At what point did you stop doing Roth conversions?

[2017ish]

My plan is to keep doing large conversions through 2025 unless tax situation changes. I'll re-evaluate with tax changes. Then will continue doing smaller conversions until 70 and at that point (or at 72) do QCDs with what is left. That is the plan, but of course all is subject to changing with changes in market, taxes, and life.

That's our plan and approach as well.

 

[RunningBum]

I've never done conversions. I'll probably get hammered when I have to take RMD's, but up until then I don't pay any taxes at all. So I figure it's a fair trade.

Probably not, if you actually ran the numbers, but that's your choice.

 

[Niuatoputapu]

I will stop doing them when they cease to provide a marginal tax rate arbitrage. Currently I'm projecting that to be "never", but I reevaluate regularly.

+1, but I'll add

We project minimal arbitrage while married filing jointly. Surviving spouse is the one to most likely benefit. If surviving spouse is the basis of the arbitrage, arbitrage will likely continue for some time as single rates will always be higher than MFJ. Am converting up to the edge of the first IRMAA threshold (in 22% bracket) and hope to do so until at least age 79. (Yes, I know conversions have to be on top of RMDs at and after age 72).

 

[Midpack]

I've never done conversions. I'll probably get hammered when I have to take RMD's, but up until then I don't pay any taxes at all. So I figure it's a fair trade.

It might be wise to check now while you still can, before RMDs start. If our longevity history holds, Roth conversions are projected to reduce my lifetime Fed & State taxes by over $400K. If tax rates become more confiscatory, as I fully expect, we'll save even more. So I'm glad I actually did the math before it was too late.

 

[Austin704]

Grateful to all for the discussion. Helpful to get some varied perspectives.

 

[Exchme]

Probably not, if you actually ran the numbers, but that's your choice.

Yes, SheitlQueen's response was puzzling. Everyone's goals, starting points and projections are different, so I respect that individual answers will be all over the map.

But ignoring it? The tax man is laughing.

 

[jebmke]

Stopped when my pension started. Can't remember the exact tax profile but it was also when I came to the conclusion that most of our RMDs will go to charity so will not be taxed.

 

[4legsgood]

Yes, SheitlQueen's response was puzzling. Everyone's goals, starting points and projections are different, so I respect that individual answers will be all over the map.

But ignoring it? The tax man is laughing.

Personally, I wouldn't be surprised if RMD's get eliminated some day.

 

[jj]

Yes, SheitlQueen's response was puzzling. Everyone's goals, starting points and projections are different, so I respect that individual answers will be all over the map.

But ignoring it? The tax man is laughing.

Not to put words into SheitlQueen’s mouth, a few years ago we were in the position where we paid no federal income tax (FIT) at all, but our marginal rate on the next dollar of income was 30% (27% under current rules). This was because increasing our income pushed us into paying 15% capital gains rate on our LTCG and qualified dividends and also made the extra income taxed at an additional 15% (12%). Even though we were paying very little FIT it made no sense to be converting to Roth at 30%.

We’re in a different situation a few years later and are converting up to the first IRMAA (1.4x) level. This time with way more income our marginal rate is 23.6% and worth doing.

Part of the vagaries of our wonderful tax system. Kitces has a good article on this, but it can all be modeled in TurboTax or similar.

 

[RunningBum]

Not to put words into SheitlQueen’s mouth, a few years ago we were in the position where we paid no federal income tax (FIT) at all, but our marginal rate on the next dollar of income was 30% (27% under current rules). This was because increasing our income pushed us into paying 15% capital gains rate on our LTCG and qualified dividends and also made the extra income taxed at an additional 15% (12%). Even though we were paying very little FIT it made no sense to be converting to Roth at 30%.

You wouldn't have gone from 0% to 12% or 15%. You'd have hit the 10% bracket first. Still, I get your point, 25% rate is still high, and you might also be losing some ACA subsidies. This is why I said "probably". It's worth looking whether pushing conversions all the way thru when all QDivs are taxed and then to the top of 12/15% or even 22%.

