My 1st Roth Conversion

[Sue J]

I've been planning on doing this all year and since I've never done this before I thought I would check here and see if I'm missing anything.

I have a very part-time job, making around $4,500/year. Since 2010 I've put my entire gross income into an IRA. Most years it went into a Roth but in 2016, 2017 and 2020 it was more advantageous to put it in a Traditional IRA due to ACA tax credits.

My total contributions for those 3 years was $12,350. This has been invested in Vanguard funds and is now worth $19,000. VERY NICE!

This $19,000 conversion would be taxed at 12% = $2280. I have the money for this outside of the IRA. I had an RMD from an Inherited IRA and when I took the RMD I had 95% of the funds withheld for federal tax, so this is already covered.

-We are nowhere close to the first IRMAA tier so that is not a factor.

-I'm already at the level where 85% of my social security benefit will be taxed (12%).

-We are both on Medicare all of 2021 so no more ACA tax credit issues.

-From what I can estimate we have plenty of room to still stay in the 0% capital gains bracket. I've modeled this in a tax calculator posted on this forum.

Have I thought of everything? I plan on doing the conversion before Dec. 31, 2021.

The goal is that this would grow tax free for many years and be passed down to our two sons, assuming that we didn't need to use this as we get older. Or we would use this last, if we needed it. DH's COLAed pension supports us nicely and I have no plans to use this money for living expenses. Adding this $19,000 to my Roth would bring the total to around $74,000. Not huge money to many on the forum but it's a nice amount that I'm very proud of. I was a SAHM until age 51 and this PT gig has been a way for me to accumulate and invest.

Please let me know if I missed anything.

 

[SecondCor521]

Sounds like you have things covered. Just a few comments for consideration:

1. You don't have to convert the entire $19K at once. It may make more sense to do partial Roth conversions over several years. For example, you might be able to convert smaller amounts and stay in the 10% bracket or even the standard deduction (=0% bracket).

2. You'll owe state income taxes on the Roth conversion as well if applicable.

3. You mentioned sons. If those sons are in high school or college and are receiving FAFSA-related financial aid, your Roth conversion may impact that aid. Also, google GEN-99-10 if this applies to you.

4. You do need to complete any conversion by 12/31 in order for it to count for 2021 taxes. You might want to do a small "test" conversion now so that you have the process down and can iron out any glitches that may occur.

5. If you're being careful to target a particular AGI, remember that you may be receiving taxable distributions (interest, dividends, capital gains) in December from mutual funds or stocks held in taxable accounts that you should account for.

 

[Sue J]

Thank you for the response.

Sounds like you have things covered. Just a few comments for consideration:

1. You don't have to convert the entire $19K at once. It may make more sense to do partial Roth conversions over several years. For example, you might be able to convert smaller amounts and stay in the 10% bracket or even the standard deduction (=0% bracket).

Between DHs pension, my SS and Inherited IRA RMD we will always be over the 10% bracket. There were a few years before Medicare and SS where we had HSA contributions and stayed in the 10% bracket but that won't happen again.

2. You'll owe state income taxes on the Roth conversion as well if applicable.

State taxes......yep, forgot about those! Using https://www.irscalculators.com/tax-calculator it looks like the conversion will cost me an additional $659 in state taxes.

3. You mentioned sons. If those sons are in high school or college and are receiving FAFSA-related financial aid, your Roth conversion may impact that aid. Also, google GEN-99-10 if this applies to you.

Our sons are in their 30s and beyond college issues.

4. You do need to complete any conversion by 12/31 in order for it to count for 2021 taxes. You might want to do a small "test" conversion now so that you have the process down and can iron out any glitches that may occur.

Yes, I did practice doing the conversion steps at Vanguard. It looked pretty clear. I didn't complete it but it looked easy enough. I would keep the same funds. Maybe adjust them later in the Roth account.

5. If you're being careful to target a particular AGI, remember that you may be receiving taxable distributions (interest, dividends, capital gains) in December from mutual funds or stocks held in taxable accounts that you should account for.

Up until 2021 all of our mutual fund investments have been in IRAs (Trad, Roth and Inherited.) This year is our first time having mutual funds in a taxable brokerage account. I've checked the expected distributions at Vanguard and our cap gains and dividends should be well under $5000 and I've modeled that we have room for about $16,000 before we lose the %0 tax. But this is our first year doing this!

 

[oldtimer]

Maybe if you do partial Roth conversions you may be able to reduce the amount of your SS that is taxed.

 

[Sue J]

Maybe if you do partial Roth conversions you may be able to reduce the amount of your SS that is taxed.

Because you posted this I went back to the calculator https://www.irscalculators.com/tax-calculator and double checked.

Between DHs pension, my W2 income and my Inherited IRA RMD, my SS will never be under the 85% taxable amount. I guess that's one of those "nice problems to have."

Thanks for making me look again. I enjoy playing with that calculator.

There really is no rush to convert the entire $19,000 in 2021. It's just that I've always known that I wanted to eventually convert it. Now I'm thinking it over. Is this the best time? I could do a portion now and the rest in early 2022. Or just get it over with all at once. Nothing is pressing, I have options.

In March 2021 this account was only $17,300, I should have done it then!

 

[Sue J]

Update-
I took care of it this week. I’m not much of a market timer but it converted at $18,661 so I saved a few dollars in tax.

Vanguard made it VERY EASY and the funds transferred in kind and showed up as converted to Roth the next day.

 

[street]

^ that is great! I like easy and painless and will be needing to do that very thing starting sometime in 2022. I kind of dread doing it but need to.

 

[VanWinkle]

^ that is great! I like easy and painless and will be needing to do that very thing starting sometime in 2022. I kind of dread doing it but need to.

It's not that hard street, you can do it!!!

VW

 

[VanWinkle]

Great job of covering all of the bases on this conversion SueJ!! I am impressed. I will be doing mine between Christmas and New Years as I have for the last 5 years. I now only have room for 10-15000 per year to stay in the 12% brkt.

Best to you,

VW

 

[Finance Dave]

Great job Sue! I also did my first...$80,000. Was a "like kind" transaction at FIDO, very easy to do. I did not have them withhold taxes, so I'll have to keep about $11k handy for tax time!