Another stupid post with ROTH questions

[joesxm3]

I realize that the answer is "do the math lazy boy", but Turbo Tax is missing parts until 12/21 and I am itching to figure things out now.

My situation is that I get $7500 and $500 tax credits from my Tesla and Wall Connector installation. To use up all of that it seems I need an AGI of about $80,000.

My state is phasing in an IRA exemption so if my AGI is $75,000 or less I can avoid paying state tax on 25% of my ROTH conversion. Right now my conversion is $54,000 so that is about $675 state tax versus not getting $500 or so federal credit.

I was hoping that I would find myself already over AGI $75,000 so I would not have to worry what to do, but it seems I am under by a couple thousand not accounting for small accounts and some fund DIVs.

If I go over $75,000 I think I should convert up to the AGI that would set me up for an IRMAA hit in two years. That seems to be $105,000 or $100,000 playing it safe.

I know that the general consensus is to convert up to the top of the 12% rate. But I am already into the 22% rate and expect to be in that or the next tier later on.

The concept that I have not seen discussed much is how much weight to give to the idea that converting stocks that I like to think will really grow fast might be a good idea even if it is at the higher current rate. That is, if my TSLA goes to the moon after robo-taxi and robots, it would be best in the ROTH

So, if I end up able to stay under the $75,000 AGI, do you think I should convert up to $100,000 AGI anyway thinking that the gamble on high growth stocks and not having to put out much this year due to tax credits makes sense?

 

[SevenUp]

Roth Conversion with Social Security and Medicare IRMAA is an oft-recommended article. Don't know how well the tool used there would handle your state tax situation.

Perhaps the general consensus might be closer to "do the math" rather than "to the top of the 12% rate". As noted in Roth conversion - Bogleheads, "Roth conversions of pre-tax money will be advantageous whenever your tax rate on the conversion is less than your tax rate on a later withdrawal."

Thus you have to prognosticate before you calculate in order to evaluate....

 

[kgtest]

The concept that I have not seen discussed much is how much weight to give to the idea that converting stocks that I like to think will really grow fast might be a good idea even if it is at the higher current rate. That is, if my TSLA goes to the moon after robo-taxi and robots, it would be best in the ROTH

I have my small and mid-cap in our taxable and our LargeCap (heavy nasdaq) and AAPL in our broker and Roth IRA.

That whole wanna get all the juice from the squeeze idea.

Although, I have been too conservative or I should say I probably should have been way more aggressive when I started investing.

I know and knew dang well after Y2K that tech stock could only recover and continue to outperforrm. Now it's AI and Data but its still tech.

Had I just went all in I could be retired here and now at 42. Oh well, at least another 8 years.

 

[SecondCor521]

The concept that I have not seen discussed much is how much weight to give to the idea that converting stocks that I like to think will really grow fast might be a good idea even if it is at the higher current rate. That is, if my TSLA goes to the moon after robo-taxi and robots, it would be best in the ROTH

So, if I end up able to stay under the $75,000 AGI, do you think I should convert up to $100,000 AGI anyway thinking that the gamble on high growth stocks and not having to put out much this year due to tax credits makes sense?

How much to convert and what to convert are two separate questions.

How much to convert depends solely on your marginal tax rate now compared with your marginal tax rate later. Commutative property of multiplication and all that.

What to convert is essentially an asset placement question, and you're right that you want the higher growth assets in your Roth where growth is untaxed, rather than in your traditional where growth is shared with Uncle Sam.

If you have low growth assets in your Roth now, and high growth assets in your traditional now, you can swap them by just doing the appropriate buys and sells (subject to market volatility, which is hopefully a minor nit). So if, for example, you had $100K of Tesla in your traditional and $100K of short term Treasuries, you could swap them now via buys/sells without doing any conversions.

The Case Study Spreadsheet (CSS) mentioned above is already set up to do 2023 taxes. The current version is at https://forum.mrmoneymustache.com/f...dy-spreadsheet-updates/msg3198094/#msg3198094

If you open it in Excel and follow the instructions in the first tab, you'll get a very useful marginal rate graph on the Calculations tab starting about cell F82. It's set up by default to compare marginal and effective total tax rate (federal plus state) across a variety of Roth conversion numbers. You can enter values in P83 and P84 to examine areas of the graph in greater or broader detail.

