Roth Conv: Go into 22% bracket to *average* 12% on conversion?

[joesxm3]

Just to make sure I am understanding this correctly.

For the 0% LTCG rate. The income max cutoff includes the LTCG, does it not?

So, if the cutoff is $40K, and I have $20K income and $19K LTCG I am OK and the LTCG is taxed at 0%

But if I have $39K income and $19K LTCG that puts me over the threshold so the LTCG is taxed at 15%.

Thanks.

 

[SecondCor521]

So I think I understand and mostly agree with all that has been said, however I'm curious what you all think about the impact of the market on your strategy. Did any raise your conversion amounts in 2020 when market crashed ?
My thinking is
- If my TIRA is 100 shares
- If I convert 10 shares selling for $10 or $100, at 22% tax rate I pay $22.
- If I market tanks and I convert same 10 shares selling for $5 I only pay $11 in taxes.
- Or I can convert 20 shares selling for $5 and pay $22.
- If I convert at $10 only 10% is converted, at $5 20% is converted.

If my goal is to convert about half of the TIRA to Roth I get more percentage moved if I increase conversion amount in a down market. I know market timing and all would suggest this is not smart.
I converted an additional $100K in 2020 and thinking of doing it again this year with 2 times IRMAA costs. I can add another $100K if I move from MAGI of $182k to $284k and it would cost about $4,500 or 4.5% for Medicare (both of us now) and an additional $2K in taxes being in 24% vs 22% bracket.

I have a two step process: First, I figure out how much I want to convert in a given tax year. Second, I try to convert it at a time when the market is "low".

I did about half of my 2020 Roth conversions on 3/17/20, which was in the midst of the COVID crash.

I did my 2021 conversions late in the year. I don't recall why, but I suspect it was because there were no obvious "lows" during the year.

So far this year I've done about 2/3 of my targeted conversion amount - on 3/7, 3/9, and 4/29. Who knew the market could go even lower?!

I hold in reserve some of my Roth conversion so I can dial in my AGI at the end of the year.

 

[RunningBum]

Just to make sure I am understanding this correctly.

For the 0% LTCG rate. The income max cutoff includes the LTCG, does it not?

So, if the cutoff is $40K, and I have $20K income and $19K LTCG I am OK and the LTCG is taxed at 0%

But if I have $39K income and $19K LTCG that puts me over the threshold so the LTCG is taxed at 15%.

Thanks.

$1K of the LTCG is taxed at 0%, the rest is over the cutoff and taxed at 15%.

Assumes your deductions have already reduced your income.

 

[SecondCor521]

Just to make sure I am understanding this correctly.

For the 0% LTCG rate. The income max cutoff includes the LTCG, does it not?

So, if the cutoff is $40K, and I have $20K income and $19K LTCG I am OK and the LTCG is taxed at 0%

But if I have $39K income and $19K LTCG that puts me over the threshold so the LTCG is taxed at 15%.

Thanks.

Essentially correct, yes.

After totaling your income and before applying the tax brackets, you do get to adjust your income for things like the standard deduction, IRA contributions, HSA contributions, and a few other things.

But yes, ordinary income will "use up" part of the 0% LTCG bracket and reduce the amount of 0% LTCG you can realize.

 

[SecondCor521]

Umm, wow, do you guys have any idea how smart you sound to just an average person trying to be smart with her money? It's like I'm reading a different language and trying to make sense of it.

So my question is about a plan I've slowly been forming for my modest ER. If I cut back to very part time, say maybe 6k a year, while I'll be receiving well earned alimony that is not taxable, I was thinking of converting a little over 12k per year of tIRA to Roth in order to put me above the MD income to qualify for ACA benefits rather than state Medicaid. Lately I've been wondering if I should go ahead and convert more each year. I clearly must have read something about this at some point because I have the IRS calculator bookmarked on my laptop, but what I thought might be relatively easy to figure out just got potentially more complicated based on this thread. Am I thinking correctly about converting in my situation?

Thank you for any help you can offer. The funny thing is that in my family, everyone thinks I'm the one who is "smart about money". They obviously haven't read this forum...

Welcome to the forum!

Yes, conversions work for increasing AGI and pushing you out of Medicaid income territory into ACA income territory.

ACA income is figured on an annual basis and Medicaid income is figured on a monthly basis, so if you want to be on Medicaid (some do) you can time your income to do so.

As others have said, figure out what your top tax bracket will be when you're 72 and receiving SS, RMDs, and any other income. Doing Roth conversions now up to that rate (or a bit below, to be cautious if you want) will probably benefit you.

 

[pb4uski]

.... In fact the gummint's allowing recharacterization (again IMO) practically encourages timing.

