ROTH Conversion Modeling Question

[SecondCor521]

You might try using the Case Study Spreadsheet. It has the very handy feature of producing graphs of marginal rates across any range of income you might consider, and it takes into account most features of the tax code.

It will tell you where and how big any tax humps are for your specific case, which is very useful in deciding how much to Roth convert.

It requires real Excel (which I go to the library to use). The latest version can be found here:

https://forum.mrmoneymustache.com/f...dy-spreadsheet-updates/msg3142027/#msg3142027

 

[SevenUp]

This is completely correct, of course, but I think it is important to emphasize that the decision must be made based on net taxes involved with a conversion. People seem to focus on the Federal tax rate, but that is only part of the story. IRMAA, taxable SS, ACA, and state tax are also part of "net tax" as well as possibly other things like means-tested real estate tax credits for seniors

+1

Other than state/local property tax credits, the tool mentioned in Roth Conversion with Social Security and Medicare IRMAA covers "the rest of the story" as listed.

 

[SevenUp]

You might try using the Case Study Spreadsheet. It has the very handy feature of producing graphs of marginal rates across any range of income you might consider, and it takes into account most features of the tax code.

It will tell you where and how big any tax humps are for your specific case, which is very useful in deciding how much to Roth convert.

It requires real Excel (which I go to the library to use). The latest version can be found here:

https://forum.mrmoneymustache.com/f...dy-spreadsheet-updates/msg3142027/#msg3142027

+1

Other than state/local property tax credits, the tool mentioned in Roth Conversion with Social Security and Medicare IRMAA covers "the rest of the story" as listed.

+1 to SecondCor521's comment also - both quotes above refer to the same tool.

 

[target2019]

I guess the main point is that 12% is good but 22% is a wash.

At 12% I might be able to convert about 30% before I hit 70 and get SS.

I don't have a huge IRA, but I have about the same amount in high!y appreciated series I bonds that are going to make a spike into 24% bracket in 2030,31,32. I guess I will just bite the bullet. I considered cashing early but the real yield portion is over 3% on these. I did not crunch but missing that interest for 7 years seems worse than an extra 2% or 4% bracket.

You have the main point correct. So convert to the top of the 12% until you can't.

Is your state doing any kind of retirement income exclusion? That will alter the future calculation. In NJ it kicks in at 62, and has qualifications.

 

[sengsational]

Another data point might be i-orp. It's not got a detailed federal tax calculation, but I think it covers the main stuff. What it does that a lot of people don't do is model all years at once. What I like is that when I do all of the stuff people spend so much time on here (convert/not convert, take SS early/late, pay off mortgage, etc) none of it makes much difference in my case. RDWHAHB

 

[orbops]

MI bought a Tesla this year and have to use up the $7500 tax credit. I either have to ROTH convert or sell some Series I bonds (I currently have a capital loss carryover).

I already converted some $50,000, which probably maxes out the 12% bracket. My dilemma is whether to convert in the 22% with state tax or sell some I bonds. The worst I Bond I have has a 1.7% real rate and several years left on it.

I hate to lose out on the nice interest rate, so I probably will just convert some in the 22% bracket enough to use up the tax credit.

For the next three years I probably will only ROTH convert up to the 12% bracket, and after that I will be hit by the Social Security torpedo.

You may want to consider just giving up the full $7500 tax credit, and just stay in the 12% bracket. If you are part of the ACA marketplace, then the higher the income, the less subsidy you'll get.

My wife was thinking of getting a EV car to also get the $7500 tax credit, but to get the full credit, we would have to do a larger Roth conversion, so then our monthly premium would jump from $10/month to over $1100/month -- essentially we would have to pay $13K to get a $7.5K tax credit.

You may want to consider signing up for an HSA account for the next 3 yrs so that you can take the $4850 single filer or $9750 married filer deduction. That may help you stay in the 12% bracket.

 

[joesxm3]

Good point, but I am 66 and on Medicare now.

 

[RunningBum]

My Excel gives me the impression that, for me, converting in the 22% bracket with current state tax rate is not very appealing. I did not include IRMAA, so that might help the ROTH side of the comparison.

I bought a Tesla this year and have to use up the $7500 tax credit. I either have to ROTH convert or sell some Series I bonds (I currently have a capital loss carryover).

I already converted some $50,000, which probably maxes out the 12% bracket. My dilemma is whether to convert in the 22% with state tax or sell some I bonds. The worst I Bond I have has a 1.7% real rate and several years left on it.

I hate to lose out on the nice interest rate, so I probably will just convert some in the 22% bracket enough to use up the tax credit.

For the next three years I probably will only ROTH convert up to the 12% bracket, and after that I will be hit by the Social Security torpedo.

I missed this Tesla tax credit twist until someone else quoted it today. This is a classic case where you shouldn't be concerned with tax brackets, and instead look at the actual marginal tax considering all of the effects on your bottom-line tax. If you can do a Roth conversion and get the amount of extra tax you'd pay on the conversion back in a tax credit that would otherwise go unused, your effective rate on the conversion is 0%. OK, it might throw you in a new IRMAA tier, but that's going to be much much lower than 22% effectively.