Roth Conversion calculation

[bfrank12]

Hello I would like to ask about how to calculate the amount for ROTH Conversion in the scenario where:

1) Tax deferred account is not needed for income stream in retirement due to pension & social security income.
2) Tax deferred account will have greater benefit from Roth conversion due to legacy goal where inheritance will not be taxed on withdrawal
3) Not doing Roth conversion will cause IRMA surtax, possible capital gain 3.8% surtax. The difference per year from one IRMA bracket to another was calculated 7548 vs 12,561 per couple.
4) The timing of ROTH conversion will be 11 years from first required minimum distribution. it
5) Assume tax for conversion will be pay from taxable account.

I calculated the "desired RMD" balance in 11 years. Then I worked backward to determine from today's tax deferred balance how much is needed to convert each year to reach the "desired RMD" in 11years. This is generic from today's balance and hypothetical ROTH conversion each year & adding a 6% yearly return.
After doing this in the excel spreadsheet it resulted converting 175,000 per year in years at 12% bracket 35,000 tax for conversion for 5 years.
In the year at 22% bracket 50,000 conversion is 15,000 in tax. This seems like a lot of money for taxes when converting to what appears "logical."
Any input is greatly appreciated. Thank-you.

 

[Dash man]

The tax rates under current law will increase in 2026 when the TCJA sunsets.
Another consideration is, if married, a surviving spouse may be left with a much higher tax burden.
These reason are why we’ve been making substantial Roth conversions these past few years.

 

[Al18]

Better check those calculations - $175,000 per year puts you at the 22% tax bracket and if you have a little more income, the 24% tax bracket AND IRMAA immediately.

 

[TheWizard]

Not enough numerical data in the OP to analyze the situation.
It's not necessary to convert ALL of your tax-deferred accounts to Roth. Just convert enough so that the eventual RMD+QCDs are reasonable.

In my case, for example, I did Roth conversions in my 60's to levelize my AGI, thus no big jump when I started SS and then RMDs.
And my RMD/QCD now is about 20% of my AGI which I think is reasonable...

 

[RetireBy90]

I'm converting so income plus conversions are $20K under IRMAA at $206K for 2024. This keeps us in 22% tax bracket. State income rate doesn't change for us with or without conversions. I plan for final conversion next year and then when RMDs kick in we will fulfill them with QCDs (Qualified Charitable Deductions) so I won't be doing any RMDs. Roths will be for beneficiaries and TIRA will be for charities when we are gone.
Current Brackets are:

2024 Tax Brackets
MFJ	Rate	Single	Rate
$23,200 to $94,300	$2,320+12%	$11,601-$47,150	$1,160+12%
$94,301 to $201,050	$10,852+22%	$47,151-$100,525	$5,426+22%
$201,051 to $383,900	$34,337 + 24%	$100,526-$191,950	$17,168+24%

 

[pb4uski]

I would suggest a different approach. First, do an analysis to estimate your RMDs if you don't do any Roth conversions and add it to your SS, pensions and other income sounces and get your tax bracket for RMDs. These tools may be helpful.

Charles Schwab

IRS & State Tax Calculator | 2005 -- 2024

Easily and accurately calculate IRS & State personal income taxes online.

www.irscalculators.com

For discussion purposes, let's say that when you start RMDs that you expect to be in the 24% tax bracket before RMDs and to keep it simple, let's say that your RMDs will incur 24% tax.

So from now until then, if you can do Roth conversions at a tax rate of less than 24%, then you should do so.

Now this is only if your IRA will be inherited by someone with a 24% tax bracket or more. Now if the IRA will be inherited by someone in a lower tax bracket, it doesn't make sense to pay 24%... let them pay less later. Or if your IRA will go to charity, then Roth conversions dont mke any sense at all.

 

[bfrank12]

Thank you Al18. I recalculated to considers IRMA .

1) Pay IRMA for one person for 1 year to convert at 12% into 24% bracket.
240,000 conversion equals 48,000 tax. 126,000 conversion equals 25,200 tax
The benefit for this is avoiding paying IRMA into the NIIT range for 2 person at a later date.

2) For other years set total taxable income to less than 206,00 for total income including ROTH conversion.

In this scenarios, the total amount of tax divided by the total amount ROTH conversion equals 21.5%.
This is a very rough estimate. Thank you.

 

[bfrank12]

Thank you pb4uski I am also thinking of the risk of market timing when doing such a large conversion is undesirable.

