My Roth/HSA Reasoning

[TromboneAl]

Being in the enviable position of having almost no income, if I contribute the max to my HSA (namely $4,050), then I can convert $25,000 to a Roth IRA, and our total tax will be only $154 ($133 state).

Doing the HSA contribution make sense, because it lets me convert that much more without paying tax.

I guess the question is, should I convert more to a Roth? I could convert up to $36,311 and still be in the 10% tax bracket (pay $1,288 fed, $387 state).

I should be able to have a negligible income for another four years (that is, I can use this same strategy four more times).

Thoughts?

 

[haha]

Being in the enviable position of having almost no income, if I contribute the max to my HSA (namely $4,050), then I can convert $25,000 to a Roth IRA, and our total tax will be only $154 ($133 state).

Doing the HSA contribution make sense, because it lets me convert that much more without paying tax.

I guess the question is, should I convert more to a Roth? I could convert up to $36,311 and still be in the 10% tax bracket (pay $1,288 fed, $387 state).

I should be able to have a negligible income for another four years (that is, I can use this same strategy four more times).

Thoughts?

I am not trying to be clever, but with what do you buy your groceries, your gasoline for trips, those snazzy bike outfits,etc?

How can a person live with no income, outside of an institution?

Ha

 

[TromboneAl]

We use the money from our taxable (non-retirement) accounts. That is, from the principal. The only income is from the dividends, and much of that money is in an S&P index fund, which doesn't throw off much income.

 

[kaneohe]

The basic question remains.....what is your tax bracket when you start withdrawing from the TIRAs eventually vs what you would pay now. If you would pay less now, I would think you would want to convert more.

 

[FUEGO]

We use the money from our taxable (non-retirement) accounts. That is, from the principal. The only income is from the dividends, and much of that money is in an S&P index fund, which doesn't throw off much income.

So you are saying you sell shares of your funds but they have not appreciated much since you bought them? In other words, you don't realize much in the way of capital gains when you sell your investments to fund your expenses?

 

[TromboneAl]

Well, they have appreciated since we bought them, but since we only sell about $35,000 worth each year, the gain is only a few thousand, especially since the 2008 downturn.

 

[FUEGO]

Well, they have appreciated since we bought them, but since we only sell about $35,000 worth each year, the gain is only a few thousand, especially since the 2008 downturn.

Gotcha. I'll be in the same boat when I start selling in 5 or so years (barring huge gains in the interim).

 

[jebmke]

I am not trying to be clever, but with what do you buy your groceries, your gasoline for trips, those snazzy bike outfits,etc?

How can a person live with no income, outside of an institution?

Ha

Tax exempt bonds.

 

[Alan]

It's all a gamble, but I doubt the tax code will move in your favor over the next 5 years so I would use up my 10% band to convert taxable funds to Roth's.

 

[TromboneAl]

If you would pay less now, I would think you would want to convert more.

Yes, will most likely pay less now, but we'll probably still be in only the 15% bracket later. I think I'll be conservative and avoid the extra $1,000 tax bill now. Maybe I'll split the difference and convert $30K.

 

[FIRE'd@51]

Even without contributing to a Roth, it makes sense to withdraw as much money as you can tax free from an IRA. It reduces the future value of your IRA and therefore your future RMD's.

 

[RunningBum]

When you want to convert a ROTH IRA to the end of the 15% bracket, do you add the Roth IRA conversion to other income INCLUDING dividends and LTCG, or do you exclude those because they are calculated separately in the div and cap gains worksheet?

After doing some calcs, it seems to me that you need to keep EVERYTHING under the 15% bracket. Otherwise, not only are you being taxed 15% on the conversion income (assuming that's the bracket your income less divs and LTCG lands), but also 15% for every dollar your divs and LTCGs push you over the 15% bracket, so effectively each dollar over the bracket costs you 30%. Is that right?

Of course if dividend and LTCG rules change, you have to rethink all of this.

 

[haha]

When you want to convert a ROTH IRA to the end of the 15% bracket, do you add the Roth IRA conversion to other income INCLUDING dividends and LTCG, or do you exclude those because they are calculated separately in the div and cap gains worksheet?

After doing some calcs, it seems to me that you need to keep EVERYTHING under the 15% bracket. Otherwise, not only are you being taxed 15% on the conversion income (assuming that's the bracket your income less divs and LTCG lands), but also 15% for every dollar your divs and LTCGs push you over the 15% bracket, so effectively each dollar over the bracket costs you 30%. Is that right?

Of course if dividend and LTCG rules change, you have to rethink all of this.

That is not how it works, but neither will it work to ignore that income.

Use tax cut, or turbo-tax. You really have to understand how these things interact if you try to do it with a spreadsheet, and it is complicated and painstaking and easily mis-understood to try to explain.

Ha

 

[kaneohe]

When you want to convert a ROTH IRA to the end of the 15% bracket, do you add the Roth IRA conversion to other income INCLUDING dividends and LTCG, or do you exclude those because they are calculated separately in the div and cap gains worksheet?

After doing some calcs, it seems to me that you need to keep EVERYTHING under the 15% bracket. Otherwise, not only are you being taxed 15% on the conversion income (assuming that's the bracket your income less divs and LTCG lands), but also 15% for every dollar your divs and LTCGs push you over the 15% bracket, so effectively each dollar over the bracket costs you 30%. Is that right?

