Become Hi and Lois' Financial Advisor

[pb4uski]

^^^ And Hi's SS will make their TI and taxes more, right?

 

[Al18]

Yes. In my previous, I did not add his SS.

 

[Dtail]

If that's the case then Lois is looking at the wrong things in deciding whether it is beneficial to do Roth conversions now or in the near future, so unfortunately, we can't be of any help to her.

The only reason to do Roth conversions now is if the tax cost now, measured by the incremental tax rate on conversions, is the same or less than either the expected incremental tax rate on future RMDs or the incremental tax rate on withdrawals by beneficiaries who inherit said tIRAs.

More of a general question.
If one is in the 12% tax bracket and already taking SS and then the marginal tax rate of taking a Roth conversion is 20-22% due to increased taxation of SS and the expected future tax rate without conversions could be 12% for some years of RMD's, but 22% in later years.
Then what is the decision?

 

[TheWizard]

More of a general question.
If one is in the 12% tax bracket and already taking SS and then the marginal tax rate of taking a Roth conversion is 20-22% due to increased taxation of SS and the expected future tax rate without conversions could be 12% for some years of RMD's, but 22% in later years.
Then what is the decision?

It's trickier then...

 

[SevenUp]

More of a general question.
If one is in the 12% tax bracket and already taking SS and then the marginal tax rate of taking a Roth conversion is 20-22% due to increased taxation of SS and the expected future tax rate without conversions could be 12% for some years of RMD's, but 22% in later years.
Then what is the decision?

Depends on where you are in that 22.2% band. See Taxation of Social Security benefits - Bogleheads for more.

 

[junkanoo]

I think that high marginal rate is due to the phase-out or phase-down of two things:
1) the 0% LTCG rate going to 15%
2) the $6000 senior deduction going to a lower value

So yes, it's possible to contrive a situation where your actual marginal rate is higher than your top tax bracket.

But in my case, for example, I'm fully phased out of both of those tax breaks, filing single with AGI around $190k with no Roth conversion. Adding a Roth conversion of $15k gets taxed at a true 24% marginal rate and avoids the next higher IRMAA tier...

First, apologies to all for my slow response.

I agree about those $2K bumps where the math gets screwy. But, this isn't that as that entire $50K Roth would be at 30% and if another $100 dollars was added of ordinary income, it would still be taxed at 30%.

However, let's say my interpretation is wrong and that $50K math should be considered contrived. Then that raises the question of ignoring the math on the Roth Conversion and, instead, consider Hi and Lois' entire tax bill. After all, they did a $50K Roth conversion in 2025, when their tax bill was $22,698. Now, Lois doesn't want to do a Roth Conversion (subject to her financial advisor's advice) when their tax bill would be $20,264, more than $2K lower. So ... should she just ignore the odd math and just do the conversion?

 

[Al18]

In post #9 - I explained how you could lower your taxes on the conversion.

Another option is to only convert $40K this year.

Or you could sell more stock from your taxable account. You could buy an iBond from Treasury Direct (max $10K per year per person). The interest rate would adjust every 6 months to account for inflation, and the iBond will pay interest for 30 years. You don't pay any interest on the taxes until your redeem the iBond. You need to hold the iBond for 1 year, but can cash in the iBond anytime afterwards.

 

[junkanoo]

You are loosing some of the 6K per person over 65 tax break, because your taxable income is $158,500 or $8,500 over the limit. If you reduced your LTCG from $60K to $50K (by carefully choosing those taxable stocks/funds to sell that did not appreciate as much), then your AGI would be $190K, taxable $147.3K your total Federal tax would be $18,443 which is an effective tax rate of 9.71%.

Assume that the $60K was carefully selected ... so the $60K is simply the $60K with no reduction available.

They need that 60K to live on and so they are not deferring needed repairs etc. for a future date. Again, all secondary to the issue at hand on the Roth conversion.

 

[junkanoo]

In post #9 - I explained how you could lower your taxes on the conversion.

Another option is to only convert $40K this year.

Or you could sell more stock from your taxable account. You could buy an iBond from Treasury Direct (max $10K per year per person). The interest rate would adjust every 6 months to account for inflation, and the iBond will pay interest for 30 years. You don't pay any interest on the taxes until your redeem the iBond. You need to hold the iBond for 1 year, but can cash in the iBond anytime afterwards.

