Why ROTH conversion is a bad idea for me.

[SecondCor521]

I added Federal tax by bracket to my model and estimated the headspace for Roth conversions before age 72, then estimated the tax saved on the converted amount.

I just can't get excited about this. It seems much ado about nothing. It is not a home run as mentioned by @RunningBum.

Well, it depends on the numbers in each situation.

It'll mostly depend on your tax brackets when you convert versus when that tax is ultimately paid. If you can convert now at 10% versus 35% later, then you're paying 25 percentage points less in federal taxes on those converted dollars. On a $50,000 conversion, that's $12,500 less sent to the federal government. Converting at 22% versus 24% is only 2 percentage points in savings, or $1,000.

It'll depend on how much you convert. On a $5 conversion comparing 10% versus 35%, that's only $1.25 in federal tax savings.

It'll depend on how much you have elsewhere. If you've got 10,000 krugerrands in your basement, you probably don't care as much. Or if you have a gold-plated government pension that is inflation adjusted and covers twice your living expenses, you probably also don't care as much.

It depends on how you view the deferred liability of taxes on the traditional IRA dollars you have. If you primarily focus on cash flow and the "pain" of paying taxes now on a Roth conversion, but plan on dying with money in your traditional IRA and don't care about someone else paying that deferred liability after you die, then that's something in your favor.

It'll depend on how you build your spreadsheet. If you don't build it accurately, then you'll obviously get inaccurate results. Things to model IMHO: investment growth, tax bracket growth, RMD divisors, SS start age, IRMAA brackets, IRMAA inflation adjustments, and state taxes.

@RunningBum with respect, what is your financial training? Mine is in both graduate school and as a business leader. I can't think of a financial action that does not come with an attendant analysis of payback, breakeven, NPV and IRR. This applies in my view to a Roth conversion.

If the concise business case for a Roth conversion can't be simply stated in 25 words or less, it doesn't get my attention.

I'm not @RunningBum.

I have an MBA from an institution that is accredited by the same organization that accredits Harvard's MBA program, which I earned on scholarship while also working full time.

I've completed courses in accounting and financial analysis, accounting decision making and controls, personal financial planning, global economics, and financial modeling.

I am a member of Beta Gamma Sigma, the international honor society for collegiate schools of business.

I am Ivy League educated and a National Merit Scholar.

I worked for 17 years for two Fortune 500 technology companies in R&D as an engineer and engineering manager of multiple teams of up to 15 engineers across two continents. I have one US utility patent, two trade secrets, and six defensive publications to my name.

I retired at age 46 and as of today have a 1.41% net WR, a paid off house, paid off car, and my three kids' college degrees fully funded.

As far as your use of payback, breakeven, NPV, and IRR, those are terms that all generally refer to cash flows. A Roth conversion is more like a grocery coupon. What's the NPV on getting a $1 off on a box of Cheerios that you were going to buy anyway?

A Roth conversion isn't a business, and that's not really what the term "business case" is properly used for, but anyway: "More after-tax spendable dollars." That's four or five, depending on how you think about the hyphen.

We all agree there is speculation in the tax arbitrage nature of Roth conversions. Everything in life has some element of speculation. The speculation may work as we expected, or it may not. No one knows beforehand.

@RunningBum mentioned he might pay 5%-10% on taxes less overall. This is the payback I am referring to.

@pb4uski provided a form of a NPV calculation.

@Gumby provided another form of NPV calculation.

Folks, the Roth topic can and should be quantified for people to make quantified, informed decisions.

So far none of this is appetizing to me. I will continue to read threads on this site and run models to see if I can get myself to see the light.

You generally seem to be using the terms payback and NPV incorrectly. If you're going to throw them around and argue for people making informed decisions - which I agree with, by the way - you may want to understand and use those terms better. You'll get more respect here I think.

Depending on the assumptions you make and the accuracy of your models and, as noted, your view on the embedded tax liability and the assumptions you make about that, you might find that they don't make sense for you.

If I were you, I'd focus more on making sure I was understanding things accurately and had my model accurate, rather than the rather normal result where something can be a good idea for one person and not for another. If I invest in a 529 and you don't, does that mean one of us is right and one of us is wrong? If I have a toddler who I expect will go to college and I want to reduce my state tax bill and you don't have a toddler, then our different circumstances means our different decisions make perfect sense.

