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Old 06-16-2021, 03:49 PM   #41
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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.
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Old 06-16-2021, 03:51 PM   #42
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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.

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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.
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Old 06-16-2021, 03:55 PM   #43
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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.
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Old 06-16-2021, 04:08 PM   #44
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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.
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Old 06-16-2021, 04:14 PM   #45
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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?

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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?

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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.
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Old 06-16-2021, 11:47 PM   #46
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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.)
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Old 06-17-2021, 08:14 AM   #47
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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.
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Old 06-17-2021, 09:03 AM   #48
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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.
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Old 06-17-2021, 09:08 AM   #49
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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.
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Old 06-17-2021, 09:39 AM   #50
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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?
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Old 06-17-2021, 09:44 AM   #51
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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.
To me, this is one of the most compelling reasons. In my family, the males usually pass 15-20 years before the women. Between the pensions, SS, and the RMDs she will go from our current 24% to the 35%. To me, this is reason enough to at least do some.
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Old 06-17-2021, 10:08 AM   #52
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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?
Wrong!

As an example:

Say I have $1,000,000 in a tIRA, and convert that at a 15% effective tax rate over a period of time. The heir would get $850,000 TAX FREE (plus what ever growth), and could let it grow TAX FREE for up to 10 more years.

If the heir inherited a $1,000,000 tIRA they would have to pay taxes at their incremental tax rate on every withdrawal. Say they elect to empty the account over 10 years. If they are working, the incremental rate could easily be 22% and maybe 24% or 32%. So they would net less than $800,000 THEN, if they don't need the money, and invest it, they would need to pay taxes on any earnings.

I am not going to bother to calculate it, but the net effect is much greater when you take the growth into account.

I am not sure why this is so hard to grasp.
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Old 06-17-2021, 10:28 AM   #53
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... Therefore there is no advantage, from the point of view of an heir, to inherit a Roth or a tIRA from the decedent, correct?
Not that this isn't complicated enough, I'll give you an edge case that we actually have. Three grands, all getting their money from via trusts, one of them a special needs beneficiary. The two get their money from a tIRA over ten years, never taxed at the trust level (35% IIRC) because any realized gains will be distributed during the tax year and taxed at the beneficiary's rate.

The special needs trust, though needs to hold assets longer than ten years, so it will be funded by Roths. It is still subject to the 10 year rule, but will hold the distributions rather than paying them out immediately. The result if they were tIRA distributions would be paying income tax at the high trust rate. Since the distributions will come from Roths, however, no taxes will be due except to the extent that the trust has investment profits after the 10 year point.

Said another way, the practical lifetime of a trust funded with tIRAs is ten years.
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Old 06-17-2021, 11:36 AM   #54
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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?
Your first statement is correct.

However, distributions from a traditional IRA are generally taxable income to the heir. With the new 10-year rule and considering the typical age at death, most heirs will probably have their 10 year period overlap with the last 10 years of their working career, when their income is probably the highest. Adding a distribution from a traditional IRA on top of that means that those distributions will be taxed at a high marginal rate.

Distributions from a Roth IRA are generally tax free to the heir and do not involve the same tax complication as in the previous paragraph.

So even though the timeline for distribution is the same, the tax treatment of the two are quite different. Which means that the answers to your second and third questions are, IMHO, "No".

(Whether one is better than the other and the impact of that on whether to do Roth conversions is a separate point.)
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Old 06-18-2021, 07:36 AM   #55
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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.
Yeah, but there isn't a point to dip into a higher tax bracket now than you'll ever likely have to touch later once RMDs hit which is why I'd stay in the 12% given their numbers. If you go into the 22% now, you're assuming that you'll be in the 24% bracket later on which seems unlikely with $1.2m in a tIRA. A lot of people assume that RMDs will force you to withdraw massive amounts of money right away and pay lots of taxes once they hit which isn't the case.
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Old 06-18-2021, 07:57 AM   #56
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Yeah, but there isn't a point to dip into a higher tax bracket now than you'll ever likely have to touch later once RMDs hit which is why I'd stay in the 12% given their numbers. If you go into the 22% now, you're assuming that you'll be in the 24% bracket later on which seems unlikely with $1.2m in a tIRA. A lot of people assume that RMDs will force you to withdraw massive amounts of money right away and pay lots of taxes once they hit which isn't the case.
Which is why I said to do some conversion now if you can do it at a lower rate. Converting at the same rate is perfectly fine too, and an advantage if you can pay the taxes out of a taxable account.

Nobody should assume what RMDs are going to be. One should estimate what the tax deferred balance will be at 72 and what the RMD amount will be based on the RMD table. Where are you seeing people assume the RMD will be massive? I hadn't seen that. But when combined with SS and possibly a pension, there usually is an income increase.
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Old 06-18-2021, 08:40 AM   #57
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New study from Edward McQuarrie, emeritus professor at Santa Clara:
https://www.marketwatch.com/story/to...th-11623431970

Link to his blog that includes link to his spreadsheet:

Roth Conversions Essays, Opinion & Advice

Long paper, I haven't gone through it all yet. His basic point seems to be that Roth conversions gain less than people think.

Factors that he did not examine that would make them better are death of a spouse, leaving the other in a high tax bracket and passing inheritances that take the annual gain of a Roth and compound for it for another decade. Those are factors that I'm interested in, so not sure the conclusions apply completely for me (still reading the paper).

Still I'm glad for some academic interest in a real world topic.
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Old 06-18-2021, 09:06 AM   #58
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New study from Edward McQuarrie, emeritus professor at Santa Clara:
https://www.marketwatch.com/story/to...th-11623431970

Link to his blog that includes link to his spreadsheet:

Roth Conversions Essays, Opinion & Advice

Long paper, I haven't gone through it all yet. His basic point seems to be that Roth conversions gain less than people think.

Factors that he did not examine that would make them better are death of a spouse, leaving the other in a high tax bracket and passing inheritances that take the annual gain of a Roth and compound for it for another decade. Those are factors that I'm interested in, so not sure the conclusions apply completely for me (still reading the paper).

Still I'm glad for some academic interest in a real world topic.
@Exchme Thanks, I agree that Roth conversions "gain less", or rather don't benefit as much as, people think. I'll work through the paper. Thanks for posting.

My view is that Roth conversions don't gain many people anything at all. But rather they are subtractive to net worth during the planning horizon, until demise of the principals.
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Old 06-18-2021, 09:17 AM   #59
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+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. ....
I agree Midpack. My plan assumes no rate changes but would have an effective rate that is within 1.2% each year from now until I'm 90.

One caveat that might apply in some cases.... where the heirs are very financially successful and in a higher tax bracket it might be optimal to do some conversions higher the the IRA owner's ultimate tax bracket since any heirs would need to drain the tIRA sometime in 10-11 years after inheriting the tIRA and those distributions may be at a higher tax rate than what the owner was paying.

I'm not sure how frequently this situation will apply but it will in some situations. I probably wouldn't start even considering this until I'm in my late 70s or early 80s.
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Old 06-18-2021, 09:37 AM   #60
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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?
Another +1 for this comment. Trying to decide what tax bracket to stop in is not the right question.

Also, the people who talk about higher taxes in the future don't often consider that taxes can be raised in different ways. What if the big future tax increase is not an income tax increase, but the implementation of a national sales tax? Maybe income taxes actually go down. Now your Roth conversions haven't helped at all.

It's difficult to make predictions, especially about the future.
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