The CSS is in general very capable and accurate on federal taxes. The quality of the state tax calculations is generally lower but will probably be in the ballpark, depending on the state you live in and the complexity of your tax situation. You can take a look at your particular row in the State Tax worksheet (about the fourth one from the left).

I'm not sure offhand which of the tax credits you're eligible for this year have carry forwards and whether and to what extent they are refundable or nonrefundable. I'd look into that carefully as you decide what to do.

Also, if you're in the 22% now and later, then you sort of have to make a decision about what you think rates are going to do in 2026 and the rest of your life in order to estimate what your future rate will be (and from there how much to convert this year).

 

[joesxm3]

I was thinking after I wrote this.

The extra state tax is about $300 if I subtract the credit I would have lost. So not that big of a deal.

I might get pushed over the state AGI limit but if I don't I think I will convert another $25,000 anyway.

After that I will be close to all T-bills in my TIRA and moon shot stuff in my ROTH. Index funds and more conservative stocks and speculative biotech in my taxable.

RMD is really not my problem. The big future hit is three years of series I bond maturing. I am getting a nice rate but I think I may have to sell some early to stay in the 22% or 24% brackets.

 

[Sunset]

.....

The concept that I have not seen discussed much is how much weight to give to the idea that converting stocks that I like to think will really grow fast might be a good idea even if it is at the higher current rate. That is, if my TSLA goes to the moon after robo-taxi and robots, it would be best in the ROTH

..

This is a separate issue.
IF you knew which stocks would go to the moon, then the best action would be to invest every account fully in those stocks.

 

[pb4uski]

I think it is well established for tax efficient placement that fixed income should go into tax-deferred accounts since interest is ordinary income as are tax-deferred account withdrawals. Then, if tax-deferred balances exceed total fixed income then stocks included in tax-deferred accounts is suboptimal because it effectively converts qualified dividends and long-term capital gains that are taxed at lower rates into ordinary income that is taxed at higher rates.

I agree it would make sense to carry growth stocks in a Roth and value stocks in taxable accounts. And of course, if you have foreign equities those should be invested in taxable accounts because the credit for foreign taxes paid gets wasted if foreign equities are held in tax-deferred ot tax-free accounts.

 

[copyright1997reloaded]

...

The Case Study Spreadsheet (CSS) mentioned above is already set up to do 2023 taxes. The current version is at https://forum.mrmoneymustache.com/f...dy-spreadsheet-updates/msg3198094/#msg3198094

If you open it in Excel and follow the instructions in the first tab, you'll get a very useful marginal rate graph on the Calculations tab starting about cell F82. It's set up by default to compare marginal and effective total tax rate (federal plus state) across a variety of Roth conversion numbers. You can enter values in P83 and P84 to examine areas of the graph in greater or broader detail.

The CSS is in general very capable and accurate on federal taxes. The quality of the state tax calculations is generally lower but will probably be in the ballpark, depending on the state you live in and the complexity of your tax situation. You can take a look at your particular row in the State Tax worksheet (about the fourth one from the left).

I'm not sure offhand which of the tax credits you're eligible for this year have carry forwards and whether and to what extent they are refundable or nonrefundable. I'd look into that carefully as you decide what to do.

Also, if you're in the 22% now and later, then you sort of have to make a decision about what you think rates are going to do in 2026 and the rest of your life in order to estimate what your future rate will be (and from there how much to convert this year).

At one point in the semi-distant past I modified this spreadsheet to gerenate the State "Gross Tax" value found on the State Tab (cell D17 in the latest version) for EVERY state at once, which I added as an extra (I think) column on that sheet. I did so because I was trying to figure out "desirable" states (other than just those who tax nothing) in terms of where to move after retirement. Of course, I have NO IDEA now what I did with that version of the spreadsheet. Ugh.