Converting $40k, doesn't change the conversion math percentage. The $40k would still cost an incremental $12,096 (which is still 30%) on the $40k.

Again, the 60K LTCG fits the couple's needs for income without a big tax bill. *Not* getting income from an iBond doesn't. Even worse when you are now going to have them sell taxable assets to potentially *not* get any income return for 30 years. Don't let the tax tail wag the dog.

Additionally, their Taxable account has been growing at 8% (as mentioned) so that 60K LTCG just means that it is growing slower. This will change when Hi turns 70, stops pulling from their taxable account and starts SS.

 

[junkanoo]

If that's the case then Lois is looking at the wrong things in deciding whether it is beneficial to do Roth conversions now or in the near future, so unfortunately, we can't be of any help to her.

The only reason to do Roth conversions now is if the tax cost now, measured by the incremental tax rate on conversions, is the same or less than either the expected incremental tax rate on future RMDs or the incremental tax rate on withdrawals by beneficiaries who inherit said tIRAs.

Agreed. Let's look.

I decided to look at their situation at age 87. Hi lives until the last day of that tax year (just to make things simple), so (due to compound interest and growth) this is when their tax concerns (MFJ) are at their max.

The methodology/assumptions is to keep the growth we decided in their accounts the same over the years (8 percent). Another assumption is that their pensions and SS keep up with inflation (which I've selected at 3.4%), nothing more, nothing less. So, for example, Lois's pension of 70K stays static. The only things that don't stay static is their investment account growth along with Hi's pension plan which is fixed (no COLA adjustments).

Therefore, his small pension of $3k is worth $1,438 in 2026 dollars (22 years out). Their $1.8 million T-IRA accounts ($900k apiece in 2026) has a $377,675 RMD 22 years out, which equates to $180,995 in 2026 dollars. Naturally, this has been adjusted for all the other prior RMDs. I used Schwab's RMD calculator for the math.

Charles Schwab

This table shows the result when they are both 87 (in 2026 dollars).

Type of Income	Amount Received	Taxed At	Federal Income Tax
Excluded Social Security (untaxed 15% of total)	$ 13,500	0%​	$ -
Taxable SS Against Standard Deduction	$ 35,500	0%​	$ -
Taxable SS Against 10% bracket	$ 24,800	10%​	$ 2,480
Taxable SS Against 12% Bracket	$ 16,200	12%​	$ 1,944
Pension against 12% Bracket	$ 59,800	12%​	$ 7,176
Pension against 22% Bracket	$ 11,638	22%​	$ 2,560
RMDs against 22% Bracket	$ 98,962	22%​	$ 21,772
RMDs against 24% Bracket	$ 82,033	24%​	$ 19,688
"Gross" Income & Total Fed Taxes	$ 342,433		$ 55,620
Adjusted Gross Income (AGI)	$ 328,933
Effective Tax Rate based on AGI			16.9%​
Taxable Income	$ 293,433
Effective Tax Rate based on Taxable Income			19.0%​
RMDs (180,995) as percent of taxes attributed to them			22.9%​
Incremental IRMMA (over base rate)	$ 6,735
Penalty (12,463 - 8,407) assigned to RMDs. Assumes Roth conversions would lower IRMMA to the next lower level.	$ 4,056
RMDs (180,995) as a percent of taxes attribute to them + Assigned IRMAA Penalty			25.1%​

This result shows that - even by assigning the highest tax brackets to Required Minimum Distributions and assuming that (doing Roth conversions) would have lowered IRMAA penalties by a bracket - RMDs + IRMAA penalties would still be around 5% lower than the cost of the Roth Conversion for the couple in 2026.

Big picture: their needs in 2026 was a gross Income of $153,000. Their equivalized Gross Income 22 years later (in 2026 dollars) is $342,000. Their after-tax income is far better than an equivalized after-tax income in 2026 dollars too. This allows them to do things like gifting to their children/grandchildren and/or augment their taxable account.

Each year, consider what has changed and always consider what might be more optimal. That said, short of tax increases, not spending another dime on Roth Conversions will still result in a positive outcome for this couple.

Or ... do you see it differently?

 

[SevenUp]

...
Without the large amount of LTCG that leads to a 27% marginal tax rate in some zone, and if they are past the $6K/person senior deduction phase-out, they may be subject only to ~24% tax rate after age 75.

If so, that reduces the impetus for Roth conversions now at higher marginal rates.

