Roth Conversion Advice

[BooBoo]

Roth Conversion Strategies:
I am conflicted about the best approach for Roth conversions. I have modeled two approaches:

22 % Bracket Ages 69-76. Convert $1.5M total, paying $334K in conversion taxes. Reduces lifetime RMDs by $2.4M and saves $312K in lifetime taxes.

12% bracket Converting $588K over ages 69-76 costs $126K in conversion taxes now, but reduces lifetime RMDs by $1.8M and moves assets into tax-free Roth growth.

Current age 69. Married filing jointly. Assume eventually one of us will end in 22% bracket, when someone passes. I trying to get past paying approximately $45000 (22%) each year in taxes until 76 to hypothetically save money. Versus paying approximately $13000 (12%) each year until age 76. I will have to use Roth withdrawals to fund the tax payments. I have always tried to avoid paying the taxman, this one is hard to swallow.

Your input is greatly appreciated.
Boo

 

[Handymike]

Boo, our situation is much different than you . Wife and I have about $600k all in ROTH. We started converting at age 66 1/2. Completed this year at 78. For us worth it. Income about $80,000 from ROTH and growing. All tax free. No IRMAA issues. Which ever way you decide is good, just do it.
Good luck
Mike

 

[pb4uski]

At first blush, it looks like your Roth conversions are costing much more than just the ordinary tax. For example, your conversions in the 12% bracket are resulting in a 21.4% effective tax rate on $588k of conversons ($126k/$588k). I'm speculating that most of your other income is SS and that the high effective rate is because the conversion is resulting on more SS being taxed as well as the 12%?

I don't see that it makes sense to pay $334k in taxes from 69-76 to save $312k in future taxes.

Roth conversions only make sense where the effective rate on Roth conversions today (which is knowable) is less than the effective tax rate on RMDs later (which is estimable but still somewhat uncertain). If the tax rate doesn't change then Roth conversions don't have a favorable effect at all. For example, say your tIRA was $25k could convert today and pay 12% or $3k in tax, leaving $22k in the Roth and between now and RMD time it doubles to $44k. If you don't convert and the $25k tIRA doubles to $50k and is then withdrawn at 12% tax then you end up with $44k after paying 12% in taxes. The point is that unless the tax rate is lower that tax-free growth in the Roth, even though it sounds great, doesn't really have an impact.

 

[RunningBum]

Take into account your actual marginal tax rates, not just the tax bracket. The main one to watch for is the 27% marginal rate when Roth conversions at 12% also push QDivs/LTCGs into being taxed at 15%. Unless you have no QDivs/LTCGs, the marginal tax rate progression is 12%->27%->22%.

I use a tax calculator like IRS & State Tax Calculator | 2005 -- 2025. I plug in my numbers without convesions, then I add $1000 or $10,000 (Roth conversions) at a time and look at the delta tax change. If it's 27% for federal see how much more you have to add before it drops back to 22%, which is when all QDivs are taxed and you've gone into the 22% bracket. If it does not take much, it could be worth pushing through to the end of the 22% or maybe even 24% rate to reduce the amount taxed at 27% with RMDs. However, if none of your QDivs are taxed without conversions, it's very likely you only want to convert up to the point where you start pushing them into being taxed.

Other things to consider are whether you'll hit IRMAA, and whether your SS benefit is fully (85%) taxed.

Generally speaking, once you start RMDs it's less likely that Roth conversions will benefit you, though the widow(er) rate is worth considering.

 

[BooBoo]

You are correct. Almost all income will be from social security and small pension.

 

[RunningBum]

Some important "trigger" levels for 2026 shows the income points for QDiv taxation ($98,901 taxable income for couples), IRMAA tiers, and other triggers.

 

[OK EE]

I would say be careful with Roth conversions. It's really easy to overconvert. And it significantly reduces your available capital today.

 

[TheWizard]

I wouldn't over convert, whatever that means.
I would look at your projected AGI at age 75 compared to present AGI and see what that tells you.