 

[Exchme]

Use a pre-made calculator like the free Bogleheads' Retiree Portfolio Model (at the bogleheads.org wiki) or Pralana Gold (paid spreadsheet). They are the only ones I'm aware of that let you hold your overall asset allocation constant while you put your bonds in tax deferred and stocks in taxable and Roth. That's attractive to slow the growth of tax deferred (which is partly owned by the government) in favor of accounts that are yours as well as limit taxable income. Most consumer grade tools don't hold the overall allocation over time and that ruins the result, artificially favoring unprofitable Roth Conversions.

Both RPM and Pralana do a good job with taxes, though Pralana is more thorough, including things like capital gains taxes, ending of TCJA, ACA premium credit calculations, more flexible state tax calculations, and AMT that may re-enter our lives if TCJA lapses. Plus it handles more types of accounts and income.

Pralana includes an "optimizer" for Roth Conversions, but I don't bother with it as it only searches ordinary tax brackets. In an optimized plan, other phase-ins and cliffs matter. The good news is it is simple to select the criteria you want to use as a limit (IRMAA, FPL multiple for ACA, tax bracket, LTCG tax phase-in) and it finds the conversion amount.

Our plan ended up a bit complicated, with conversions to the top of the 24% bracket for a few years before IRMAA and before TCJA lapses, then either the top of the base IRMAA tier or the 1st IRMAA tier (depending on if I keep working part time) for a few years until time to claim SS. Then no more conversions until RMDs as we may be able to keep some of the SS benefits from being taxed. Once RMDs start, do some small conversions to the top of whatever IRMAA tier we are in.

 

[SlowlySaving]

Use a pre-made calculator like the free Bogleheads' Retiree Portfolio Model (at the bogleheads.org wiki) or Pralana Gold (paid spreadsheet). They are the only ones I'm aware of that let you hold your overall asset allocation constant while you put your bonds in tax deferred and stocks in taxable and Roth. That's attractive to slow the growth of tax deferred (which is partly owned by the government) in favor of accounts that are yours as well as limit taxable income. Most consumer grade tools don't hold the overall allocation over time and that ruins the result, artificially favoring unprofitable Roth Conversions.

Both RPM and Pralana do a good job with taxes, though Pralana is more thorough, including things like capital gains taxes, ending of TCJA, ACA premium credit calculations, more flexible state tax calculations, and AMT that may re-enter our lives if TCJA lapses. Plus it handles more types of accounts and income.

Pralana includes an "optimizer" for Roth Conversions, but I don't bother with it as it only searches ordinary tax brackets. In an optimized plan, other phase-ins and cliffs matter. The good news is it is simple to select the criteria you want to use as a limit (IRMAA, FPL multiple for ACA, tax bracket, LTCG tax phase-in) and it finds the conversion amount.

Our plan ended up a bit complicated, with conversions to the top of the 24% bracket for a few years before IRMAA and before TCJA lapses, then either the top of the base IRMAA tier or the 1st IRMAA tier (depending on if I keep working part time) for a few years until time to claim SS. Then no more conversions until RMDs as we may be able to keep some of the SS benefits from being taxed. Once RMDs start, do some small conversions to the top of whatever IRMAA tier we are in.

I have downloaded the Retiree Portfolio Model spreadsheet and have been planning to utilize it more. This is a great reminder to do so! I may have to check out Pralana too
Tnx!

 

[FargoI]

Please clarify. Can one continue Roth conversions once they are required to start RMDs? Thank you.

 

[Dtail]

Please clarify. Can one continue Roth conversions once they are required to start RMDs? Thank you.

Yes but can't convert the RMD itself directly into a Roth conversion.

 

[explanade]

Is there an RMD calculator which could determine what your RMD will be in the future, like years ahead?

It's based on what your balance is at the time?

 

[CardsFan]

Is there an RMD calculator which could determine what your RMD will be in the future, like years ahead?

It's based on what your balance is at the time?

I find this one useful: Charles Schwab

After yo enter your info, click on "Make a selection" select life time. You can change assume return rate here.

 

[pb4uski]

+1 the Schwab calculator is useful. What you need to do is to estimate what your IRA balance will bewhen you stat RMDs. If no withdrawals then it would be x *(1+i)^n where x is the current balance, i is the earnings rate from your investments in the IRA and n is the number of years to the first RMD. Then divide that result by the factor for that age.

https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/UniformLifetimeTable.pdf

 

[SecondCor521]

Please clarify. Can one continue Roth conversions once they are required to start RMDs? Thank you.

Yes, but technically federal regulations make it so that you can only do a Roth conversion after completing your annual RMD. I've argued this over at Bogleheads and lost the argument quite convincingly - I don't think the rules should be that way, but BHers are right that the rules are in fact that way.