This table shows the result when they are both 87 (in 2026 dollars).

Type of Income	Amount Received	Taxed At	Federal Income Tax
		​
		​
		​
		​
		​
		​
		​
RMDs against 24% Bracket	$ 82,033	24%​	$ 19,688
			​
			​
			​
			​

This result shows that - even by assigning the highest tax brackets to Required Minimum Distributions and assuming that (doing Roth conversions) would have lowered IRMAA penalties by a bracket - RMDs + IRMAA penalties would still be around 5% lower than the cost of the Roth Conversion for the couple in 2026.

That looks reasonable. 24% later vs. 30.24% now might still be a wash or even favorable, due to the way "Traditional plus taxable" vs. Roth works, especially when heirs' situations might affect things, but without that sharper pencil "don't convert now" seems OK.

 

[TheWizard]

...Or ... do you see it differently?

Yes, I see it differently.
I look at "mandatory income" as being taxed at the average effective rate for all that income.
Mandatory includes everything that I can't reasonably forego: 85% of SS, lifetime pension/annuity income, RMD income, dividends and interest income.
The average effective rate for all that was just under 18% for me last year. I should probably make a tweak for qualified dividends @15% but I'm not going to worry about it.

The only other income I have is optional: Roth conversions and part-time employment, which is taxed at my marginal rate of 24% Federal or possibly 32% if I'm not careful. But I've had zero employment income since 2016 and I plan my Roth conversions carefully...

 

[pb4uski]

...Or ... do you see it differently?

I absolutely see it differently. I think you are overcomplicating the analysis and your numbers aren't right, so let's simplify it.

Base case is $20k of SS and $70k of pension with MFJ over 65. Using dinkytown, that $90k of income in 2026 would result in $4,247 in federal income tax.

Now, let's add $50k of Roth conversions. Using dinkytown, that $140k of income in 2026 would result in $10,247 in federal income tax. The $6,000 increase in income tax is 12% of the $50k of Roth conversions.

So now, to simulate the impact of RMDs, lets replace the $50k of Roth conversions with $162k of RMDs. Using dinkytown, that $252k of income in 2026 would result in $36,407 in federal income tax. The $32,160 increase in income tax is 19.9% of the $162k of RMDs (probably a mix of 12% and 22%).

So it looks to me like you end up paying 19.9% later vs paying 12% now. And as you have noted, there are other second order impacts like IRMAA.

I calculated your RMD a bit differently. $1.8m for 20 years at 8% would be $8,389,723 ($1800000*(1+8%)^20). $8,389,723 discounted for 20 years at 3.4% would be $4,298,697 in 2026 $$$ (($1800000*(1+8%)^20)/(1+3.4%)^20). The $4,298,697 divided by 26.5 is $162,214 and I rounded it to $162,000.

 

[pb4uski]

More of a general question.
If one is in the 12% tax bracket and already taking SS and then the marginal tax rate of taking a Roth conversion is 20-22% due to increased taxation of SS and the expected future tax rate without conversions could be 12% for some years of RMD's, but 22% in later years.
Then what is the decision?

I'm in that exact situation in that at RMD time I expect that some ot my RMD will be taxed at 12% and additional at 22%... probably 17% on average.

I'm closer to 85% of SS being taxable before doing Roth conversions so my effective rate on Roth conversions in 2026 is ~15%. As long as my effective rate is the same or less than the 17% expect to pay later I'll keep doing Roth conversions.

 

[SevenUp]

Yes, I see it differently.
I look at "mandatory income" as being taxed at the average effective rate for all that income.
Mandatory includes everything that I can't reasonably forego: 85% of SS, lifetime pension/annuity income, RMD income, dividends and interest income.
The average effective rate for all that was just under 18% for me last year. I should probably make a tweak for qualified dividends @15% but I'm not going to worry about it.

That makes sense, although it has no impact on whether Roth conversions appear favorable or not.

The only other income I have is optional: Roth conversions and part-time employment, which is taxed at my marginal rate of 24% Federal or possibly 32% if I'm not careful. But I've had zero employment income since 2016 and I plan my Roth conversions carefully...

Yes, the marginal tax rate on your optional income is what is what matters. Marginal Vs Effective Tax Rates And When To Use Each describes it well.