 

[RunningBum]

I added Federal tax by bracket to my model and estimated the headspace for Roth conversions before age 72, then estimated the tax saved on the converted amount.

I just can't get excited about this. It seems much ado about nothing. It is not a home run as mentioned by @RunningBum.

Jeez, you'd think with all of your training and experience mentioned below you'd have better reading comprehension. What I said was:

there are no home runs to be had with such low risk

I bolded the word no to make it easier for you to see. This is not the first time you've drawn the wrong conclusion from posts in this thread. Post #88 is another example where you drew a very off-base conclusion. https://www.early-retirement.org/fo...s-a-bad-idea-for-me-108113-5.html#post2571452

@RunningBum with respect, what is your financial training? Mine is in both graduate school and as a business leader. I can't think of a financial action that does not come with an attendant analysis of payback, breakeven, NPV and IRR. This applies in my view to a Roth conversion.

I have a finance minor and am otherwise self-taught in personal finance through reading books and forums like this, and plowing through calculations and numbers to better understand these kind of issues, while gaining experience. I doubt that impresses you. I don't care. Show me something rather than presenting your laurels. Business world standards and situations often don't apply to personal finance.

If the concise business case for a Roth conversion can't be simply stated in 25 words or less, it doesn't get my attention.

This has been done multiple times in this thread, but I'll repeat it in your required terms:

Roth conversions are a tax arbitrage play achieved by doing conversions at a lower tax rate than you'll expect to have when taking RMDs.

One word to spare.

We all agree there is speculation in the tax arbitrage nature of Roth conversions. Everything in life has some element of speculation. The speculation may work as we expected, or it may not. No one knows beforehand.

As I said before, there's more speculation by deferring paying those IRA taxes than there is in locking them in now, but apparently you fail to see or acknowledge this. I'm not surprised.

@RunningBum mentioned he might pay 5%-10% on taxes less overall. This is the payback I am referring to.

@pb4uski provided a form of a NPV calculation.

@Gumby provided another form of NPV calculation.

Folks, the Roth topic can and should be quantified for people to make quantified, informed decisions.

So far none of this is appetizing to me. I will continue to read threads on this site and run models to see if I can get myself to see the light.

You know, I should've paid attention when you called it gimmicky, and a play that requires effort, machinations and gymnastics that I don’t see as being worthy of my time and effort. Your mind was made up, and I don't see evidence of you making any more than token attempts to understand this.

Do your own thing. I truly don't care. And it certainly isn't worth my time and effort to try to convince you. I always think there may be something I can learn from debating with people, but you haven't even given any reason for why you don't see the light. No numbers, nothing. At least the OP gave some reasons. Most of them fall under "I have too much money to care" rather than being a bad idea, but at least one of them had some validity.

 

[chassis]

Thanks again to all for the comments. I remain open to the idea I have missed something. I will continue to work the Rubik's cube. Until then I categorize Roth conversion as a marginal play.

 

[pb4uski]

....I just can't get excited about this. It seems much ado about nothing. It is not a home run as mentioned by @RunningBum.

@RunningBum with respect, what is your financial training? Mine is in both graduate school and as a business leader. ....

I think the benefits can very situational... if the tax arbitrage is between the 12%/22% tax brackets (or 15%/25% if tax rates revert) then the punch is alot more than if the tax arbitrage is between the 22%/24% tax bracket (or 25%/28% if tax rates revert).

chassis, this isn't rocket science so no need to question people's credentials. Heck, even an engineer or actuary could do it (jk... I used to work alot with engineers and actuaries).

FWIW, my background is a CPA with an MBA and 16 of my 34 year career with two different Big 4 firms, 6 years with a Fortune 500 and 12 years in upper financial management of a major life insurer and lots of valuation modeling, M&A, financial decision analysis, etc.

For me, it's pretty simple... at the end of days are we richer or poorer with Roth conversions? My modeling suggests that we are definitely richer. I was curious about the impact of rates reverting so I recently added to my model a reversion of rates to what they were in 2017 beginning in 2026... it increased the benefits at age 91 very modestly.

Bottom line, at age 91 we're about 8-10% richer with Roth conversions from now until I start SS than if we don't... it's that simple and so easy to do... no NPV or payback calculation required. I think part of why it works for us is that we're in a sweet spot where the rate differences are more significant.... I suspect that the benefits are more modest for others because the rate difference is much smaller which may be why you can't get so excited about it and why Gumby's benefits are more modest than mine. just a guess on my part.

