Low tax bracket conundrum

[harley]

I've managed to stay with the 15% bracket this year (and possibly next year too), with a fair amount of buffer (~$20K). This is not normal for me, I'm usually in the 25% bracket, and sometimes higher. So I want to take advantage of the situation to keep some money out of Uncle's hands. My best options seem to be Roth conversion from pre-tax IRAs, and selling appreciated stock for 0% capital gains. These are individual stocks from a small gambling fund I started 15 years ago that has done pretty well. The money was intended to go toward paying for DDs college, but she never went. Now she's going (one class at a time at community college), so I'm thinking of using the money to pay for the classes as well as funding her Roth contribution while she's young and poor.

I'm leaning toward selling the stock, since the 0% break is only for the next two years. Also I'll be saving 15% on the tax, as opposed to the 10% difference on the bracket change with the Roth. However, I'd really like to get moving on the Roth conversion, since it's going to take a number of years to complete it. And I'm worried that the gov't will be raisng the tax brackets, or curtailing the conversion option, or both. Any opinions? Suggestions? Options I'm missing? Thanks in advance.

 

[JohnP]

harley
We are post-medicare and pre-RMD at 66yo with pensions. I've been drooling over that 0% cap gains on appreciated stocks and mutual funds when one is in the 15% bracket and just can't get there. If I could, I wouldn't hesitate selling all my appreciated funds from any taxable account and then rebuy or rebalance after 30 days.

I'm not as keen on doing a roth conversion since I am in 25% Fed + 5-6% state and can't really justify to myself paying those tax levels when I couldn't make much of a dent in the TIRA total anyway.

JohnP

 

[kaneohe]

harley
I'm not as keen on doing a roth conversion since I am in 25% Fed + 5-6% state and can't really justify to myself paying those tax levels when I couldn't make much of a dent in the TIRA total anyway.
JohnP

JohnP,

Have you compared the conversion now to what happens once you start taking RMDs which will increase your income, perhaps significantly? and perhaps tax brackets will be higher then too?

 

[harley]

JohnP,

Have you compared the conversion now to what happens once you start taking RMDs which will increase your income, perhaps significantly? and perhaps tax brackets will be higher then too?

That's what I'm worried about too. I would really like to get Uncle's hand out of my pocket as much as possible. I don't have to take RMDs for 17 years, and by then my IRA(s) could be worth significantly more. The possibly large forced withdrawals could be at a very high tax rate. Of course, if I've made that much money by then I could probably afford the taxes, but it would p!ss me off royally. So I'm going to convert to Roths as quickly as I can, although I expect it to take me many years so as to maximize tax efficiency.

I asked this question on another forum, and someone made a good suggestion. They told me to do the Roth conversion this year, and gift the appreciated stocks to my DD. She's in the middle of the 15% bracket and could sell a good chunk of it without going up into the next one. Sort of eating my cake and having it too. I could do this for the two years that the 0% CG tax is in place. Of course, this would require that I trust her to do as we request with the money. But she's pretty good that way. It's the best plan I've heard so far.

 

[JohnP]

Originally Posted by kaneohe
JohnP,

Have you compared the conversion now to what happens once you start taking RMDs which will increase your income, perhaps significantly? and perhaps tax brackets will be higher then too?

Yes, I have compared the impacts in our near future in the case of doing or not-doing the Roth Conversion; for us there really is not a significant difference. We have been retired for almost seven years; we live pretty comfortably off two pensions and a small SS amount without having been required to withdraw from any of our pretaxed or tax-deferred savings. Our forthcoming RMD (without doing a Roth Conversion) will increase our income less than 20% from current levels, which I consider to be not significant for us. We will not see any change in Tax Brackets.

I can see how it may be possible to come out ahead through the Roth Conversion if you can control your taxable income in early retirement and take advantage of special situations. I just don't see it as benefitting us with our incomes, portfolios and time frame.

JohnP

 

[haha]

For various reasons good and not very sharp I left this issue until late. I made a spreadsheet that shows my projected AGI and taxable income before SS and before Roth Conversion.

If I stop my SS immediately and resist taking any capital gains, in 2010 I can convert a little in the 15% bracket, and a lot in the 25%. This year I am doing a modest conversion all in the 25%. In 2008 I skipped it because I did not want to get shoved into higher Medicare rates due to the modified AGI test. Alternatively in 2010 I could sell a little appreciated stock and do the conversion entirely in the 25% bracket, thus taking advantage of the privileged LTCG rates.

So my dual constraints are keeping modified AGI below $85,000, and not going above the 25% bracket. Actually this resolves to the AGI constraint.

In 2011 I must start my RMDs and restart SS. If I can again avoid taking any gains (unlikely I think, because I still remember my reasoning along these lines in Oct 2007!).

At any rate, I think I should convert whatever I can at 25%. Washington has no state income tax, but I would not be at all surprised if that ended. As far as federal rates, I think it is written on the wall. Duck Mr. Ha, other more deserving people want your money.

Ha

 

[sirion]

I was having this SAME conversation with myself earlier today. I ended up using the room in my 15% bracket to convert to the Roth instead of selling my appreciated stocks. I figure that the stocks I have I am happy with so selling just to get a tax break seems strange. I think your idea of gifting the stocks is fine, if that is what you want to do.