 

[junkanoo]

That looks reasonable. 24% later vs. 30.24% now might still be a wash or even favorable, due to the way "Traditional plus taxable" vs. Roth works, especially when heirs' situations might affect things, but without that sharper pencil "don't convert now" seems OK.

In this particular situation, there is no tax drag in their taxable account (i.e., no dividends nor interest), but in other situations, that is a factor.

Again, in their specific situation, they have four children all with modest incomes. Lois will declaim Hi's T-IRA as she has more income than she needs, along with the knowledge that the four children splitting it up over 10 years (40 periods) will be taxed at a lower rate than she would be taxed at. That's a no-brainer.

However, the widow tax situation is not a no-brainer and after the dust settles on Hi and Lois' situation, I'll analyze Lois' tax situation going forward.

 

[junkanoo]

Yes, I see it differently.
I look at "mandatory income" as being taxed at the average effective rate for all that income.
Mandatory includes everything that I can't reasonably forego: 85% of SS, lifetime pension/annuity income, RMD income, dividends and interest income.
The average effective rate for all that was just under 18% for me last year. I should probably make a tweak for qualified dividends @15% but I'm not going to worry about it.

The only other income I have is optional: Roth conversions and part-time employment, which is taxed at my marginal rate of 24% Federal or possibly 32% if I'm not careful. But I've had zero employment income since 2016 and I plan my Roth conversions carefully...

Think about it more about options.

Did Lois have an option not to contribute to her teacher's pension? No.

Did Hi have an option not to participate in the SS program while at MegaCorp? No.

Did they both have the option not to participate in their 403B and 401K programs at work? Yes.

Just like someone has the option to do a Roth conversion, someone has the option NOT to participate in a deferred-tax plan. So, the tax consequence of RMDs, is the result of options taken or not taken.

Hi and Lois only have three income streams, (1) pensions, (2) SS, and (3) RMDs ... one is unlike the other two.
Again, we're looking at whether to do a Roth Conversion or not. Whether I did some "average effective rate" on the combined taxable income of SS and Pensions does not change the result. Putting RMDs in that stream DOES make a difference as it gives no tax or lightly taxed status to an income stream that could have been zero.

Put plainly, someone could have simply said no to the 401K, paid their taxes upfront and invested in a taxable account in Berkshire Hathaway (with no tax drag). Heck, if *some* had known how this (largely) bull market was going to work out, they would have done just that and fully avoided being on the Government's schedule as to when you owe taxes or potentially disadvantaging some widow.

 

[junkanoo]

I absolutely see it differently. I think you are overcomplicating the analysis and your numbers aren't right, so let's simplify it.

Base case is $20k of SS and $70k of pension with MFJ over 65. Using dinkytown, that $90k of income in 2026 would result in $4,247 in federal income tax.

Wrong. The base case is AGI of $150K. That's $17K of SS (3K is untaxed), 73K of combined pensions, 60K of LTCG.

snip...

I calculated your RMD a bit differently. $1.8m for 20 years at 8% would be $8,389,723 ($1800000*(1+8%)^20). $8,389,723 discounted for 20 years at 3.4% would be $4,298,697 in 2026 $$$ (($1800000*(1+8%)^20)/(1+3.4%)^20). The $4,298,697 divided by 26.5 is $162,214 and I rounded it to $162,000.

Perhaps it was already cocktail time when you did this, but let's look at the key mistakes.

1. No idea why you're using 26.5, that's the appropriate denominator for someone that is taking RMDs at 73 (note: this couple doesn't start RMDS until 75). The correct denominator is 14.4 when they are both 87. It needs to be applied against the prior end-of-year balance. THEN, that RMD-at-87 calculation can be converted to 2026 dollars correctly.

2. You are not accounting for the RMDs paid out as income from ages 75 onward. I did provide a link to a Schwab RMD calculator that does this correctly for you.

 

[TheWizard]

Think about it more about options.

Did Lois have an option not to contribute to her teacher's pension? No.

Did Hi have an option not to participate in the SS program while at MegaCorp? No.

Did they both have the option not to participate in their 403B and 401K programs at work? Yes.

Just like someone has the option to do a Roth conversion, someone has the option NOT to participate in a deferred-tax plan. So, the tax consequence of RMDs, is the result of options taken or not taken.