BTW, the 8-10% richer is only from here forward and excludes the future value of the $64k of savings from Roth conversions that I did from 2013-2019.

So if you don't get it, then you don't get it... not much more we can do to help you.

 

[dmpi]

Lots of good advice here. I spent my whole working life trying to minimize my taxes by over-funding my 401Ks. To me Roth conversion represents the 'end game'. I'd hate to get this far and screw it up now.

 

[Time2]

This thread has made me do more thinking. I started doing Roth conversions up to the top of the 12% bracket, and will most likely continue.
I don't have as big a problem as I thought. We now live on about $50k.
But in several years,in today's dollars, my wife and I will have about $42k of SS, $15K of dividends and interest, and first year RMDs of $37k for an income of $94k. This would still leave me in the 12% bracket after the standard deduction. These numbers will increase with inflation, but so will the tax brackets. I will still continue Roth Conversions because, we over saved and even after withdrawals, I expect our net worth to grow, making RMDs higher than I wrote above and, when one of us dies the other will be filing single, making their taxes much higher.
I regained my clarity from the start to the finish of my post.

 

[RunningBum]

Sorry if I got a little too emotional last night. When someone completely misrepresents what I said (the home run thing, among others) it can set me off. Having my credentials challenged didn't help either.

As an aside, this is one of the ways I use the ignore list. I will probably still view their posts, but it's a reminder to me that we have had some total disconnects, and that I should think carefully about whether I want to engage with them again.

 

[RunningBum]

This thread has made me do more thinking. I started doing Roth conversions up to the top of the 12% bracket, and will most likely continue.
I don't have as big a problem as I thought. We now live on about $50k.
But in several years,in today's dollars, my wife and I will have about $42k of SS, $15K of dividends and interest, and first year RMDs of $37k for an income of $94k. This would still leave me in the 12% bracket after the standard deduction. These numbers will increase with inflation, but so will the tax brackets. I will still continue Roth Conversions because, we over saved and even after withdrawals, I expect our net worth to grow, making RMDs higher than I wrote above and, when one of us dies the other will be filing single, making their taxes much higher.
I regained my clarity from the start to the finish of my post.

Except you're not in the 12% marginal rate when taking RMDs. Every RMD dollar pushed 85 cents of additional social security being taxed. So instead of your marginal rate being 1x12%, it's really 1.85x12%, which is 22.2%.

I quickly ran your numbers thru https://www.guidestone.org/resources/education/calculators/tax/tax1040 . With $37K of RMDs you have $30,650 of SS taxed, and your total tax is $5038. If you could reduce this to $27K of RMDs, you have $22,150, and total tax of $2818. That's a $2220 difference of taxes.

This is part of the SS tax hump. Fortunately you would not be pushing any qualified dividends into being taxed, or the rate would be much higher, 49.95%.

This is what I meant earlier in this thread that people really should try to go through a little more effort to try to determine their real tax rate. It took me about a minute at that website to plug in your numbers. Might take you a few minutes to become familiar with it on your first run.

Does that mean you should convert more now, like to the top of 22%? Maybe, maybe not. There are other factors to consider like pushing qualified dividends into being taxed, ACA subsidies if you are using them, and IRMAA if you are 63 or older. Maybe some years to convert big, and some years you stay at the 12% cap with no QDivs taxed.

Maybe I should add the disclaimer that I only have a finance minor and no professional experience in financial management.

Edited to add: You said you had $15K of interest and dividends. I put $5K of interest and $10K of total and qualified dividends in the tool. You may come out with different total tax numbers if those numbers are split differently, but the difference should still be $2220.

 

[thefist]

Clearly this topic is personal. My IRA is about 13% of portfolio. So any benefit on that portion will be somewhat muted overall. So far I've only used i-orp to run projections. Maybe I'll start a spreadsheet later. Depending upon market returns I plug in, my result is an extra 1000-4000 per year of spending with conversions. At this point, ANY increase goes to my discretionary budget as my needs are fulfilled.

I have yet to run a scenario where the converting is worse. But I haven't modeled a 40yr bear market or early death.

So, what's $1000 worth to ya... more dinners out during the year? Kayak? Golf Clubs? another weekend trip? ticket upgrade on overseas flight? more NHL hockey tickets? donation to your favorite non-profit? gift to children or grandchildren? replace furniture?
now, what if it ends up being $3000/yr?

