First Roth Conversion, Understanding of Brackets?

[SunnyOne]

My very first Roth conversion, please check my knowledge/plan? please be understanding of a first timer.

I am currently in the 12% tax bracket. I have been advised for 2022 to convert up to the 24% bracket.

So, in terms of total dollar amounts to convert for 2022 (I plan to do this in a series, not all at once) - I would convert in total, a dollar amount up to, but not exceeding $89K? Is it that straightforward?


2022 brackets (single filer)

12% $10,276 to $41,775

22% $41,776 to $89,075

24% $89,076 to $170,050

 

[SALTedOut]

You also have to add the converted amount (assuming no after tax contributions) to your other taxable income and then subtract your standard deduction (or itemized if that is greater than your standard deduction). You'd also have to take into account any other adjustments to taxable income such as contribution to HSA, etc.

 

[SunnyOne]

2022 Income all in (pension, interest, dividends)

$24,000
Adjustments (none)
minus standard deduction 12,950 =

$11,050.

$89,000 - $11,050 = $77,950

So that would bring the total amount to $77,950 for 2022. Does that follow logically?

I realize these are rough numbers, all I am interested in for now are rough numbers.
I can refine as I go along until 12/31/2022.

 

[Midpack]

It depends on your sources of income, the table applies to taxable income, not necessarily the same as total wages/income. e.g. if you had $50K in wages with $50K in ordinary dividends ($40K qualified) - your total income is $100K but your taxable income would be about $87K. You may have other sources of income, interest, capital gains, deductions, etc. Roth conversions aren't separate taxable events from other income etc.

You can use the calculator below to predict what your taxable income will likely be using your income details - and see your (marginal) tax bracket. Hope that helps?

https://www.dinkytown.net/java/1040-tax-calculator.html

[And the extra taxes for going over a little aren't that costly. If you're trying to bring taxable income in under $87,075 and you miss to $88,500 taxable, paying 22% on the "over" is just over $300 - not a financial catastrophe]

 

[SALTedOut]

Sounds logical. To play with numbers you can go to dinkytown .net and enter your actual information. when you submit it it will give you a report below your input that lays out a lot of tax bracket information. You would enter your conversation amount in the "Taxable IRA distributions" entry.

If you haven't already, I'd also recommend you determine approximately how much your RMDs will be since that is what your trying to lower. You can find the year by year RMD requirements through google pretty easy and set up a spreadsheet to take your pre-tax balances and model it out with and without conversations to see the overall impact.

 

[xlf11]

Also don't forget Medicare IRMMA (1st cliff for 2023 is $149k based on 2021 income for single filer, below 24% top limit) if you are going to start Medicare in 2025...

 

[SunnyOne]

Yes, there is that issue too....I will first begin Medicare in 2025. I am eligible now for early Soc Sec but have held off from claiming - not sure when I will start....doing ok for now without it.

 

[Midpack]

Also don't forget Medicare IRMMA (1st cliff for 2023 is $149k based on 2021 income for single filer, below 24% top limit) if you are going to start Medicare in 2025...

Yes, there is that issue too....I will first begin Medicare in 2025. I am eligible now for early Soc Sec but have held off from claiming - not sure when I will start....doing ok for now without it.

I must be missing something. If you're single, the 2022 threshold is $91K (2020 Income) before any IRMAA premium increase. IRMAA is always based on income 2 years in arrears, and we won't know what the 2023 table looks like until late this year (it will be based on 2021 MAGI).

The standard premium for Part B in 2022 is $170.10 for individuals who earn less than $91,000, individuals who filed jointly with an annual income of $182,000 or less, and couples who file separately with an income of $91,000 or less. The IRMAA is the dollar amount added to the standard premium.

 

[xlf11]

I must be missing something. If you're single, the 2022 threshold is $91K (2020 Income) before any IRMAA premium increase. IRMAA is always based on income 2 years in arrears, and we won't know what the 2023 table looks like until late this year (it will be based on 2021 MAGI).

Sorry for the error and $91k for 2022 is right (based on 2020 income for single). Now the estimate for 2024 (based on 2022 income) seems about $104k assuming a 5% inflation...