Being in the phase-out range for certain things that pb4 mentioned makes the decision trickier.

And I don't like the idea of using Roth withdrawals to pay the additional income tax on Roth conversions. I'd have to think about that more...

 

[pb4uski]

You are correct. Almost all income will be from social security and small pension.

Then even if you limit Roth conversions to increase taxable income to the top of the 12% tax bracket, as long as your taxable SS is less than 85% of your gross SS, your marginal tax rate on Roth conversions will be higher than 12% and as much as 22.2% [12% * (1+85%)]. You can analyze it more but I suspect that Roth conversions may not be good in your situation.

I think you could test it as comparing 3 scenarios and the effective tax rate on tIRA withdrawals/Roth conversions.... 1) 2026 with no tIRA withdrawals, 2) then add Roth conversions to the top of the 12% tax bracket and 3) then add additional tIRA withdrawals so the combination of Roth conversions and tIRA withdrawals are what RMDs would be (tax-deferred balance divided by RMD factor for the age when you are first subject to RMDs). The results would give you an idea of the dynamics.

 

[junkanoo]

Roth Conversion Strategies:
I am conflicted about the best approach for Roth conversions. I have modeled two approaches:

22 % Bracket Ages 69-76. Convert $1.5M total, paying $334K in conversion taxes. Reduces lifetime RMDs by $2.4M and saves $312K in lifetime taxes.

12% bracket Converting $588K over ages 69-76 costs $126K in conversion taxes now, but reduces lifetime RMDs by $1.8M and moves assets into tax-free Roth growth.

Current age 69. Married filing jointly. Assume eventually one of us will end in 22% bracket, when someone passes. I trying to get past paying approximately $45000 (22%) each year in taxes until 76 to hypothetically save money. Versus paying approximately $13000 (12%) each year until age 76. I will have to use Roth withdrawals to fund the tax payments. I have always tried to avoid paying the taxman, this one is hard to swallow.

Your input is greatly appreciated.
Boo

What are your total tax-deferred assets?

What was the lifetime RMDs based on ... i.e., how long did you estimate that you would be MFJ and how long taxed as a single?

 

[pb4uski]

...And I don't like the idea of using Roth withdrawals to pay the additional income tax on Roth conversions. I'd have to think about that more...

I agree but I used that in the example to make the illustration more straight forward. To do it with the tax coming from taxable account money it makes the illustration much more complicated and results in Roth conversions being slightly preferable if the effective tax rate on conversions is unchanged, but the difference is so slight as to not be worth mentioning.

 

[Al18]

The best time to make Roth IRA conversions is when you are in your lowest tax bracket. This is typically after you retire and before you claim SS. For most on this forum, it's ages 55-70. It's useful doing the calculations to see if you can do some in 2026, but it may not be worth it.

 

[Al18]

I would not try to convert all of my IRA to a Roth IRA. I only do so where it makes economic sense. My goal is to convert 25% of my IRA, and I've been working on it for 8 years.

 

[Dtail]

Then even if you limit Roth conversions to increase taxable income to the top of the 12% tax bracket, as long as your taxable SS is less than 85% of your gross SS, your marginal tax rate on Roth conversions will be higher than 12% and as much as 22.2% [12% * (1+85%)]. You can analyze it more but I suspect that Roth conversions may not be good in your situation.

I think you could test it as comparing 3 scenarios and the effective tax rate on tIRA withdrawals/Roth conversions.... 1) 2026 with no tIRA withdrawals, 2) then add Roth conversions to the top of the 12% tax bracket and 3) then add additional tIRA withdrawals so the combination of Roth conversions and tIRA withdrawals are what RMDs would be (tax-deferred balance divided by RMD factor for the age when you are first subject to RMDs). The results would give you an idea of the dynamics.

What about the future years of RMD's? The OP's situation applies somewhat to me, so thinking about it all.