ETA: Another thing to consider is that if you are now in one of those "double" taxation points where new income is taxed at 12+15%, there's a good chance in retirement that you'll be there too. I ran projected for age 72 and over, and the first ~$3K of RMDs would be taxed at the 49.9% SS torpedo rate, then close to $7K more at 12%+15% (which may be 15+15% by then). That makes converting at 27% now worth considering.

 

[COcheesehead]

They don’t always make sense. For some of us, the lower current income has benefits too, mainly for HC costs. In the end it’s prepaying a tax that you may or may not owe. I can only predict my taxes and income with any accuracy in a two year window. Looking out 12 years and beyond and paying the tax now isn’t as clear as some make it. Taxes can go down in the future too. Roth’s may taxed. I don’t have a crystal ball.
I will revisit annually, but up to age 65, I am now 58, it likely won’t make sense for us.

 

[pjigar]

You say you are going to be in higher than 24% bracket in the future. So it is safe to assume that you are an HNI with after-tax investments and/or cash flows. There is some objective analysis you can do to project future tax bill based on projected RMD, impact on Medicare premiums, impact of taxable SS income, lost ACA subsidies, etc. but it gets complicated if you try to combine the effects of all these objective factors. Beyond that, I think it is better to distribute dollars equally in tax-differed, after-tax and Roth accounts for people like you. No one knows the future tax laws so having dollars distributed across these buckets will give you greater flexibility to control the tax bill and estate planning later. Just my two cents.


I have created a google sheet which you can leverage to analyze some of the objective factors impacting Roth conversion decision making.


PS: I am in the similar boat as you as far as the tax brackets. But we choose to stay at the top of the 12% bracket for Roth conversion because there is a hidden tax of "lost subsidies" worth 8.5% of AGI even at 12% bracket so effectively I am already paying 12+8.5=20.5% "tax" for conversions which is still less than my future tax bracket which will be 22+%. YMMV.

 

[Exchme]

Not to put words into SheitlQueen’s mouth, a few years ago we were in the position where we paid no federal income tax (FIT) at all, but our marginal rate on the next dollar of income was 30% (27% under current rules). This was because increasing our income pushed us into paying 15% capital gains rate on our LTCG and qualified dividends and also made the extra income taxed at an additional 15% (12%). Even though we were paying very little FIT it made no sense to be converting to Roth at 30%.

We’re in a different situation a few years later and are converting up to the first IRMAA (1.4x) level. This time with way more income our marginal rate is 23.6% and worth doing.

Part of the vagaries of our wonderful tax system. Kitces has a good article on this, but it can all be modeled in TurboTax or similar.

Absolutely, the case studies I've done for us have weird stuff like this, where sometimes there are years with conversions to the top of 24% or even 32%, then later there are years limited to get an ACA premium credit or convert only to the top of the 0% capital gains or the SS tax hump or an IRMAA tier. Basically have to re-plan each year as circumstances and tax laws change.

The oddity is being confident in doing no analysis.

 

[Exchme]

Personally, I wouldn't be surprised if RMD's get eliminated some day.

Oddly, as long as your heirs have to take the money out and pay taxes eventually, the very best estate plan for your heirs' benefit might be for you to start taking the money out in an amortized way. In other words, it might be best to follow a withdrawal plan that looks a lot like taking RMDs!

 

[4legsgood]

Oddly, as long as your heirs have to take the money out and pay taxes eventually, the very best estate plan for your heirs' benefit might be for you to start taking the money out in an amortized way. In other words, it might be best to follow a withdrawal plan that looks a lot like taking RMDs!

I was sad when the 10 year withdrawal for heirs change was made, but it opened my eyes to the fact that rules regarding taxation of retirement accounts can and will be changed. I'm just trying to get my taxable, tax-deferred, and roth into more equal parts and stay below real crazy tax rate currently.

 

[COcheesehead]

Oddly, as long as your heirs have to take the money out and pay taxes eventually, the very best estate plan for your heirs' benefit might be for you to start taking the money out in an amortized way. In other words, it might be best to follow a withdrawal plan that looks a lot like taking RMDs!