IRMAA makes this a more complex and personal problem. Without conversions I think I'm spending a lot of years in higher IRMAA tiers. That can be 2000-3000 extra per year. At a given spending level, I'd much rather spend an extra $2000 on golf than IRMAA.

Then you have age. I'm 55, so have some valuable years ahead of me to 63. Assuming no tax changes effecting me, the next 5 tax years may be quite valuable until the 2017 law sunsets. For someone 65 and already receiving Medicare and possibly pensions and SS, this is completely different scenario.

 

[meleana]

Unless you aren't able to withdraw Roth conversions at any time (haven't had the account open for 5 years yet, under 59.5), I can't see any way that a withdrawal could work out better than a conversion, unless you lose money. Few of the things we do are huge difference makers, but smaller things add up.

I don't understand this. If the idea is to lower the amount of your mandatory RMD's when the time comes, what difference would it make if- years before you were required to take RMD's- you just withdrew $ from the Traditional IRAs and paid the taxes on the money and invested it somewhere or whatever as opposed to converting the Traditional IRA to a Roth and having to pay taxes on the money and no access for 5 years?


Is it because the money you convert can still grow tax free in a Roth as opposed putting it into a "taxable" account?


But then you still have to pay the taxes from the conversion out of a taxable account, so you have to pay taxes on that money- unless it is cash. My head is spinning. I'm not good at this stuff.

 

[Dtail]

I don't understand this. If the idea is to lower the amount of your mandatory RMD's when the time comes, what difference would it make if- years before you were required to take RMD's- you just withdrew $ from the Traditional IRAs and paid the taxes on the money and invested it somewhere or whatever as opposed to converting the Traditional IRA to a Roth and having to pay taxes on the money and no access for 5 years?

Well it depends where are you investing those monies, as opposed to what it was invested in the tIRA or the Roth, but then it really isn't an apples to apples comparison.
As for the 5 year rule, in the real world most folks wouldn't use their Roth monies early in their retirement, so would not likely be a consideration in one's 60's.

 

[RunningBum]

I don't understand this. If the idea is to lower the amount of your mandatory RMD's when the time comes, what difference would it make if- years before you were required to take RMD's- you just withdrew $ from the Traditional IRAs and paid the taxes on the money and invested it somewhere or whatever as opposed to converting the Traditional IRA to a Roth and having to pay taxes on the money and no access for 5 years?

There are a few differences. What's not different is the amount of taxes if you convert or withdraw the same amount.

Yes, there are 5 year rules. I'm not totally up on the rules since I won't run into them so I might get them wrong if I try to apply them here, but one thing that helps is to open a Roth early. One of the 5 year rules is based on the age of the Roth itself. But you are raise a good point, make sure you fully understand the Roth rule before converting, but don't just avoid conversions with only a vague understanding of the rules that might not apply to you. By the way, you always have access to your Roth, but you may owe tax on growth and/or penalties if you run into a 5 year rule.

Other differences:

If you are less than 59.5 you can't withdraw without penalty, so conversions are almost always better. There may be a case where you are almost 59.5 and will need the money shortly after 59.5, where it might be better to do nothing and withdraw when you can. But I think this is a case where establishing a Roth 5 years earlier means you could access conversion money at 59.5 too. I also know there are ways around access to a tIRA before 59.5 but that's another thing I'm not doing so I'm not up on this either.

The main advantage of converting is that the funds grow tax free in the Roth, but growth would be taxed in your taxable account. Unless you run into a 5 year rule, or are immediately going to spend the money, it seems to me you should do a conversion over a withdrawal.

 

[meleana]

There are a few differences. What's not different is the amount of taxes if you convert or withdraw the same amount.

Yes, there are 5 year rules. I'm not totally up on the rules since I won't run into them so I might get them wrong if I try to apply them here, but one thing that helps is to open a Roth early. One of the 5 year rules is based on the age of the Roth itself. But you are raise a good point, make sure you fully understand the Roth rule before converting, but don't just avoid conversions with only a vague understanding of the rules that might not apply to you. By the way, you always have access to your Roth, but you may owe tax on growth and/or penalties if you run into a 5 year rule.