 

[braumeister]

Yes, but technically federal regulations make it so that you can only do a Roth conversion after completing your annual RMD. I've argued this over at Bogleheads and lost the argument quite convincingly - I don't think the rules should be that way, but BHers are right that the rules are in fact that way.

A very common question, and very understandable. It's not the way most of us would look at it, but the important thing is that this is how the IRS looks at it.
Say I have 100K in my IRA and my RMD for the year is 10K.
I want to convert 15K to Roth.
I have to take 25K out of the IRA because IRS says the first 10K is my RMD. The other 15K can be converted, along with however much more I want to take out.

Obviously, the idea is to get your tax-deferred money out and taxed as quickly as possible.

 

[USGrant1962]

I find this one useful: Charles Schwab

After yo enter your info, click on "Make a selection" select life time. You can change assume return rate here.

FWIW that calculator is not current. RMD for folks born after 1959 is now age 75. The calculator shows age 73.

 

[CardsFan]

FWIW that calculator is not current. RMD for folks born after 1959 is now age 75. The calculator shows age 73.

It appears you are correct. Does not impact me, but good for others to know. This does surprise me, as they have usually been good at updating.

 

[SecondCor521]

A very common question, and very understandable. It's not the way most of us would look at it, but the important thing is that this is how the IRS looks at it.
Say I have 100K in my IRA and my RMD for the year is 10K.
I want to convert 15K to Roth.
I have to take 25K out of the IRA because IRS says the first 10K is my RMD. The other 15K can be converted, along with however much more I want to take out.

Obviously, the idea is to get your tax-deferred money out and taxed as quickly as possible.

I didn't actually ask a question. I just don't like the way the regulations are written.

To be more precise, let's take your example of a $100K IRA, a $10K RMD, and a $15K Roth conversion.

If I do a $15K Roth conversion on February 22nd and then take a $10K distribution from my IRA on May 12th, I think that should be perfectly OK.

However, the IRS would treat the first $10K of the February 22nd Roth conversion as my RMD, which is ineligible for rollover, and thus $10K of my $15K Roth conversion is an ineligible contribution, which the IRS would penalize if they had the information and manpower to enforce all the rules.

If I reverse the order and do the $10K distribution from my IRA on February 22nd and then do a $15K Roth conversion on May 12th, then everything works as expected and the IRS would, if they had the manpower to enforce all the rules, not have any problem with or assess any penalties.

I don't think the transaction order should matter, but the CFRs say it does, and Bogleheads kindly have pointed me to the exact portion of the rules which say so. They're right, and I agree they're right.

I still don't like the rule. Here's an example of why. My Dad has his RMDs set up like a paycheck with Vanguard, so monthly on the 15th, 1/12th of his RMD is automatically transferred out of his IRA. For tax reasons, it may make sense to do an additional Roth conversion on top of his RMD in some years. Even if I figure that out in October, I have to wait until after 12/15 to make the Roth conversion. It's just a hassle.

 

[oldtimer]

A very common question, and very understandable. It's not the way most of us would look at it, but the important thing is that this is how the IRS looks at it.
Say I have 100K in my IRA and my RMD for the year is 10K.
I want to convert 15K to Roth.
I have to take 25K out of the IRA because IRS says the first 10K is my RMD. The other 15K can be converted, along with however much more I want to take out.

Obviously, the idea is to get your tax-deferred money out and taxed as quickly as possible.

Though one can withhold the necessary taxes from the 10k to cover the tax for both the RMD and Roth conversion.

 

[explanade]

FWIW that calculator is not current. RMD for folks born after 1959 is now age 75. The calculator shows age 73.

Wow, that's news to me. I was expecting to do RMD at age 70.

Does that mean you can do Roth conversions until age 75?

 

[SecondCor521]

Wow, that's news to me. I was expecting to do RMD at age 70.

Does that mean you can do Roth conversions until age 75?

You can do Roth conversions at any age: 12, 75, 371, 4263. You just have to take any necessary RMDs first, and of course pay any applicable taxes.

 

[G-Man]

FWIW that calculator is not current. RMD for folks born after 1959 is now age 75. The calculator shows age 73

Any recommendation on one that is current and simple to use.

 

[G-Man]

Any recommendation on one that is current and simple to use.

Looks like this is a good one...

Estimate Your RMD Using Our Required Minimum Distribution Calculator

The IRS requires you to withdraw a minimum amount from some types of retirement accounts annually. Use this calculator tool to figure out your RMD.

www.aarp.org