 

[Midpack]

I converted about 2/3rds of our tIRAs to Roths with very large distribution-conversions every year starting in 2019. Basically converted to the top of the 1.4X IRMAA bracket every year, which hits before the top of the 22% bracket. Otherwise we would have landed in the 24% bracket and 2x IRMAA permanently once SS (started me 2024, DW 2026), RMDs and all our other passive income hit - that starts and builds 2027-2029. I am not planning on any more significant conversions after this year, we should land low in the 22% bracket from now on, and we've avoided paying more than 1.4X IRMAA.

I was also enjoying paying VERY low taxes for several years, but realized Roth conversions could save us almost $400K in lifetime taxes.

As for biting the bullet and voluntarily paying taxes (in advance), it also helped that I believed, and still do, that taxes have to increase sometime in my remaining lifetime which will make Roth conversions even more beneficial.

If you think tax brackets will stay the same or go down (inflation adjusted), you probably shouldn't convert at all...

 

[pb4uski]

...Roth conversions only make sense where the effective rate on Roth conversions today (which is knowable) is less than the effective tax rate on RMDs later (which is estimable but still somewhat uncertain). If the tax rate doesn't change then Roth conversions don't have a favorable effect at all. For example, say your tIRA was $25k could convert today and pay 12% or $3k in tax, leaving $22k in the Roth and between now and RMD time it doubles to $44k. If you don't convert and the $25k tIRA doubles to $50k and is then withdrawn at 12% tax then you end up with $44k after paying 12% in taxes. The point is that unless the tax rate is lower that tax-free growth in the Roth, even though it sounds great, doesn't really have an impact.

... And I don't like the idea of using Roth withdrawals to pay the additional income tax on Roth conversions. I'd have to think about that more...

I agree but I used that in the example to make the illustration more straight forward. To do it with the tax coming from taxable account money it makes the illustration much more complicated and results in Roth conversions being slightly preferable if the effective tax rate on conversions is unchanged, but the difference is so slight as to not be worth mentioning.

Here is the example but with taxes being paid from taxable account. Opening state is $25k in tIRA, $3k in taxable and 12% tax rate.

If Roth convert then $3k of taxable goes to pay taxes on $25k conversion and $25k in Roth doubles over 10 years to $50k of tax-free money available for spending (7.1773%/yr).i

If not Roth conversion then tIRA doubles from $25k to $50k over 10 years. The $3k taxable account doesn't double because taxes have to be paid on the income each year so it only grows at 6.316%, from $3k at time zero to $5,535*. The $50k tIRA balance is withdrawn and $6k is paid to the IRS leaving $44k, which when combined with the $5,535 is $49,535.

So in this case, even if the taxes are paid from a taxable account subject to taxes and the tax rates are the same the Roth is slightly advantageous. Now the result would be back to even if the taxable account is equities and subject to 0% tax on qualified dividends and LTCG.

* $5,535 = 3000*(1+7.1773%*(1-12%))^10

 

[MarieIG]

I wouldn't over convert, whatever that means.
I would look at your projected AGI at age 75 compared to present AGI and see what that tells you.

Being in the phase-out range for certain things that pb4 mentioned makes the decision trickier.

And I don't like the idea of using Roth withdrawals to pay the additional income tax on Roth conversions. I'd have to think about that more...

I pay for the conversions out of taxable dividend and Internet income. Honestly I prefer to see the melt up in my Roth although it's looking like we will not be converting a significant percentage of DH's traditional retirement accounts.

 

[SevenUp]

You are correct. Almost all income will be from social security and small pension.

Roth Conversion with Social Security and Medicare IRMAA might interest you, especially if you can use Excel.

The tool discussed there, the Case Study Spreadsheet, automatically shows your marginal tax rate across any range of Roth conversions you might consider.

Then you just need to be able to predict the future to know the best current strategy.

 

[TheWizard]

I would not try to convert all of my IRA to a Roth IRA. I only do so where it makes economic sense. My goal is to convert 25% of my IRA, and I've been working on it for 8 years.

I certainly agree, especially for single people.
It can be tricky to determine how much of my tax-deferred I've converted since I hold mostly stock funds in both places and there's been a lot of growth. But my tax-deferred is around $1.2M while my Roth IRA is around $600K, so that's not a bad ratio.