Other differences:

If you are less than 59.5 you can't withdraw without penalty, so conversions are almost always better. There may be a case where you are almost 59.5 and will need the money shortly after 59.5, where it might be better to do nothing and withdraw when you can. But I think this is a case where establishing a Roth 5 years earlier means you could access conversion money at 59.5 too. I also know there are ways around access to a tIRA before 59.5 but that's another thing I'm not doing so I'm not up on this either.

The main advantage of converting is that the funds grow tax free in the Roth, but growth would be taxed in your taxable account. Unless you run into a 5 year rule, or are immediately going to spend the money, it seems to me you should do a conversion over a withdrawal.

Thanks. My husband will be 67 next month and I will be 65 in June. Our Roths were set up as soon as they came into existence, but prior to that we invested in IRA's (and 401k's all along). Most of our money is in the traditional/rollover IRA's. No plans for SS until age 70 for either of us.


Been living off cash this past year- 1st year of retirement. Have an ACA plan and I took out some money from a traditional IRA last year so I wouldn't fall below the poverty line and put on Medicaid, but upon thinking about it further I probably did not have to do that because my ACA plan renewed automatically in January with no questions asked, income taxes were just filed and in a few months I will be off the ACA plan and on Medicare anyway, so silly for me to have been concerned about that. Oh well....live and learn. (not that it will help me in the future anyway. LOL!)


This year I will have the required distribution from an Inherited IRA (last year I rolled it back over per the Cares Act, but this year the distribution is required). I usually invest that money in a taxable account. Again this year living off cash, so I have to decide about doing a Roth conversion.

 

[pb4uski]

This thread has made me do more thinking. I started doing Roth conversions up to the top of the 12% bracket, and will most likely continue.
I don't have as big a problem as I thought. We now live on about $50k.
But in several years,in today's dollars, my wife and I will have about $42k of SS, $15K of dividends and interest, and first year RMDs of $37k for an income of $94k. This would still leave me in the 12% bracket after the standard deduction. These numbers will increase with inflation, but so will the tax brackets. I will still continue Roth Conversions because, we over saved and even after withdrawals, I expect our net worth to grow, making RMDs higher than I wrote above and, when one of us dies the other will be filing single, making their taxes much higher.
I regained my clarity from the start to the finish of my post.

.... I quickly ran your numbers thru https://www.guidestone.org/resources/education/calculators/tax/tax1040 . With $37K of RMDs you have $30,650 of SS taxed, and your total tax is $5038. If you could reduce this to $27K of RMDs, you have $22,150, and total tax of $2818. That's a $2220 difference of taxes. ...

I get the same results but look at it a bit differently. The marginal tax on their RMD is $5,038... $0 tax without RMD vs $5,038 with RMD. The marginal income is the $37k RMD, so his marginal tax rate on the RMD is 13.6%. That is assuming $5k interest and $10k qualified dividends. The 13.6% is a blend of using $10,400 of unutilized standard deducton offset by an increase in income from the RMD and to the RMD causing $28,650 more SS to be taxable... pushing total income into the 12% tax bracket.

Assuming the same $5k interest and $10k qualified dividends and no SS today, they could do $92,400 of Roth conversion and only owe $8,008 in tax for a marginal tax rate of 8.7%.

Better to pay 8.7% now vs 13.6% later methinks... looks like ~$4,500 of savings to me for a negligible effort.

 

[Gumby]

Thanks. My husband will be 67 next month and I will be 65 in June. Our Roths were set up as soon as they came into existence, but prior to that we invested in IRA's (and 401k's all along). Most of our money is in the traditional/rollover IRA's. No plans for SS until age 70 for either of us....

If you are over 59 1/2 when you take the money out, you don't need to meet the 5 year rule for conversions. https://www.doughroller.net/retirement-planning/the-5-year-rule-on-roth-ira-conversions/. So you should be free to Roth convert today and withdraw next month if you want. Of course, you still have to pay the taxes on the conversion amount.

 

[RunningBum]

I get the same results but look at it a bit differently. The marginal tax on their RMD is $5,038... $0 tax without RMD vs $5,038 with RMD. The marginal income is the $37k RMD, so his marginal tax rate on the RMD is 13.6%.

It looks like they can keep some RMDs and pay no taxes so Time2 should probably not fully convert the tIRA. This is why I like to look at the deltas as well as full conversion to try to estimate how much to convert.

