Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
What tax bracket should I stop doing Roth Conversions
Old 06-16-2021, 08:30 AM   #1
Thinks s/he gets paid by the post
 
Join Date: Oct 2019
Posts: 2,676
What tax bracket should I stop doing Roth Conversions

I'm 66 , she is 62.

Say we have $2M in the stock market, allocated as below.
$1.2M tIRA
$240k Roth
$600k Taxable
We are spending about $45k per year.

When I'm 70 we will get $45k of SS
My RMDs start at 72 on about $600k. (grown to about $1M in 6 years)

Hers start 4 years later on the other $600k. ($1M in 6 years)
The first year I Roth converted $75k and stayed in the 12% tax bracket.
But the tIRA fund grew faster than the conversion.
I'm questioning whether I should max out the 22% bracket.
I can see $88k of forced income when I get my first RMD.
Running $12k dividends, $45k SS, and $32,850 RMDs through Dinkytown tax calculator, https://www.dinkytown.net/java/1040-tax-calculator.html
It leaves me well within the 12% tax bracket, I could add another $35k before going into the 22% bracket. So, 4 years later adding my wife's RMDs, we will just hit the 22% tax bracket.


After doing the above Dinkytown calculations, I now think max to the top of the 12% bracket. (I didn't know I waffled so easily)

Anyone have feedback, other than "ya, but tax rates will go up". Then I have to wonder, will the income level rise with the tax bracket percentage increase. ie I doubt the 12% bracket will increase as high as 22% and the income level will probably be higher. Suggesting I should not go into the 22% bracket with Roth Conversions.
Time2 is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 06-16-2021, 08:36 AM   #2
Thinks s/he gets paid by the post
 
Join Date: Aug 2012
Posts: 1,448
Can't follow your numbers. Do you have 2 million or 4.2 million?
finnski1 is online now   Reply With Quote
Old 06-16-2021, 08:38 AM   #3
Recycles dryer sheets
 
Join Date: Jul 2020
Posts: 263
Quote:
Originally Posted by Time2 View Post
I'm 66 , she is 62.

Say we have $2M in the stock market, allocated as below.
$1.2M tIRA
$2.4M Roth
Just a quick ? here, 1.2 + 2.4 doesn't add to 2M.
cat4ever is offline   Reply With Quote
Old 06-16-2021, 08:40 AM   #4
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
OldShooter's Avatar
 
Join Date: Mar 2017
Location: City
Posts: 8,711
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?
__________________
Ignoramus et ignorabimus
OldShooter is offline   Reply With Quote
Old 06-16-2021, 08:52 AM   #5
Thinks s/he gets paid by the post
38Chevy454's Avatar
 
Join Date: Sep 2013
Location: Cincinnati, OH
Posts: 3,725
As OldShooter said, it is a pay now vs pay later, where you try to pick the lower rate option. I don't think rates will be any lower than present, and may be higher in future. So given your situation, it certrainly makes sense to maximize up to 12%. Whether to do more conversion and pay higher tax rates may still be an option. Especially if you look at after one of you passes and the surviving spouse has only half the deductions. It may make sense to do more conversions now to help that case later.
__________________
I used to have a handle on life, but it broke.
You can't spend yourself to prosperity.

Semi-Retired 7/1/16: working part-time (60%) for now [4/24/17 changed to 80%]
Retired Aug 2, 2017; age 53
38Chevy454 is offline   Reply With Quote
Old 06-16-2021, 08:56 AM   #6
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Sunset's Avatar
 
Join Date: Jul 2014
Location: Spending the Kids Inheritance and living in Chicago
Posts: 13,894
OP - Going to the top of the 12% bracket is obviously a good choice, while your IRA may grow faster, you can feel good about getting some of the money out at 12% rather than leaving it in to grow and be taxed at a higher rate.

Personally, we are comfortable going into the 22% bracket, although writing that tax check is painful ! We do intend to stay below IRMAA triggers as that makes the tax rate too high (a mental thing).

We are content to leave a large amount in an IRA, as medical costs may be high, and then it will be largely deductible withdrawals.

Our reasoning for going into the 22% bracket, is we just have to look at what happens when there is only 1 of us left. At around $40K being the start of 22% bracket, it's a low bar.
__________________
Fortune favors the prepared mind. ... Louis Pasteur
Sunset is offline   Reply With Quote
Old 06-16-2021, 09:00 AM   #7
Thinks s/he gets paid by the post
 
Join Date: Oct 2019
Posts: 2,676
Quote:
Originally Posted by finnski1 View Post
Can't follow your numbers. Do you have 2 million or 4.2 million?
$2M total. I corrected my error in the OP.
Thanks
Time2 is offline   Reply With Quote
Old 06-16-2021, 09:04 AM   #8
Thinks s/he gets paid by the post
 
Join Date: Oct 2019
Posts: 2,676
Quote:
Originally Posted by 38Chevy454 View Post
As OldShooter said, it is a pay now vs pay later, where you try to pick the lower rate option. I don't think rates will be any lower than present, and may be higher in future. So given your situation, it certrainly makes sense to maximize up to 12%. Whether to do more conversion and pay higher tax rates may still be an option. Especially if you look at after one of you passes and the surviving spouse has only half the deductions. It may make sense to do more conversions now to help that case later.
I had not thought about the surviving spouse with regards RMDs. Good Point.
Edit to add; The SS check will drop $15k when one spouse leaves. Just one more complication.
Time2 is offline   Reply With Quote
Old 06-16-2021, 09:05 AM   #9
Full time employment: Posting here.
 
