At what point did you stop doing Roth conversions?

[googily]

Anyone want to hazard a guess at what the income levels for the 15% and 25% brackets might be in 2026 when everything reverts? (both MFJ and single?)

I've been converting well into the 24% bracket the past few years (still working), and keep going back and forth as to whether to keep doing them that high until the brackets revert (which also happens to be the year I'll start survivor SS). I would likely be in the minimum 28% bracket when RMDs start, but that's way way down the road, and with no direct heirs, I don't want to get too wild with prepaying taxes.

No easy answers!

 

[RunningBum]

Thank you so much for the detailed response!
Mom recently reduced her working hours/income and will likely retire altogether next year. Something else to factor. If we made a blanket statement that her income is $0 next year, is there some simple math I can explain this to her? She relies on us for decisions like this, last thing she would want to investigate herself

Thanks again!

Edit: she has about $400k cash and I think around $100k in Roth. Will have to double check, but it’s roughly around those figures

I gave you the tool to do the calculations. Wouldn't it be better if you ran the numbers and told her the findings rather than say Some Guy On The Internet (SGOTI) gave you the numbers?

It's worth doing the numbers for this year too, since you still have time to do a conversion. It wouldn't be as much as next year, but since I'm almost certain it wouldn't work out to convert her entire account over the next few years, every little bit helps.

 

[Gotadimple]

Thank you so much for the detailed response!

Edit: she has about $400k cash and I think around $100k in Roth. Will have to double check, but it’s roughly around those figures

In addition to the info you got from Runningbum, you need to consider your mother's tolerance for an increase in her Medicare Part B/Part D premiums. There is an income limit that drives these premiums higher. So the goal, overall is to manage RMDs and Conversions so that she doesn't hit IRMAA, or if she does it is tolerable.

https://www.medicare.gov/your-medicare-costs/part-b-costs

 

[patela6]

Thanks. Much appreciated. Will run the numbers

 

[patela6]

Great point. She will not want to pay Medicare premiums at all…

 

[H2ODude]

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...

This is pretty much what my strategy has been. 70 now, and have been Roth converting the amount that would be our estimated SS and the estimated
RMD's ever since retired at 60. So things pretty much keep a smoothed tax cost and bracket. It has put us right up to the end of the 22%. I'm not good at predicting tax changes so it seemed as reasonable as anything. What's surprising is that while the Roth has grown substantially, the tIRA is still rocking along about at same level as when I started. Oh well. Good for the heirs, we spend all we can on things that have any meaning. When the RMD's kick in, it will start rebuilding our taxable account or increase charitable.

 

[RunningBum]

Great point. She will not want to pay Medicare premiums at all…

IRMAA should be a factor in the calculations, but if she can save $5000 but pay $1000 in IRMAA she should do it.

 

[Austin704]

If the money being used to pay taxes is cutting into other priorities, that's an issue.

You need to enjoy your life NOW and not sacrifice too much for future marginal tax savings-savings that you might never see given the uncertainties of mortal existence.

Thanks for this... It's a balancing act, for sure. I'm convinced that paying the taxes today and letting the Roth grow tax-free is the optimal financial move but sending the IRS those quarterly tax payments is painful.

I like the idea of scaling it back a bit, maybe for a year or two. Truth is that some of my "other priorities" probably aren't smart money, like replacing my 14-year old pickup truck with something newer. It runs fine and meets my needs.

 

[Austin704]

Austin704… I seems we are in a similar situation. Both IORP and Pralana have suggested full conversion of IRA to Roth (in 24% bracket) before TCJA sunsets. So far I’ve only gone up to 22.

Here’s a few things to consider:

Great ideas. Thank you!

 

[Exchme]

Austin704… I seems we are in a similar situation. Both IORP and Pralana have suggested full conversion of IRA to Roth (in 24% bracket) before TCJA sunsets. So far I’ve only gone up to 22.
Here’s a few things to consider:
- run the calculations every year. After a few conversions the benefit of them will likely be reduced and you can then opt to stop. Or slow down.
- work backwards from RMD to determine when to stop. Estimate your SS and other income at 72 and how much of an RMD you can tolerate for tax purposes. Once you have that balance, determine how much you need to reduce your IRA balance to get there.
- hold your bonds in IRA to slow down the growth
- do a bunch of conversions in these early years, then after 59.5 you can then take small distributions later to keep it down. Or do small conversions.
- figure out the number where you get “control” over your IRA balance and work towards it. Control in this case means that you can withdraw or convert the gains each year, tax efficiently, and keep the balance from growing.