Roth conversion echaracterizations were prohibited after 2017... in part because too many people were abusing it and doing the horse-race thing... doing numerous conversions and then recharacterizing all the losers and keeping the winner... which the gummint viewd as abusive (and I agree it was abusive).

Too bad because the horse racer ruing it for others of us that were using recharacterizations differently.

 

[I am He]

I think there's a lot of moving parts needing to be thought of besides "this year's brackets:"

Are you filing married and in good health? (RMDs change drastically if you become widowed),
Age? Do you have a lot of years to do conversions or only a few?,
Do you care about beneficiaries and their tax rates? (assumes you plan to leave a legacy),
ACA premium subsidies? (lose them for a year or two or maybe none if stretched long enough),
Medicare premiums/IRMAA and their lookbacks,
NIIT

just to name a few.

I usually try to split the difference or so. Then I'm only 25% to half-wrong after running optimizations.

 

[TheWizard]

I think there's a lot of moving parts needing to be thought of besides "this year's brackets:"

Are you filing married and in good health? (RMDs change drastically if you become widowed)...

Not necessarily.
It partly depends on what the deceased spouse willed for his/her tax-deferred funds. Wealthier couples might be advised to pass a portion of the decedent's IRA to non-spousal recipients (offspring, etc) so they can start the ten year withdrawal on a smaller inheritance earlier.

Surviving spouse can also use QCDs to reduce RMDs if they seem excessive.

And if surviving spouse is <72, then no RMDs for a while longer...

 

[Al18]

I early retired at 56, 3.5 years ago. I spent some time with The 2021 HRBlock tax program the past two days, working to determine the most I can convert to Roth IRA. I’ve been converting for 3 years so far, converting 42K last year while staying in the 12% tax bracket. I found I can convert up to 48K this year to the top of the 12% bracket, resulting in Fed taxes of 7.5K and state taxes of 1K. I calculated how much extra I could convert while still getting a state tax break and it was an extra 40K. However converting the extra 40K resulted in an extra 10K of Fed tax and 2K of state tax. Just to reduce RMD and extra taxes in 13 years.

Doesn’t seem worth it. I think I’ll stay at 48K for 2023, 2024 and 2025

 

[SevenUp]

...converting the extra 40K resulted in an extra 10K of Fed tax....

To hit a 25% marginal tax rate just above the 12% bracket, you may be in a situation very similar to the one pictured in that reference. If you have Excel, you could use the tool used for that picture (link underneath the chart) to see your specific situation.

 

[pb4uski]

I early retired at 56, 3.5 years ago. I spent some time with The 2021 HRBlock tax program the past two days, working to determine the most I can convert to Roth IRA. I’ve been converting for 3 years so far, converting 42K last year while staying in the 12% tax bracket. I found I can convert up to 48K this year to the top of the 12% bracket, resulting in Fed taxes of 7.5K and state taxes of 1K. I calculated how much extra I could convert while still getting a state tax break and it was an extra 40K. However converting the extra 40K resulted in an extra 10K of Fed tax and 2K of state tax. Just to reduce RMD and extra taxes in 13 years.

Doesn’t seem worth it. I think I’ll stay at 48K for 2023, 2024 and 2025

I don't get your numbers. The total federal tax at the top of the 12% bracket with all ordinary income would be $4,807 for a single and $9,591 for a married couple filing jointly and would be 8.78% of total income... yet you say if you convert $48k to the top of the 12% tax bracket that you have $7.5k of federal tax which is 15.6% of $48k... seems at most it should be 12%.

The 25% effective rate on the next $40k into the 22% bracket is plausible if you have significant preferenced income (qualified dividends or LTCG) as the some of the additional Roth conversions are taxed at 12% but also push preferenced income from 0% to 15%... so some of that additional $40k is taxed at 27% and then some at 22%.... but that doesn't happen in the 12% tax bracket.

 

[SevenUp]

I don't get your numbers. The total federal tax at the top of the 12% bracket with all ordinary income would be $4,807 for a single and $9,591 for a married couple filing jointly and would be 8.78% of total income... yet you say if you convert $48k to the top of the 12% tax bracket that you have $7.5k of federal tax which is 15.6% of $48k... seems at most it should be 12%.

$44K pension and $16K qualified dividends, to which the $48K conversion is added, would match the $7.5K federal and $1K NJ amounts for MFJ under age 65. No doubt other income combinations could as well.

While admiring Al18's diligence at spending 2 days with H&RB software for this estimate, one might hope use could be made of much faster ways....

 

[Al18]

In my numbers, there was about 14K in qualified dividends and long term capital gains, which should be tax free at the 12% tax bracket. These amounts would be taxed in the 22% tax bracket. The graph posted by SevenUp seems to explain the large increase in taxes when converting the additional 40K Roth IRA.