Have Any Of You Tried to Figure Out Your Tax Equilibrium Rate?

[Midpack]

Pralana Online and Boldin for anyone interested.

 

[TheWizard]

We don't control the income tax rate structure; Congress does.
I was in the 28% marginal bracket for over a decade and then suddenly in 2017 the TCJA put me into the 24% bracket.

As I've mentioned before, my plan has been to levelize my AGI from year to year, allowing for inflation. This plan has worked well, getting me through the start of SS at age 70 and then the start of RMDs.

At present, I use Roth conversions and QCDs to control my AGI a bit with two goals: to avoid getting into the next higher IRMAA tier and to avoid getting into the 32% marginal tax bracket...

 

[Midpack]

So I had all the data already projected, just wanted to see it in graph form - registers easier in my brain. Interesting. Confirms what I've been doing since 2019 should project out as expected. Obviously I could slow up on Roth conversions and/or not fully convert re: tax equilibrium, but whether I will or not depends on what I expect for future tax rates - and I'm still assuming they have to go up sooner or later. Fun way to spend an hour to me if nothing else...

 

[FiveDriver]

IMO there appears to be two stumbling blocks to the Roth Conversion.

1 -- Estimating MAGI before the Dec 31st deadline can be difficult
2 -- Finding the MAGI number that keeps MFJ within the 22% tax bracket, while also staying within the LTCG max tax of 15%, and that also stays below AGI $250K where Medicare surtax kicks in.

Without trying to squeeze every last dollar of my IRA into Roth conversion....is there a MAGI amount that would allow an MFJ filer to comfortably convert ?

Could we take last year's AGI (if it's similar to this year), add a reasonable estimate for the MAGI add-backs, and then convert to just below the $201,500 limit of the 22% bracket ??

Without going thru the spreadsheet gymnastics, would $195K - AGI give a high-confidence amount to convert ??

 

[Midpack]

I’ve not found estimating MAGI by Dec 31st very difficult, I do it every year using a homegrown one page spreadsheet. I also use that to project Fed and state taxes and quarterly estimated taxes. You must have some significant income sources I don’t. I wouldn’t be comfortable using a MAGI rule of thumb, for IRMAA more than tax brackets. I know exactly what Soc Sec and RMDs will be. I know what interest and dividends I’ve received thru Nov. I can apply last years QDI factors to my holdings so I have a good idea what my qualified dividends will be. I can estimate foreign taxes and QBI based on prior years. I can also estimate Dec interest and 4th quarter dividends, some I’ll have exactly before Dec 31st. I know what cap gains I’ve taken. I do a large Roth conversion (80%) in Jan. I do another small trim Roth conversion a few days before Dec 31st based on the MAGI - usually staying a couple thousand under the 22% bracket and the IRMAA 1.4X upper limit.

 

[USGrant1962]

IMO there appears to be two stumbling blocks to the Roth Conversion.

1 -- Estimating MAGI before the Dec 31st deadline can be difficult
2 -- Finding the MAGI number that keeps MFJ within the 22% tax bracket, while also staying within the LTCG max tax of 15%, and that also stays below AGI $250K where Medicare surtax kicks in.

IMO, $195K is too low unless you have some strange income streams. I usually just look at last year's interest, dividends, and capital gains distributions to estimate where I'll be at the end of the year. Maybe round up due to higher rates.

Based on your parameters, the top of the 22% bracket MFJ is $206,700 plus the standard deduction of $30K for an AGI target of $236,700 is good. This is below NIIT/Medicare surtax at $250K and nowhere near the 20% LTCG bracket. At that number, even if you have a $5K surprise capital gain distribution or two you should still be fine.

A little bit taxed in the 24% bracket versus 22% is no big deal, though NIIT and additional medicare tax are really annoying.

 

[Gumby]

I usually can estimate my MAGI a year in advance. I just took a first crack at my taxes earlier this week to confirm my original prediction and found it to be within a few hundred dollars. The only remaining estimated portion of that amount is the interest on my federal money market fund (settlement account at Vanguard) for the month of December. But, in my experience, using the 7 day SEC yield can get me within a dollar or two. I then calculate my Roth conversion headroom and back off a few hundred dollars to be conservative. I'll do my Roth conversion next week.

 

[FiveDriver]

IMO, $195K is too low unless you have some strange income streams. I usually just look at last year's interest, dividends, and capital gains distributions to estimate where I'll be at the end of the year. Maybe round up due to higher rates.

Based on your parameters, the top of the 22% bracket MFJ is $206,700 plus the standard deduction of $30K for an AGI target of $236,700 is good. This is below NIIT/Medicare surtax at $250K and nowhere near the 20% LTCG bracket. At that number, even if you have a $5K surprise capital gain distribution or two you should still be fine.

