Roth Conversion not for us?

[Rianne]

DIY here, but we're at a crossroad. Thinking about the math, I figure Roth conversions are not for us. We have $1.4m in DH tIRA earning 4-5%. We plan to use the interest as income in the future. According to the RMD calculator, when we're 73 we'll have to take $56K out. So we pay taxes on that. Not so bad, and the worst tax situation would be 18-22% effective taxes at RMD age.

Without a Roth conversion for the next 6 years, we pay $0 taxes because we'll take some after tax losers in our stock portfolio. Also have healthy Roth IRAs and $100K+ in I-bonds where interest is dropping.

Edit: Our state does not tax retirement income.

 

[COcheesehead]

Everybody has to do their own numbers. It never made sense for us for a variety of reasons, being in a high current bracket the biggest. I also could not wrap my head around prepaying a tax I may never owe or at least not owe for 25 years.

 

[MarieIG]

More info might be factored into your, such current tax bracket vs. future tax brackets, did you start SS yet (current income vs future income), tax bracket of survivor, etc.

And remember - it does not have to be all or nothing.

 

[Qs Laptop]

I'm glad someone brought this up. I'm wrestling with the same issue. It seems that I could do a bunch of calculations, take some actions to lower income, make a bunch of transactions, a do some Roth conversions and possibly save $2,000 to $3,000 over a couple of years when I start RMD's. Is it really worth it? I'm thinking it's not.

 

[CalBird]

RMD would trigger many other taxes such as tax on social security. That’s why it’s called tax torpedo. It is always good idea to reduce pretax accounts as much as you can before RMD. But it is very challenging to manage especially if you need to manage your income for ACA.

 

[Flieger]

RMD would trigger many other taxes such as tax on social security. That’s why it’s called tax torpedo. It is always good idea to reduce pretax accounts as much as you can before RMD. But it is very challenging to manage especially if you need to manage your income for ACA.

I think, as the OP is stating, the RMD issue depends largely on the value of tIRA and expected "other" income.

Flieger

 

[COcheesehead]

RMD would trigger many other taxes such as tax on social security. That’s why it’s called tax torpedo. It is always good idea to reduce pretax accounts as much as you can before RMD. But it is very challenging to manage especially if you need to manage your income for ACA.

I am not sure I agree with this. The numbers tell the story. Our RMDs do not begin to put us into a higher tax bracket for almost 25 years. Fidelity’s retirement planner gives you a good view into potential future RMDs and it was eye opening for us.

 

[InsertCleverHandle]

You can use Boldin.com (formerly NewRetirement) to model the conversions. Two week trial is free, and then $120 a year. I did not find it that helpful with weighing ACA subsidies vs. Roth conversions, but that will likely change with whatever tax changes come in 2026 anyway.

 

[latexman]

DIY here, but we're at a crossroad. Thinking about the math, I figure Roth conversions are not for us.

What about IRMA? Does that increase after RMDs? Is it significant for you?

 

[COcheesehead]

I'm glad someone brought this up. I'm wrestling with the same issue. It seems that I could do a bunch of calculations, take some actions to lower income, make a bunch of transactions, a do some Roth conversions and possibly save $2,000 to $3,000 over a couple of years when I start RMD's. Is it really worth it? I'm thinking it's not.

There’s a really good financial planner podcast I listen to and he says this all the time. Just because you can optimize, doesn’t mean you have to. Sometimes doing nothing gets you 95% of the way there anyway.

 

[Rianne]

More info might be factored into your, such current tax bracket vs. future tax brackets, did you start SS yet (current income vs future income), tax bracket of survivor, etc.

And remember - it does not have to be all or nothing.

I figure in our income level, our future tax rates will be similar to now. We started SS in Jan. 2025. Taking I-bonds, one at a time...we've had them since early 2000s, that will cover some income. I'm a tax consultant for AARP and have the software in my computer to use all year. I've looked at this 10 different ways, plus the standard tax deduction will increase a bit over time for MFJ both over 65. If we're taking out the interest yearly from the tIRA for income (interest is about 50K) why bother with Roth conversion.