We inherited an IRA and have been taking withdrawals, so far we have been able to mange the taxation. Next year it should be at 0. So your heirs may or may not be taxed. It just depends.

 

[Gumby]

I don't care what happens to the IRA money when I'm gone. There will likely be a lot of it, and if my heirs have to pay tax, so be it. They will have inherited quite literally infinity times what I inherited, so they should just pay and be grateful.

 

[TheWizard]

I become 72 early next year so my last significant Roth conversion will be next month.
My Roth conversion amount this year will be ruffly the same as my RMD amount next year, so that keeps taxes and IRMAA tier about the same...

 

[MarieIG]

I was sad when the 10 year withdrawal for heirs change was made, but it opened my eyes to the fact that rules regarding taxation of retirement accounts can and will be changed. I'm just trying to get my taxable, tax-deferred, and roth into more equal parts and stay below real crazy tax rate currently.

Ditto.

 

[Exchme]

I don't care what happens to the IRA money when I'm gone. There will likely be a lot of it, and if my heirs have to pay tax, so be it. They will have inherited quite literally infinity times what I inherited, so they should just pay and be grateful.

To each his own, but I would rather do what I can to minimize the government's take. As they say, I'll pay what I owe, but ain't leaving a tip.

 

[MarieIG]

As it stands now, I'm looking at conversions in 22, 23, 24 and maybe 25.

Will reassess in 26.

I will then look at spending down/ withdrawing from the regular IRA, as I don't see it as much of a benefit to heirs (other than spouse who is primary heir) over taxable accounts.

I will look at making qualified charitable contributions from the IRA and also look at that to potentially fund LTC expenses.

 

[jj]

You wouldn't have gone from 0% to 12% or 15%. You'd have hit the 10% bracket first. Still, I get your point, 25% rate is still high, and you might also be losing some ACA subsidies. This is why I said "probably". It's worth looking whether pushing conversions all the way thru when all QDivs are taxed and then to the top of 12/15% or even 22%.

I have just looked back at my 2016 MFJ return. AGI was $158,942 with taxable income at $118,938. This is squarely in the middle of the 25% tax bracket. Total FIT paid was $0. Yes, zero.

We have never qualified for ACA subsidy - nor should we IMHO with our level of assets - but this year included an $8750 HSA deduction (reducing AGI from $167,692), foreign tax credit, itemizing for property taxes on two houses/unsubsidized medical, and residential energy credits for solar that we added in 2016.

The US tax code is very strange.

 

[COcheesehead]

I have just looked back at my 2016 MFJ return. AGI was $158,942 with taxable income at $118,938. This is squarely in the middle of the 25% tax bracket. Total FIT paid was $0. Yes, zero.

We have never qualified for ACA subsidy - nor should we IMHO with our level of assets - but this year included an $8750 HSA deduction (reducing AGI from $167,692), foreign tax credit, itemizing for property taxes on two houses/unsubsidized medical, and residential energy credits for solar that we added in 2016.

The US tax code is very strange.

You may want to revisit the ACA premium credits. Biden raised the cap to I believe $300,000. Many more folks will be eligible for reduced HC payments, not as a financial subsidy, but as a premium credit. Which is really just accelerating the tax deduction you might get into a monthly credit vs waiting for a year end tax filing. It’s all so simple.

 

[Sunset]

OP - I would leave $250K in my IRA in today's dollars, unless I could do conversions for 0% tax.

I would view this as medical insurance money, because many folks end up having high medical costs or nursing home costs. At that point, one can withdraw from the IRA and offset the taxes by the medical deduction that would otherwise go unused.

 

[jj]

You may want to revisit the ACA premium credits. Biden raised the cap to I believe $300,000. Many more folks will be eligible for reduced HC payments, not as a financial subsidy, but as a premium credit. Which is really just accelerating the tax deduction you might get into a monthly credit vs waiting for a year end tax filing. It’s all so simple.

Yes, thanks I realized that we would start to qualify for ACA premium subsidy, and I have just applied through Healthcare.gov for 2022 and will receive an estimated $390/month PTC. First time ever!