And since starting RMDs a while ago, some of that tax-deferred $$$ is making my taxable account grow as well...

 

[walkinwood]

Why not try to optimize using financial planning software like Pralana, Boldin or the like? A $100 or so may save you a bunch. There is a learning curve and you'll have to make some assumptions, but I would think the exercise would be worth the time & expense. You can also see how sensitive the decision is - ie. do small changes in assumptions make a big difference in savings -something to be aware/critical of.

 

[SevenUp]

Why not try to optimize using financial planning software like Pralana, Boldin or the like? A $100 or so may save you a bunch. There is a learning curve and you'll have to make some assumptions, but I would think the exercise would be worth the time & expense.

Perhaps. There are certainly some passionate promoters of those tools.

You can also see how sensitive the decision is - ie. do small changes in assumptions make a big difference in savings -something to be aware/critical of.

Because things can depend so heavily on those assumptions (and most of us can't predict the future well), it is not clear that the increased precision the tools above can provide necessarily leads to improved accuracy of results.

 

[Midpack]

Perhaps. There are certainly some passionate promoters of those tools.

Because things can depend so heavily on those assumptions (and most of us can't predict the future well), it is not clear that the increased precision the tools above can provide necessarily leads to improved accuracy of results.

So your recommendation?

 

[SevenUp]

Perhaps. There are certainly some passionate promoters of those tools.

Because things can depend so heavily on those assumptions (and most of us can't predict the future well), it is not clear that the increased precision the tools above can provide necessarily leads to improved accuracy of results.

So your recommendation?

Take your best guess at your (and perhaps your heirs') future marginal tax rate, then convert to the top of that amount. Revisit annually. Get on with life with the time you save vs. a complicated approach.

You can always sharpen the pencil (i.e., add complexity) as much as you want. For example, you could tilt toward higher conversion marginal rates to hedge against a long span of survivor filing single, or tilt toward lower conversion marginal rates to hedge against a long span of high, unreimbursed, medical expenses.

 

[VanWinkle]

Roth Conversion Strategies:
I am conflicted about the best approach for Roth conversions. I have modeled two approaches:

22 % Bracket Ages 69-76. Convert $1.5M total, paying $334K in conversion taxes. Reduces lifetime RMDs by $2.4M and saves $312K in lifetime taxes.

12% bracket Converting $588K over ages 69-76 costs $126K in conversion taxes now, but reduces lifetime RMDs by $1.8M and moves assets into tax-free Roth growth.

Current age 69. Married filing jointly. Assume eventually one of us will end in 22% bracket, when someone passes. I trying to get past paying approximately $45000 (22%) each year in taxes until 76 to hypothetically save money. Versus paying approximately $13000 (12%) each year until age 76. I will have to use Roth withdrawals to fund the tax payments. I have always tried to avoid paying the taxman, this one is hard to swallow.

Your input is greatly appreciated.
Boo

Why wouldn't you just withhold taxes from the TIRA if you don't have the brokerage account cash to pay for it. If you are paying them from your Roth, it is the same thing. Paying from the IRA is not ideal, but it is better than not converting or pulling out Roth money to pay the taxes. I would go with converting to the 22% brkt with a sizable TIRA as it seems you have.

 

[tominboise]

On a tangent to this, I reread the 5 year rules around Roth conversions and withdrawing conversion $$. I am still slightly confused - Since I am 66, the 5 year rule on conversion $$ does not apply? In other words, I can withdraw conversion $$ at any time without a penalty?

Also, my wife and I each have a TIRA (age 66/64). I also have a Roth IRA but she does not. We each have a fair amount of $$ in the TIRA's. I have been converting for 6 years but the TIRA is growing faster then I convert. I have not considered also having her start a Roth and start converting $$. It would result in more tax $$ than I really want to pay. But maybe I should have her start a Roth just to get the clock ticking, in case we change our minds regarding conversions in the future.