A little bit taxed in the 24% bracket versus 22% is no big deal, though NIIT and additional medicare tax are really annoying.

Thanks, I see your logic here. So it's 1040 Line 11 and add-back the Std Deduction for MAGI ?
My DW has inherited a big chunk of Magellan MF and it usually throws off a CapGains (in December I think).

I don't need to convert every last dollar, but a target of MAGI of $230K would make for a nice Roth conversion.

Would I be penalized for Under With-holding of taxes ??
Could I pay the extra taxes out of the converted Roth money ?

 

[audreyh1]

IMO, $195K is too low unless you have some strange income streams. I usually just look at last year's interest, dividends, and capital gains distributions to estimate where I'll be at the end of the year. Maybe round up due to higher rates.

Based on your parameters, the top of the 22% bracket MFJ is $206,700 plus the standard deduction of $30K for an AGI target of $236,700 is good. This is below NIIT/Medicare surtax at $250K and nowhere near the 20% LTCG bracket. At that number, even if you have a $5K surprise capital gain distribution or two you should still be fine.

A little bit taxed in the 24% bracket versus 22% is no big deal, though NIIT and additional medicare tax are really annoying.

This is above the first threshold IRMAA for 2025 of $212,000 for MFJ, probably $214K-$218K in 2026 based on 2024 MAGI.

Unless someone starting or on Medicare in 2026 wants to pay 1.4x for their Medicare premiums they might not want to go above these levels.

 

[SecondCor521]

Thanks, I see your logic here. So it's 1040 Line 11 and add-back the Std Deduction for MAGI ?

No. Line 11 is AGI. For MAGI, there are several different types so you would need to specify for what purpose you are calculating MAGI in order to determine what to add to line 11 in order to get MAGI.

For IRMAA, MAGI is line 11 plus line 2a (tax exempt interest). For ACA, there are different add backs.

My DW has inherited a big chunk of Magellan MF and it usually throws off a CapGains (in December I think).

Vanguard publishes estimates that you can find on their website which are usually pretty close. They also publish a calendar and so you can see the exact date and whether Magellan will make a distribution. The estimates document will estimate the amount for you.

I don't need to convert every last dollar, but a target of MAGI of $230K would make for a nice Roth conversion.

Would I be penalized for Under With-holding of taxes ??

If you don't meet one of the several safe harbors, then possibly.

Could I pay the extra taxes out of the converted Roth money ?

Sure. You might even be able to withhold from the Roth conversion - call your IRA custodian to find out. Withholding is better than estimated for the purposes of avoiding an underpayment penalty.

 

[RunningBum]

Isn't this part of the Roth conversion calculation, to see how much you will convert each year and stop where the rate becomes higher than you expect to pay when you have to take RMDs? I would think many of us have done this. Sounds like a new name for an old thing.

I will redo my calculations for 2027, when I am over 65 and no longer concerned with the impact of conversions on ACA subsidies. Or perhaps that will happen in 2026. Maybe other things related to tax rates and SS benefits will cause changes too. I had factored those years in before, but I'll have newer info and a closer horizon so it makes sense to re-callibrate.

 

[TheWizard]

Isn't this part of the Roth conversion calculation, to see how much you will convert each year and stop where the rate becomes higher than you expect to pay when you have to take RMDs? I would think many of us have done this. Sounds like a new name for an old thing...

That's part of it but it goes beyond that, back to your working years when you have to decide whether to add even more money to tax-deferred or whether to go Roth or taxable accounts.

But we can only plan in the forward direction so that starts with where you are right this year...

 

[FiveDriver]

This is above the first threshold IRMAA for 2025 of $212,000 for MFJ, probably $214K-$218K in 2026 based on 2024 MAGI.

Unless someone starting or on Medicare in 2026 wants to pay 1.4x for their Medicare premiums they might not want to go above these levels.

I'd like to keep us out of IRMAA territory -- so $212K is probably The Number, and we should base everything off of that.

Quote --
No. Line 11 is AGI. For MAGI, there are several different types so you would need to specify for what purpose you are calculating MAGI in order to determine what to add to line 11 in order to get MAGI

This is what I mean by "estimating MAGI" can be difficult.
There must be an easier way to get a number for doing Roth conversions?

 

[SecondCor521]

I'd like to keep us out of IRMAA territory -- so $212K is probably The Number, and we should base everything off of that.

Quote --
No. Line 11 is AGI. For MAGI, there are several different types so you would need to specify for what purpose you are calculating MAGI in order to determine what to add to line 11 in order to get MAGI

This is what I mean by "estimating MAGI" can be difficult.

I wish it were easier.

There must be an easier way to get a number for doing Roth conversions?

To get an accurate number, you have to go through the effort.

If you don't want to make the effort, then you can approximate or guess.

Up to you to what extent it is worth the effort.