This is why it's impossible to say that you are going to get $X or Y% by converting as some people seem to be looking for. For some people it will be a lot, for others a little, and some should not convert, or only convert a little.

 

[meleana]

If you are over 59 1/2 when you take the money out, you don't need to meet the 5 year rule for conversions. https://www.doughroller.net/retirement-planning/the-5-year-rule-on-roth-ira-conversions/. So you should be free to Roth convert today and withdraw next month if you want. Of course, you still have to pay the taxes on the conversion amount.

Thanks! I didn't know that!

 

[Gumby]

It looks like they can keep some RMDs and pay no taxes so Time2 should probably not fully convert the tIRA. This is why I like to look at the deltas as well as full conversion to try to estimate how much to convert.

This is why it's impossible to say that you are going to get $X or Y% by converting as some people seem to be looking for. For some people it will be a lot, for others a little, and some should not convert, or only convert a little.

Correct. I found with my model that changing the starting balance in the tIRA and the account growth assumptions would change the relative benefit of conversion. Among other things, that drives the RMD tax bracket, and the delta between the RMD rate and the rate at the time of conversion is what drives the size of the conversion benefit.

I haven't modeled everything, but my sense is that the most beneficial case is one where someone starts with a small enough tIRA balance, has no other taxable income (so that conversions can occur in the 10% and 12% brackets), and starts early enough so that the tIRA is completely converted prior to RMD age.

In our case, we are starting out in the 22% bracket due to other income and we are 62 and 60. So, even converting to the IRMAA threshold will only slow the growth of the tIRA. The balance will not drop until we are close to 90 and the RMDs get quite large. So our conversion benefit is small, as pb4uski posited.

 

[pb4uski]

It looks like they can keep some RMDs and pay no taxes so Time2 should probably not fully convert the tIRA. This is why I like to look at the deltas as well as full conversion to try to estimate how much to convert.

This is why it's impossible to say that you are going to get $X or Y% by converting as some people seem to be looking for. For some people it will be a lot, for others a little, and some should not convert, or only convert a little.

Agreed... I get that Time2 could have as much as $12.5k of RMDs assuming $10k of qualified dividends and pay no tax so that would be ~$312k tIRA at age 72. Add another $10k in RMD to $22.5k and the additional $10k attracts $1,843 in tax... which would be 18.4%.

 

[chassis]

@RunningBum We agree. You said there are no home runs with such low risk. I agree that Roth conversions are not a home run and have low risk. I see no gap in our perspective here.

@pb4uski I don't view asking an anonymous internet poster about their education and experience as questioning their credentials. It would be an error to assume that any one of us on this site has the same level of financial education, acumen or experience. Therefore I ask, rather than assume. It is a sign of respect that I would use if I was sitting across the table from anyone on this thread, drinking coffee and talking personal finance.

@pb4uski You mention "richer". This means a numerically higher net worth, correct? This is what your words mean to me. This means that the impact of a Roth conversion can be measured, in fact calculated. This is what I have been asking through this thread.

@SecondCor521 You suggest understanding things. I agree with you. Many people, including Socrates and myself, do this by asking questions. I have never retired before; it's a once-per-lifetime action for most people. So I come to this site with apparently knowledgeable people and ask questions. And when I don't understand the answer I ask more questions. Do you agree with this approach: asking questions when you don't understand what has been said or written?

Business case is precisely a term that can be applied to Roth conversions. A translation for business case is financial payoff, or payback, or breakeven, or NPV or FV. Hopefully people executing Roth conversions are of the belief they are "better off" by doing them. Business case can also be translated into "What's in it for me?", "Why am I doing this?", "Where's the beef?" and "Is the juice worth the squeeze?"

How much better off is what I am trying to understand. So far my calculations tell me I will not be much better off. But a little better off.

 

[SecondCor521]

@SecondCor521 You suggest understanding things. I agree with you. Many people, including Socrates and myself, do this by asking questions. I have never retired before; it's a once-per-lifetime action for most people. So I come to this site with apparently knowledgeable people and ask questions. And when I don't understand the answer I ask more questions. Do you agree with this approach: asking questions when you don't understand what has been said or written?

Yes, I agree. However, my willingness to engage and help is based on whether the person asking questions appears to be listening and trying to understand better or just digging in and being argumentative.

