Does this roth conversion plan make sense?

[dobig]

Current scenario.

Age 55. Spouse 55. Will be retiring Jun of this year. Will be closing on the sale of 2nd home in next 2 weeks which will give us $240,000 cash. We will be relying on income from our brokerage account for retirement along with a pension of $1,500/month. Current brokerage income is approximately $98,000/year from dividends and income funds. Retirement expenses projected to be $7,500/month or $90,000/year including healthcare.

Does it make sense to move to a more tax efficient allocation which would bring our brokerage income down to $58,000. With the pension our shortfall would be around $14,000 a year. The $240,000 would be used to bridge the shortfall. If my calculations are correct we should be paying close to 0$ in federal taxes since the investments would pay primarliy qualified dividends or other tax efficient distributions. We could then roll over around $100,000/year until age 59 1/2 to Roth in retirement accounts paying 12% taxes for the conversion. Currently 18% of retirement accounts in Roth. Pension is non taxable.

Is it really worth doing this just to get money moved over to Roth? We will be able to qualify for ACA health coverage which will save us $1,150/month so that's nice. Just wondering if this is a sound plan and does it make sense?

 

[RetiredHappy]

Rollover of $100K counts towards AGI/MAGI and your $58K in capital gains/qualified dividends will no longer be at $0 tax rate.

I see that you added the info on ACA, if you convert $100K you will most likely lose your subsidies.

 

[Time2]

I think any reasonable answer about Roth Conversions would require how much you have in tax deferred accounts. And how will that affect your future tax bracket.

 

[xlf11]

Depending on your total tIRA size, you have to look at which one give you better outcome in the longer term: ACA subsidy vs. Roth conversion. It's usually better to focus more on ACA year by year (as rules are changing) and use any gap left for Roth.

 

[RunningBum]

When looking at Roth conversion you always need to guesstimate your marginal tax rate when you are taking SS, pensions, and RMDs. You don't want to convert at a higher rate now than you'd be paying on that later. I don't see any mention of that here. Partial or full loss of ACA subsidy counts towards today's marginal tax rate on conversion.

Without the ACA cliff, I found it best to stop conversions at the point where they would push QDivs into being taxed. The marginal rate beyond that would be 12% regular income of conversion + 15% same amount of QDivs pushed into being taxed + x% subsidy loss.

With the ACA cliff returning I'm going to stop safely short of 400% FPL. Unless I was to go way over, losing the subsidy hits the marginal conversion rate too hard.

Your situation may be different from mine.

You talk of moving to a more efficient tax allocation. What are the tax ramifications of doing so? I did sacrifice one year of subsidies doing this (selling off a managed fund and an international fund). In that same year I set up a DAF and made a large contribution, which helped my tax situation that year (but did not reduce MAGI). One big charity deduction that year but I can do grants from that for years to come, while taking the standard deduction. So it may make sense for you to do so. My decision was based on not being able to stay short of 400% FPL with those funds in the future. At the time I didn't know the cliff would go away for a few years.

 

[dobig]

Rollover of $100K counts towards AGI/MAGI and your $58K in capital gains/qualified dividends will no longer be at $0 tax rate.

I see that you added the info on ACA, if you convert $100K you will most likely lose your subsidies.

Ahhh, didn't think about that. So unless there is some sort of expansion of the enhanced ACA subsidies I don't think this would make sense for us. Wouldn't mind if we had to pay taxes on that $58,000 but doing that in conjunction with losing ACA subsidies really isn't appealing.

 

[dobig]

I think any reasonable answer about Roth Conversions would require how much you have in tax deferred accounts. And how will that affect your future tax bracket.

Currently have $950,000 in tax deferred. Of that $160,000 is Roth. $1.75 in taxable and the $240,000 in cash once our second home closes.

 

[engineernerd]

I think reducing the income thrown off by your taxable brokerage account will be needed to keep the ACA premium subsidy, since $98k exceeds 400% FPL. I have no personal experience getting subsidies prior to the enhanced subsidies, but to be safe what I would do is target 399% FPL so they don't round your MAGI up to 400%. For a household of 2 in the lower 48 states, FPL = $21,150 and 399% FPL = $84,389.

 

[Exchme]

I would arrange the portfolio to preferentially put bonds/cash in tax deferred and leave taxable/Roth for stocks. That is more tax efficient as it matches the taxes on bond dividends (ordinary income) with the taxation of tax deferred money. Meanwhile taxable holds stocks where most of the returns will be taxed at the lower Long Term Capital Gain rate. See this article in the Bogleheads.org wiki:

Tax-efficient fund placement - Bogleheads

Roth is not tax-deferred, it is tax-free or after tax, so I'm reading that you have $790K in tax deferred. That is not enough to create a big urgency for Roth Conversions. I would think that once you are on Medicare, that some Roth Conversions would be a good idea and might tip the scales towards waiting until 70 to claim SS to make time to do the conversions.

 

[engineernerd]

Sort-of off-topic: we somehow ended up with our VWO holdings in our taxable accounts, never noticing until now that it throws off mostly NON-qualified dividends. In 2023 only 21% of the total dividends were qualified, though last year it was 36% so not quite as bad. Should have bought that in a Roth account, moving it over now requires recognizing significant capital gains since we bought it a long time ago.

 

[gwill1010]

This is the kind of question I found the Boldin app to be very useful. With so many moving parts and so much at stake, the cost of the app is well worth it.

-Mr. Cheap

 

[dobig]

This is the kind of question I found the Boldin app to be very useful. With so many moving parts and so much at stake, the cost of the app is well worth it.

-Mr. Cheap

That Boldin app is a lot of fun. Just playing around with the free version right now but if it's trustworthy think I might look at the paid subscription.

 

[mrfeh]

Ahhh, didn't think about that. So unless there is some sort of expansion of the enhanced ACA subsidies I don't think this would make sense for us. Wouldn't mind if we had to pay taxes on that $58,000 but doing that in conjunction with losing ACA subsidies really isn't appealing.

We are not doing Roth conversions in order to keep ACA subsidies.

But, depending on the size of your household, you may not qualify for them anyway, given your income, which is another reason to focus on total return and not dividends.

 

[mrfeh]

That Boldin app is a lot of fun. Just playing around with the free version right now but if it's trustworthy think I might look at the paid subscription.

I was going to suggest Pralana, but whatever you choose, it does sound like you need some software to examine your options.

You probably will want your taxable account to be more tax efficient.

 

[Koolau]

Roths have advantages to the next generation if you plan to pass significant amounts to them. If not, then that's one less thing in favor of Roths. Personally, I like Roths and wish I could have converted more.

If you still have plenty of cash to pay the taxes, that is a major advantage of Roths. Effectively, you are increasing the tax advantage by the size of the taxes you pay. Look this up or ask questions if interested.

I realize ACA complicates things. We never had to deal with that.