point, the instantaneous (i.e., on the "next dollar") marginal rates are either 0%, 18.5%, or 22.2%. The weighted average ("cumulative" curve on the chart: (total change in tax)/(total amount converted)) does reach ~13% at some point - is that what you are looking at?

The marginal tax rate is often the same as the individual's tax bracket, but not always. See that link for more.

 

[SecondCor521]

DS inherits it tax free (and tax free until he is required to deplete, I forget if it is 5 years or ten years for a Roth).

My understanding is that it is generally 10 years for the Roth as well, as long as you name him as the direct beneficiary of the Roth rather than passing it through your estate.

(And as always I'll point out that it's actually 12/31 of the year that contains the 10th anniversary of the date of death, so it's 10.5 years on average and could be nearly 11 years if the original owner dies in January.)

 

[Midpack]

Roth conversions are essentially tax rate arbitrage where you don't know the future tax rate. Stop when you get to the point where your tax rate equals your expected future tax rate. If you are right, you win. Conversely ...

This is absent other considerations like ACA and IRMAA which effectively raise your current tax rate and RMDs, which may raise your future tax rate. Having fun yet?

+1. After exhaustive research, including detailed analysis using Income Strategy software, I believe the above is exactly right. The goals isn’t one tax bracket, it’s keeping your tax bracket constant before and after RMDs. Not knowing future tax brackets, future returns, and ACA and IRMAA (to a lesser extent) all conspire to make the Roth conversion exact right answer unknowable. I’m 3 years into 7 years of aggressive conversions, using what we know about TCJA and post TCJA brackets, and I believe future rates/cap gains can only become more confiscatory eventually. That’s what fits what I expect, and I know I may be wrong.

 

[figuy1]

With your numbers, I'd stick with up to the top of the 12% bracket, you probably won't have any issues unless your portfolio grows much faster than you can spend it, in which case you'll have a lot of money to afford extra taxes.

RMDS are actually lower than most expect and pretty close to how much people withdraw anyway, 4-5%/year in your 70s, 5-6% in early 80s. If you ever got your tIRA above $2million, I might reassess it then and consider dipping into the 22% bracket for conversions. The beauty is if it turns out you're "wrong" and end up in the 24% bracket, later on, it probably means you're probably much richer than expected.

 

[RunningBum]

RMDS are actually lower than most expect and pretty close to how much people withdraw anyway, 4-5%/year in your 70s, 5-6% in early 80s.

Spending is different than managing taxes though. If I can pay taxes on deferred income at a lower rate by converting when I'm in ER before I start SS, I can withdraw that money tax free from my Roth IRA to live on.

 

[chassis]

Distribution timeline for Roth (which were converted from tIRA) and tIRA are the same, or nearly so, correct? See post #46.

This means there is no material difference to heirs as it relates to inherited distributions, whether from a Roth or a tIRA, correct?

Therefore there is no advantage, from the point of view of an heir, to inherit a Roth or a tIRA from the decedent, correct?