Join Date: Jul 2014
Posts: 565
Quote:
Originally Posted by Time2 View Post
Running $12k dividends, $45k SS, and $32,850 RMDs through Dinkytown tax calculator, https://www.dinkytown.net/java/1040-tax-calculator.html
It leaves me well within the 12% tax bracket....
That may put you in the "12% bracket" but your marginal tax rate at that point is 22.2%.

If you can use Excel, the case study spreadsheet will probably give you a more useful picture of your tax rate topography.
SevenUp is online now   Reply With Quote
Old 06-16-2021, 09:19 AM   #10
Thinks s/he gets paid by the post
 
Join Date: Oct 2019
Posts: 2,676
Quote:
Originally Posted by SevenUp View Post
That may put you in the "12% bracket" but your marginal tax rate at that point is 22.2%.

If you can use Excel, the case study spreadsheet will probably give you a more useful picture of your tax rate topography.

You are right! But, if you drop $1000 income from Roth Conversion that puts you in the 12% bracket.
Time2 is offline   Reply With Quote
Old 06-16-2021, 09:28 AM   #11
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
RunningBum's Avatar
 
Join Date: Jun 2007
Posts: 12,380
You may be in the 12% bracket, but your marginal rate isn't 12%.

I ran your numbers thru dinkytown, assuming all $12K of dividends are qualified. You came up with $3631 in taxes, right? Take a look at how much SS is taxed. $25,848, right?

Now, suppose you do more conversion such that you have $1000 less in RMDs ($31850). I show $3409 in taxes. That's $222 less on $1000 less income, so your marginal rate is 22.2%. How can that be when you are squarely in the 12% bracket? Only $24,998 of SS is taxed with the lower income. That $1000 difference in RMDs also caused an $850 difference in SS taxation.

Who knows, by then all SS may be taxed, which means your marginal rate goes back to 12%.

Are those dividends qualified? When you converted $75K, does that mean you kept those dividends from being taxed? When people talk about converting to the top of 12%, what they really mean if they have QDivs is convert to the top of the 0% tax rate on those dividends, which is $80,800 AGI.

In any case, if you converted to the top of the 22% bracket, you'd have a window of $12,000 where your regular income was taxed at 12% and divs at 15% for a marginal rate of 27%. After all divs are taxed, the marginal rate drops back to 12% for the next $250, then you go into the 22% bracket.

Looking to the future, with your projection of $32850 RMDs, your AGI is $70698, so the QDivs are not taxed. If they were taxed, this would push even more SS into being taxed, and I think you'd find your marginal rate to be 49.95%.

Given all that, I would continue converting to the point of having QDivs taxed ($80,800 limit) but I would repeat this exercise every year to make sure your RMDs won't push QDivs into being taxed, probably due to the tIRA continuing to grow with high returns. If that happens, convert more.

What investments do you have in your tIRA? I keep the bond portion of my AA in my tIRA, for a couple of reasons. Bond income is generally regular income, so it's better to not have it in taxable. And if I'm going to have bond or other non-equity holdings to reduce volatility even if it puts a drag on my earnings in good times, putting it in the tIRA slows the growth of that account.
RunningBum is offline   Reply With Quote
Old 06-16-2021, 09:33 AM   #12
Full time employment: Posting here.
 
Join Date: Jul 2014
Posts: 565
Quote:
Originally Posted by Time2 View Post
You are right! But, if you drop $1000 income from Roth Conversion that puts you in the 12% bracket.
Regardless of the nominal bracket, it is your marginal tax rate that matters.

Do you foresee something significantly different from the rates below? These are based (unless I made a typo) on MFJ both over 65 with $12K qualified dividends and $45K Soc. Sec. benefits.

SevenUp is online now   Reply With Quote
Old 06-16-2021, 09:47 AM   #13
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
RunningBum's Avatar
 
Join Date: Jun 2007
Posts: 12,380
I agree with SevenUp, you have to pay attention to marginal tax rates, not just what tax bracket you are in.
RunningBum is offline   Reply With Quote
Old 06-16-2021, 09:56 AM   #14
Thinks s/he gets paid by the post
 
Join Date: Oct 2019
Posts: 2,676
Quote:
Originally Posted by RunningBum View Post
You may be in the 12% bracket, but your marginal rate isn't 12%.