 

[SevenUp]

There must be an easier way to get a number for doing Roth conversions?

I think the Case Study Spreadsheet secondcor521 mentioned in an earlier post handles all (the common?) MAGI calculations and Roth conversion consequences. Roth Conversion with Social Security and Medicare IRMAA covers that in some detail.

 

[sengsational]

There must be an easier way to get a number for doing Roth conversions?

You'll need to do your 2024 taxes sooner or later, so if you buy the tax software now, you can have the software calculate it for you. Easy!

It will take a little longer because you'll need to key in your 1099's instead of downloading them, and in some cases won't be the precise amount, but good enough. And it takes no logic or skill, which is why I do it

Use last year's return to see what 1099 forms you got, gen up the 2024 values from statements, estimating where necessary. Then you can iterate on the Roth conversion amount all you'd like, watching the marginal rate zig zag around as it hits the breakpoints buried in the tax law for your specific situation.

 

[Midpack]

^^^ And if you don’t want to buy software early (or at all), you can calculate your 2024 taxes exactly here 1040 Tax Calculator.

It’s an excellent tool - can handle all but the most complex returns. I use a spreadsheet that I wrote myself updating throughout the year as income comes in, but I double check with the calculator above periodically.

 

[Montecfo]

So I had all the data already projected, just wanted to see it in graph form - registers easier in my brain. Interesting. Confirms what I've been doing since 2019 should project out as expected. Obviously I could slow up on Roth conversions and/or not fully convert re: tax equilibrium, but whether I will or not depends on what I expect for future tax rates - and I'm still assuming they have to go up sooner or later. Fun way to spend an hour to me if nothing else...

The only way to address the budget deficit is via growth. Raising taxes will limit growth so I am less sure that higher rates are in our future (though at times tax policy has been directed by other considerations.

 

[Midpack]

The only way to address the budget deficit is via growth. Raising taxes will limit growth so I am less sure that higher rates are in our future (though at times tax policy has been directed by other considerations.

May well be. Here's an interesting non partisan take on increasing growth while preserving most of TCJA tax structure. Options for Navigating the 2025 Tax Cuts and Jobs Act Expirations

 

[Montecfo]

Yes very interesting read. I agree generally. We should seek permanency and further reforms to simplify the tax code and make it as pro-growth, understandable and frictionless as possible. But raising taxes in general will not do this in my view which was my point.

To paraphrase J Powell "we do not need to pay down the debt or balance the budget. We need to grow the economy faster than the debt is growing". And if you look at the stunning growth in federal spending it is clear where the problem lies.

 

[TheWizard]

Yes very interesting read. I agree generally. We should seek permanency and further reforms to simplify the tax code and make it as pro-growth, understandable and frictionless as possible. But raising taxes in general will not do this in my view which was my point.

To paraphrase J Powell "we do not need to pay down the debt or balance the budget. We need to grow the economy faster than the debt is growing". And if you look at the stunning growth in federal spending it is clear where the problem lies.

Federal spending is growing?

 

[Montecfo]

Federal spending is growing?

 

[Kings over Queens]

I have an adhoc spreadsheet to decide equilibrium point. You may get some ideas from this. It tries to project future values of everything. It has two sheets with simple and more advanced versions.

RMD Scenarios

docs.google.com

Is this your spreadsheet? it's in view only mode and tells me to ask the owner for access to edit.

 

[Kings over Queens]

It's too late for me now, but for anyone younger, be careful of building a tax deferred balance too large, too soon. I should have been doing Roth for the earlier years and a bit into the later years while working. If you save tax deferred too much, too early, natural portfolio growth will carry you right into a higher bracket and undo all your Roth/deferred tax arbitrage plans.

This is what I struggle with in terms of conversions. We're both 57 with $1,800,000 combined in tax deferred accounts and I plan to retire next year. She's been a stay home mom. Using RMD calcs assuming we were at RMD age today puts us about $21,000 below the 22% bracket, and that's easily going to be chewed up by other ordinary income or capital gains.

 

[Midpack]

This is what I struggle with in terms of conversions. We're both 57 with $1,800,000 combined in tax deferred accounts and I plan to retire next year. She's been a stay home mom. Using RMD calcs assuming we were at RMD age today puts us about $21,000 below the 22% bracket, and that's easily going to be chewed up by other ordinary income or capital gains.

That's almost exactly where we were at your ages. Good thing I finally woke up and started doing aggressive Roth conversions 6 years ago, once I realized how much "passive" income we would have from interest, dividends, cap gains, Soc Sec and RMDs - more than we'd ever spend. You owe it to yourself to do the calcs to figure out how your current tax bracket/rates will compare to same when all your income sources have kicked in. You may have noticed my other thread showing what we avoided by doing detailed calcs for ourselves.