Converting everything by 2026 sounds like an odd recommendation. There will be zero/low tax brackets later that can be filled up with small conversions/RMDs. Check to make sure you are using the same stock/bond asset allocation in each account. Otherwise the programs simply favor the account with the highest stock percentage.

The only program I know of in the free/low cost tier that can handle different allocations in various types of accounts while holding the overall portfolio asset allocation constant is the beta of Bogleheads Retiree Portfolio Model spreadsheet. The tax model in RPM is not nearly as strong as Pralana Gold's though, so there is a trade-off.

 

[Brat]

I just ran the numbers for 2021... we are over the 19% bracket. No Roth conversion this year as I would rather keep the 22% invested.

 

[RetireBy90]

I just ran the numbers for 2021... we are over the 19% bracket. No Roth conversion this year as I would rather keep the 22% invested.

Just another way to look at it, all we (you and I) are doing is running an investment fund for Uncle Sam. That 22% or whatever his claim is, is his money, not yours. I changed my net worth tracking to deduct 28% from my TIRA assets to account for federal and state tax claims I’m custodian for.

Just wish I could get them to pay me the 1% fee eac h year advisors charge.

 

[GrayHare]

Unless I missed it, no one mentioned P/E ratio compared to historic norms as a conversion decision factor. If your tIRA is mostly invested in equities, and those equities are now priced above their historic P/E norms, if you convert now you are risking paying tax on an overly high valuation. Ideally, you want to convert more when your tIRA asset values are relatively lower, less when those values are higher. Getting in your time machine and converting lots more back in 2009 or 2010 would be even better.

 

[tony554]

I gave you the tool to do the calculations. Wouldn't it be better if you ran the numbers and told her the findings rather than say Some Guy On The Internet (SGOTI) gave you the numbers?.

I scrolled back through this thread and don’t see that calculator that you referred to. Can you point me to it, please? I’m looking for a good one to help model what to do (or not) with conversions. This conversation is excellent and has given me a lot to think about.

 

[mountainsoft]

I will be converting the last $25K of my traditional IRA to my Roth in January. We expect to be in the same 12% tax bracket after retirement, but I would rather pay the taxes now. Tax rates will likely increase in the future, and lowering our taxable income will allow us to qualify for more Obamacare subsidies, as well as a reduction on our property taxes. It may also reduce the amount of SS that is taxable.

 

[SevenUp]

I scrolled back through this thread and don’t see that calculator that you referred to. Can you point me to it, please? I’m looking for a good one to help model what to do (or not) with conversions. This conversation is excellent and has given me a lot to think about.

Don't know which one was referenced, but there are several decent ones. See the "using a spreadsheet" section of Roth IRA conversion - Bogleheads for a couple.

 

[RunningBum]

I scrolled back through this thread and don’t see that calculator that you referred to. Can you point me to it, please? I’m looking for a good one to help model what to do (or not) with conversions. This conversation is excellent and has given me a lot to think about.

Whoops, I forget to post the link!
https://www.irscalculators.com/tax-calculator is a very easy to use tax calculator.

 

[thefist]

Converting everything by 2026 sounds like an odd recommendation. There will be zero/low tax brackets later that can be filled up with small conversions/RMDs. Check to make sure you are using the same stock/bond asset allocation in each account. Otherwise the programs simply favor the account with the highest stock percentage.
.

I think it’s more of a coincidence rather than odd. The amount in there can be done by then. I read the results as get it done quickly for the highest benefit. I asked the Pralana author about the result, specifically the lost years of zero-12% bracket, and he just stood by the optimization algorithm.

The warning about asset allocation is correct. The software is quite sensitive to this. I don’t use the same AA in tax favored and taxable. Also, with all bonds in IRA, the conversions alter the AA quickly, rather than the glide path the software would use. I’m not sure how to fix this other than a rerun at the beginning of each year. I’ll try a case with Roth and IRA AA the same and see what it does.

 

[Exchme]

I think it’s more of a coincidence rather than odd. The amount in there can be done by then. I read the results as get it done quickly for the highest benefit. I asked the Pralana author about the result, specifically the lost years of zero-12% bracket, and he just stood by the optimization algorithm.

The warning about asset allocation is correct. The software is quite sensitive to this. I don’t use the same AA in tax favored and taxable. Also, with all bonds in IRA, the conversions alter the AA quickly, rather than the glide path the software would use. I’m not sure how to fix this other than a rerun at the beginning of each year. I’ll try a case with Roth and IRA AA the same and see what it does.