Hi and Lois only have three income streams, (1) pensions, (2) SS, and (3) RMDs ... one is unlike the other two.
Again, we're looking at whether to do a Roth Conversion or not. Whether I did some "average effective rate" on the combined taxable income of SS and Pensions does not change the result. Putting RMDs in that stream DOES make a difference as it gives no tax or lightly taxed status to an income stream that could have been zero.

Put plainly, someone could have simply said no to the 401K, paid their taxes upfront and invested in a taxable account in Berkshire Hathaway (with no tax drag). Heck, if *some* had known how this (largely) bull market was going to work out, they would have done just that and fully avoided being on the Government's schedule as to when you owe taxes or potentially disadvantaging some widow.

A few points:
1) Quite correct that contributions to tax-deferred employer plans are not generally required, but they are often said to be a good idea when an employer match is involved. Regardless, the past is history and RMDs at some level are now mandatory income.

2) I said not generally above, but my long time employer had a mandatory 5% employee contribution to their 403(b), "matched" by a 10% employer contribution. We also had the full elective contribution available as a supplemental plan.

3) Many folks had 30+ years of Ordinary Income in their working years, whether W-2 or self-employment. To somehow transition to viewing a comparable level of Ordinary Income in retirement (including RMD income) as a Bad Thing is pure horse pucky...

 

[IncomeOriented]

Lots of good ideas here.
Maybe I'm missing the point but,
Why not just spread out the conversions over 2 to 4 years to minimize the annual tax impact?

 

[Montecfo]

Best approach is to do a spreadsheet projection of income, deductions, RMDs, etc. Don't forget to adjust the standard deduction and tax brackets for inflation.

Agree on the spreadsheet. But an easier approach is to compute or select a "real" rate of return for your investments and leave your inflation adjusted pensions and all tax rates at current levels (other than ending e.g. the senior deduction).

 

[pb4uski]

Both Wizard and I and perhaps others told the OP that we see it differently and he isn't listening. You can't have a discussion with the ignorant. I'm out.

 

[TheWizard]

Lots of good ideas here.
Maybe I'm missing the point but,
Why not just spread out the conversions over 2 to 4 years to minimize the annual tax impact?

Even better, spread the conversions over ten years from age 65-75.
They have $1.8M total in tax-deferred so how much to convert each year will depend on a properly constructed spreadsheet.

As I've mentioned before, it's neither necessary nor desirable to Roth convert all of one's tax-deferred money. Note that $1M in tax-deferred at age 75 equates to around $40,000 RMD which is less than my SS income.

Additionally, it's much better to use QCDs for donations rather than paying the tax first...

 

[junkanoo]

Lots of good ideas here.
Maybe I'm missing the point but,
Why not just spread out the conversions over 2 to 4 years to minimize the annual tax impact?

I was going to say that $50K already spreads things out as that represents only 2.8% of their T-IRA assets ... but that misses the point. The key point is .... spreading something out only helps if it delivers value.

More specifically, Hi and Lois' have exactly $150K in AGI this year. This year is different from last year as they both turn 65. This means that they both get an additional senior bump to their standard deduction and are both eligible for what is being called the Senior Deduction of 6K per person that reduces for every dollar OVER 150K AGI (MFJ). So, just considering the Senior Deduction part of this, every dollar of income over 150K AGI costs them 12% (combined) until it becomes zero at 250K AGI. So, in the example given, if they did a 50K Roth Conversion, that would cost them $6,000 in deductions (6,000/50,000 = 12%).

The Senior Deduction is available for the next three years (2026-2028) for Hi and Lois. So ... the dilemma/question I raised is ... as the cost of that Roth Conversion is 30% on each dollar converted (between 1 and 50K) is it worth doing? Or is it better to not pay taxes you don't need to pay and have those funds continue providing a return of 8% (on average)?

This becomes quite the issue for those 65+ with RMD concerns and becomes even more provocative if that Senior Deduction were to become permanent and the range increases with inflation.

Hope that helps.

 

[Diogenes]

With all due respect, I don't understand why Roth conversions are so popular, or why they receive so much attention in the retirement-planning literature. Yes of course, there is merit in figuring out how to legally minimize our taxes... but it seems to me, that (1) the assumptions are speculative, and (2) the amounts in question are small.

I would humbly suggest that if Hi and Lois are hypothetically going to chat with a financial advisor, that instead of Roth conversions, they focus on things like their portfolio asset allocation, their withdrawal strategy, whether they should own a house or rent in retirement, what to do about wills/trusts/inheritance and so on.