Business case is precisely a term that can be applied to Roth conversions. A translation for business case is financial payoff, or payback, or breakeven, or NPV or FV. Hopefully people executing Roth conversions are of the belief they are "better off" by doing them. Business case can also be translated into "What's in it for me?", "Why am I doing this?", "Where's the beef?" and "Is the juice worth the squeeze?"

The first sentence here indicates to me that you are not trying to listen or learn, because you have simply reiterated what you have said before and have not asked any further questions seeking to understand.

As I have already said once before, you are using the term business case incorrectly, although the way you are misusing it is pretty common.
You're also using the other business terms sloppily. I understand exactly what you mean. However, the fact that you're not willing to listen means that I am going to wish you well but not help you any further until you show signs of being interested in learning rather than just arguing like a troll.

 

[pb4uski]

+1

 

[Cobra9777]

+2

 

[Time2]

Except you're not in the 12% marginal rate when taking RMDs. Every RMD dollar pushed 85 cents of additional social security being taxed. So instead of your marginal rate being 1x12%, it's really 1.85x12%, which is 22.2%.

Just to make sure we're thinking the same. I am in the 12% bracket now and you are writing about after we get SS and RMDs, correct?

I quickly ran your numbers thru https://www.guidestone.org/resources/education/calculators/tax/tax1040 . With $37K of RMDs you have $30,650 of SS taxed, and your total tax is $5038. If you could reduce this to $27K of RMDs, you have $22,150, and total tax of $2818. That's a $2220 difference of taxes.

Without looking, I'm guessing that RMD reduction drops me one tax bracket?

This is part of the SS tax hump. Fortunately you would not be pushing any qualified dividends into being taxed, or the rate would be much higher, 49.95%.

This is what I meant earlier in this thread that people really should try to go through a little more effort to try to determine their real tax rate. It took me about a minute at that website to plug in your numbers. Might take you a few minutes to become familiar with it on your first run.

Yes, but knowing what the numbers in my accounts will be in 6 years is a bit of a guess.

Does that mean you should convert more now, like to the top of 22%? Maybe, maybe not. There are other factors to consider like pushing qualified dividends into being taxed, ACA subsidies if you are using them, and IRMAA if you are 63 or older. Maybe some years to convert big, and some years you stay at the 12% cap with no QDivs taxed.

I don't know the number, that will push my qualified dividends to be taxed. But MFJ, only living on $50k and doing Roths, to the top of the 12% bracket (for now), What is the number that causes qualified dividends to be taxed?
No ACA subsidy, IRMAA is a lot higher income than I expect to have.

Maybe I should add the disclaimer that I only have a finance minor and no professional experience in financial management.

Edited to add: You said you had $15K of interest and dividends. I put $5K of interest and $10K of total and qualified dividends in the tool. You may come out with different total tax numbers if those numbers are split differently, but the difference should still be $2220.

Actually, this year ended the interest payments, so things are a little different than stated, and my crystal ball does not see 2025 (SS) and 2027 RMDs very well and what my account gains will be then. I expect the tax deferred accounts will grow at about the same rate as I can Roth convert if I stay in the 12% bracket.[/quote]

As I said, we over saved, when we start SS and RMDs, that will be plenty for us, With RMDs 3.65% of our Tax deferred accounts, that drops us to under 2% WR for our total accounts.
We just need to learn to "blow that dough"
I appreciate your time and feedback.

 

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Just to make sure we're thinking the same. I am in the 12% bracket now and you are writing about after we get SS and RMDs, correct?

Yes, I tried to make that clear by saying "When taking RMDs".


Without looking, I'm guessing that RMD reduction drops me one tax bracket?

No, not really. You're in the 12% bracket either way. It appears to be a lower bracket but what's really happening is that $10K reduction also keeps another $8500 of SS income from being taxed at 12%.

Yes, but knowing what the numbers in my accounts will be in 6 years is a bit of a guess.

I get that. IMO it's worth taking a reasonable guess than not including other factors like SS taxation at all.

I don't know the number, that will push my qualified dividends to be taxed. But MFJ, only living on $50k and doing Roths, to the top of the 12% bracket (for now), What is the number that causes qualified dividends to be taxed?
No ACA subsidy, IRMAA is a lot higher income than I expect to have.

Right now it's $80,800 for MFJ. It's indexed somehow to inflation, so it will slowly creep up but this is close enough.


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I appreciate your time and feedback.
You're welcome.