Of course if dividend and LTCG rules change, you have to rethink all of this.

RB......you have it exactly right.......and your visual of stacking LTCG/QDIV on top of other income and watching where they land wrt to 15/25% dividing line is a good intuitive way of visualizing what happens. Of course, as ha mentioned , it is always good to doublecheck w/ a tax calculator or software since your intuition can lead you astray at times. You may have done that to get to your conclusion?

 

[RunningBum]

I ran different numbers in the Qualified dividends and cap gains worksheet manually. I should do a full check with TurboTax though to make sure I have it right. I actually didn't think this was the case before.

 

[Koolau]

Al, I understand your reluctance to go into the "same" tax bracket you believe you'll eventually be paying as you either reach RMDs or just when you need the money. Put aside the possibility that the 15% bracket could become the new 20% bracket one day. A separate, subtle difference you might consider: If you can pay the taxes out of already taxed funds, you will "step up" the value of your ROTH from your TIRA by the amount of the tax (as has been discussed elsewhere). For this reason alone, I would strongly consider going to the end of the 15% bracket if it were me (actually what I've done, but at the 25% level for me).

Probably enough other subtle things to consider that a tax person might be worth the money - just don't let 'em do the "never pay taxes now that you can put off until later" which is what my tax guy told me. I don't ask him anymore. Don't forget, YMMV.

 

[landover]

Being in the enviable position of having almost no income, if I contribute the max to my HSA (namely $4,050), then I can convert $25,000 to a Roth IRA, and our total tax will be only $154 ($133 state).

Thoughts?

I am in same situation although my situation is little different. I am aiming for 0%.

I think it is a bigger question, how much you have in tax deferred accounts and approximately how much you will need to withdraw due RMD and then add social security income, appx. income from other sources? And you can not guess exactly future tax rates, how much tax deferred will grow in the meanwhile. So put these assumptions and figures in a spreadsheet, it will give you some idea if converting at 10% is a good bet.

 

[TromboneAl]

Thanks for the input. I'm about to pull the trigger on a $40,000 conversion.

Do you think such a large conversion could trigger any red flags?

Also, since I owed $0 in taxes last year, there's no need to send in any estimated tax this year, right?

 

[REWahoo]

Al, I converted a similar amount four years ago without a problem. That was in a year where I reported very little income after earning a substantial amount the previous year.

Of course YMMV...

 

[ziggy29]

Frankly, with the debt mess and the budget deficit mess I think taxes have nowhere to go but up, and if I were in that situation I'd pay all the taxes I could today at the 10% rate and maybe even the 15% rate.

 

[TromboneAl]

It's done, $40K, thanks for the help.

 

[fisherman]

You sir are a man of action. I have been looking at the same think and need to pull the trigger.

 

[Zero]

I have a question for Al or others. If your TIRA was $2,000,000, would you "still" be doing the conversions? I ask because it seems that doing the Roth conversion is viewed by some as being a way to reduce RMD's so that taxes are lowered to a reasonable 15% type rate. But in reality that seems to only help if the TIRA is significantly impacted by $40k withdrawals, which would not be the case for a $2mil TIRA.

Am I seeing this correctly?

 

[RunningBum]

I have a question for Al or others. If your TIRA was $2,000,000, would you "still" be doing the conversions? I ask because it seems that doing the Roth conversion is viewed by some as being a way to reduce RMD's so that taxes are lowered to a reasonable 15% type rate. But in reality that seems to only help if the TIRA is significantly impacted by $40k withdrawals, which would not be the case for a $2mil TIRA.

Am I seeing this correctly?

If you can even get some of the TIRA converted at 15% or lower, that's worthwhile because it's less that will be taxed above 15% later. Significant? Well, we look at fractions of a percent in CD rates and mutual fund expenses, so I think we all agree that everything counts, and this is more than nickels and dimes. 40K @ 15% compared to 25% is $4000 for each conversion, just for a bit of paperwork.

Another factor is that if you are worried about exceeding the estate tax exemption, paying taxes on the conversion lowers the estate and is better than passing on yet-to-be-taxed TIRA money.

 

[Zero]

If you can even get some of the TIRA converted at 15% or lower, that's worthwhile because it's less that will be taxed above 15% later. Significant? Well, we look at fractions of a percent in CD rates and mutual fund expenses, so I think we all agree that everything counts, and this is more than nickels and dimes. 40K @ 15% compared to 25% is $4000 for each conversion, just for a bit of paperwork.

Another factor is that if you are worried about exceeding the estate tax exemption, paying taxes on the conversion lowers the estate and is better than passing on yet-to-be-taxed TIRA money.

I see your point, and yes, it is likely worth the paperwork. But it still leaves the TIRA with RMDs that will force a 35% tax rate, especially if I delay SS until 70.

For the moment, I have not decided for this year and I'm in the same situation at Al, which is I can control my income to near zero and do a maximum Roth conversion in the 15% bracket. But I'm vacillating on whether I want to establish yet another account for each of us.

Looking back, I wonder if it would have been better had I simply put the "matched" amount into my 401k.