DB Pension and ROTH conversions?

[Slim11]

I am similar, 52 , 120k non inflation ajusted pension. From my calculations it was almost a wash doing the conversions. But, it could save me some taxes down the line. Mostly, it will be left to my child when I pass. So I am doing conversions in the 24 percent range, but becasue I am in nj, I am converting only the part of my 457 plan that was allready taxed by nj. Otherwise it would cost another 6 percent to do the conversions. So take into consideration if you have to pay state taxes where you live also.

 

[nun]

Are you filing as single? I ask as if so I would check again your calculations for IRMAA going forward. For a single filer you will need to keep your AGI not too much higher than $130k to stay in the 1.4x IRMAA zone in 2026 (this is my situation). Given your pension of $50k, and a $100k Roth conversion I don't see how you're going to stay in the 1.4x zone, especially with rent and other income. Now if you're married this is a different story.

Yes, I'm definitely in the 2x zone with the look back years and I can moderate my conversions in the coming years. But I think the IRMMA hit will be worth the larger ROTH conversions in the long run.

 

[nun]

I am similar, 52 , 120k non inflation ajusted pension. From my calculations it was almost a wash doing the conversions. But, it could save me some taxes down the line. Mostly, it will be left to my child when I pass. So I am doing conversions in the 24 percent range, but becasue I am in nj, I am converting only the part of my 457 plan that was allready taxed by nj. Otherwise it would cost another 6 percent to do the conversions. So take into consideration if you have to pay state taxes where you live also.

My DB pension is free of state tax, but I have to pay 5% state tax on other income and that obviously includes ROTH conversions. I'm just going to put my head down and convert up to the top of the 24% bracket with the deciding factor being the 40% income tax my foreign beneficiaries would pay if they had to take out the money from a regular IRA within 10 years.

I have about 40% of my investments in either ROTH or after tax general investment accounts already which I think is a larger proportion than many retirees so I'll just keep plugging away. I had to take my DB pension at 55 to get the associated healthcare benefits, but I can defer SS and my TIAA Traditional, although that TIAA is just more tax deferred income. These are ultimately "first world problems" that I'm glad I have

 

[junkanoo]

Yes, I'm fully retired and DB pension and rental income cover my spending. I did some ROTH conversions about a decade ago and then got some part time consulting work and contributed to a ROTH solo 401k, but that work is winding down. I'm sure the brackets will change, but rates might also increase; it's just another set of variables. When SS, and the similar benefits I'll get from another country, start I'll be getting at least $75k maybe close to $100k income that I can't turn off. Taxes are inevitable and so I figure paying 24% marginal tax now isn't a bad deal. There's the wrinkle that some of my heirs are high earners and some live in another country with high taxes so taking money from an inherited IRA would lead to their marginal tax rates being far higher than 24%, but the ROTH inheritance would have zero tax impact on them.

What I bolded indicates (at least to me) that you're not really that concerned about optimizing as directionally moving the peanut forward (as a boss used to say). That seems fine to me.

As you know, you have two critical factors going against you over time:

1. You're single
2. You have Ordinary Income handcuffs

The only positive around those two things that springs to mind is using QCDs. Which only truly excel if you're first and foremost charitably minded. That too could change over time. My mom was charitably-minded but not so much my dad. However, over time and (perhaps) thoughts on mortality, he changed his mind.

A moderate use of QCDs just to get you out of the next IRMAA bracket or the next marginal tax rate can be quite useful.

That said, it appears that you're in the 22% marginal tax bracket NOW, thus doing 150K in Roth Conversions to keep to the top of the 24% bracket seems more than reasonable to me. However, if you plan to move to move to a state without income taxes, that would change the math.

Btw, as gifting your heirs seems front and center to you ... perhaps yearly gifting (when in your 70's) might not be a bad approach to introduce into the mix.

 

[nun]

What I bolded indicates (at least to me) that you're not really that concerned about optimizing as directionally moving the peanut forward (as a boss used to say). That seems fine to me.

As you know, you have two critical factors going against you over time:

1. You're single
2. You have Ordinary Income handcuffs

The only positive around those two things that springs to mind is using QCDs. Which only truly excel if you're first and foremost charitably minded. That too could change over time. My mom was charitably-minded but not so much my dad. However, over time and (perhaps) thoughts on mortality, he changed his mind.

A moderate use of QCDs just to get you out of the next IRMAA bracket or the next marginal tax rate can be quite useful.

That said, it appears that you're in the 22% marginal tax bracket NOW, thus doing 150K in Roth Conversions to keep to the top of the 24% bracket seems more than reasonable to me. However, if you plan to move to move to a state without income taxes, that would change the math.

Btw, as gifting your heirs seems front and center to you ... perhaps yearly gifting (when in your 70's) might not be a bad approach to introduce into the mix.

I'm already gifting to my beneficiaries up to the gift allowance ($19k each this year) that doesn't impact my lifetime allowance and need me to file IRS forms. QCDs have crossed my mind, but many of the charities I give to don't qualify as they are overseas. I have thought about giving through a Donor Advised Fund, but the amounts don't make it sensible.

