First Roth IRA conversion questions ?

[targatom2019]

I just retired at 50 September 2019 and like to start thinking about Roth conversion for 2020, I will get my first building income rental LLC with partners for about $40,000 in 2020 and will get about $20,000 dividend from taxable accounts. I am married and filed jointly with 1.1M sitting in a roll-over IRA and most likely will not touch this account so my questions are:


1. should I try to convert for in the 12% tax bracket for the next 20+ years or bum it up to the 22% tax bracket and get it over with faster so the converted Roth could gain tax free ?

2. how much could I convert for the 12% and 22% bracket ?


Thanks

 

[pb4uski]

Top of 0% preferenced income tax bracket for 2020 is $80k for MFJ... add $24.8k standard deduction and that is total income of $104.8k.

You have $60k of income so that means you could do $44.8k of Roth conversion in 2020... so you should be able to make a good dent into that $1.1m of tax-deferred money over the next 15-20 years and have very managable RMDs.

I'd schedule it out but it seems that there doesn't seem like there is much to be gained by converting into the 22% tax bracket.

What do you expect your income to be in today's $$ once SS and any pensions are online?

 

[VanWinkle]

I agree with pb4uski's reply, with the future income deciding if 22% conversions make sense. You should be able to ballpark your future income by adding up SS, pension, growth on dividends, and inflation.

 

[karen1972]

The 22% is $171+24.8 (standard) or $195.8k

I agree I'd start with 12%; however I don't think of my plan as fixed 12 vs 22%, too many variables. Taking it year by year. My plan is in down years to convert up to 22% to get more "bang for buck" as I have to assume there will be several dips along this journey.

If the market continues to make these types of gains, I'll have no choice but to do up to the 22% as this year I took out $30k but the market returned $150k so now I'm $120k backwards... depends on how big that snowball becomes in the future which is why I do re-calculate every year, at some point no "dip" in the market will help my situation.

Also you have to be flexible, tax brackets may/will change, something could happen and you would end up filing single at 70 which would drastically change your numbers, etc, lots of unknowns and this is assuming you don't care about the ACA subsidy.

 

[kskmfire]

I have the same considerations on Roth converting over 10-20 years and trying to figure out which bracket to maximize. First, there is no negative to filling the 12%/0% bracket. That should be a giving for everyone who has the "low income" opportunity.

I believe taking "ordinary income" (tIRA money) first to fill the bracket seems better than filling with 0% LTCGs (which feels amazing to pay 0%, but that would leave tIRA money waiting to possibly a 22% (or future higher) haircut (verus leaving LTCGs waiting for a possible 15% (or future higher) tax. Oh, an states may tax LTCGs more aggressively than the IRS.

That's all obvious I know, but I still think about all the levers over decades to be as smart as possible..

I'm trying to figure how the LTCGs, Roth conversion income, other income(?), then possible SS, then IRMAA "tax" all tie together and which of those are the most critical.

Also take serious consideration on your filing status. Most people don't stay MFJ until they die. Things happen cutting tax brackets in half for the survivor.

Some people with large IRAs use the 22% for at least a few years to get their RMDs into a range that allow more future tax impact flexibility.

 

[targatom2019]

Thank you for good advice, I will drag out to the next 22 years to see if I eventually make dent in the account.

I never counted on SS when I planned for retirement so where do I find out how much I will get ? I used to get a letter from the government one time per year that shows the breakdown.

 

[CRLLS]

Top of 0% preferenced income tax bracket for 2020 is $80k for MFJ... add $24.8k standard deduction and that is total income of $104.8k.

You have $60k of income so that means you could do $44.8k of Roth conversion in 2020... so you should be able to make a good dent into that $1.1m of tax-deferred money over the next 15-20 years and have very managable RMDs.

I'd schedule it out but it seems that there doesn't seem like there is much to be gained by converting into the 22% tax bracket.

What do you expect your income to be in today's $$ once SS and any pensions are online?

Help me out here please. 44.8K is ~ 4% of the 1.1M. Converting at 4% annually will not keep up with average, untaxed (yet) gains, leaving more in the IRA after 15-20 years than he started with. No? Maybe the assumption is to keep the IRA from growing? What am I missing?

 

[RunningBum]

Help me out here please. 44.8K is ~ 4% of the 1.1M. Converting at 4% annually will not keep up with average, untaxed (yet) gains, leaving more in the IRA after 15-20 years than he started with. No? Maybe the assumption is to keep the IRA from growing? What am I missing?

Anything you convert the taxes on now won't be taxable later. So, yes, limiting the growth of the IRA can be a goal. If you don't convert at all, you'll have a much larger tax situation later. Just because you may not actually reduce the IRA doesn't mean it wasn't worthwhile.

I favor converting more aggressively, to really try to cut the IRA down and let it grow in the Roth tax free. 24% isn't much higher than 22%, and lower than the 25% or that taxes may revert to. I'd at least consider converting to the top of the 24% bracket

 

[CRLLS]

I saw it as not making a "good dent" in the IRA, rather, keeping the IRA from growing. A fine point I grant you, but one that think needed clarification.

I agree in converting more aggressively. But that is where I stand financially and my goals for the conversion. Last year I was up to the top of the 12% bracket, This year, close to the IRMAA limits. OP has quite a few years before considering IRMAA, but maybe ACA subsidies etc.