Edit: SS is $60K

 

[Rianne]

What about IRMA? Does that increase after RMDs? Is it significant for you?

No issues with IRMA. Our income doesn't come close.

 

[gauss]

CalBird said:

"RMD would trigger many other taxes such as tax on social security. That’s why it’s called tax torpedo. It is always good idea to reduce pretax accounts as much as you can before RMD. But it is very challenging to manage especially if you need to manage your income for ACA."

+1
That was my concern after reading OP's initial post that did not explicitly address Social Security.

Not understanding SS taxation and how it can turn a 22% marginal tax rate into a ~ 40% marginal rate is not something you want to find out after drawing SS.

I hope everyone takes a good look at this.

Note - DW and myself both plan to delay drawing SS until age 70 (dual earners) - Our current SS payout looks to be over 100k a year combined. At lower levels this may be less of an issue. As often posted with Roth conversions, you need to run your own numbers.

-gauss

 

[Dtail]

Sounds like a no go for you. Even though many posters here do them, it is not for everyone. In an overall sense, it may not be super important to convert with no IRMAA and 22% bracket
I calculated that the ACA subsidies for my brother and I saved 23k yearly for 7 years, which beat conversions. The fiance still did some Roth conversions.
Now we are all on Medicare. Brother has no TIRA. I will probably take SS before 70, so leaning against converting. The fiance will continue to convert to the top of the 12% bracket.

 

[Dtail]

CalBird said:


+1
That was my concern after reading OP's initial post that did not explicitly address Social Security.

Not understanding SS taxation and how it can turn a 22% marginal tax rate into a ~ 40% marginal rate is not something you want to find out after drawing SS.

I hope everyone takes a good look at this.

-gauss

Ah the famous/infamous Sandy and Shirley posts.

 

[pjigar]

I think, as the OP is stating, the RMD issue depends largely on the value of tIRA and expected "other" income.

Flieger

That is exactly right. The "other" income can be a deal breaker for some and not so much for the others. I have posted a calculator I made in several other posts. I try to account for "other" income, growth and potential impact "lost" ACA subsidies.

RMD Scenarios

docs.google.com

 

[SevenUp]

...the worst tax situation would be 18-22% effective taxes at RMD age.

Don't know offhand if conversions would be worthwhile for you but using marginal, not effective, tax rates will provide the best comparison.

 

[NgineER]

I think you should consider what will happen when one of you passes away, now your 12% tax bracket for MFJ is 22% as a single filer. It doesn't make sense to me to pay 0% in taxes for the next six years and then go to 18-22% thereafter. A little tax smoothing would not be a bad thing.

 

[imjustawarrior]

Rianne,

thank you for posting this. I am always trying to learn.

If you will have 0% taxes for the next 6 years, why wouldn't you convert to at least the top of the 12% bracket?

Have you considered the taxes once one of you passes?

 

[TheWizard]

Rianne,

thank you for posting this. I am always trying to learn.

If you will have 0% taxes for the next 6 years, why wouldn't you convert to at least the top of the 12% bracket?

Have you considered the taxes once one of you passes?

Correct on those points.
I did Roth conversions in my earlier retirement years to levelize my AGI (and resulting income tax) across future years, including the start of SS and then RMDs.

But I didn't have any strange marginal rates to deal with. My SS was 85% taxable from the start.

I'm sure that lots of people ignore Roth conversions and survive just fine, higher taxes or not...

 

[Rianne]

Don't know offhand if conversions would be worthwhile for you but using marginal, not effective, tax rates will provide the best comparison.