I ran your numbers thru dinkytown, assuming all $12K of dividends are qualified. You came up with $3631 in taxes, right? Take a look at how much SS is taxed. $25,848, right?

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.
Time2 is offline   Reply With Quote
Old 06-16-2021, 10:02 AM   #15
Thinks s/he gets paid by the post
 
Join Date: Oct 2019
Posts: 2,676
Quote:
Originally Posted by SevenUp View Post
Regardless of the nominal bracket, it is your marginal tax rate that matters.

Do you foresee something significantly different from the rates below? These are based (unless I made a typo) on MFJ both over 65 with $12K qualified dividends and $45K Soc. Sec. benefits.


I'm not understanding this. My method is to find where the last $100 of extra income costs me $12. But if I add another $100 it costs me $22.
Willing to listen if I'm wrong.
I do understand I have about $19,500 that is taxed at 10%, is this what I'm missing?
Time2 is offline   Reply With Quote
Old 06-16-2021, 10:11 AM   #16
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
RunningBum's Avatar
 
Join Date: Jun 2007
Posts: 12,380
Quote:
Originally Posted by Time2 View Post
I'm not understanding this. My method is to find where the last $100 of extra income costs me $12. But if I add another $100 it costs me $22.
Your last $100 may cost you $12 in taxes, but that doesn't mean that every $100 before that cost you $12. There was a range where it cost you $22.20, because of how SS taxation works. Once you have all SS taxed, the marginal rate goes back down to $12.

That said, I wouldn't convert to 22% today just because you have some window where it'd later be taxed at 22.2% later.
RunningBum is offline   Reply With Quote
Old 06-16-2021, 10:21 AM   #17
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
RunningBum's Avatar
 
Join Date: Jun 2007
Posts: 12,380
Maybe a good way to see this is with your dinkytown calculator. Start with $15,000 for your RMD and add $1000 at a time, charting your tax each time. Also note your AGI and how much SS is taxed at each $1000 RMD increment. You should see that it's not a smooth line, because of how SS is taxed.
RunningBum is offline   Reply With Quote
Old 06-16-2021, 10:25 AM   #18
Full time employment: Posting here.
 
Join Date: Jul 2014
Posts: 565
Quote:
Originally Posted by RunningBum View Post
Your last $100 may cost you $12 in taxes, but that doesn't mean that every $100 before that cost you $12. There was a range where it cost you $22.20, because of how SS taxation works. Once you have all SS taxed, the marginal rate goes back down to $12.
And a range where it cost $18.50, also due to Taxation of Social Security benefits.

In fact, in Time2's situation, there is no 12% rate at all (it jumps from 0% to 18.5%) until ~$47,440 of tIRA distributions have caused the SS benefits to be 85% taxable.

Time2, does the chart make any more sense now?
SevenUp is online now   Reply With Quote
Old 06-16-2021, 10:41 AM   #19
Thinks s/he gets paid by the post
 
Join Date: Oct 2019
Posts: 2,676
Quote:
Originally Posted by SevenUp View Post
Regardless of the nominal bracket, it is your marginal tax rate that matters.

Do you foresee something significantly different from the rates below? These are based (unless I made a typo) on MFJ both over 65 with $12K qualified dividends and $45K Soc. Sec. benefits.


Is this chart for my specific case? (The numbers I posted)
Time2 is offline   Reply With Quote
Old 06-16-2021, 10:49 AM   #20
Thinks s/he gets paid by the post
 
Join Date: Oct 2019
Posts: 2,676
Quote:
Originally Posted by SevenUp View Post
And a range where it cost $18.50, also due to Taxation of Social Security benefits.

In fact, in Time2's situation, there is no 12% rate at all (it jumps from 0% to 18.5%) until ~$47,440 of tIRA distributions have caused the SS benefits to be 85% taxable.

Time2, does the chart make any more sense now?

Yes, but!
I can understand how SS being taxed differently depending on income will cause the chart you posted.
What I don't get (using Dinkytown) is the last $100. $100 more income costs more than $12, $100 less income only saves $12. Are there two points where it costs $12, but more in between those two points? IF yes, then what am I supposed to look at?
Time2 is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Roth Conversions to Next Highest Bracket? PatrickA5 FIRE and Money 51 01-13-2019 11:57 AM
The 29% Bracket in Roth Conversions sengsational Health and Early Retirement 14 11-18-2017 11:35 AM
Roth Conversions at 15% or 25% Tax Bracket? Felix Mulier FIRE and Money 41 12-14-2016 08:32 PM
Roth conversions beyond the 15% bracket MrLoco FIRE and Money 46 05-15-2016 02:40 PM

» Quick Links

 
All times are GMT -6. The time now is 02:10 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2022, vBulletin Solutions, Inc.