I looked back at my ROTH solo 401k that I set up when I was doing some part time consulting and in the early years I was just in the 33% marginal tax bracket, but that fell to 24% in 2018 so doing conversions at the 24% level now that my part time work is coming to an end seems sensible.

The tax that my beneficiaries will pay overseas is an important consideration, but also is the possibility that I might move to join them in that high income tax country. At least I will avoid the 5% state tax if that happens and I'll get 4 year's in that country where I will be able to make conversions without having to pay the local tax rates on foreign sourced income so I might be filling the 32% bucket at that point...OMG! I think I need to get married in this situation.

 

[Coaster4Now]

My DB pension is free of state tax, but I have to pay 5% state tax on other income and that obviously includes ROTH conversions. I'm just going to put my head down and convert up to the top of the 24% bracket with the deciding factor being the 40% income tax my foreign beneficiaries would pay if they had to take out the money from a regular IRA within 10 years......

I have about 40% of my investments in either ROTH or after tax general investment accounts already which I think is a larger proportion than many retirees so I'll just keep plugging away. I had to take my DB pension at 55 to get the associated healthcare benefits, but I can defer SS and my TIAA Traditional, although that TIAA is just more tax deferred income. These are ultimately "first world problems" that I'm glad I have

Since you are a state with income tax, probably looking at IRMAA brackets and trying to fine tune each conversion according to income
Be aware how IRMAA is calculated - if you prev itemized on federal.
State tax refunds you received in the previous year are added back into your federal, to properly calculate federal taxes.

But IRMAA MAGI counts that as income for that year, despite that it was income received in a prior year.

From how I understand it, you don't want a refund of state taxes, if you itemized on federal - if you are in IRMAA range. Or atleast acccount for that refund in your calcs for income for IRMAA MAGI

EDIT I'm sure someone will chime in if this is incorrect. And it only matters if you itemized federal and trying to avoid IRMAA income thresholds

 

[nun]

Since you are a state with income tax, probably looking at IRMAA brackets and trying to fine tune each conversion according to income
Be aware how IRMAA is calculated - if you prev itemized on federal.
State tax refunds you received in the previous year are added back into your federal, to properly calculate federal taxes.

But IRMAA MAGI counts that as income for that year, despite that it was income received in a prior year.

From how I understand it, you don't want a refund of state taxes, if you itemized on federal - if you are in IRMAA range. Or atleast acccount for that refund in your calcs for income for IRMAA MAGI

EDIT I'm sure someone will chime in if this is incorrect. And it only matters if you itemized federal and trying to avoid IRMAA income thresholds

For 2025 I'll be in IRMMA Tier 3, nothing I can do about that now. Next year I'll be applying for Medicare and a $100k ROTH conversion will put me in Tier 2 which seems sensible. I should be able to do ~$600k of conversions at ~24% (rates might change) before I hit 70 and get the income spike of SS. At that point I'll adjust the conversions to stay in the ~24% tax bracket and just keep doing that until 75. My plan is coming into focus as basically keeping my marginal tax rate at around 24% for the rest of my life...assuming I don't move overseas when IRMMA won't be an issue as I'll stop paying Part B and my marginal tax rate might spike at 35% for a few years.

 

[Coaster4Now]

For 2025 I'll be in IRMMA Tier 3, nothing I can do about that now. Next year I'll be applying for Medicare and a $100k ROTH conversion will put me in Tier 2 which seems sensible. I should be able to do ~$600k of conversions at ~24% (rates might change) before I hit 70 and get the income spike of SS. At that point I'll adjust the conversions to stay in the ~24% tax bracket and just keep doing that until 75. My plan is coming into focus as basically keeping my marginal tax rate at around 24% for the rest of my life...assuming I don't move overseas when IRMMA won't be an issue as I'll stop paying Part B and my marginal tax rate might spike at 35% for a few years.

Just be aware, that any state tax refund, if you itemized Fed, will be included in your IRMAA MAGI. Hate to be a dollar over, due to that, in IRMAA brackets.

If you don't itemize, it won't matter.

 

[Coaster4Now]

A bit off topic, but maybe not, (for projecting)
I have found that the Number Crunch Nerds spreadsheet gives me all the tax info I need to make decisions in the current year - including impacts on IRMAA and NITT. You can project things and tweak that as you go, as no one knows the future.

It's a tax planning spreadsheet - not something you'd use for 'Will I go Broke?" things.
With that said, you have to be a spreadsheet person and be willing to give some of your time to watching videos.
But all in all, my time spent since buying it early in 2025 was well worth the learning curve.

Edit: Now I have at least a plan, that of course has to be tweaked - but boy, with little effort to see projections

Edit again - there was no way that I would be able to produce a planning spreadsht that gets Taxes RMDs IRMAA and NITT into projections.

 

[nun]

At some point the spreadsheets and online tools just become exercises in changing parameters to flesh out the boundaries of the problem and you can end up fixated on the "best solution" rather than a set of ok avenues. I've come to the conclusion that keeping my marginal tax rate roughly constant at 24% is what I should do. This should avoid nasty tax spikes when RMDs start and also reduce the income tax payable by my heirs.