 

[SevenUp]

You can use the calculator below to predict what your taxable income will likely be using your income details - and see your (marginal) tax bracket. Hope that helps?

https://www.dinkytown.net/java/1040-tax-calculator.html

[And the extra taxes for going over a little aren't that costly. If you're trying to bring taxable income in under $87,075 and you miss to $88,500 taxable, paying 22% on the "over" is just over $300 - not a financial catastrophe]

Tax bracket may or may not be the same as marginal tax rate.

SunnyOne, Roth IRA conversion may also be of interest to you.

 

[Midpack]

Tax bracket may or may not be the same as marginal tax rate.

Not sure what it has to do with the OP. For most people the highest tax bracket you pay into is your marginal rate. Do you have a common exception you’re referring to? From your link:

The marginal tax rate is often the same as the individual's tax bracket, but not always.

 

[AbbA]

Sounds logical. To play with numbers you can go to dinkytown .net and enter your actual information. when you submit it it will give you a report below your input that lays out a lot of tax bracket information. You would enter your conversation amount in the "Taxable IRA distributions" entry.

If you haven't already, I'd also recommend you determine approximately how much your RMDs will be since that is what your trying to lower. You can find the year by year RMD requirements through google pretty easy and set up a spreadsheet to take your pre-tax balances and model it out with and without conversations to see the overall impact.

We are a few years away from considering whether we'll need or not perform Roth IRA conversions (not "conversations"), but I'm curious about the usefulness of the advice in your second paragraph.

What would this exercise tell OP?
Isn't it a sort of a mind game? He/she isn't aware of the IRA value at the future date when the actual RMD's will commence unless you mean that the comparison will inform whether it's worth paying taxes today by converting to the Roth IRA.

Thank you.

 

[SevenUp]

Not sure what it has to do with the OP. For most people the highest tax bracket you pay into is your marginal rate. Do you have a common exception you’re referring to?

Sure. See any or all of
Taxation of Social Security benefits
Roth IRA conversion
Traditional versus Roth examples
and the one in the Marginal tax rate article itself.

 

[Midpack]

If you haven't already, I'd also recommend you determine approximately how much your RMDs will be since that is what your trying to lower. You can find the year by year RMD requirements through google pretty easy and set up a spreadsheet to take your pre-tax balances and model it out with and without conversations to see the overall impact.

We are a few years away from considering whether we'll need or not perform Roth IRA conversions (not "conversations"), but I'm curious about the usefulness of the advice in your second paragraph.

What would this exercise tell OP?
Isn't it a sort of a mind game? He/she isn't aware of the IRA value at the future date when the actual RMD's will commence unless you mean that the comparison will inform whether it's worth paying taxes today by converting to the Roth IRA.

Thank you.

If IRAs and the like are a significant part of your net worth, excessive RMDs are a primary factor for many making a decision re: Roth conversions. You can’t wait until RMDs begin to decide. While we can’t know exact future IRA values, tax rates, changes in legislation or other factors, we can make educated assumptions like with all financial planning. When and how are you planning to make that decision?

I did exactly what was suggested. I spent $20 on a one month subscription to Income Strategy (not recommended for all) to project out several strategies for a range of IRA balances, associated RMDs, and projected taxes with and without conversions. For some Roth conversions are a no brainer for (my case) or against, or something in between, for some it may be a wash. If you’re unable to plan that out as some folks are, you’ll have to hire someone to do the analysis for you. I’m in my 4th year of Roth conversions, with zero regrets.

 

[SecondCor521]

Sure. See any or all of
Taxation of Social Security benefits
Roth IRA conversion
Traditional versus Roth examples
and the one in the Marginal tax rate article itself.

I'll add:

ACA subsidies create a similar effect to SS taxation where they increase one's effective marginal rate.

FAFSA EFC effects can be viewed as a marginal tax rate.

On the flip side, tax credits like AOTC can create effectively a 0% ordinary income tax bracket (or increased standard deduction, if you prefer). The $1,000 of refundable AOTC effectively counteracts the first $10K of 10% bracket income.