With a great deal of fiddly effort, you can manually adjust the asset allocation of each type of account up to 4 times in Pralana, so you could start with the program a few percent low on the overall stock percentage and let it rise for several years until stocks are the same amount too high, then adjust. I would not recommend trying to do a lot of case study work this way, it takes forever and you can't use the program's Roth optimizer, you have to set a rule for Roth Conversions (tax bracket or IRMAA tier).

I believe the Pralana developer is working on adding the tax efficient asset allocation option and more Roth Conversion choices, so you can change strategies at different times. That's needed in order to be able to do big Roth Conversions at first and then taper off.

 

[RetireBy90]

Converting everything by 2026 sounds like an odd recommendation. There will be zero/low tax brackets later that can be filled up with small conversions/RMDs. Check to make sure you are using the same stock/bond asset allocation in each account. Otherwise the programs simply favor the account with the highest stock percentage.

.

We are in situation where we will have income throughout with 3 small pensions and SS so no chance for zero or low for us. Converting a substantial portion before current rates expire will allow us to avoid large RMDs. Plan is to use QCD for remaining TIRA. I guess my point is many different situations so each needs to be considered on individual situation.

 

[camfused]

I've stopped because I now will have to start paying for the inlaws to be in assisted living (they are poor enough to have no money, but not poor enough to get much assistance), which means I need to sell taxable stocks to generate cash. This income increase causes me to use up the buffer between our income and the MAGI that I was using for Roth conversions.

Yeah, I could just pull TIRA funds to pay for it, but there are complicated (personal) reasons I am not going that path.

Oh well, maybe I can start up again in a few years when they both have passed.

 

[BadgerNCarolina]

Hi all - so sorry for the basic question, and I'm sure it's somewhere on this site, but struggling to find it so I was hoping I could ask directly here. Previous lurker, first post, so please be gentle.
When you all talk about doing a conversion to the 'top of the 24% bracket', for example, can we talk real numbers? Are you saying, for example (assuming married, filing jointly):
- Top of the 24% bracket is $329850.
- Your AGI for 2021 is $300000.
- You convert $29850 from Traditional to Roth and pay the 24% tax on that $30k?

Oh - and are there limits to conversion? I know there are limits to contribution, but wasn't sure about conversion.
Thanks!!

 

[RunningBum]

Hi all - so sorry for the basic question, and I'm sure it's somewhere on this site, but struggling to find it so I was hoping I could ask directly here. Previous lurker, first post, so please be gentle.
When you all talk about doing a conversion to the 'top of the 24% bracket', for example, can we talk real numbers? Are you saying, for example (assuming married, filing jointly):
- Top of the 24% bracket is $329850.
- Your AGI for 2021 is $300000.
- You convert $29850 from Traditional to Roth and pay the 24% tax on that $30k?

Oh - and are there limits to conversion? I know there are limits to contribution, but wasn't sure about conversion.
Thanks!!

First, taxable income is the target, not AGI, in this case. The standard deduction would subtract $25,100 from that $300,000.

Second, if there are any qualified dividends or LTCGs in that $300K, they are taxed at a different rate.

So if you are taking the standard deduction and have $24.9K in qualified dividends, you have $300K-$25.1K-24.9K = $250K of regular income. That leaves you with $79,850 you can convert at 24%. Note that there may be an additional QDivs/LTCG tax at that income level, but that's a different topic.

It's a different story when people are talking about going to the top of the 12% bracket. Usually what they mean is they want to keep from having LTCGs and QDivs taxed, which means their taxable income target is $80,800 ($40400 for singles). Note that this is slightly different from the top of the 12% bracket. So if they have, say, $90K AGI, $20K of that QDivs, and take the std deduction, they can convert $15,900. $80,800 target + $25,000 StdDec - $90,000 income = $15,900. Note that the amount of QDivs really isn't important here.

And another different story for the ACA subsidy, which uses MAGI. For that case you would use the AGI number before deductions, and adjust for any modifications for ACA. This year and next there is no cliff, but when there is one, the cliff (400% FPL) is what to keep MAGI under.

 

[RunningBum]

No limits on Roth conversions.

 

[BadgerNCarolina]

Thanks RunningBum - SUPER helpful. First, thanks for the correction on the income component. Next - really great to understand the 12% vs other brackets, it's all coming together now !
My early calculations (very early, I know) are that I may have overestimated taxes this year and could be getting a refund of close to $5k. I'm considering converting the amount that gets me close to $0 owed/refunded this year, then be more intentional in future years.