 

[Koolau]

When I have done spreadsheets regarding the relative value of Roth conversions, I use current account values, with the assumption that my spending, tax brackets, deductions, IRMAA tiers, etc. will all increase by the same rate of inflation. For my investments, I assume a certain return above and beyond inflation. It is probably too simplistic, but it gives me a general idea of how things will go.

One fly in the ointment is the 3.8% NIIT, which kicks in at $250,000 (MFJ) and is not inflation adjusted. I would guess that the start of the 24% tax bracket will be higher than the NIIT in 6-7 years.

Time to draft a letter to our representative and senator!!

 

[Koolau]

I am similar, 52 , 120k non inflation ajusted pension. From my calculations it was almost a wash doing the conversions. But, it could save me some taxes down the line. Mostly, it will be left to my child when I pass. So I am doing conversions in the 24 percent range, but becasue I am in nj, I am converting only the part of my 457 plan that was allready taxed by nj. Otherwise it would cost another 6 percent to do the conversions. So take into consideration if you have to pay state taxes where you live also.

How do you segregate taxed from untaxed?

 

[Alan]

I'm already gifting to my beneficiaries up to the gift allowance ($19k each this year) that doesn't impact my lifetime allowance and need me to file IRS forms. QCDs have crossed my mind, but many of the charities I give to don't qualify as they are overseas. I have thought about giving through a Donor Advised Fund, but the amounts don't make it sensible.

I looked back at my ROTH solo 401k that I set up when I was doing some part time consulting and in the early years I was just in the 33% marginal tax bracket, but that fell to 24% in 2018 so doing conversions at the 24% level now that my part time work is coming to an end seems sensible.

The tax that my beneficiaries will pay overseas is an important consideration, but also is the possibility that I might move to join them in that high income tax country. At least I will avoid the 5% state tax if that happens and I'll get 4 year's in that country where I will be able to make conversions without having to pay the local tax rates on foreign sourced income so I might be filling the 32% bucket at that point...OMG! I think I need to get married in this situation.

Since you are considering moving overseas have you looked at the inheritance tax rules for that country? If you do make the decision to move it might be worth making large gifts to your heirs just before you move to greatly reduce your net worth. IRS form 709 is not so bad to complete.

 

[nun]

I've thought about that and definitely plan to make some substantial gifts to family before any moves.

 

[Slim11]

How do you segregate taxed from untaxed?

You have to keep track of it. The original componies before they got bought out by others would include your contrabutions. This part was allrady taxed by the state but not the feds. So when withdrawing money that part is not state taxable. When the other componies took over they did not include this number so I had to go back and print all the monthly contabutuon sheets and add up the numbers. This then went to the accountant, and a copy in my files. This way I would have proof if asked. My pension workes the same way. My contrabutions are not state taxed. After I recover that amount I needed to pay state tax on it. Nothing like making it easy for you! And too boot, they never tell you this, so most eaiter dont keep or find the records, or when they go to withdraw the funds forget that some of it is non taxable. Now if you move to another state that dosent have a state tax, I have no idea what happens. I assume nj just keeps it.

 

[nun]

You have to keep track of it. The original componies before they got bought out by others would include your contrabutions. This part was allrady taxed by the state but not the feds. So when withdrawing money that part is not state taxable. When the other componies took over they did not include this number so I had to go back and print all the monthly contabutuon sheets and add up the numbers. This then went to the accountant, and a copy in my files. This way I would have proof if asked. My pension workes the same way. My contrabutions are not state taxed. After I recover that amount I needed to pay state tax on it. Nothing like making it easy for you! And too boot, they never tell you this, so most eaiter dont keep or find the records, or when they go to withdraw the funds forget that some of it is non taxable. Now if you move to another state that dosent have a state tax, I have no idea what happens. I assume nj just keeps it.

Just another angle on this, my state DB pension is free of state tax but taxed at the Federal level. It's very convenient as there was no co-mingling of funds. When I retired from my state job I started a sole-proprietorship to do some consulting and put money into a ROTH solo-401k because I had regular IRAs that I'd rolled 401ks into that had had a long time to compound and are now causing me my "problem". With my self employed income probably now going away I'm going to be replacing it with ROTH conversions to keep me in the 24% tax bracket. I'm glad I don't have to keep track of state vs federally taxed co mingled funds. Whether or not my DB pension remains state tax free if I move states depends on where I move and if I move overseas I won't be paying state tax anyway. Of course the 24% federal and 5% state tax I now pay will be replaced by a marginal tax rate of 40%. Ouch.

 

[nun]

Another though about all this is the various assets held in ROTH and TIRA. I still keep some cash and Global Wellesley in my allocation and I have those in my TIRA and I'm 100% equities in my ROTH with the idea that more growth happens in the ROTH. When I do the conversions I do an in kind transfer from the equity funds leaving the cash and Wellesley alone.