The beauty about retirement is you can control your other income. I looked up what we paid during working years while we were contributing to tIRA. The PDF shows marginal tax rates going back way past 1980.

https://files.taxfoundation.org/legacy/docs/fed_individual_rate_history_nominal.pdf

For 10 years we were paying marginal tax rates 28-33%. Marginal tax rates are based on taxable income. With dividends, STCG, interest, SS, selling LTCG, our taxable income is $11,798 for 2025 with no tIRA WD. That means a small state tax on the dividends, STCG, selling LTCG.

Say our tIRA grows to $2m (I did the calculation for RMD with the interest earning without any WD until 73). The RMD is $75,000.

If I add $75,000 WD from tIRA...taxable income becomes $120,726. Taxes are $15,000 approx. And we'd use the $75K as income if we choose. 12% to $96,950, $23,776 at 22%.

We'll take WD over the next 7 years for income, so that will lower the tIRA balance. I said $2m without any W/D.

I've been entering and re-entering these #s in Taxslayer. I've included all income in many different scenarios. And have not used any Roth funds. That's how I came to my conclusion.

 

[Rianne]

Rianne,

thank you for posting this. I am always trying to learn.

If you will have 0% taxes for the next 6 years, why wouldn't you convert to at least the top of the 12% bracket?

Have you considered the taxes once one of you passes?

Yes, tax rates explode if one of us dies. But SS decreases considerably. There's always the Charitable giving option (QCDs). We don't have children. And not that concerned with our beneficiaries. There are charities I should be giving more to now. You have to be 70.5 to get the tax deduction. And have to be 73 when QCDs can count towards RMDs.

 

[SecondCor521]

I'm also an AARP Tax Aide volunteer.

I'm surprised you are looking at effective rather than marginal. For Roth conversions I always compare marginal today versus predicted/estimated marginal later.

If you can shift that age ~73 income of $23,776 at 22% to today at 12%, that could save you 10%, or $2,377 for a single Roth conversion. Over ten years or so that adds up to a nice cruise or half a car.

You might already be at the top of the 12% bracket, or you might have other tax effects like ACA that come into play. But honestly to me you sound like ideal candidates for conversions to the top of the 12% bracket, or even more if you have non-refundable credits to soak up more taxable income. Although it also sounds like you don't really need to optimize if you don't want to.

 

[Sanstar]

We have RMD’s, pension, monthly annuity and dual earner SS to manage day to day expenses. My latest, and current plan is to start the year with $150k in high yield, post tax savings. That will cover lumpy expenses, fun and annual gifts to kids and charity.

Whatever we have left at the end of the year will be used to pay taxes, including Roth conversion taxes up to the leftover amount. New Year will start with RMD, less 22% withholding to refill savings bucket to $150k.

Hope is as we age and do less travel, there will be more to fund conversions until most of what we have pre-tax is converted. We’ll use it as needed or leave it to kids.

No tax planning or spread sheet required.

 

[SevenUp]

With dividends, STCG, interest, SS, selling LTCG, our taxable income is $11,798 for 2025 with no tIRA WD. That means a small state tax on the dividends, STCG, selling LTCG.

Depending on how much of that is LTCG and qualified dividends (QD), federal tax would be anywhere from $0 to $1,178.

Say our tIRA grows to $2m (I did the calculation for RMD with the interest earning without any WD until 73). The RMD is $75,000.

If I add $75,000 WD from tIRA...taxable income becomes $120,726. Taxes are $15,000 approx. And we'd use the $75K as income if we choose. 12% to $96,950, $23,776 at 22%.

Due to how SS benefits are taxed, you first have to pay 18.5% and 22.2% before dropping back to 12%. Again depending on the amount of LTCG and QD, you'll then hit a 27% marginal rate band before dropping back to 22%.

Probably won't make a huge difference whatever you do, but reducing the RMDs enough to avoid the 27% band (without reaching that band due to conversions) could be worthwhile. And of course there is what a surviving spouse might have to pay, or the marginal rates expected heirs would pay, etc.